Digitalization in Government Procurement Digitalization in Russian Government Procurement: Key Stages and Legal Risks

 

June 30, 2024

BRACE ©

 

In an era of rapidly developing technologies, digital data is becoming increasingly prevalent in all sectors of the economy. Russia set its course toward the digital transformation of the economy as early as 2017, when the President of Russia approved the Strategy for the Development of the Information Society in the Russian Federation for 2017–2030.

In October 2020, the Russian Government adopted the Unified Plan to Achieve the National Development Goals of the Russian Federation for the Period up to 2030,[1] which included a separate block dedicated to the digitalization of the government procurement system. The objectives of digitalizing procurement activities were to simplify procurement processes by implementing information systems, reduce procurement timelines, and increase the transparency of procedures.

In this article, we examine the stages through which procurement digitalization has passed and what is further planned. We will use practical examples to look at the difficulties that customers and suppliers face during the implementation of these mechanisms and provide recommendations for overcoming them.

Stages of Public Procurement Digitalization

The digitalization of government procurement began in 2019 and continues to this day. The following stages of digitalization are identified:

• January 1, 2019 — transition to electronic notices;
• January 1, 2022 — implementation of electronic acceptance of goods, works, and services (electronic certification);
• July 1, 2022 — transition to electronic management of claims work;
• October 1, 2023 — transition to structured descriptions of the procurement object and structured bids;
• January 1, 2024 — implementation of automated payments;
• April 1, 2024 — transition to the digital contract.

The final stage of digitalization is set to include the conclusion of digital agreements on the amendment and termination of contracts starting January 1, 2025, as well as the conclusion of digital contracts based on the results of failed electronic procedures and certain procurements from a single-source supplier.

Below, we examine in detail the key stages of digital transformation: the transition to structured descriptions of the procurement object, structured bids, and digital contracts.

Structured Description of the Procurement Object

On October 1, 2023, amendments to Decree of the Government of the Russian Federation No. 145 dated February 8, 2017[2] came into force, which approved the Rules for Using the Catalog of Goods, Works, and Services. In accordance with Clause 7 of these Rules, when forming a notice for electronic procedures and closed electronic procedures, the functional, technical, qualitative, and operational characteristics of the procurement object must be specified by customers using only the Unified Information System (the "EIS").

In effect, a structured description of the procurement object is information about the required characteristics of goods, works, and services (the "TWS"), which is provided by filling out on-screen forms in the EIS web interface. Furthermore, when completing the structured description, it is also necessary to fill out instructions for completing each item in a structured format, even though this is not expressly provided for by regulations. Meanwhile, other information not related to the characteristics of the goods, works, or services (for example, requirements for shelf life or warranties, the novelty of the product, etc.) continues to be specified in the form of an electronic document created without using the EIS. Additionally, other documents continue to be attached to notices: the justification of the Initial Maximum Contract Price (IMCP), the draft contract, instructions for completing the bid, etc.

Thus, as researchers of this topic correctly point out,[3] a description of a procurement object currently consists of two parts:

• structured (containing only functional, technical, qualitative, or operational characteristics);
• unstructured (in the form of a separate file attached to the procurement notice, which specifies the full description of the procurement object).

The regulatory body, the Ministry of Finance of Russia, expressed a similar opinion in Letter No. 24-03-09/90944 dated September 25, 2023.

Despite more than six months having passed since the transition to structured descriptions of the procurement object, the number of disputes has not decreased. Let us examine the main errors using examples from law enforcement practice.

1. Absence of product characteristics in the structured description of the procurement object.

The Customer conducted an auction for the supply of angiography kits. One of the bidders filed a complaint against the provisions of the notice. As established by the antimonopoly authority, the structured description of the procurement object contained no requirements for the characteristics of the goods, whereas the Technical Specifications included in the notice did establish such requirements. During the hearing of the FAS Directorate Commission, the Customer argued that no KTRU existed for the kits being purchased; therefore, the product characteristics were defined only in the Technical Specifications based on the institution's needs. The control authority ruled that the Customer failed to comply with the requirements for the content of the procurement notice and found the complaint to be substantiated.[4]

2. Contradictions between the structured and documentary descriptions of the procurement object.

The Customer announced an auction for the supply of the medicinal product Bortezomib. A Bidder was denied admission to the auction because the proposed product had a dosage that did not correspond to the notice. Upon reviewing the complaint, the antimonopoly authority found that the structured description of the procurement object required a dosage of 1 mg, while the documentary file required 3.5 mg. The antimonopoly authority ruled that the resulting discrepancies misled bidders and prevented them from properly completing their bids, thereby finding the complaint substantiated.[5]

3. Establishing incorrect product characteristics or requirements for their completion.

The Customer posted a notice for the supply of electrodes. In the description of the procurement object, requirements for the product's characteristics were established: the shape of the electrode must be round or oval. At the same time, the instructions for filling out the characteristics stated that the bidder could specify only one value for the characteristic in the bid. The Bidder filed a complaint, arguing that the structured bid lacked the technical capability to specify the value of the characteristic.

The antimonopoly authority ruled that the Bidder was deliberately deprived of the opportunity to correctly fill out the bid and therefore found the complaint substantiated.[6]

Thus, an analysis of law enforcement practice shows that discrepancies between the description of the procurement object and the requirements of current legislation, as well as contradictions between the structured and documentary descriptions, entail risks of holding the Customer and its officials administratively liable under Part 1.4 of Article 7.30 of the CAO RF—Publication of information and documents in violation of the requirements provided for by the legislation of the Russian Federation on the contract system. The fine under this provision for officials is 15,000 rubles, and for legal entities, it is 50,000 rubles.

Structured Bid for Participation in Electronic Procedures and Closed Electronic Procedures

In parallel with the obligation of customers to form a structured description of the procurement object, an obligation was established for bidders as of October 1, 2023, to submit a bid for participation in electronic procedures and closed electronic procedures in a structured form. In accordance with Clause 31 of the Additional Requirements for Operators of Electronic Platforms approved by Decree of the Government of the Russian Federation No. 656 dated June 8, 2018,[7] the following must be specified when forming a bidder's proposal using an electronic platform:

• the name of the country of origin of the goods;
• the trademark (if any);
• the characteristics of the proposed goods (regarding the characteristics specified in the structured description of the procurement object).

As for the procurement of works and services, the Ministry of Finance of Russia clarified that these do not need to be specified in the bid; submitting a bid signifies the bidder's consent to perform them.[8]

In effect, a structured bid is an electronic card located on an Electronic Trading Platform (the "ETP"), in which the bidder fills in the required data.

It should be noted that it is impossible to specify information in a structured bid that runs counter to the customer's requirements. It would seem that this should simplify the work and reduce the risks of rejections, but practice shows the opposite. Let us examine the most common errors identified by control authorities during the preparation and evaluation of bids.

1. Requirement to specify information in a structured bid that does not constitute product characteristics.

The Customer conducted an electronic auction for the supply of household goods. It established restrictions on the admission of foreign goods in accordance with Decree of the Government of Russia No. 617 dated April 30, 2020. One of the bidders was rejected because it did not specify the registry number and the cumulative number of points for the products offered for supply in the structured bid. The Bidder complained to the FAS Directorate, pointing out that it had attached an extract from the registry of Russian products as a separate document. The antimonopoly authority found the complaint substantiated. Registry entry data is not specified in the structured bid because it is not a characteristic of the goods.[9]

2. Contradictions between the structured bid form and the attached file.

The Customer announced an auction for the supply of laboratory equipment. One bid was rejected for providing unreliable information: the structured bid proposed the supply of a steam sterilizer, trademark L., country of origin Russian Federation, while the attached file specified an autoclave, trademark S., People's Republic of China. The Customer's commission decided that the bidder provided contradictory information about the goods. The Bidder filed a complaint against the commission's actions, arguing that under Part 4 of Article 5 of Federal Law No. 44-FZ dated April 5, 2013, On the Contract System in the Sphere of Procurement of Goods, Works, and Services for Ensuring State and Municipal Needs (the "Contract System Law" or "Law No. 44-FZ"), priority is given to the information specified in the structured bid form. The antimonopoly authority pointed out that the bidder sends the bid for participation to the ETP operator rather than posting it in the EIS; therefore, this provision is not applicable. The complaint was denied. [10]

The presence of contradictions between the structured bid form and the attached file is generally treated in law enforcement practice as a ground for rejecting the bid. At the same time, situations arise in practice where contradictions between the structured part of the bid and the attached files are inevitable. This is primarily due to technical limitations established in the EIS. Let us highlight some of them.

3. Inability to recalculate quantity and/or packaging.

As Article 42 of the Contract System Law establishes, the customer specifies the quantity of goods in the notice. Currently, the technical capability to recalculate quantity or change the packaging specified in the notice within a structured bid is absent.

For example, a customer was purchasing the drug Moxifloxacin, solution for infusion 250 ml, in a quantity of 6,250 ml. The Bidder planned to offer this medicinal product with a packaging of 28 bottles of 250 ml per box. Thus, the quantity of the product offered for supply actually amounts to 7,000 ml. It is currently technically impossible to correct the quantity of goods in a structured bid. Therefore, bidders specify the correct quantity in the bid attached as a separate file, which formally contradicts the data in the structured bid.

4. Inaccuracy of medicinal product data.

Bidders also face difficulties when specifying data for medicinal products offered for supply. For example, when submitting a structured bid, a bidder lacked the opportunity to select a medicinal product with a specific Marketing Authorization number.[11] In another case, a bidder could not specify the form of the medicinal product in accordance with the State Register of Medicinal Products.[12]

In such cases, we recommend filing a complaint with FAS Russia regarding the actions of the ETP Operator for failing to provide the technical capability, although such actions do not always lead to success. It also remains impossible to specify other characteristics of the product in the bid (filling volume, etc.) that were not established by the customer in the structured description.

5. Absence, in some cases, of the ability to specify the name of a medical device in accordance with the Marketing Authorization.

According to Part 4 of Article 38 of Federal Law No. 323-FZ dated November 21, 2011, On the Fundamentals of Health Protection of Citizens in the Russian Federation, only medical devices registered in accordance with the established procedure may circulate in the territory of the Russian Federation. To identify the medical device offered for supply, customers require its name to be specified in the bid in accordance with the Marketing Authorization.

Since the transition to structured bids, this has not always been technically possible. This possibility exists only if the description of the procurement object was carried out using a KTRU item containing a medical device type code. Even in this case, a bid may be submitted without filling in this field. If the description was carried out by the customer without using the KTRU, the field for filling in such a name in the structured bid is absent. Consequently, several bidders currently enter the name from the Marketing Authorization into the "Trademark" field, which is not legally correct, while others simply ignore the customer's requirement. All of this inevitably gives rise to disputes. Let us illustrate this with an example.

The Customer conducted a procurement for medical gloves. In the instructions for filling out the bid, it required the name of the medical device to be specified in accordance with the Marketing Authorization in a separate file attached to the bid. The Bidder filed a complaint against the provisions of the notice.

During the hearing of the FAS Directorate Commission, the Customer explained that the specified requirement applies to cases where there is no technical capability to specify this in the structured bid. In the case under consideration, the antimonopoly authority agreed with the Customer and found the complaint unsubstantiated.[13] However, opposite decisions based on a formal approach to this issue cannot be ruled out.

We believe that the functionality of the EIS and ETP needs to be improved in all the above cases.

It should be noted that all unresolved problems can result in a denial of admission to participate in a procurement for suppliers, while for the members of the Customer's commission, they entail risks of administrative liability under Part 2 of Article 7.30 of the CAO RF—Unlawful denial of admission to participate in an auction. The fine under this provision for officials is 1 percent of the IMCP, but not less than 5,000 rubles and not more than 30,000 rubles.

Digital Contract

Following the results of procedures published after April 1, 2024, customers form draft contracts using the EIS in a structured form. This obligation was introduced by Part 11 of Article 8 of Federal Law No. 360-FZ dated July 2, 2021.[14]

In effect, a digital contract is a ".xml" file formed using the EIS, with data pulled from the notice, the structured bid, and the protocol for summarizing results.

The list of information included in a structured contract is set forth in Clause 1 of Part 2 of Article 51 of Law No. 44-FZ and includes a significant volume of information, including:

• information about the customer and the supplier, the subject matter, and the grounds for concluding the contract;
• information about the TWS;
• information about the terms of contract performance (performance timelines and stages, place of delivery, amount of security, and warranty obligations);
• information about the contract price and unit prices for goods, sources, and terms of financing.

Most information in the digital contract is locked for editing; however, some information is available for editing when forming the draft contract. For example, editing the unit price of a product is permitted when multiple product items are involved in the procurement.

Note that the digital contract does not contain all the information provided for by Article 34 of the Contract System Law as mandatory contract terms. For instance, it lacks terms regarding the liability of the parties, the procedure and timelines for acceptance and payment, the provision of warranty obligations, and several others. In this regard, customers are obliged to attach the contract in the form of an electronic document along with the digital contract.

Let us examine the main issues that customers and suppliers face when concluding digital contracts.

1. Ability to specify the unit price of a product up to 11 decimal places.

When forming a digital contract, the unit price is calculated automatically by the EIS based on the results of the procurement, proportional to the IMCP reduction coefficient. Under this methodology, the unit price may be calculated up to 11 decimal places. The Treasury of Russia, which is implementing digitalization in government procurement, has repeatedly stated that the EIS functionality was implemented in accordance with Order of the FNS of Russia No. ED-7-26/970@ dated December 19, 2023.[15] According to the formats for invoices and universal transfer documents approved by the specified act, it is permissible to specify the price per unit of measurement (tariff) with 11 decimal places. At the same time, the total cost of the transferred goods, works, and services is specified with precision to the kopeck.

These conclusions are also confirmed by law enforcement practice. For instance, in one case reviewed by a FAS Directorate, the procurement winner sent a protocol of disagreements to the contract, proposing to correct the prices for each product item to 2 decimal places. The Customer refused to make the changes, which served as the reason for filing a complaint with the FAS Directorate. The antimonopoly authority ruled that the Customer correctly specified the unit prices with rounding up to 11 digits, and therefore found the complaint unsubstantiated.[16]

Some customers round the unit price to 2 decimal places at the contract formation stage. Despite the technical capability for price adjustment, we do not advise resorting to this method unless absolutely necessary. Such actions entail risks of the control authority finding a violation of the contract conclusion procedure, given that the Contract System Law generally does not provide for reducing the contract price at the stage of its formation. Furthermore, if a customer artificially inflates the price of one item compared to others, the control authority may qualify this as an overexpenditure of budget funds.

2. Inability to correct the quantity of goods in a digital contract.

Information about the quantity of goods is pulled into the digital contract from the notice, and there is no technical capability to correct it. This creates difficulties in cases where the procurement winner offered a larger quantity of goods. This problem is particularly relevant, as discussed above, in the procurement of medicinal products. Although the standard contract for medicines states that the supply of medicines is carried out in whole packages and that supply in excess of the quantity is carried out at the supplier's expense, questions arise in practice as to how to formalize this excess in the contract, especially if it involves a partial package of a medicinal product.

We agree with the opinion of researchers on this topic[17] that adjustments to regulatory provisions are required to allow changing the quantity in a digital bid and using it as a source for forming a digital contract.

3. Scope of completion of the documentary contract.

Among practitioners, there are debates regarding the extent to which the contract attached as a separate document should be filled out: should it be fully completed with a duplication of the information specified in the digital contract, or should it only cover the parts missing from the digital contract, with references to the content of the digital contract?

The Treasury of Russia, at public events, has expressed the opinion that the second option is permissible. In our view, it is also preferable, as it reduces the risk of contradictions between the digital and documentary contracts, which are treated by control authorities under Part 1 of Article 7.32 of the CAO RF as a violation of the contract conclusion procedure. The fine for officials is 1 percent of the IMCP, but not less than 5,000 rubles and not more than 30,000 rubles.

Undoubtedly, the implementation of digital contracts has simplified the process and reduced the time spent on their formation due to the automatic filling of most of the contract and the lack of need to reconcile the information entered into the contract with the procurement terms and the bid. Furthermore, information on the conclusion of such a contract is generated automatically, eliminating "manual" oversight of contract terms by the treasury authorities. At the same time, the indicated problems require resolution in the shortest possible time. Furthermore, in our view, it would be desirable to continue the work on expanding the terms included in the digital contract.

Key findings

Undoubtedly, the digitalization of government procurement carried out by state authorities should be assessed positively. Many of the assigned tasks have been successfully implemented. At the same time, despite the significant number of measures taken, several unresolved technical problems and situations unregulated by regulatory acts remain.

In particular, the following are required:

• legal regulation of the rules for forming TWS characteristics and instructions for filling out bids, and the procedure for concluding digital contracts;
• expanding the capabilities for entering data into structured descriptions of the procurement object and structured bids, with a parallel move away from duplicating them in attached files;
• including other mandatory conditions in the digital contract, with the exclusion of their duplication in the electronic file.

Furthermore, in our view, it is worth continuing the digital transformation of the procurement process. For example, databases of potential reliable suppliers could be created, mechanisms for verifying procurement participants could be improved, and small-scale procurements could be transitioned to "digital."

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References

[1] Approved by Decree of the Government of Russia No. 2765-р dated October 1, 2021.

[2] Decree of the Government of Russia No. 145 dated February 8, 2017, On Approval of the Rules for the Formation and Maintenance in the Unified Information System in the Sphere of Procurement of a Catalog of Goods, Works, and Services for Ensuring State and Municipal Needs and the Rules for Using the Catalog of Goods, Works, and Services for Ensuring State and Municipal Needs.

[3] S. Postovalova, Structured Description of the Procurement Object: Common Errors, Progoszakaz RF, No. 7, pp. 6–11.

[4] Decision of the Moscow FAS Directorate of Russia dated June 26, 2024, in Case No. 077/06/106-8470/2024.

[5] Decision of the Moscow Regional FAS Directorate of Russia dated May 27, 2024, in Case No. 050/06/105-15878/2024.

[6] Decision of the Voronezh FAS Directorate of Russia dated May 27, 2024, No. 036/06/42-657/2024.

[7] Decree of the Government of Russia No. 656 dated June 8, 2018, On Requirements for Operators of Electronic Platforms, Operators of Specialized Electronic Platforms, Electronic Platforms, Specialized Electronic Platforms, and the Functioning of Electronic Platforms, Specialized Electronic Platforms, Confirmation of Compliance with Such Requirements, and the Loss by a Legal Entity of the Status of an Operator of an Electronic Platform or Operator of a Specialized Electronic Platform.

[8] Informational Letter of the Ministry of Finance of Russia No. 24-01-10/122331 dated December 18, 2023, On the Formation Using the Unified Information System in the Sphere of Procurement of a Notice of Procurement and on the Submission Using an Electronic Platform of a Bid for Participation in a Procurement.

[9] Decision of the Pskov FAS Directorate of Russia dated April 19, 2024, in Case No. 060/06/48-130/2024.

[10] Decision of the Primorsky FAS Directorate of Russia dated May 13, 2024, No. 025/06/49-464/2024.

[11] Decision of FAS Russia dated May 3, 2024, in Case No. 28/06/105-1159/2024.

[12] Decision of FAS Russia dated February 12, 2024, in Case No. 28/06/105-233/2024.

[13] Decision of the Krasnodar FAS Directorate of Russia dated February 19, 2024, No. 121/2024 in Case No. 023/06/42-752/2024.

[14] Federal Law No. 360-FZ dated July 2, 2021, On Amending Certain Legislative Acts of the Russian Federation.

[15] Order of the FNS of Russia No. ED-7-26/970@ dated December 19, 2023, On Approval of the Formats for an Invoice, a Universal Transfer Document Including an Invoice, a Universal Transfer Document, Formats for an Invoice Issued (Drawn Up) During the Sale of Goods (Works, Services), the Transfer of Property Rights, as Well as Upon Receipt of Payment Amounts, Partial Payment Against Future Supplies of Goods (Performance of Works, Rendering of Services), the Transfer of Property Rights, the Submission of a Document on the Shipment of Goods (Performance of Works), the Transfer of Property Rights (a Document on the Rendering of Services) Including an Invoice Issued (Drawn Up) During the Sale of Goods (Works, Services), the Transfer of Property Rights, as Well as Upon Receipt of Payment Amounts, Partial Payment Against Future Supplies of Goods (Performance of Works, Rendering of Services), the Transfer of Property Rights, and the Submission of a Document on the Shipment of Goods (Performance of Works), the Transfer of Property Rights (a Document on the Rendering of Services) in Electronic Form.

[16] Decision of the Novosibirsk FAS Directorate of Russia dated February 2024, No. 054/06/51-250/2024.

[17] G. Aleksandrov, Structured Contract: Problems of Implementation, Progoszakaz RF, No. 7, pp. 22–35.