2.7 PROCUREMENT

Procurement Management

During the first eight months of 2010 Federal Grid Company conducted all procurements in accordance with the Company’s Provision on the Regulated Procurement of Goods, Products and Services for Federal Grid Company Needs, as approved by the Company’s Board of Directors in July 2009. Since September 2010 all procurement activities have been carried out in accordance with the Provision approved by the Company’s Board of Directors in August 2010. The Provision sets out a uniform procedure for procuring goods, work and services based on modern competitive sourcing forms, predominantly in an open competitive format. The procedure complies with requirements specified in the Russian Government’s Regulations No. 1158 dated 13.10.1999 “On the Enforcement of Economically Sound Principles for Product (Services) Pricing by Natural Monopolies.”

The uniform procurement procedure helps ensure that funds are spent efficiently as intended and to secure economically sound and competitive prices from suppliers. This procedure ensured the realization of the following basic procurement management principles:

Import replacement

Import replacement is an economic strategy and state industrial policy aimed at replacing imports that are in high demand on the domestic market with domestically produced goods. The social and economic goal of this strategy is to create jobs and keep added value in Russia, as well as to foster innovation.

  • Transparency. Procurement procedure rules are set out on the corporate web site. Information about any procedural violations can be sent to the Company’s Central Tender Committee (CTC), which includes representatives from the Russian Ministry of Energy and the Federal Antimonopoly Service. The annual procurement program is published on the corporate web site and on the TZS-Elektra electronic trading site. A significant share of contracts is awarded via open tenders and other open competition formats. Bids for these contracts are solicited via the corporate web site, the electronic trading site and via mass media.
  • Competition. The procurement system is designed to give a preference to open bidding, ensuring that the best offer wins. Any competitive process restrictions require serious substantiation and the approval of the Company’s regulatory bodies. Only the Company’s CTC can make decisions to use only one a single supplier for sourcing.
  • Substantiation. The procurement procedure rules require every decision to be substantiated and delivered in writing, which makes the process more efficient and prevents corruption.

Federal Grid Company’s Central Tender Commission approved TZS-Elektra, a system designed to set up and manage competitive and regulated non-competitive procurement based on Internet technologies, as the electronic trading site (ETS) recommended for use by Federal Grid Company and its SDCs (Minutes No. 2007/51/5 as of 2 March, 2007).

Competitive Procurement

2008 2009 2010
Competitive procurement amount (RUR mln) 234 475,3 49 550,8 259 302,98
% of total procurement 90,3 59,6 72,5

The Annual Comprehensive Procurement Program (ACPP) is drafted by various departments of the Company’s administrative office and its branches.

In 2010 competitive procurement carried out by the Company stood at RUR259,302.98 million, which represents 72.5% of the year’s total procurement.

In 2010 as part of the Import Replacement Program, the Company signed agreements with 35 Russian power equipment producers. In value terms, the share of imported equipment purchased by the Company stood at 70%.

The Company’s 2011 procurement tasks include:

  • Cost reduction by saving funds when sourcing products (goods, work and services);
  • Providing Federal Grid Company and other electric grid companies with products of the required quality at the lowest price possible and on schedule;
  • Optimizing the procurement management system using best practices;
  • Aligning the Company’s Regulations on Procurement in accordance with the law “On the Procurement of Goods, Work and Services by State-Run Corporations (Companies), Natural Monopolies and Public Utilities Companies,” after it passes Russian State Duma.

Import Replacement Policy

Import replacement is an economic strategy and state industrial policy aimed at replacing imports that are in high demand on the domestic market with domestically produced goods. The social and economic goal of this strategy is to create jobs and keep added value in Russia, as well as to foster innovation.

The primary principles of Federal Grid Company’s import replacement policy include:

  • Upgrading existing electric grid production assets;
  • Instituting innovations in the UNEG;
  • Improving energy efficiency (including reducing electricity losses in the Russian UNEG (~5%) to the level of the UNEG losses typical in developed economies (~3.7%), which enables potential savings of up to 3 billion kWh per year);
  • Having strong industrial safety;
  • Developing production and scientific potential;
  • Engaging in technological improvement in production;
  • Improving the payment balance structure;
  • Optimizing internal demand;
  • Creating jobs.

Federal Grid Company is developing an Import Replacement Program that aims to boost Russia’s electric equipment industry and increase the share of Russian suppliers in the Company’s major investment program. The Program is planned till 2020 and includes three sub-programs:

  • Short-term (till 2014) will see an increase in the share of Russian-made equipment in the Company’s procurement to 40%. The sub-program also relies on making greater use of
  • Russianmade equipment, which is already mass-produced and has received industrial certification. Companies that produce equipment look to receive expanded services, including maintenance support for equipment;
  • I Mid-term (till 2015). In accordance with it the share of Russian-made equipment purchased by the Company is to reach 50%. This stage aims to upgrade equipment properties to world best levels. One way to achieve this aim is to create joint or licensed production facilities;
  • Long-term (till 2020) will see the share of Russian-made equipment increase to at least 60%, driven by the development and launch of mass production for innovative equipment previously not made in Russia, and by exceeding best practice standards.
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