Order rate: Accounts Chamber sees risks for public procurement due to key rate increase

Due to the high key rate, more and more state procurements may not take place in thenear future, the Accounts Chamber warned in its report (Izvestiya has it). The rate affects the cost of bank guarantees, which suppliers need when signing contracts. In addition, the Central Bank's policy affects the amount of penalties in case of delays in contract fulfillment. After the key rate was raised only in August 2024 (to 18%), the share of failed deals jumped to 69%. Despite the fact that the volume of government purchases is quite large - last year they were announced for 10 trillion rubles. Why fewer and fewer entrepreneurs want to participate in tenders and what it means for the economy - in Izvestia's article.

How the key rate affects public procurement

Thegrowth of the key rate may increase the share of failed government purchases in the short term, the Accounts Chamber (AC) warned in its November report on government tenders. The point is that the high rate reduces the availability of banking products for potential suppliers, which reduces their activity in the bidding process, the auditors explained.

Photo: RIA Novosti/Maria Devakhina

In particular, the terms of the bank guarantee, which is required to participate in the tender, depend on the size of the key, the SP report said. This is a document stating that a credit organization vouches for the fulfillment of the contractor's obligations.

Often for participation in a tender the customer asks to make a security deposit, which many people form from credit funds, explained Andrei Barkhota, PhD in Economics. According to him, the availability of the latter has sharply decreased amid the growth of the key rate. In addition, the contractor often has to attract bank financing to perform the work , which also requires borrowing at high interest rates. As a result, both motivation and the very possibility of participation in public procurement are reduced, the expert added.

The supplier pays a fee to the bank for issuing a guarantee. It usually amounts to 3-5% of the contract amount. Due to the growth of the key rate, the costs of credit organizations for raising funds are increasing, and they put it into the cost of their products. As a result, this increases the financial burden on suppliers, and they subsequently do not participate in procurement.

- The influence of the rate also affects fines and penalties, if the terms of the contract are violated after a particular supplier has won the tender, - added Andrei Girinsky, PhD in Economics, Associate Professor at the Faculty of Economics of PFUR.

Thus, penalties are charged for each day of delay and are calculated based on the key rate: the higher it is, the more you have to pay.

Chairman of the Bank of Russia Elvira Nabiullina

Photo: press service of the Bank of Russia

The Accounts Chamber analyzed the correlation between the key rate and the share of failed purchases. According to the report, when the Central Bank raised the rate from 16% to 18% in August 2024, the monthly average of failed deals jumped from 58% in July to 69% the following month.

The central bank has been raising the rate consecutively since July 2024. At the last meeting on October 25, the regulator raised it from 19% to 21%. The key rate may begin to decline as early as 2025, said Central Bank head Elvira Nabiullina on November 19 in the State Duma.

Why every second government procurement turned out to be failed

According to the results of last year, 60% of public procurement failed, according to the report of the SP. Thus, in 2023, the total volume of proposed contracts was Br10.6 trillion - of which contracts for Br4.2 trillion were executed. Since 2017, the number of failed deals has increased by 18%.

In most cases, the high proportion of failed procurements was due to the lack of those willing to fulfill the order or the participation of only one bid, the auditors emphasize. In some cases, this is explained by the territorial remoteness of participants, as well as the specifics and conditions of tenders, the SP notes.

Photo: Izvestia/Anna Selina

In addition, according to the document, many state bodies make centralized and large orders - for example, publish one notice for the supply of medicines for all entities at once. This is often abused by customers to facilitate the process. Too large a purchase by the number of items does not take into account the capabilities of manufacturers and market offers, which discourages potential suppliers from bidding, the auditors explain.

For example, in procurements up to 5 million, half of the contracts are successful. Whereas for notices for 50 million and more only every fifth bid finds an executor, the report says.

At the same time, the most expensive orders are won in most cases by suppliers with five years of experience in the public procurement market, the auditors say. According to them, this hinders the development of competition.

Photo: Izvestia/Mitriy Korotayev

According to the SP, the most competitive areas of procurement include catering orders, as well as services in education, certification, cleaning and security. Meanwhile, the most failed contracts are in real estate, insurance and transportation deals.

- The fact that the bulk of failed contracts are in real estate transactions is due to the high cost of such procurements. The same applies to insurance, as it is inextricably linked to the registration of loans, which are affected by the growth of the key, - emphasized Associate Professor of the basic department of financial control, analysis and audit of Plekhanov Russian Economic University Yulia Kovalenko.

Finally, another reason for the high proportion of failed deals is underestimation by government customers of the cost of purchased goods and services compared to their market values, according to the document of the Accounts Chamber.

Why public procurement is important for the economy

Public procurement is of strategic importance not only for individual companies, but also for entire industries, said economist Andrei Barkhota. He explained: government contracts are firmly embedded in a company's business processes, and often in their production cycle. According to the expert, on the contractors' side such deals often provide the lion's share of revenue and employment.

To avoid negative consequences, it is necessary to provide for affordable financing for contract fulfillment at least for successful bidders, he believes.

A large share of unfulfilled state contracts can be a problem, as such deals are very important for the economy, said Andrei Girinsky of the Russian University of Management and Science. He explained: as a rule, they are related to the provision of necessary goods and services for state needs. And their volumes are very large: for example, according to the SP, in 2023, there were applications for public procurement for more than Br10 trillion, while all federal budget expenditures that year amounted to Br32.4 trillion.

The problem of the growth of failed government purchases can be solved by a more conscientious attitude of suppliers to their duties, the expert believes. As well as modifications in the application of penalties and likely changes in the key rate in the foreseeable future, he concluded.