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New Russian procurement law

Main legal consequences for the pharmaceutical and medical devices industries

24/12/2013

New Russian Federal Law No. 44-FZ “On the Contractual System in the Public Procurement Sector” dated 5 April 2013 (the “New Law”) will enter into force on 1 January 2014. This Law is to replace the current Russian Federal Law “On Placing Orders of Goods, Works and Services for State and Municipal Needs” No. 94-FZ (the “Old Law”).

This Alert gives a general overview of the main legal consequences of the implementation of the New Law for medical devices and pharmaceutical businesses in Russia.

1. Benefits for domestic manufacturers

1.1. Preferential legal regime for domestic goods

The New Law retains the concept of a preferential legal regime for those goods originating from the Russian Federation. Notwithstanding that the Russian Federation has joined the ranks of the WTO members last year, the preferences for Russian manufacturers of drugs and medical devices will be kept. Russia did not accede to the WTO Agreement on Government Procurement and, therefore, reserves the right to provide domestic manufacturers with a preferential legal regime. 
Moreover, the regime provided by the New Law is even stricter towards foreign goods than the one provided by the Old Law. Please see the table below for a comparison:

 

Old Law provisions

New Law provisions

Effect

Equal access of foreign and domestic goods 
to the public procurement system

As a general rule, foreign goods are to be admitted to public procurement on equal terms to domestic goodsunless otherwise provided by law or an international treaty.

The foreign goods may only be admitted to public procurement on equal terms to domestic goods provided an international treaty of the Russian Federation with the country of origin of goods provides so.

The equality of access presumption has been reversed. Equal access will be subject to the relevant international treaties so permitting having been signed and ratified. Currently, there is only such a treaty with Belarus.

Grounds for the provision of a preferential regime for domestic goods by partially limiting or totally prohibiting the procurement of foreign goods

For the purposes of the defence and safety of the Russian Federation.

For the purposes ofprotection of the constitutional system, national defence and safety of the country, protection of the domestic market, development of national economics and to support domestic manufacturers.

The Russian Government will enjoy new legal grounds on which to justify measures favouring domestic goods.

Therefore, the New Law is more supportive of domestic goods. The public procurement of goods produced outside of the Russian Federation will be more limited come January 2014.

1.2. Pricing benefits for domestic medicines and medical devices

The drugs and medical products produced in Russia (and Belarus) are traditionally granted preferential treatment in the public procurement sector. During previous years these goods were regularly included in the annual list of goods which are subject to “foreign goods discounting” (i.e. a supplier’s obligation to grant an additional discount if the goods being sold to a public customer are of foreign origin).

Currently, the winner of an auction (e.g. a bidder offering the lowest price) offering drugs or medical products produced outside of Russia and Belarus, has to grant an additional 15% discount on the final price for the goods. It is reasonable to assume that a similar approach will be taken in 2014.

2. Main innovations in the public procurement of drugs and medical devices

2.1. Anti-dumping provisions
General anti-dumping provisions

The New Law provides for certain measures against price dumping by bidders.

In particular, if the initial (maximum) contract price exceeds 15m RUB (approx. 330k EUR), but the winner of the tender proposes a price that is lower than the initial (maximum) price by 25% or more, the winner must provide an increased financial assurance – 1.5 times more than initially proposed to the public customer.

The lawmakers believe that such financial measures will help prevent unreasonable price dumping during the tender, which could take place if a bidder proposes goods of a poor quality or that are unreasonably cheap.

Special anti-dumping provisions

If the goods to be procured are needed for normal life support (including food, medicines and medical devices needed for the provision of emergency medical services), then an additional measure may apply cumulatively with the general anti-dumping measures referred to above.

When a contract price in an electronic tender is reduced by 25% or more compared to the initial (maximum) contract price, the winner must submit a calculation of the proposed contract price or the manufacturer’s letter of guarantee or other document evidencing that the goods can actually be supplied at the price specified in the bid.

2.2. Procurement of medicines under names

As a general rule, the medicines are to be procured under international non-proprietary names or, in the absence of such, under chemical or grouped names.

Only those medicines which are included in a special List to be approved by the Russian Government, or prescribed for a particular patient in accordance with his/her individual indications, may be procured under trade names.

Furthermore, when procuring medicines, it is prohibited to combine into one tender lot:

  • medicines procured under international non-proprietary or chemical names together with medicines procured under trade names; or
  • two or more medicines with different international non-proprietary or chemical names if the initial (maximum) price of the lot exceeds the limit stipulated by the Russian Government – depending on circumstances, the limit will be 1, 2.5 or 5m RUB (approx. 22k, 55k or 111k EUR).
2.3. Peculiarities of the procurement of EDL medicines

A tender participant will be prohibited by law from entering into a contract for the supply of medicines included in the Essential Drug List if:

  • the maximum sale price of the medicines has not been registered with the Ministry of Health; or
  • the participant offers a price which exceeds the registered maximum sale price.
2.4. Presumption of supply of new goods

By default, only new goods may be supplied under any kind of public procurement contract.

Therefore, if repaired, refurbished or remanufactured medical equipment or other medical devices are to be supplied under a public procurement contract, this will have to be expressly permitted in the tender documentation. One can reasonably anticipate that this will, in practice, be very unlikely.

3. New anti-corruption and financial assurance initiatives
3.1. Enhancement of the role of the List of Bad-Faith Suppliers

From 1 January 2014, public customers will be under a legal requirement to provide in the tender documentation that the supplier must not be included in the List of Bad-Faith Suppliers.

Previously, public customers were free to decide whether to make inclusion on that List a bar to participating in a tender. In practice, it was rare for public customers to exercise this right. Therefore, the companies included in the List of Bad-Faith Suppliers had a good chance of participating in tenders.

Moreover, the List of Bad-Faith Suppliers will contain information not only on suppliers themselves (legal entities), but also on their shareholders and general manager.

Therefore, the companies included in the List of Bad-Faith Suppliers or those companies with general managers or shareholders included in that List will not be able to participate in tenders.

3.2. Disclosing information about shareholders and management

The winner of a tender entering into a contract at a price which increases by:

  • 1bn RUB (approx. 22m EUR) when the goods are being procured for federal needs; or
  • 100m RUB (approx. 2.2m EUR) when the goods are being procured for regional or municipal needs

will be obliged to disclose information about its shareholders and management.

3.3. Financial assurance of the performance of a public procurement contract

From 1 January 2014, public customers will be obliged to require the winner of a tender to provide financial assurance of the proper performance of the contract in the following amounts:

Initial (maximum) contract price

Assurance amount

< 50m RUB (approx. 1.1m EUR)

From 5% to 30% of the contract price

> 50m RUB (approx. 1.1m EUR)

From 10% to 30% of the contract price, with the amount of the advance payment as a minimum

4. Requirements retained in the New Law

4.1. Form of public procurement of drugs and medical devices

As before, medical devices and drugs will have to be procured through an electronic auction or request for quotations, unless otherwise stipulated by law.

In exceptional cases expressly provided for in the New Law (for example, the individual indications of a particular patient) medicines may be procured through requests for quotations and proposals, and a subsequent purchase from a single supplier.

4.2. Prohibition on joining different kinds of medical equipment into one tender lot

The New Law, together with the relevant instructions of the government authorities (such as the Russian Federal Anti-monopoly Service), retains the requirement that medical equipment may not be combined with other equipment in the same tender lot.

5. Comments

Based on the above, the New Law reveals the following trends:

  • Further support for domestic manufacturers 
    • The New Law develops the concept of state support for Russian manufacturers and provides for even more preferences for domestic manufacturers than the Old Law.
    • The benefits granted to Russian manufacturers of medicines and medical devices might be an additional argument in favour of manufacturing localisation in Russia.
  • Increased transparency of public procurement procedures and requirements of financial assurance
  • The New Law provides for the disclosure of a significant volume of information about tender winners and enhances the role of the List of Bad-Faith Suppliers. It should make it more difficult for bad-faith tender participants to circumvent legal requirements by applying fraudulent schemes. 
  • In addition, the New Law provides for strict requirements of financial assurance of contract performance to be provided by tender participants. 
  • Thus, we recommend giving additional attention to the financial security of the distributors promoting your products in Russia and to the absence of them and their managers in the List of Bad-Faith Suppliers. Indeed, these issues should be among the key points of any distributor audit.
  • No change to the tender procedure from a technical standpoint
  • Although the New Law introduces some new kinds of public procurement tenders (such as requests for proposals, closed two-stage tenders, etc.), this should not significantly affect pharmaceutical and medical device businesses, because medicines and medical devices will still mainly be procured under an electronic auction and request for quotations. 
  • The technical peculiarities of conducting electronic auctions and requests for quotations (timing, procedure, etc.) will also remain much the same.
Source
CMS Client Alert | December 2013 | Lifesciences
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Authors

Vsevolod Tyupa