The amount of publicly invisible state purchases for 2018 exceeded 7% of GDP, as RF Accounts Chamber revealed. BRIGHT is involved in developing opinions on the subject

Corporate purchases for about 7.5 trillion RUB were withdrawn from public visibility and traceability in 2018. This sum exceed in two times the rate of previous year, it was revealed by monitoring of the Accounts Chamber.

Hidden tenders 

Last year purchases made through UIS (Unified Information System in the sphere of state purchases) were 16,7 trillion RUB. And total amount of contracts, including publicly unvisible is estimated at 24,2 trillion RUB according to the reports of corporate customers. The difference was 7,5 trillion RUB – what is in two times more than the previous year ( 3,4 trillion RUB).

Hidden purchases lead to restriction of competition, increased risks of inefficient spending of budget funds, what restrains economic growth, the Accounts Chamber stressed. According to the Ministry of Finance of RF the amount of closed purchases, including state secret and purchases which the government classified by special decisions was 808 billion RUB. 

Low savings and competition 

The main problem is that there is a lack of stable competitive offer in many sectors, Denis Abakumov managing partner of consulting company Bright explained to RBK. “You can invent as many refined laws and procedures as you want but if on market there are no suppliers, contractors or their amount is strictly limited, including the reason of sanctions you won`t be able to get a nice price. Abakumov said. In Russia, not all markets have signs of pure competition. “The main aim of purchase system – is to satisfy the need of customer: to deliver the equipment in time, to bring a qualified contractor to the site and so on. And the price from the customer point of view is not a main factor of success.” – the expert emphasized. 

But even if there is competition purchases are made at inflated prices. To reduce “human factor” and corruption risks, the Unified Information System in the sphere of state purchases was introduced. From 2019 customer has to do all purchases in electronic form. But with a help of monitoring it was found out that the system is unreliable. 21% of all the period that it worked it was unavailable due to maintenance work. Overloads and technical problems make the access to purchases difficult for business, lead to delays in terms and involvement of customers to administrative responsibility as auditors say. 

It makes no sense to transfer all purchases into electronic trading as Abakumov thinks. “System of electronic purchases can provide the full cycle only for standardized goods and services with a clear connection between price and quality. Any complex equipment, multi-part service with a complex pricing system requires face-to-face negotiations, starting with discussion of technical tasks and finishing with final signing of contract” – explained the expert. 

The financial burden for business has grown  

Since October 2018, the rules for assurance of application for participation in public state purchases (Federal Law of the Russian Federation from April 5, 2013 No. 44-FZ) and purchases of state companies from subjects of small and medium-sized enterprises (Federal Law of the Russian Federation from July 18, 2011 of No. 223-FZ) has been significantly changed. That led to increase of cost loading for business.

The amount of breakdowns has grown in almost three times

The total amount of founded breakdowns by the Accounts Chamber was 293,7 billion RUB – that`s 2,8 times more than in 2017. Traditionally, the majority of breakdowns (74,6% or 219,7 billion RUB) are connected with initial minimum of contract price. At the same time the legislation doesn`t regulate pricing in purchases.

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Digitization in the agenda. Nornickel example

Yesterday (04/30/19) an interesting article was published in Vedomosti about the digitization experience of the largest Russian company producing precious and non-ferrous metals. This topic is consonant with the current global agenda and our expertise in the implementation of the Digital Field project in the oil industry. We give the whole article and the comment of our partner on the topic.

Nornickel will save millions of dollars with digital technology. Digital transformation has an increasing impact on mining companies.

In the period from 2019 to 2022, the capital costs of Nornickel (34.6% owned by Interros structures of Vladimir Potanin) will be about $ 10.5–11.5 billion, it follows from the presentation of the company's long-term strategy. Excluding environmental investments and growth projects, the company's capital expenditures for four years will be $ 6.5–7.5 billion, 3% of which will be used to introduce information technologies, i.e., about $ 200 million. The company expects to get more significant effect of these investments: annual EBITDA growth of $ 30–40 million, indicated in the document. In 2018, EBITDA was $ 6.2 billion.

Digitization is not an end in itself, it is an additional efficiency tool that managers can use to implement the efficiency improvement program, said Sergey Malyshev to Vedomosti, the Senior Vice President and Chief Financial Officer of Nornickel. Digitization is carried out in several sectors - in the accounting, in the service of accreditation of suppliers and contractors, in the field of labor protection and industrial safety, etc.

The technology of big data analysis and machine vision has the greatest potential for application at industrial facilities, Malyshev said. For example, at Talnakhsky concentrating plant (Krasnoyarsk Territory), the company was able to optimize the flotation process (one of the stages of ore processing) by creating a digital prompter. The line processes huge amounts of raw materials, and the prompter improves the efficiency of metal extraction. We have already managed to increase extraction by 800 tons of nickel equivalent and earn an additional $ 10 million per year in only one flotation site, Malyshev reports. The digital prompter has passed the stage of pilot operation and will be introduced at other concentrating plants of the company.

The project for the implementation of the anode closure detection system in the electrolysis shop of the Copper Plant (Transpolar Division) is in the advanced stage, he continues. During electrolysis, growths appear on the sheets, and if they are not removed, a short circuit may occur, which significantly slows down the production process. A system has been developed that includes a dynamic thermal imager and an image processing algorithm therefor, which allows you to track these processes at an earlier stage. “This has the effect of tens of thousands of dollars in savings,” Malyshev said. Another process where machine vision turned out to be more efficient than human vision is to identify the ore-contaminating elements on the conveyor before they enter the crusher. “Metal elements can cause the crusher to stop temporarily, and machine vision avoids such stops. A person may miss a metal element in the ore, but a machine will not”, he added.

Industry leaders have made a significant step forward in understanding what digitization is and how it affects all aspects of the business, including the company's production and commercial processes, argues Olga Linde, partner at Bain & Company. “Introduction of digital solutions is beginning to bring significant results for companies in the industry. For example, predictive repairs increase equipment reliability and can lead to overall savings of 10–20%, ”she continues.

But the introduction of digital technologies is not a replacement for system work to improve the company's operating processes, but a tool that allows you to speed up or increase the effect of this work, Linde emphasizes.

“Digitization is a logical continuation of the development initiatives of companies to automate their business,” Bright Managing Partner Denis Abakumov agreed. - This is the next stage of development of the industry, which complements the human intellect, becomes its assistant in solving everyday tasks”.

Digital transformation will provide companies in the industry with an increase in efficiency of 15–20% over a period of 5–7 years by optimizing operating activities and maintaining equipment, said Jörg Dorler, executive director of the consulting department at Deloitte. “The key success factors of digital transformation are quick selection and implementation of the right technologies, as well as a flexible corporate culture able to adapt to such changes,” the expert says. Although the dynamics of commodity markets will remain a key indicator affecting industry players, digitization will be an increasingly important factor in the value of companies, Dorler concludes.

The effect of the introduction of new technologies is not immediately visible, Abakumov emphasizes, their introduction requires the mobilization of internal and external resources of companies. “But the long-term perspective of the direction is huge,” he concludes.

BRIGHT is involved in developing opinions on the causes of poor-quality oil entering the Druzhba pipeline

The problem with the quality of oil coming from Russia to Belarus via the southern branch of Druzhba pipeline (running on the territory of Belarus, Ukraine and Poland to Germany) arose on April 19, when the Belneftekhim consolidated group announced the receipt of low-quality Urals export mixture with high organic chlorides content. Russia had to limit its exports to Europe. Transneft and the Ministry of Energy recognized the problem and promised to fix it. The situation was discussed at the highest level: President of Belarus, Alexander Lukashenko, discussed with the President of Russia the issue of supplying substandard oil to Belarusian refineries, law enforcement agencies opened a criminal case for deliberate oil pollution, investigations are taking place in Samara in the offices of several private companies (Transneft announced that substandard oil entered the pipeline through the accounting site in the Samara region, which was owned by Samaratransneft-Terminal and through which raw materials from several private oil companies of the Samara region arrived, that were not a part of vertically integrated companies). About 700,000 tons of oil occurred to be polluted. Belneftekhim estimated the lost revenue from refining reduction due to the deterioration of the quality of Russian oil at $ 100 million (the company also had to replace some of the equipment that failed due to the high chlorine content in Russian oil), but reputational risks are much higher. The investigation produces several versions - up to sabotage. 

Our comments on a sensitive issue appeared live on "Echo of Moscow" radio (as of April 26, 2019), issues of Vedomosti (as of February 26, 2019) and Kommersant (as of April 29, 2019) newspapers. "Denis Abakumov, managing partner of Bright consulting company, notes that it is impossible to overpass the Transneft quality control system without violating the law. “It’s impossible to overpass the system without leaving traces, especially on such a scale,” he says.“ All processes are technically secured and regulated in detail.” According to him, if the problem is not corrected, there will be the likelihood of crisis situations in the markets where Russian oil went through Belarus, “but it is very low.” Mr. Abakumov recalls that under contracts, Transneft is responsible for the oil supplied through its pipelines. “If Transneft has taken oil into its system, this means that it agreed that the raw materials in its system are of a good quality and therefore all the risks lie on it,” he says". 

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Utilization of solid municipal waste in Russia. We follow the reform/creation of the industry

Global environmental context

Every year, more and more parties are trying to bring their own economic activity and political decisions in line with the global environmental agenda - states, transnational corporations, medium and small businesses, and individual citizens. For a country that ranks 114th in the Global Green Economy Index (out of 130 countries participating in the study), this should be especially relevant.

“Global warming, deterioration of air quality and pollution of the oceans - all of these environmental problems, as a rule, are not perceived by the inhabitants of the planet as aggravated as the constant increase in solid municipal waste (SMW). Although the contribution of SMW to total carbon dioxide emissions is limited to a “modest” 5% (power engineering, industry and agriculture, for example, harm the ecosystem much more), the threat of proliferation of SMW landfills and disposal sites or the construction of incinerators in the immediate vicinity of residential infrastructure is regularly caused by public protests in different parts of the Earth", - an excerpt from the March issue of RBK" Green is a new black", entirely devoted to the" Green economy".

The situation with the MSW in the country, “garbage reform” and our contribution 

And this is very indicative with the example of our country. Thus, planned not for the first year (or more precisely since 2014, when the government decided to seriously take up the “regulation” of the market, developing a full package of amendments to the legislation over the last 5 years) reform of MSW industry (solid municipal waste - ФЗ-89 introduces this term instead of habitual SMW) entered into force to the accompaniment of several major exacerbations: in Volokolamsk, the Arkhangelsk region and other regions, residents demanded to deal with the old landfills and opposed the development of new ones located too close to human settlements. Unauthorized landfills, dozens of private and municipal companies involved in waste removal and disposal, lack of adequate infrastructure, lack of “green thinking” among the population, including due to the lack of an adequate education system ... and 70 million tons of MSW generated in the country every year (according to the Ministry of Natural Resources). 

The agenda of “Ecology” National Project, approved at the end of 2018, envisages 11 federal projects with a period of implementation by 2024, designed to systematically respond to the environmental problems accumulated over the years, including those listed above regarding the treatment of MSW. As part of “Development of an integrated system for MSW treatment” FP, a significant launch of new capacities in sorting and recycling of waste and, accordingly, an increase in the proportion of MSW sent for recycling (that is, recycling - in accordance with the definition of ФЗ-89) is expected, from 7% in 2019 up to 36% by 2024, and the share of MSW directed to processing (that is, sorting), from 12% to 60% in the same time period. Financing of the project is estimated at 296 billion rubles, with about a third of these funds allocated from the federal budget.

In addition, the country launched a “garbage reform”, changing the principle of organization of the system: on January 1, 2019 a new link was introduced into the waste management system - regional operators, selected by parties on a competitive basis and called upon to be responsible for the entire waste management cycle in the region, and to develop the appropriate infrastructure. In addition to regional operators, a federal regulatory body, the Russian Ecological Operator, also appeared, which is designed to accompany the “garbage” reform, create conditions for investors to enter and attract investments in the industry, carry out educational activities, accumulate and develop competences in the sphere of MSW treatment, initiate changes in legislation - both justified and necessary.

In 2011-2012, “Bright” company carried out a project on reforming the system for handling solid waste in Moscow (the capital waste volume is more than 12% of the volume of the country as a whole), within the framework of which the Integrated Reform Program for waste of Moscow”, based on the current situation of enterprises (SUE“ Ecotechprom ”and MSUE “Promothody”) in the industry, analysis of international experience in this field, selected model of development of each enterprise and economic efficiency. Even then, we paid special attention to the exhaustion of landfills, the lack of capacity for sorting and recycling, tariffs that did not cover the industry’s costs and investment needs, need to create attractive conditions for private investment, expediency of having a single operator responsible for the entire MSW from transportation to disposal, as well as organization of at least two-container waste collection (for organic waste and separately for glass, plastic, paper and metal - fractions to be further processed). All this was accompanied by calculations and a solid evidence base accumulated by our experts for almost a year of work on the project. 

Consonant initiatives with the results of that project — a random coincidence or evidence of their justification and the time tested, we are now observing in the course of the “garbage reform”, only by the example of other regions (for federal cities - Moscow, St. Petersburg and Sevastopol, the authorities provided three years for transition to a new model). To some extent, this allows us to feel involved in the changes taking place in the industry. In addition, our internal corporate and private initiatives of our employees (separate collection of garbage and its sending for recycling) are characterized by a conscious relationship with the environment, and at the local level contribute to this issue. We are advocating our readers for this.

We continue to monitor changes in the garbage industry and to inform you about significant changes.

3 significant projects in the field of supply chain transformation for a large oil company have been implemented

BRIGHT, together with the employees of a large oil company, has implemented a large-scale project to develop and implement a targeted procurement system - specified to meet the needs of offshore fields. By the way, the offshore discoveries of the customer company are among the top 10 largest oil and gas discoveries in the world. The construction of the target system included its concept, detailed described and regulated processes of the procurement system of the relevant unit, new procurement tools and mechanisms for long-term needs planning, a program for developing competencies, a plan for developing the procurement system of the exploration and production unit.

In parallel, projects were implemented for:

  • allocation of a separate center for procurement of oilfield services and capital construction services for exploration and production units,
  • organizing the process of developing and managing changes in integrated supply strategies for large projects for the respective unit.
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