To support its activities, RusHydro Group purchases large quantities of works, services, raw materials (including fuel) and products from third parties. RusHydro Group has in place a number of internal by-laws to prevent inappropriate and inefficient use of funds.
Procurement by RusHydro is governed by the applicable Russian laws, including Federal Law No. 223-FZ On Procurement of Goods, Works and Services by Certain Types of Legal Entities dated July 18, 2011 and the Regulations on Procurement (approved in 2018 by resolution No. 265 of RusHydro’s Board of Directors No. 265 dated February 6, 2018, restated as the Uniform Regulations on RusHydro Group’s Procurement Policy effective as of November 1, 2018 pursuant to resolution No. 277 of RusHydro’s Board of Directors No. 277 dated October 4, 2018), whereby:
- the Company’s Board of Directors oversees procurement management, approves the annual comprehensive procurement program and its progress report.
- the Central Procurement Commission (CPC) is a permanent collective body which shapes and carries out the uniform procurement policy as well as exercises control and coordination of procurement activities. The CPC Chairman is responsible for procurement management within RusHydro.
- the CPC appoints standing procurement commissions, which are directly authorized to arrange for and carry out procurement procedures. Depending on the scope of powers, there are procurement commissions of level 1 and level 2 as well as ad hoc commissions.
The objectives and principles of the Uniform Regulations on RusHydro Group’s Procurement Policy
The Regulations on Procurement set out the following objectives and principles:
- procurement regulation aims to ensure timely and efficient supply of goods, works and services to the customer as well as prudent use of the customer’s funds.
- procurement regulation relies on rational use of special procedures to make purchases on an arm’s length basis as closely as practicable and provides for mandatory procedures to be followed by the officers in charge of procurement.
These procedures ensure:
- careful planning of demand;
- market research;
- procurement transparency;
- focus on equality and fairness, with no discrimination or unreasonable restrictions on competition among participants where possible, or, if impossible, enhanced internal control;
- intended and efficient use of funds allocated for purchasing goods, works and services (taking into account their life cycle cost, where applicable), and implementation of cost-cutting initiatives;
- no restrictions on participation in the procurement in the form of non-measurable requirements for participants;
- efficient and fair selection of preferred suppliers following a comprehensive SWOT analysis (with price and quality being the key factors); and
- follow-up on contracts and use of goods, works and services purchased.
Procurement regulation is based on a systemic approach which ensures that uniform corporate rules are laid down and followed, also determining the authority and responsibility of the officers in charge of procurement. As a result, the customer enjoys:
- benefits of a regulatory framework;
- effective platform for procurement management and follow-up control;
- qualified procurement professionals;
- well-established procurement infrastructure (information support, e-commerce tools, certification, professional consultants, etc.).
RusHydro publishes information on planned procurement activities and places up-to-date official announcements describing the scope of procurement (item name), material terms of the competitive procurement and other details on its official website in Russia at www.zakupki.gov.ru as well as on the electronic trading platform at https://rushydro.roseltorg.ru.
Following the competitive procedure, the Company publishes the procurement results specifying the winning bidder and the respective price. [103-2]
Implementation of the annual comprehensive procurement program
In 2018, total value of contracts awarded under procurement procedures at RusHydro Group amounted to RUB 270,704 mn (incl. VAT), down by 13% year-on-year, mainly due to a 39% decrease at RusHydro Subgroup. At the same time, the number of procurement procedures rose by 10% to 17,445 due to a 14% increase at JSC RAO ES East Subgroup. Open bidding accounts for over 50% of all procurement procedures, of which 99% run on an electronic trading platform. [102 -9]
|Type of procurement||2017||2018|
|RusHydro Subgroup||RAO ES East Subgroup||RusHydro Subgroup||RAO ES East Subgroup|
|Procurement through open bidding||67.79||42.37||52.69||48.31|
|Procurement through closed bidding||0||0||0.29||0.82|
Procurement is mostly (in money terms) for works and services related to repair and investment programs (upgrade, capital construction projects) of the companies within RusHydro Group.
The procurement items include goods usually purchased by energy companies (core equipment (boilers and turbines), transformers, switchgear cells, package transformer sub stations, isolation valves, control valves, line accessories, cable fittings, pipelines, steam pipelines and spare parts, cabling and wiring, electrical appliances, metal goods, insulators, heat insulators, etc.).
One of the Group’s most important strategic priorities in procurement is to ensure, in a timely and efficient manner, competitive awarding of contracts for fuel supplies (mainly coal and diesel fuel) to meet the needs of its generating facilities (GRES, CHPP, etc.). In 2018, the value of contracts awarded for fuel supplies amounted to RUB 83,042.59 mn (incl. VAT), or 30.7% of total value of contracts awarded under procurement procedures.
The years 2016 through 2018 were characterized by high export prices for coal products, including in the Asia-Pacific market. As a result, the domestic market faced shortage of coal supply nudging up prices that steadily rose at a rate of up to 20 a year. During the period of low coal prices, RusHydro Group’s subsidiaries entered into a number of long-term contracts that expired in 2018. The price terms in these contracts were based on the tariffs then applicable. RusHydro Group intends to adjust the coal purchase price so that it equals the fair price reflecting the fuel cost component and use it as a base price in bidding for long-term coal supply contracts. 
Impact of procurement activities on the regions of operations, communities and the environment
Being one of Russia’s largest purchasers of goods, products, services and raw materials, RusHydro Group is fully aware of its responsibility to the regions where it operates, communities and environment and relies on the Uniform Regulations on RusHydro Group’s Procurement Policy (approved by resolution No. 277 of RusHydro’s Board of Directors No. 277 dated October 4, 2018). According to the regulation, any design works (including pre-feasibility studies) for new hydropower and thermal power projects, their construction and modernization, any core equipment and technical specifications and the terms of contracts awarded under procurement procedures must be aligned with the customer’s approved internal sustainability by-laws to ensure:
- compliance with environmental requirements;
- protection of cultural heritage sites;
- industrial and occupational safety;
- protection of indigenous peoples and socially vulnerable groups;
- control over negative footprint on climate change and environment; and
- biodiversity conservation and restoration.
Procurement procedures based on tenders or requests for bids may include relevant sustainability criteria.
Procurement from small and medium-sized businesses (SMEs)
To facilitate competition and development of SMEs, RusHydro Group seeks to partner with small and medium-sized businesses as part of its procurement activities.
RusHydro launched a partnership program with small and medium-sized businesses (the “Partnership Program”) approved by RusHydro’s Order No. 568 dated July 16, 2014). The Partnership Program is developed in accordance with the Russian Ministry of Economic Development’s guidelines (letter No. 23941-EE/D28i dated November 1, 2013).
The register of small and medium-sized businesses included in the Partnership Program is published on RusHydro’s official website in the Procurement section and is updated as necessary.
The list of goods, works and services purchased from SMEs can be found on the website of the Unified Information System for Procurement and on RusHydro’s website.
RusHydro’s target for contracts awarded to SMEs in 2018 was determined by Russian Government’s Resolution No. 1352 On Special Aspects of Participation of Small and Medium Enterprises in Procurement of Goods, Works and Services for Certain Types of Legal Entities dated December 11, 2014. As at December 31, 2018, the Group significantly exceeded the target.
|Procurement through businesses including SMEs, % of annually awarded contracts||RusHydro||18||70.77|
|Procurement only through SMEs, % of annually awarded contracts||RusHydro||15||42.15|
RusHydro Group’s planned target for contracts to businesses including SMEs in 2019 is at least 18%, with at least 15% of its procurement to be delivered only through SMEs.
Import substitution projects
- As part of the Comprehensive Modernization Program for RusHydro’s generating facilities, the Company plans to increase supplies from domestic machinery producers given that, among other things, certain types of equipment and components will be produced in Russia.
- To increase supplies from local manufacturers in 2018, RusHydro reduced the share of imported equipment for its operations so that foreign goods, works and services are gradually phased out and replaced by local goods, works and services of equivalent performance and properties.
- As part of import substitution, in compliance with Federal Law No. 223-FZ On Procurement of Goods, Works and Services by Certain Types of Legal Entities dated July 18, 2011 as well as Russian Government’s Directive No. 1659p-P1383 dated March 15, 2016On Approval of Procedure for Registering Investment Projects Included in the List of Investment Projects , the Company approved the Regulations on Registering Investment Projects Resolution of RusHydro’s Board of Directors dated May 31, 2016 (Minutes No. 237) Included in the List of RusHydro Group’s Investment Projects, which determine a set of standards, rules and requirements for selecting investment projects and obtaining approval to include the investment projects in the Register approved by the Government Commission on Import Substitution Established by Russian Government’s Resolution No. 785 On the Government Commission on Import Substitution dated August 4, 2015 . The Standard Regulations for RusHydro’s Subsidiaries on Registering Investment Projects Included in the List of RusHydro Group’s Investment Projects were approved by RusHydro’s Management Board.
- In 2018, the share of imported equipment stood at 23%, which is in line with the Roadmap target capped at 23%.
- As part of efforts to gradually substitute purchases of foreign goods, works and services locally manufactured that have equivalent performance and properties, the Company is supposed to reduce the share of imported equipment in the course of its operations.
- The Roadmap until 2025 was amended along with RusHydro Group’s updated Long-Term Development Program for 2018–2022 (Minutes No. 271 of the Board of Directors No. 271 dated June 1, 2018).