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Analysis & Opinion
11.08.10 Scanning For Fraud
By Tai Adelaja

It took yet another instance of some state officials lining their own pockets with state funds for President Dmitry Medvedev to direct his outrage at one of Russia’s perennial problems: an irretrievably corrupt bureaucracy. The president, who was vacationing at the Black Sea resort of Sochi, was seen visibly angry after hearing a report that some unscrupulous regional officials had paid thrice or more for medical equipment that should have cost the taxpayers considerably less.

How to deal with wheeler-dealers in public service is one big lesson the president could probably glean from his predecessor, Prime Minister Vladimir Putin. When Putin ordered the reconstruction of fire-ravaged homes in the Mokhovoye village near Moscow last week, he also ordered video cameras to be installed at each construction site to beam real-time images to his Web site and office. Putin, like most ordinary Russians, has learned to distrust bureaucrats, many of whom regard state funds as everybody's and therefore nobody's.

President Medvedev first learned about the fraudulent practices in the state procurement system in June, when Konstantin Chuichenko, the head of the president's audit department, informed him that different regions were paying widely differing prices for the same type of CT scanners. Chuichenko told Medvedev on Tuesday that regional authorities paid between 30 and 50 million rubles ($1 million to $1.6 million) for one 16-multi-slice CT scanner, which normally should cost between 16 and 20 million rubles ($530,000 to $660,000), while a 64-multi-slice CT scanner was acquired for between 60 and 90 million rubles ($2 million to $3 million), compared to the factory price of between 30 and 50 million rubles ($1 million and $1.7 million). "Thus, the middleman profit is sometimes up to 55 million rubles ($1.8 million)," Chuichenko said. "[The] tender papers were all in violation of the law, since they were crafted in such a way partly to exclude competition between different suppliers."

As part of president Medvedev’s modernization program the number of CT scanners being installed has grown, as the
government invests huge sums into the Public Health Services National Project. The president has promised to overhaul the nation’s health system, which still registers stroke rates 20 times higher than in the West. The government has so far spent 7.5 billion rubles ($250 million) to acquire a total of 170 CT scanners for installation in health centers across the country, according to the State Audit Department.

However, the huge backlog in Russia’s healthcare market appeared to provide a great opportunity for canny officials willing to make a quick buck by carrying out huge transactions, such as the purchase of CT scanners, experts said. Chuichenko said that an investigation conducted by his department has revealed that in Rostov, a 16-multi-slice CT scanner, which the manufacturer was selling for 34.5 million rubles ($1.1 million), was purchased for 90.39 million rubles ($3 million) through a UK-based company, which had acquired it for 71.7 million rubles ($2.3 million). But Rostov was not an isolated instance, he said. In Kaliningrad, CT scanners purchased by city authorities cost the taxpayers 19 million rubles ($630,000) over and above the market price.

Timofei Nizhegorodtsev, the head of the consumer and social sphere at the Federal Antimonopoly Service (FAS), said the agency was able to spot violations in the state procurement system through its regular price monitoring, "Plus complaints from competitors who were not allowed to tender for state orders." "Some of the health officials that have been indicted were found guilty of doctoring the parameters of the CT scanners to suit a particular supplier, thereby stifling competition," Nizhegorodtsev said. "However, under the current law, a violator can only be forced to pay up to 50 thousand rubles ($1,600). Therefore fines are not an option; the only suitable punishment is criminal conviction."

The Prosecutor General's Office said it has opened 17 criminal cases in connection with the purchase of 170 CT scanners. In September last year, a criminal case filed against the former head of the Kamensk-Ural City Health Service for causing the city budget to lose 80 million rubles during a transaction to purchase a CT scanner. Seven Health Ministry officials were brought to book in Rostov-on-Don for overpaying 22,500,000 ($750,000) rubles for the city tomography scanner. In the Kaliningrad region, a former health commissioner was indicted for allegedly overpaying 19 million rubles ($633,000) for a CT scanner.

"This is not simply an element of corruption – it is an absolutely cynical, impudent theft of state funds," Medvedev said. "Those who engaged in this have neither shame nor conscience." Medvedev said that the situation "can no longer be tolerated" as it provokes "the savage hatred of our people" and "negates the authority of our country." "It is a blemish on the prestige of the state and our economy," Medvedev said while ordering officials to put an end to such an “orgy.” He said he would personally order the Prosecutor General's Office and the Investigative Committee to ensure that all those involved in this case are severely punished.

In a quick response, Prosecutor General Yuri Chaika said on Tuesday that he would personally monitor the investigation into abuses in the procurement of scanners. Medvedev had earlier ordered the government to prepare amendments to the legislation on placing orders for the purchase of medical equipment at market prices. "The most important thing is to make sure that the system of uncontrolled purchases of expensive medical and other equipment is liquidated," Medvedev said. A raft of amendments to the legislation has been prepared and coordinated with the Federal Anti-monopoly Services and the Ministry of Economy Development, the Vedomosti daily reported on Thursday, citing Michael Evrayev, the head of FAS. "The ordering party will be obliged to take into account both the market price and the results of previous auctions for similar goods in determining the initial price for equipment," Evrayev said. It is necessary to revert to purchasing medical equipment through auctions, where the only criterion is price, he said.

In developed economies, state orders are made by choosing the optimal from several offers. However, in Russia, experts say, officials are unwilling to a leave positive balance on their budgets because that could lead to cuts in their financial assignation in the next financial year. But president Medvedev signaled Tuesday that he wants to put an end to the practice. The government, he said, should create unified technical requirements for equipment to be purchased not later than February 2011. An effective system of monitoring the prices of items for purchase, including the manufacturers and suppliers of medical equipment, should be put in place, he said.
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