Procurement activities

According to these documents, the Board of Directors of Russian Railways has approved and accepted for guidance and execution the regulation on the procedure for goods purchase order placement, works performance and services for the main types of services that Russian Railways provides. This regulation entered into legal force on January 1, 2012.

The Company has created a unified purchasing system which is functioning on the basis of general rules and provisions and is equally accessible for all market participants.

The Company’s total volume of purchases in 2013 was RUB 834.7 billion; thereafter, 54% of total volume purchases were bought from one supplier.

Direct contracting can be undertaken in the following circumstances:

• Services purchased from large businesses (such as the purchase of water supply, wastewater disposal, heat supply, and natural gas supply);
• Via Russian Railways order documents (highly specialised purchases which have no alternative on the market, such as traction rolling stock or track superstructure materials);
• By corporate order placed with Russian Railways associated enterprises;
• If the supplier (contractor) holds exclusive rights for procured goods, works and services.

The share of manufacturing procurements represents 84% of the Company's total purchase volume; the share of intermediary organisations procurements is 16%. The intermediary organisations are selected on the basis of competitive procurement. Major trading companies therefore have an advantage due to availability of huge product selection and a more flexible pricing policy. However, the Company also endeavours to purchase goods and services from small and medium-sized enterprises.

Cost savings during both the undertaking of the procurement process and in the price of goods and services purchased were a key factor for the Company’s cost minimisation programme.

On a permanent basis, Russian Railways engages in the following activities: the establishment of overall price levels at the lower end of the market; potential price decreases from the current level; the testing of to determine the real economic feasibility of any increase; the monitoring of the business environment in the relevant markets, and ongoing negotiations with current and potential suppliers of goods.

To determine the original (maximum) price for Russian Railways orders, the following methods, which allow for the most favourable conditions in the procurement of goods, works and services are used:

The Company’s measures enable procurement prices decreases on the main commodity groups below the level of inflation.

In 2013, the Company’s collective savings during the formation of original (maximum) prices over the course of procurement procedure preparation were RUB 34.9 billion, or 9.2% (from the procurement volume on a competition basis), including:

• RUB 21.5 billion – at the expense of a decrease in procurement prices for goods purchase;
• RUB 8.7 billion – at the expense of degression factor 0.9 implementation for objects of construction, reconstruction and repair works;
• RUB 4.7 billion – at the expense of saving of original maximum prices for the procurement of services at the level of previous years based on inflationary constituent availability in 2013 – 6.5%.

Summarising the results of order placement procedures performance in 2013, the savings totalled RUB 7.4 billion, or 2%

The Company’s complex approach to cost reduction during the implementation of procurement activities allowed Russian Railways to achieve a total saving of RUB 42.3 billion, or 11.2%.