Mikhail Sirotkin: Boosting efficiency

March 4, 2013, the interview was taken by Sergey Pravosudov
Published in corporate Gazprom Magazine Issue 1–2

Mikhail Sirotkin, Head of the Corporate Costs Department of Gazprom answers the questions posed by the Gazprom Magazine.

Mr. Sirotkin, what was the reason for setting up the Competitive Purchases Department in 2010?

The reorganization of the Gazprom Group purchases system was driven by the need of making this line of activity more transparent and efficient. Moreover, by early 2010 the drafting of a federal law regulating purchases of state companies and natural monopoly entities had been underway for several years already. Such companies had to follow the basic purchasing principles, i.e. information disclosure, free competition as well as appropriate and economically efficient expenditures. Gazprom started gradually reorganizing its purchases system in advance, taking into consideration the requirements set in this draft law.

With a view to implement a single purchasing policy, Gazprom set up the Competitive Purchases Department on the platform of the Tender Committee. New Guidelines for Purchases of Goods, Works and Services by Gazprom Group were elaborated within the shortest possible time. The Guidelines took into account the requirements of the state authorities for purchases by natural monopoly entities, as prescribed in the draft law prepared by the Russian Ministry of Economic Development. The Guidelines were approved by the Gazprom Board of Directors and came into effect on January 1, 2011. The document set the unified requirements for the preparation and implementation of competitive purchase procedures within Gazprom Group – from planning to contract administration.

Under the Guidelines, from 2011 all notices and documents as well as information regarding the results of competitive purchases have to be published on the websites of Gazprom and its subsidiary companies. As a result, the purchases transparency considerably increased, especially within Gazprom’s subsidiaries. Moreover, the centralized planning of Gazprom Group competitive purchases was introduced.


What are the main results of work done in 2011 and 2012?

Based on our customers’ demands we formulated the Gazprom Group plan for 2011, envisaging more than 16 thousand purchases. In 2012 the plan included about 15.3 thousand purchases. Since August 2011 competitive purchases plans have been published on the Gazprom website. This enables the participants to select in advance the lots they are interested in, prepare standard qualification documents and trace the publication of notices.

The measures taken by the Department in 2010 and 2011 helped Gazprom by early 2012 to organize its purchasing activities in line with the Federal Law on Purchases of Goods, Works and Services by Individual Types of Legal Entities, which entered into force on January 1, 2012.

In April and December of the last year the Board of Directors enforced some amendments to the Guidelines with a view to abide by the federal law and the bylaws connected with it. Moreover, in 2012 guidelines for purchases were approved for all limited liability subsidiaries where Gazprom is the only member.

Since the opening of a government’s official website aimed at publishing information about purchases made in accordance with the Federal Law of July 18, 2011, the Department discloses all data in the public section of the website. In order to clarify the provisions of the Federal Law and the Guidelines as well as the operational procedure of the government’s official website, last December the Department held a workshop for Gazprom’s subsidiaries, affiliates and representative offices. Representatives of Russia’s Federal Antimonopoly Service, Ministry of Economic Development and Treasury as well as specialists engaged in the law drafting delivered their presentations and answered questions.

In order to raise the level of competition and purchasing efficiency, we conduct marketing research and search for market players to whom we send additional personal invitations once a purchase procedure has been announced. We pay special attention to involving immediate manufacturers.

In 2012 the Department introduced the practice of open workshops for potential purchase procedure participants. Last July a meeting was held with the organizations offering construction and assembly services, and in August – with the companies specializing in linepipe overhaul.

The Department conducts an open prequalification procedure for potential purchase process participants in more than 14 types of activities, including construction, upgrade and overhaul of production facilities as well as design, geological exploration, geophysical and geochemical operations. Prequalification is aimed at identifying potential suppliers of goods, executors of works and providers of services who are included into the Gazprom Group Register of Potential Purchase Procedure Participants based on the results of qualification testing. The Register is published on the Gazprom website and enables us to objectively assess possible competition for any purchase item. While for the suppliers included into the Register it becomes easier to prepare purchase procedure documents, for the organizers it becomes easier to evaluate the qualification of participants. All this reduces the purchase procedure timescale and increases its efficiency.

Based on the results of competitive purchases by Gazprom Group, the cost of goods, works and services reduced by more than RUB 55 billion in 2012 (the difference between starting prices and final prices of contracts)

The centralization of competitive purchases produced a considerable positive effect. The competitive purchases made in 2011 by the Department for the Gazprom Group needs amounted to RUB 354.2 billion (which is ten times more than the volume of 2009 purchases made by the Gazprom Tender Committee that served as the platform for setting up the Department), while the economic effect totaled RUB 38.8 billion (the difference between the sum of starting prices and the sum of winner prices). Preliminary results show that the competitive purchases made by Gazprom Group permitted to reduce the cost of goods, works and services by more than RUB 55 billion in 2012 (the difference between starting prices and final prices of contracts, taking into account the overall competitive contracts totaling RUB 1.065 trillion), which is a record-breaking figure in the Gazprom Group practice of carrying out competitive procedures. Based on the results of purchases made by the Department, more than 2 thousand contracts worth RUB 717 billion were entered into; cost reduction with regard to starting (maximum) prices totaled RUB 43.7 billion.

New tasks

How did the tasks set before the Competitive Purchases Department change?

In addition to planning, making and controlling competitive purchases within Gazprom Group, the Department was charged with analyzing the feasibility of contracts entered into without competitive procedures and with a single participant, as well as analyzing the investment programs of Gazprom and its subsidiaries and the Company’s expenditure budget.

Following the decision by the Chairman of Gazprom’s Management Committee, the Gazprom Budget Committee was set up at the initiative and under the guidance of the Department. The Committee is responsible for optimizing the price of contracts for purchases of goods (works, services), entered into with a sole supplier (contractor, provider). During a year and a half the total cost reduction proposed by the Budget Committee made up some RUB 17.2 billion (about 27 per cent of starting contract prices).

In furtherance of the assignment by the Chairman of the Management Committee, the Gazprom Investment Committee was established in order to improve the formation quality of the Company and its subsidiaries investment programs. The activities of the Investment Committee are aimed at providing the optimal balance between target strategic priorities, current production needs for investments and the Company’s actual financial capacities. Materials submitted to the Committee are prepared by the Investment Programs Directorate (which is part of the Department) that performs preliminary analysis of planned investment expenditures in order to find the ways of their optimization as well as makes an evaluation of projects readiness for the implementation.

After two years of consistent growth the Department has moved to the level of managing the Company’s expenditures. In fact, its actual duties were reflected in a new name – the Corporate Costs Department.

What are your plans for 2013?

The priorities of our Department for 2013 through 2015 are as follows:

  • improving the purchases system with the account for new realities and growing legal requirements, maximally automating all purchase procedures (from data collection and planning to contract administration) in the framework of creating the Gazprom Automated Electronic Purchases System and converting the purchases process to the electronic format;
  • boosting the purchases efficiency, inter alia, through contract administration;
  • cutting the expenditures of Gazprom Group.