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Working meeting with Presidential Aide and Chief of the Presidential Control Directorate Konstantin Chuychenko

August 10, 2010, Sochi

Konstantin Chuychenko submitted a report to Dmitry Medvedev on the audit of budget spending on medical equipment.

In particular, the Chief of the Presidential Control Directorate briefed the President about the audit of the regions’ acquisition of 170 tomographic scanners worth in total 7.5 billion rubles. Mr Chuychenko reported that in some cases the purchase prices were two or three times higher than manufacturer prices.

Mr Medvedev stressed that he will instruct the Prosecutor General’s Office to conduct an investigation and to prosecute the officials involved in the fraudulent purchases of expensive medical equipment.

In addition, the President signed an executive order to strengthen monitoring of cash flows in the federal state unitary enterprises that perform socially valuable functions. The draft executive order had been prepared by the Presidential Control Directorate, partly on the basis of the audit of the Russian Post, which revealed that purchases there had been of low efficiency and at prices above the optimum level.

* * *

President of Russia Dmitry Medvedev: Mr Chuychenko, I have received your report. On my instructions, you have conducted an audit together with the Prosecutor General's Office of federal budget spending on certain state programmes for specific diseases and the acquisition of medical equipment. Frankly, the report makes for very distressing reading. I think it requires a drastic response. Could you please tell me your conclusions and suggestions?

Presidentil Aide and Chief of Presidential Control Directorate Konstantin Chuychenko: Mr President, as you have said, the General Prosecutor's Office and our agency have conducted the audit you requested as a follow-up to the videoconferences held on June 21 and 25. In total, 170 computerised tomography scanners were purchased worth 7.5 billion rubles [about $250 million]. Our conclusion was that the public funds used for the procurement of medical equipment were spent very inefficiently. Typically, the purchases were made at prices two to three times higher than manufacturer prices.

Dmitry Medvedev: That is 200 to 300 percent?

Konstantin Chuychenko: Yes, that is absolutely correct.

Dmitry Medvedev: What are the manufacturers’ prices and the prices at which the CT scanners were purchased?

Konstantin Chuychenko: In rubles, the manufacturer’s price for a 16-slice CT scanner ranges from 16 to 20 million rubles, whereas the regions purchased them for between 30 and 50 million rubles.

I would also like to point out that the purchases made in the course of the audit involved dramatically reduced prices. For example, four 16-slice CT scanners were purchased in Daghestan for 20 million rubles.

Dmitry Medvedev: Those were new purchases?

Konstantin Chuychenko: That’s right.

Dmitry Medvedev: The scanners could have been bought for 50 million, but they bought them for just 20 million.

Konstantin Chuychenko: Yes, they paid just 20 million.

Next, the manufacturer’s price for a 64-slice CT scanner is between 28 and 35 million rubles. The regions paid between 60 and 90 million rubles for them.

Again, we saw a decrease in prices during the audit: for example, the Amur Region purchased a CT scanner for 40 million rubles in July, while St Petersburg paid 52 million rubles for the same type of scanner.

In our opinion, the discrepancy has the following reasons. First, the calculation of subsidies for each region is based on the intermediaries’ prices, which are up to three times higher than the manufacturers’ prices.

In addition, purchases have been made at the federal level of 64-slice CT scanners at the price of over 90 million rubles. In fact, 95 million rubles were paid in one case. Information on these purchases was posted online, which made it possible to set certain price targets.

In addition, there is no legal regulation that would ensure the monitoring of manufacturers’ prices, which would also make it possible to set price limits for the purchases of goods and services for state needs. The tender documentation contains violations, often pursuing the aim of precluding fair competition between manufacturers. As a rule, prices were reduced at tenders by one percent.

In our view, corruption was evident in the organisation of several tenders. In fact, 17 criminal cases have been filed as a result of the audit conducted by the General Prosecutor's Office. At present, the investigations are being carried out.

As an illustration, I would like to recount the way the purchase price was determined in the Rostov Region. We discussed this on June 25.

Dmitry Medvedev: When was the purchase made?

Konstantin Chuychenko: It was made in 2009. The manufacturer’s price was 35 million…

Dmitry Medvedev: If I have the right information, the manufacturer’s price for CT scanners was 34.5 million rubles?

Konstantin Chuychenko: That’s right, the manufacturer’s price was 34.5 million. Next, a UK-based distributor sells this CT scanner for 71.7 million. Thus, the profit margin is 37.2 million.

Then a Russian distributor steps in, adding another 18.69 million. In the end, we have the final price of 90.39 million rubles, of which 55.89 million rubles go to the distributors.

Dmitry Medvedev: That makes the end price more than two and a half times higher, almost three times higher. The distributors’ margin practically doubles the CT scanner’s price from 34.5 million to 55.89 million rubles. By the way, it is likely that these distributors in the UK and in Russia are the same company, just registered in different places.

Konstantin Chuychenko: We have met with all the manufacturers of CT scanners, and they have agreed to offer a 30% discount if there was centralised procurement; in addition, they are prepared to include servicing of the equipment in the price.

Dmitry Medvedev: What do you suggest?

Konstantin Chuychenko: We have prepared a draft of your instructions, which consist of three parts. The first part is systemic and aims at establishing a legal framework that would ensure procurement at manufacturers’ prices.

The second part of your instructions defines the legal liability for fraudulent procurement, including criminal liability.

The third part deals with organisational issues. Its aim is to continue the work that we have been doing until now and to establish a permanent working group for this purpose.

”This is an absolutely cynical and brazen theft of public funds. This can no longer be tolerated. This is something that, firstly, arouses bitter hatred of our people and, secondly, creates a negative image for our country.“

Dmitry Medvedev: You know, I think this is not just corruption but an absolutely cynical and brazen theft of public funds. The people who perpetrate this fraud have absolutely no shame and no conscience.

It is clear that there are intermediary firms who take part in the procurement process. They should have their profit, but that profit should never be as high as several hundred percent, especially when it comes to healthcare.

So, apart from signing the instructions, I will personally charge the Prosecutor General and head of the Investigative Committee to bring to justice everyone involved, and to impose severe punishment on them.

This can no longer be tolerated. This is something that, firstly, arouses bitter hatred of our people and, secondly, creates a negative image for our country. Everyone knows how much this equipment costs, but in Russia it is sold at three times the price. It undermines the prestige of the state and our economy.

We will not tolerate this. We need the systemic measures you have mentioned: price monitoring, and we should probably have authorised dealers, who will understand from the outset the limit of their profits, so that this mayhem comes to an end in the regions, with some people earning 200 to 300 percent.

Finally, we will bring corrupt officials to justice. By that I mean all officials in all Russian regions. I would like you to oversee this process to the end, everything that has been done by our colleagues at the federal level to inspect the decisions made earlier, the actions of the regional leaders, and the punishments imposed on them.

I would also like to ask you to prepare another report in a few months on what is happening, because it is impossible to tolerate this any longer. I will certainly sign the instructions, but most importantly we need to make sure that we destroy the system of unregulated purchases of expensive equipment, medical supplies, appliances, and other kinds of technology because this problem is not limited to the healthcare system. Please oversee this and report to me personally.

Konstantin Chuychenko: Yes, Mr President, we will carry this through to the end.

Dmitry Medvedev: Good.

August 10, 2010, Sochi