President of Russia Dmitry Medvedev: Last summer I issued a directive calling for an audit of state corporations. For us, these are new entities and there are a whole range of issues to be considered, so I instructed the Prosecutor General's Office and the Presidential Control Directorate to verify the status of these entities, assess efficiency of their performance, and identify any problems involved in their daily activities, in order to arrive at a clear ultimate decision on the future of this sort of corporate organisation.
I would like to hear what’s been done. Please go ahead.
Prosecutor General Yury Chaika: In line with your instruction, the Prosecutor General's Office in conjunction with the Presidential Control Directorate verified compliance of the state corporations with the respective laws. In general, their operation is in conformity with objectives set forth within the law.
However, our audit revealed that at times state corporations fail to comply with their statutory functions and purposes or engage in activities which are not envisaged in the respective federal laws on founding and operation of such corporations. We uncovered some cases of inappropriate and inefficient use by state corporations of financial and material government resources they manage. We established some facts of the state corporations breaching the legislation when performing their functions set forth upon their incorporation by respective federal laws.
As per a special federal law, Russian Corporation of Nanotechnologies [RUSNANO] was established on July 19, 2007 for the purposes of implementing projects in nanotechnology and for developing industry of nanotechnologies. Nevertheless, out of the funds of 130 billion rubles allotted to RUSNANO on November 29, 2007, which is 2 years ago, only 10 billion rubles was spent by July 1, 2009, of which 5 billion rubles was spent on the corporation’s operating performance. Hence, most of the respective government funds has not been used for its intended purposes, and has instead been placed in bank accounts as idle money.
Since RUSNANO incorporation, its Supervisory Council has approved 36 projects in nanotechnologies out of over 1,200 projects that have been submitted for consideration, and only eight projects, all of minor scale, have been actually funded.
Similar facts have been uncovered in operations of the state corporations Housing and Municipal Services Sector Reform Fund, Olympstroy, and Russian Technologies [Rostekhnologii].
Our audit revealed some facts of mismanagement and inefficient spending of the government financial and material resources by RUSNANO, Vnesheconombank, the State Deposit Insurance Agency, and Olympstroy state corporations.
There were cases of the unlawful disposal of assets allocated to state corporations. 22 criminal cases have been initiated into such unlawful alienation of assets managed by subsidiaries of Rostekhnologii, with some of these cases involving abuse of authority and deliberate bankruptcy.
As the legislation on state corporations lacks restrictions for certain decision making by their officials, and a detailed mechanism governing conflicts of interests, our audit uncovered situations of decisions being made to the benefit of the corporations’ employees or the entities affiliated with them, as was the case with RUSNANO.
State corporations are not subject to legislation on public procurement of goods, works and services, which results in a lack of transparency in orders placing and allows for tender rigging. This creates conditions for favouritism in selecting suppliers, aggravates corruption risks and consequentially causes inefficient use of allocated funds.
Such abuses have occurred in the state corporations Olympstroy, RUSNANO, the State Deposit Insurance Agency, and Rostekhnologii.
Even though state corporations have sufficient highly skilled and well remunerated specialists, substantial funds are paid to third-party companies and individuals to perform services which are within the duties of the corporations’ own employees. In particular, RUSNANO paid to Troika Dialog 130 million rubles for the works that should have been performed by the corporation itself. This also occurred at Rostekhnologii and the State Deposit Insurance Agency.
Federal laws concerning [state] corporations do not specify such basic elements as remuneration and legal status of employees, nor contain any restrictions appertaining to the specifics of their work. Left outside the legislative framework, executive bodies of state corporations allow very substantial and unjustified labour costs. This applies to RUSNANO, Housing and Municipal Services Sector Reform Fund, Olympstroy and Vnesheconombank.
In the absence of clear performance indicators, corporate employees are given unwarranted awards and bonuses, and provided with social benefits and compensation that are incommensurate with the privileges of public servants. This practice was followed at RUSNANO, Housing and Municipal Services Sector Reform Fund, Olympstroy and Vnesheconombank.
There is evidence of poor performance of executive bodies of state corporations and a merely ceremonial involvement of supervisory boards’ members. Thus, of a total of 21 meetings of RUSNANO Supervisory Council held between 2007 and 2009, 7 to 13 sessions -nearly two-thirds of all sessions — were not attended by 8 of its 15 members.
Reports of the executive bodies of state corporations are heard at meetings of the supervisory boards without prior verification of the information and data or any assessment of the feasibility of intended investments or their appropriateness. Sometimes these reports are approved by absentee ballot without the members actually being present. Thus, over the period from December 19, 2007 to September 1, 2009 the Supervisory Board of Rostekhnologii held 16 meetings, and 11 of these were held in absentia, at which more than 60 issues were considered.
There is evidence of inconsistencies between corporation purposes as identified in the federal legislation on their establishment and their actual practice. This is true for Rostekhnologii.
I think that Mr Chuychenko is now ready to report our overall conclusions.
Dmitry Medvedev: Okay. Please go ahead. What are your suggestions?
Director of the Presidential Control Directorate Konstantin Chuychenko: Further to the results of our audit we have formulated proposals that are embodied in a draft instruction. The essence of these proposals is as follows.
We believe the Government Cabinet should be requested to submit proposals on transformation of state corporations operating in a competitive environment into other sorts of organisational and legal entities, in particular into joint stock companies. Where there is no competition, the Cabinet should set a lifetime for the corporations, and in effect this period should be determined by the particular purpose of each state corporation.
The Cabinet must identify specific performance indicators for each of the remaining state corporations.
In addition, we propose to request the Cabinet to submit amendments to current legislation that would aim at ensuring transparency in the corporations’ activities, as well as at ensuring effective governmental control over their activities. These proposals are as follows.
We propose the Cabinet to be instructed to draft amendments to regulations on state corporations’ activities allowing application to the corporations of the legislation on public procurement.
Besides, we believe it is necessary to specify the legal status of state corporation employees and to subject them to certain restrictions applicable to public servants.
Dmitry Medvedev: In your opinion, what status should they have? Should their status be similar to that of private businesses employees or of public servants?
Konstantin Chuychenko: Since we assume that executives of state corporations operating in a non-competitive environment should pursue goals in the interests of the nation, we believe that the status of such executives should be similar to the status of public servants.
It is also necessary to establish a mechanism to avoid potential conflict of interests, a mechanism similar to the one that exists in the public service.
In our view, we should introduce such legal concepts as interested-party transactions and revenue intensive transactions. The examples cited by the Prosecutor General today show that, despite the fact that there have been abuses, from the viewpoint of the current corporate laws these abuses are not subject to what we might call tort law, since there is no concept of interested-party transactions, and since there have been cases of assignment of authority in which major deals were allowed to be approved by board of directors instead of supervisory board. For these reasons we believe it is necessary to introduce for state corporations the same sort of a legal concept that is applied to joint-stock companies, namely major deals or revenue intensive transactions.
Dmitry Medvedev: In other words, the degree of transparency [in state corporations] is less than in joint stock companies.
Konstantin Chuychenko: Yes, considerably less.
Dmitry Medvedev: While the transactions that occur are in their essence perfectly regular business transactions effected in the conduct of entrepreneurial activities.
Konstantin Chuychenko: Absolutely. We also propose to instruct the Cabinet to adopt provisions on government representatives serving on the supervisory boards of state corporations, which would regulate their activities, as well as their accountability to the government. We believe the remaining state corporations must be supervised by the Accounts Chamber, as well as other supervisory authorities. In our opinion, the deadline of March 1, 2010 gives sufficient time to meet this directive.
Dmitry Medvedev: Thank you. In my view, the proposals that you’ve made are quite reasonable. Of course I will look them over again.
As regards the general attitude concerning how we develop the appropriate legal institution [of state corporations], I will be ultimately defining and articulating it in my Address to the Federal Assembly.
Thank you, colleagues.