Public Procurement

Introduction

  • The foundation and legal framework for procurement in India is derived from the Constitution of India. The Constitution via Article 53 of Constitution of India vests the executive powers of the Union of India in the President of India. The President, by his order, and issuance of allocation rules of the Government of India, vested the financial powers of the Indian Government in the Ministry of Finance. These powers in turn are delegated to the subordinate authorities under the 1947 General Financial Rules, which were revised in 2017.
  • Further, the Indian Contract Act, 1872 and the Sale of Goods Act, 1930 are major legislations governing contracts of sale/ purchase of goods in general. There is no law exclusively governing public procurement of goods. However, comprehensive rules and directives in this regard are available in the General Financial Rules (GFR); Delegation of Financial Powers Rules (DFPR); Government orders regarding price or purchase preference or other facilities to sellers in the Handloom Sector, Cottage and Small Scale Industries and to Central Public Sector Undertakings etc. and the guidelines issued by the Central Vigilance Commission (CVC) to increase transparency and objectivity in public procurement. These provide the regulatory framework for the public procurement system.
  • The success of a project largely depends on the capability of the contractor/vendor. Prequalification is a process to select competent contractors having technical and financial capability commensurate with the requirements of the particular procurement (work/supply of goods/hiring of services). The pre-requisites of pre-qualification process are: -Transparency -Fairness -Maintenance of fair competition 8.2 The Commission had issued guidelines vide circular No12-02-1-CTE-6 dated: 12.12.2002 and 07.05.2004 advising the organizations to frame the pre-qualification criteria in such a way that it is neither too stringent nor too lax to achieve the purpose of fair competition. 8.3 During intensive examinations of the works of the organizations dealing with the power projects, following deficiencies were observed:
    • Stringent PQ Criteria resulting in poor competition.
    • Unduly restrictive criteria, creating entry barrier for potential bidders.
    • Evaluation criteria not notified to the bidders, making the PQ process non-transparent.
    • PQ Criteria relaxed during evaluation, thus creating entry barrier to the other potential bidders fulfilling the relaxed criteria.
    • Credentials of the bidders not matched with the notified criteria.
    • Credentials of the bidders not verified.
  • Following check-points are suggested:
    • Whether there are proper guidelines on pre-qualification of contractors/suppliers in the procurement manual of the organization?
    • Whether pre-qualification criteria for the instant procurement has been framed objectively commensurate with importance and size of the project/procurement?
    • Whether the pre-qualification criteria was frozen before inviting pre-qualification bids?
    • Whether the pre-qualification criteria has been approved by the Competent Authority as per the provision in the procurement manual of the organization?
    • Whether there is any deliberate attempt to make the pre-qualification criteria suiting to particular bidder(s)?
  • GFR developed by the Ministry of Finance, establish the principles for general financial management and procedures for government procurement. The rules contained in chapter 6 concern the procurement of goods and services, while chapter 8 addresses contract management.
  • All government purchases must strictly adhere to the principles outlined in the GFR. One of the objectives of the various procurement policies under the framework of the general principles contained in the GFR is to ensure responsibility, accountability, efficiency and economy. The policies under GFR also ensure the transparent, fair and equitable treatment of suppliers and the promotion of competition in public procurement.
  • The cardinal principle in any public buying is to procure the materials and/or services of the specified quality, at the most competitive prices in a fair, just and transparent manner, as outlined in the Manual on Policies and Procedures for purchase of Goods, issued on August 31, 2006.
  • The constitutionally appointed Comptroller and Auditor General (CAG) oversee the accounts of the Union and states.The reports of the CAG on Union accounts are presented to each house of the Indian Parliament, while those relating to the accounts of the states are presented to the legislature of each state assembly. These reports also cover procurement. The Parliamentary Accounts Committee (PAC), the Standing Committees and the Legislative Accounts Committees in the states oversee the functioning of the executive power. To ensure transparency in the process at each level of the Indian Government, a local fundaudit for local bodies has been established. Reports on the audits are presented to each state legislative assembly.
  • Complaints of corruption and the vigilance administration of the central government are investigated by the Central Vigilance Commission, a statutory body founded as a result of the enactment of the Central Vigilance Commission Act, 2003. As a signatory to the U.N. Convention against Corruption, internationally, India has also pledged its commitment to the zero tolerance of corruption.

As India is a union of states, each state, including the Union Territories, have their own rules, guidelines or legislation on procurement. State governments and Central Public Sector Units (CPSUs) have their own general financial rules, which are based on the broad principles outlined in the GFR. Some states have even introduced legislation for procurement which include:

  • The Tamil Nadu Public Procurement Act.
  • The Karnataka Public Procurement Act.
  • The Rajasthan Transparency in Public procurement Act, 2012.
  • The Public Procurement Bill, 2012.

It is pertinent to note that the Government of India is presently in the process of legislating a public procurement bill, 2012 (“Procurement Bill”) the same has been passed in the lower house of the Parliament in May 2012, i.e., the Lok Sabha. It now awaits clearance in the upper house, i.e. the Rajya Sabha. The Procurement Bill encompass the following:

  • Procurements undertaken by the Central Government, all bodies owned/controlled by the Central Government or established by an act of the Parliament, or otherwise specified by the Central Government (subject to these being entities that receive substantial financial assistance from the Central Government in so far as the utilization of such assistance towards procurement is concerned).
  • The Procurement Bill seeks to regulate and ensure transparency in procurement by the Central Government and its entities. It exempts procurements for disaster management, for security or strategic purposes, and those below Rs. 50 Lakhs. The Central Government can also exempt, in public interest any procurements or procuring entities from any of the provisions of the Bill.
  • The Government can prescribe a code of integrity for the concerned officials of procuring eligible bidders. The Bill empowers the government and procuring entity to debar a bidder under certain circumstances.
  • The Procurement Bill mandates publication of all procurement-related information on a Central Public Procurement Portal.
  • The Bill sets Open Competitive Bidding as the preferred procurement method; an entity must provide reasons for using any other method. It also specifies the conditions and procedure for the use of other methods such as Swiss Challenge Method.
  • The Procurement Bill provides for setting up Procurement Redressal Committees. An aggrieved bidder may approach the said Committee for redressal.
  • The Procurement Bill penalizes both the acceptance of a bribe by a public servant as well as the offering of a bribe or undue influencing of the procurement process by the bidder with imprisonment and a fine.
  • A concession contract is an agreement between a contracting authority and suppliers (typically private companies) on Public Private Partnership Basis (PPP) basis where suppliers are given the right to exploit works or services provided for their own commercial gain.
  • Under concession contracts, suppliers either receive payment for those services solely through third party sources (usually users of the service they are providing, ie the general public) or partly through payment from the contracting authority along with income received from third parties.
  • Department of Economic Affairs, Govt. of India defines Public Private Partnerships (PPPs) as: An arrangement between government or statutory entity or government owned entity on one side and a private sector entity on the other, for the provision of public assets and/or related services for public benefit, through investments being made by and/or management undertaken by the private sector entity for a specified period of time, where there is a substantial risk sharing with the private sector and the private sector receives performance linked payments that conform (or are benchmarked) to specified, pre-determined and measurable performance standards.
  • Concession contracts are typically defined by the following four features:
    • The contract governs the relationship between the concession-granting authority and the private concessionaire. The concession-granting authority is the government, an inter-ministerial commission, or less common – and the least appropriate – the regulatory agency.
    • The concession is awarded for a limited but potentially renewable period, during which concessionaire enjoys the exclusive right to use the assets, exploit existing facilities, and develop new ones. The contract determines conditions under which concessionaire uses these facilities and the prices at which it provides the service. The facility continues to be publicly owned.
    • The concessionaire is responsible for all investments and for developing all new facilities – many of which are specified in the contract – under the supervision of state or regulator. The concessionaire retains control and use rights over the new assets until they are handed over at the expiration of the contract. The contract might contain a clause specifying compensation for investments not fully amortised by the endof the concession period, and clauses specifying causes and remedies for early termination of contract and stating penalties and fines for non-compliance with agreedupon terms.
    • The concessionaire is remunerated based on contractually established tariffs (with appropriate guidelines for review and adjustment) collected directly from users. These prices are typically regulated through rate-of-return or price-cap mechanisms, usually driven by the principle of “efficient financial equilibrium” – allowing the firm to earn a fair rate of return on its investments. If revenues do not cover costs, compensation mechanisms are established.Given a wide range of settings in which they are used, concessions are often far more complicated than these basic features suggest. Concession contracts also usually contain other obligations and rights that require regular regulatory oversight in monitoring compliance, reconciliation of interpretations, adjustment of tariffs in the event of contingency, periodic (usually quinquennial) tariff reviews, and renegotiation of triggers and terms. The government’s role thus involves setting rules for competition at the bidding stage and enforcing terms of agreement and compliance with regulations
  • The Authority has adopted a two-stage bidding process (collectively referred to as the “Bidding Process”) for selection of the Bidder for award of the Project.
  • The first stage (the “Qualification Stage”) of the process involves qualification (the “Qualification”) of interested parties/ consortia who make an Application in accordance with the provisions of this RFQ (the “Applicant”, which expression shall, unless repugnant to the context, include the Members of the Consortium). Prior to making an Application, the Applicant shall pay to the Authority a sum of Rs 50, 000 (Rupees fifty thousand) as the cost of the RFQ process.
  • At the end of this stage, the Authority expects to announce a short-list of up to six suitable pre-qualified Applicants who shall be eligible for participation in the second stage of the Bidding Process (the “Bid Stage”) comprising Request for Proposals (the “Request for Proposals” or “RFP”).
  • Government of India has issued guidelines for qualification of bidders seeking to acquire stakes in any public sector enterprise through the process of disinvestment. These guidelines shall apply mutatis mutandis to this Bidding Process. The Authority shall be entitled to disqualify an Applicant in accordance with the aforesaid guidelines at any stage of the Bidding Process.
  • In the Qualification Stage, Applicants would be required to furnish all the information specified in this RFQ.
  • Only those Applicants that are pre-qualified and short-listed by the Authority shall be invited to submit their Bids for the Project. The Authority is likely to provide a comparatively short time span for submission of the Bids for the Project.

The Indian procurement system as institutionalised in the Government rules / regulations and exclusive manuals is prone with certain concerns. Some of the representative concerns are given below:

  • Existence of multiple procurement guidelines & procedures: A major problem expressed by the procurement officials is the confusion created by the existence of multiple procurement guidelines and procedures established by multiple agencies. There is neither a single comprehensive public procurement standard nor a single nodal agency to deal with public procurement policy. This office is headed by a committee consisting of the heads of the major procuring organizations. There is an urgent need to put in place a (similar) comprehensive public procurement standard in India with a single authority to handle public procurement issues. The office of the DGS&D can be reconfigured to serve as the nodal agency for all public procurement issues. It should also operate a help desk to provide clarifications and guide the procurement officials.
  • Overt emphasis on procurement procedures and guidelines: Another anomaly in our public procurement regime is that there is an attempt to apply the procurement procedures and guidelines in the letter without an appreciation of the spirit behind these stipulations. These procedures and guidelines have been framed to uphold the values of competition, transparency, fairplay, integrity and value for money while undertaking procurement. The ultimate test of any procedure is its ability to promote these values. Therefore, a good manual of procedures should explain the underlying principles.
  • Poor quality of manpower: The quality of manpower which operates the procurement system is equally crucial. In India, public procurement has never been treated as a specialized activity requiring specialized knowledge and skills. Even the most critical and complex procurements are handled in a non-professional manner. Except for the Railways and the DGS&D, no other organization has created a specialised cadre for this purpose. In most of the developed countries and international organisations, occupying a procurement desk requires some professional qualification. There is a need to either have qualified staff handling procurement or to provide adequate professional training to convert the procurement officials into procurement managers.
  • The fear of vigilance: The lurking fear of landing in vigilance cases, even amongst honest employees, withholds them from giving off their to the organisation. This fear arises out of the uncertainties about the view that would be taken by vigilance organisation in case of an inadvertent mistake without any mala-fide intention. The numerous and eve changing rules also give rise to such fear.
  • Frequent updates of manuals: In some cases, overemphasis on swift updates of manuals also creates a problem. Those responsible for procurements are not aware of immediate changes and thus are at variance with latest guidelines or instructions.
  • Absence of a central authority to oversee procurement related issues: Presently, there is no central authority that is exclusively responsible for defining procurement policies and for overseeing compliance with the established procedures. The ministries or departments have been delegated full powers to make their own arrangements for procurement of goods. In case however, a ministry or department does not have the required expertise, it may procure goods through the Central Purchase Organization (DGS&D).
  • Absence of an exclusive law governing public procurement: In the absence of an exclusive law governing public procurement, the conditions governing the contract contain provisions for settlement of disputes and differences binding on both parties . Thus, there may be problems related to uniformity of contractual conditions, or the interpretation / implementation of the same.
  • Most of the time, public procurement is carried out through competitive bidding or tendering process with the intention of achieving maximum economic efficiency through competitive process.
  • Any anticompetitive practices in a procurement process, such as collusion, bid-rigging, fraud and corruption, could lead to artificially raise prices, or compromise on the parameters and consequently adversely impact public expenditure and the precious national resources.
  • Ensuring effective functioning of public procurement markets is also part of good governance and necessitates two distinct but inter-related challenges:
    • Ensuring integrity in the procurement process (i.e. preventing corruption on the part of public officials) ; and
    • Promoting effective competition among suppliers, including preventing collusion among potential bidders.
  • The Competition Commission of India, that has been striving to address the competition concerns in the public procurements, has studied the issue in detail and identified following anti-competitive behavior in the procurement process:
    • Collusive bidding: Collusive bidding can take form of an agreement among firms to divide the market, set prices, or limit production. It can involve 'wage fixing, kickbacks, or misrepresenting the independence of the relationship between the colluding parties.
    • Bid rotation: In bid-rotation schemes, conspiring firms continue to bid, but they agree to take turns being the winning (i.e. lowest qualifying) bidder. The way in which bid-rotation agreements are implemented can vary.
    • Cover bidding: Cover (also called complementary, courtesy, token or symbolic) bidding occurswhen individuals or firms agree to submit bids that involve at least one of the following:
      • A competitor agrees to submit a bid that is higher than the bid of the designated winner,
      • A competitor submits a bid that is known to be too high to be accepted, or
      • A competitor submits a bid that contains special terms that are known to be unacceptable to the purchaser.
    • Bid suppression: Bid suppression schemes involve agreements among competitors in which one or more companies agree to refrain from bidding or to withdraw a previously submitted bid so that the designated winner's bid will be accepted.
    • Market allocation: Competitors carve up the market and agree not to compete for certain customers or in certain geographic areas. Competing firms may, for example, allocate specific customers or types of customers to different firms, so that competitors will not bid (or will submit only a cover bid) on contracts offered by a certain class of potential customers which are allocated to a specific firm.
  • The Union Government has launched a series of initiatives to streamline the public procurement system. Some of them are as follows:
  • Formation of Group of Ministers on corruption: The Government has formed a high powered Group of Ministers (GoM) under the then Finance Minister in January 2011. The GoM, in its meeting on 14th February 2011 decided to recommend among others, discretionary quota of ministers that will have monetary impact (38 out of 84 ministries have accepted to have discretionary quotas), permission for prosecution to be given within three months, and fast track procedure for processing corruption cases against guilty bureaucrats. Meanwhile, The Cabinet Secretary has set up a special committee headed by former Competition Commission of India (CCI) Chairman Vinod Dhall to give recommendations on a comprehensive public procurement law. The Committee will give its report to the GoM on corruption as soon as possible.
  • Public procurement policy in offing: The Government is also working towards a central public procurement policy to bring transparency, curb irregularities and corruption. The new procurement policy is intended to plug inconsistencies in government procurement arising due to multiplicity of guidelines. The new policy will also include procurement of services with a focus on engaging experts on contractual basis instead of permanent employment. A draft procurement policy, prepared by Shri M Raman, Secretary (Chemicals) is under the consideration of a committee of secretaries. Shri Raman was earlier Director General of Supplies & Disposal (DGS&D). The draft suggests a central procurement law to cover purchases by all government departments and organisations and lay down rules for different type of procurements. The drafty document also envisages the creation of an independent national nodal authority for public procurement. It will be a law making and regulatory body, with an advisory role overseeing the procurement activities.
  • Single portal to streamline procurement on cards: In the coming days, all government procurements would be streamlined and every vital information related to such procurements may be posted on a 'single procurement portal'. The Vinod Dhall Committee is likely to propose that a single procurement portal should be developed on the lines of e-governance programme MCA21, and all the procurement related details should be posted on the portal for all the suppliers to see. This will enable the supplier to see who has won the bid, on what grounds etcwhich willmaximise the competition.
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