Introduction to Public Procurement
- 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 General Financial Rules, 2005 (GFR)(amended 2017) which, inter alia, prescribe the broad rules and procedures for the procurement of goods and services and for contract management.
- There is no central legislation governing procurement in India. Comprehensive rules and directives in this regard are contained in the GFR 2005 and Delegation of Financial Powers Rules (DFPR). A broader framework is also provided by the Contract Act, 1872, the Sale of Goods Act, 1930, the Law on Arbitration and Limitation and the recent Right to Information Act, 2005.
- 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 like Tamil Nadu, Andhra Pradesh and Karnataka have even introduced legislation for procurement.
- The constitutionally appointed Comptroller and Auditor General (CAG) oversees 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 fund audit for local bodies has been established. Reports on the audits are presented to each state legislative assembly.
- In addition, guidelines are issued by the Directorate General of Supplies and Disposals and the Central Vigilance Commission (CVC) together with instructions by Ministry of Finance (MoF) that are responsible for bringing about integrity in public sector procurement. Further, public procurement are also subject to review (where deemed necessary) by the CVC, and the procuring entities in all public procurements are required to adhere to the guidelines issued by the said commission in relation to all such procurement.
General Financial Rules (GFR) 2017
- The policy framework primarily covered by the General Financial Rules (GFRs) 1963 (amended in 2005 and 2017) framed by the Ministry of Finance by executive order and the Delegation of Financial Powers Rules 1978 (again framed by the Ministry of Finance). The Ministry of Finance issued GFRs on 11 February 2017 and came into force on 8 March 2017. Rule 153(iii) of the GFRs 2017 allows the Central Government to provide (by way of notification) mandatory procurement of any goods or services from any category of bidders, or provide for preference to bidders on the grounds of promotion of locally manufactured goods or locally provided services.
- The main features of GFRs are as follows:
- Defines works, goods, and services to be procured and the scope of public procurement
- Outlines the fundamental principles of public procurement like enhancing transparency and efficiency, instilling fair practice, and promotion of competition
- Prescribes monetary thresholds for using specific procurement methods across the categories of procurements, i.e., works, goods, and services.
- Describes different procurement methods and their applicability.
- Prescribes Code of Integrity.
- Specifies tender award criteria.
- Outlines general principles and rules of contract management.
- While GFR 2017 had kept intact the monetary threshold limits for a few categories as given in GFR 2005, it has augmented the threshold limits for others. For instance, GFR 2017 had kept intact the threshold limit for the procurement of original works through limited tender. However, it has enhanced the upper threshold limit for open tender enquiry from INR 10 lakhs to 30 lakhs.
- Alternatively, it has increased the upper threshold limit for procurement of goods by the purchasing committee from INR 1 lakh to 2.5 lakhs.
- While GFR 2005 had recognised procurement of all kinds of services to be similar, GFR 2017 had procurement of services into two broad categories viz., ‘consulting services’ and ‘non-consulting services’.
- In addition to these changes, GFR 2017 also incorporated a few important in order to streamline the public procurement activities in the country:
- GFR 2017 recommended two-stage bidding where a procuring entity holds discussions with the bidder community to finalize the technical specifications in the first stage. The financial bid was called from those whose ideas were accepted, and the bid is awarded to the bidder with the best quality-price ratio. It was expected to enhance the technical capacity of the procuring entity by drawing on the know-how from the market.
- It directed towards assigning higher weightage to quality as compared to the price especially in the procurement of services through the quality and cost-based selection.
- It provided emphasis on the use of information technology in public procurement to ensure greater transparency and competition by mandating the use of Central Public Procurement Portal (CPPP)for publication of all tender details, compulsory e-bidding for all procurements, and promotion of electronic reverse auction.
- It introduced Code of Integrity to address probity in procurement activities.
- It urged to include environmental issues in the bid documents.
- It directed towards sharing the reasons of rejecting a tender or non-issuing a bid document to a prospective bidder upon request.
Public Procurement System in India
In general, Indian public procurement system involves five different stages namely planning of procurement, preparation and publication of bids, submission and evaluation of bids, award and execution of bids, and redressal mechanism
Planning of bids
- The procurement process starts with the need assessment of the procuring entity followed by an internal research for technical and financial specifications. India does not consult the private parties (bidders) for need assessment and procurement specifications.
- Recently, GFR 2017 had advised to adopt two-stage bidding process (for the procurements where an entity does not have expertise). Once the need is finalized, the stage of bid planning then involves a few other elements such as sanction of the procurement (administrative, technical, and financial), cost estimation, and assignment of officials for different stages (bid preparation, bid evaluation, etc.).
- Given the inputs received from the internal assessment, a procuring entity describes the need, specifies the technical and financial requirements, and accordingly, prepares the bid documents.
- Although GFRs have advised the procuring entities to include all relevant information such as the evaluation criteria including respective weightage in the bid documents, many bids do not incorporate the same.
- Even in many cases, the weightages given to different cost and quality parameters seem to be inconsistent.
- Moreover, GFRs have permitted the procuring entity to draft the procurement activities at their discretion which lead to inconsistent and fragmented bid documents even for the similar procurements.
Preparation and Publication of bids
- The bid documents should also comprise of critical information such as bid fee, earnest money deposit (EMD) or bid security, performance security, etc.
- While the procuring entity charges a fee for most of the bids, a few bids are exempted. The EMD in India has an average validity of 45 days beyond the final bid validity period, and it is stipulated to be 2-5 percent of the estimated procurement.
- The MSEs registered with the concerned ministry/department/procuring entities are exempted from depositing the EMD. The EMD of the unsuccessful bidders should be returned at the earliest after the expiry of the final bid validity and latest within one month after the contract award, but there has always been some delays.
- Adoption of e-payment for depositing the different bid related fees is a recent initiative, and it is playing a crucial role in reducing bidders’ transaction costs. Bid documents also include the time-frame of the procurement process, i.e., dates of accessing bid documents, pre-bid meetings, submission, opening, and evaluation. A few bids also include clauses on environmental concerns especially in construction tenders which is an important step for ensuring GPP.
- The bids so prepared are then published through multiple channels including e-portals with a reasonable time to access and submit the bids.
Submission of Bids and Evaluation
- Once a bidder has decided to submit a bid in response to a notice inviting tender/bid, it needs to properly prepare and submit the bid (offline/online) complying to all the specifications and procurement timeline as mentioned in the bid documents.
- Both the concerned government officials and bidders use valid digital signature certificate (DSC) to access the e-portals.
- Meanwhile, the procuring entities take some steps to ease the preparation of bids by addressing questions of the bidders through e-portals and holding pre-qualification/pre-bid meetings.
- Once submitted through CPPP, the bidders are given the opportunity to modify/withdraw their bids within a stipulated time which ordinarily happens to be the last date of the bid submission. Most of the bids are submitted in a two-envelope system, i.e., the bidders submit technical bid and financial bid separately.
- Although the bids need to be opened and evaluated immediately after the submission deadline, there are often delays in bid opening and evaluation. However, there have been some improvements in this regard, and a few entities have started electronic bid opening. The delays of opening and evaluation of bid have been drastically reduced after the introduction of e-procurement.
- The bids are opened in the presence of the bidders or their representatives and evaluated for compliance with the tender specifications to select the qualified bids. The minutes of bid opening are often published online and sent to the participating bidders electronically. Only the bids that meet the necessary requirements are retained for technical evaluation, and others are returned unopened.
- The concerned officials then undertake technical evaluation, and only technically qualified bids are retained for financial evaluation. Many entities hire consultants to evaluate technical bids due to lack of in-house procurement expert
Award & Execution
- After the selection of technically qualified bidders, the contract is awarded promptly and transparently to the most favoured bidder/s as per the award criteria (often the lowest price L1).
- GFR 2017 had mandated on using quality-price criteria for awarding the contract especially in the procurement of services. In order to enhance transparency in the system, the procurement framework has mandated the publication of contract awards.
- Another significant improvement in this direction is that the unsuccessful bidders can obtain the feedback on request, which will emerge as a learning opportunity for them in submitting future bids. It should be noted that no price negotiation is allowed in India other than in a few special circumstances.
- The awardee is asked to accept and sign the contract for execution. The awardee has to deposit a performance security in the form of a certificate of deposit. The performance security is regulated to be 5-10 percent of the contract value and remains valid for sixty days beyond the date of completion of all contractual obligations including warranty obligations.
- While in some cases, EMD is accepted as a part of the performance security, it is usually refunded to the successful bidder on receipt of performance security. The provision for online payment request through CPPP/GeM for the bidders is an improvement in the contract payment. However, in the absence of a legal time-frame for processing the contract payment, the later often is delayed; and thus, seeks attentions from the policy makers.
- Establishment of an efficient redressal mechanism is a key element for ensuring transparency and accountability in public procurement by addressing the faults and non-compliances in a procurement process.
- India exercises a two-tier review system although this is not formally specified in the procurement framework. In the first tier, an aggrieved bidder can report the irregularities to the concerned officials of the procuring entity.
- As a first tier review authority, many tenders engage arbitrator (Dispute Review Expert) to resolve any possible disputes in the procurement activities as per the Indian Arbitration and Conciliation Act 1996. In the second tier, the aggrieved bidder can move to the courts for settlements. In many cases, CCI is also approached for addressing anti-competitive issues in public procurement. A bidder (including successful), if found guilty, is debarred either indefinitely or for a given period from participating in public procurement.
Public Private Partnership (PPP) and Procurement
- If the public entity or function is transferred into private ownership, a procurement procedure is required. On 16 May 2007, the Ministry of Finance issued special procedures and guidelines for procurement of PPP projects. The bidding process for PPP projects has been divided into two stages.
- The first stage is generally referred to as a request for qualification or expression of interest. The objective of the first stage is to shortlist eligible bidders for the second stage of the process.
- The second stage is generally referred to as the request for proposal or invitation of financial bids. Here, shortlisted bidders conduct a comprehensive examination of the project and submit their financial offers. On 18 May 2009, the Ministry of Finance issued revised guidelines for request for qualification (RFQ) for pre-qualification of bidders for PPP pro- jects. Some of the main changes in the RFQ include elimination of the provisions relating to shortlisting of bidders for more than one project. Provision has been made to:
- enable the project authority to specify restrictions to prevent concentration of projects in the hands of a few entities;
- make suitable amendments to meet social sector and other project requirement;
- increase the number of shortlisted bidders from five to six and further to seven in projects costing less than 5 billion rupees or for repetitive projects; and
- create a reserve list of bidders in case of substitution in the event of their withdrawal or rejection.
- In 2011, the Department of Economic Affairs formulated an extensive policy for PPP projects including rules for regulating expenditure, appropriation of revenue, contingent liabilities, etc. However, this is still at the consultation stage within the government and has not yet been financed. In April 2016, the Department of Economic Affairs introduced the PPP Guide for Practitioners, which serves as a manual for practitioners to develop projects through appropriate PPP frameworks.
Small and Medium-sized Enterprises (MSMEs)
- The Ministry of Micro, Small and Medium Enterprises had formulated a public procurement policy for micro, small and medium-sized enterprises (MSMEs), which had been approved by the cabinet in November 2011.
- An order in 2012 was issued, titled the Public Procurement Policy for Micro and Small Enterprises Order 2012. It stated that the Central Government, Departments and Public Sector Undertakings would procure a minimum 20 percent of their annual value of goods or services from micro and small enterprises.
- This minimum procurement has become mandatory since April 2015.
- The policy further included a reservation of 4 percent in favour of MSMEs owned by specific ‘backward classes’. The Ministry of Micro, Small and Medium Enterprises issued a Circular dated 10 March 2016 allowing central public sector undertakings to relax the norms of ‘prior experience and prior turnover’ for those MSMEs that could deliver goods as per prescribed technical and quality specifications.
- The Ministry has also stated that there is a need for central public sector undertakings to achieve the minimum 20 percent annual procurement target including 4 percent by socially disadvantaged classes. It was stated by the Ministry that during the financial year 2017-18, 38 public sector undertakings managed to achieve the 20 percent procurement target.
Issues in the Public Procurement in India
- In reality, procurement practices in the country often differ from what is prescribed because of the hurdles such as inefficient monitoring process, limited accountability and governance, limited awareness, and organizational culture. Given below are the major challenges involved in the Indian Public Procurement System:
- The absence of a comprehensive procurement Act-In the absence of a comprehensive procurement Act, GFRs allow the government entities to frame procurement process with its own understanding of public interest.
- Lack of standard bid documents- In spite of the initiatives for standardizing the bid documents and code of contract following the international agencies such as IMF and the World Bank, there continues to be a multiplicity of bid documents across the entities in terms of addition/rephrase/repetition of clauses/provisions. Such ambiguities and contradictions in the bid documents stand against the principles of standardization, transparency, and accountability.
- Delays in activities in procurement cycle- The introduction of e-procurement has managed to reduce the procurement cycle especially in the stages of publication, submission, opening, and evaluation of bids. However, the procurement process is often delayed in the stage of need assessment, budget preparation, and approval.
- Unfair practices and corruption– Despite the procedural safeguards corruption level in India is perceived to be high in recent years leading to low quality of public services which ultimately hampers the development process.
- Anti-competitive elements -The existence of anti-competitive practices by the bidders’ community tends to hamper the procurement process by negating the best value of money. Competition issues in India mainly concern with collusive bidding, bid rigging, cartelization, and abuse of dominance.
- Low participation of the domestic MSEs– Despite the MSMEs provisions, the participation of domestic MSMEs in the public procurement activities remains low in India. Apart from resource-related entry barriers including anti-competitive elements, many MSMEs do not also take part in public procurement due to a perception that government procuring entities often delay in releasing the contract payments.
- Absence of an independent grievance redressal mechanism- India does not have an Independent Grievance Redressal Mechanism in the procurement system. The GFR 2017 only allows the aggrieved bidders to file complaints with procuring entities, arbitrators, and courts.
- Competency and skill of the procurement officials– There are implementation challenges concerning the skills and competency of the government procurement officials as these activities require professional skills. The officials need to be more acquainted with the procurement management, rules and regulations, legal issues, contract management issues, and others.