Infravisioning: A Historic Reform In Public Procurement

Vinayak Chatterjee's Infravisioning video series will analyse and explain developments in India’s infrastructure sector to the BQ Prime audience twice a month.

Edited transcript of the video:

India has seen a historic reform in public procurement. Why is it historic? For decades, the Indian industry, particularly those engaged in infrastructure—developers, construction companies, operators—have been complaining about what they call this L1 tender system, where without much focus on quality, the person who submits the lowest cost tender is chosen and that has been often attributed for all the ills plaguing Indian public works—the L1 license tender raj.

The second thing that infrastructure players have been complaining for decades is delayed payments. There seems to be no control on timely payments by sarkari entities.

On Oct. 29, 2021, we had this bombshell of a notification from the Finance Ministry. The Department of Expenditure seeks to completely change the historical paradigm of public procurement and it’s steered by none other than the Finance Secretary TV Somanathan. It required a significant amount of push by Somanathan and his colleagues and a tremendous amount of bureaucratic and political capital to push this through the system.

So, what are these reforms?

These reforms for Indian infrastructure and public works are in three broad buckets. The first one is the order and the discipline for timely payments. The second is the dismantling of the lowest cost tender or the L1 raj. The last one is clear guidelines on not fooling around with arbitration awards, but honouring them in cases where the sarkari entity has lost the arbitration.

For decades, the Indian industry has stood at the door of bureaucracy asking for payments, which would come as late as 90 days, 120 days, one year, who knows. This time, the notification says 75% of a running bill has to be cleared in 10 working days and the balance 25% within 28 working days of a contract being closed.

The final bill is to be cleared within three months of completion of works, a provision to pay interest may be put in. In bureaucracies, there is a major difference between can, shall and may. Large parts of this notification of clearing these payments on time are shall, only the interest cost is may.

The responsibility of the officers concerned has been clearly documented and they are accountable for unwarranted delays. And equally importantly, this notification now instructs that online system for bills and payments monitoring or an e-platform is made available for contractors to track, which means anybody who will work on public goods, on public works for the government will now have the privilege of logging in and seeing the status of the submitted bills and when the payment is going to be released; and if there is something holding it up, what is holding it up.

Bucket number two is the famous L1 tender Raj bidding. Biddings comes in different forms and shapes. For consultancies, there are three procurement methods already in place, and these are pretty well-known among consulting engineering firms. The first, a quality and cost-based selection called QCBS, is for everybody. All engineers and consultants who work for the National Highways Authority of India are familiar with this system that the tenders or the bids are evaluated on the basis of 80% technical score and 20% financial score. This is called QCBS quality and cost resolution.

The other is the old LCS least cost system called L-1 and there is SSS or the single-source selection. These three have been historically allowed and now the notification allows a fourth method called the fixed budget selection, where the price is fixed and only merit is to count. This is fine for consultancies, but the bigger picture is what are the bidding norms for works contracts.

Till now, all public works in our country were based on selection of the lowest cost tender or the L1 raj. This notification, in a sense, breaks down this decades-old hindrance and allows quality and cost-based selection of consultancies as long as the sponsoring authority—a government department, a ministry, a PSU—defines it as a quality-oriented procurement or QOP. Which means, if you are issuing a tender for a simple stone boundary wall, let’s say in a village panchayat that is not a QOP and then you could still follow L1 because these are commodity bids.

But if their project is defined as a project of quality, let us say a major project for tunnelling in the Himalayas or a significant irrigation project or an 8- to 10-lane highway with bridges and overlays and underpasses. All these can be declared quality-oriented procurement and in these projects, the sponsoring authority is allowed to select the bidder based on 30% technical score and 70% financial score.

Why 30-70? Why 30% technical and not 80% technical as is allowed in the case of consultancies? We will come to that later.

For non-consulting services, it allows QCBS or quality-based system where order value is less than Rs 10 crore. For example, if at a major airport, a medical company or a hospital were to set up hundreds of kiosks for Covid-19 testing, that is a non-consulting service but it's a service and in the selection of the service, even the same 30-70 norm can be incorporated where the order value is less than Rs 10 crore.

There has always been a controversy in India about the applicability of single bids. That is when a tender is out, no other person, no other company bids. In this notification, single bids have been allowed, subject to the fact of certain caveats that they have been widely advertised and are not completely wacko. But broadly, single bids are to be considered. So, this is the major reform after timely payments on bidding, which is the beginning of the process of dismantling the L1 raj.

The third bucket is arbitration awards. All of us know, there are constant disputes between a private sector provider of construction and related services and a sponsoring authority. There are ‘n’ number of jhagras and disputes, which ultimately go to arbitration.

For one of the largest construction companies, an arbitration process today can stretch as long as 10 to 14 years till it sees final resolution. This is a system that has broken down, and every government officer or institution now finds it convenient every time it loses an arbitration award, to kick the process upstairs to the next higher court, thereby delaying the process inordinately.

So, what does the government say in its notification of Oct. 29, 2021? It says that we recognise the negative and obstructive behaviour by state-run entities. You can't get a more transparent statement from the central government. Having recognized that, it says where an award against a government entity has been lost by the state entity, 75% of the award shall, not may, be paid to the contractor and may include interest against bank guarantee. This decision was actually taken by the PMO five years ago, but it was not honoured and today, this rule, like all the other clauses contained in this notification, is now part of the general financial rules of the Union of India and, therefore, you can't now fool around with it. You have to follow them.

Even while challenging an arbitration award the government had lost, the routine was that the officer concerned would challenge it in a casual manner. That itself has been stopped and the notification says that challenging an arbitration award that the government has lost can only be done with full application of mind by a duly constituted special committee of the board of that particular entity.

The top three buckets relate to what I call a historic reform in public procurement.

Special Cases

There are issues to be addressed. For example, why is the technical score given at only 30% and not 80% as in consultancies? You could argue that if it is very complicated tunnelling in the Himalayas, then only very specialised companies with knowledge and competence would be allowed to bid for that tender and be evaluated on their competence and past track record. Therefore, there is a clear case for arguing with the government that in special cases, provisions should be allowed to take the technical score as high as 80% as done for consultancies. There is a case for increasing the technical score from 30%. But we do recognise that it's a beginning and I am sure as this whole format comes down, these refinements will be taken care of.

Threat Of Encashing Guarantees

There is next the scourge of arbitrary bank guarantees and threats of blacklisting.

This is standard procedure in construction and EPC bids in Indian infrastructure and related projects that on the whims and fancies of the procurement agency, if there is a dispute, a bank guarantee is encashed, without giving notice or without giving time for a cure period. And even junior officers in state public works departments or even in central entities can threaten a private company by saying, "You don't follow my instructions; I will blacklist you."

This business of arbitrary encashing of bank guarantees and constant threats of blacklisting—sometimes without substantive reasons—has not been addressed in this notification and in future needs to be addressed. All of us know that in public tendering, there is always that one bad apple that gives a bid that is either extraordinarily low, or extraordinarily high in the case of revenue sharing and other methods like auctions. That vitiates the entire bidding tendering process.

Irrational Bids

We must have a system for weeding out irrational bids, whether that is done statistically or through committees empowered to do it. It is still to be addressed. The future modifications to this notification must address that.

Swiss Challenge is a method of procurement that is popular for infrastructure projects the world over, which is a private sector player thinks of a creative project, brings it to the government and asks for the privilege of implementing it. India still doesn't have a clear policy on what is called Swiss Challenge and that now needs to be built into the procurement process.

All public procurements have a system where an independent engineering firm clears the bills and assures quality. That system today, in a sense, is not really fulfilling its purpose. For the simple reason that the independent engineer is not paid by the government but is paid by the private sector company whom it is supposed to audit and monitor. It's built for failure. So, the independent engineer system needs to be modified.

Safety Net For Bureaucrats

There is a need to protect bureaucrats against post facto investigation. Newspapers were full of the news about ex-Coal Secretary HC Gupta sent to jail for rigorous imprisonment for his role in the so-called coal scam. If the newspapers, commentators and editorials raise the question that if bureaucrats are not empowered to take decisions, then I am afraid major infrastructure projects will come to a halt.

A system needs to be created where bureaucrats are protected in genuine cases against post facto investigation, where there are no allegations of personal corruption against them, and decisions need to be taken by committees.

States Must Follow Up

A very important point in this Oct. 29, 2021 historic reform is the fact that it is only restricted to central government entities. It is only restricted to the central government works contracts and related consulting and service assignments which are issued by the ministries and departments of public sector units. But procurement and public works is a state subject and 60% of public works in this country are done by the states. This public procurement constitutionally belongs to the states wherever the state is spending money on it.

It is a crying need for all of us who are concerned with the infrastructure sector to now rally state governments to come around to this point of view that the centre's historic initiative in reforming public procurement processes now needs to cascade down to the states. Not only should media do it, not only should state finance ministers wake up to it, but the Indian industry led by the different industry associations should now stand at the door of state governments, particularly their finance departments, and say, "The central government has done it, this is good for the industry, why don't states adopt it and it should be taken up in Mission Mode."

Time-Bound Process, Fair Price Escalation

There are two other smaller issues. The future additions and modifications to this notification should take care of the fact that the bid process cannot be indefinite. Sometimes bids are asked for and a decision is not communicated for nine months to 12 months, by which time inflation has eaten away margin, prices have changed, conditions have changed. There must be a definite time limit when you call for a bid to say that the decision has to come, and I would argue it should not come later than three months. That's enough to evaluate the bids. That means taking care of price escalation in works contracts.

Today, there are very huge inflationary pressures in the economy. A large portion of that affects the construction trade, steel, cement, and building materials. All of that push up the costs, which were not seen at the time of the tender. Public works tenders do have a provision for providing price escalation, but the formula used there is not practical.

To give an example, the entire cost of package of works contracts has increased by anywhere from 16-20% because of the current bout of inflation, but the formula used for giving them compensation, as per the CPWD contracts, compensates them for only about 6-7%. You are hit by about 10% in your construction contracts, where your margin may not be more than 9% or 10%. So, issue of price escalation for works contracts needs to be taken care of in future additions.

Effective Implementation

Now, a very important question is consequences management. What is going to happen if people don't follow these rules. These rules for timely payments, the process of procurement, the bidding process of QCBS quality and financial scores and honouring arbitration awards have been incorporated in the general financial rules of the Union of India. Every member of the bureaucracy and the political system has to follow it.

So, how will you follow it? The best method is CAG audits it and pulls up officers who do not follow these rules. As recently as July 1, 2022, about six or seven months since the notification was issued, the Central Vigilance Commission pushed aside all historical notifications on public procurement and incorporated these changes in its public procurement manual.

It has now gone into the DNA of the audit and vigilance process of this country. Any officer who violates this is not only auditable, but the CVC can pick it up for non-compliance. This is a serious offence and it can't get more serious than that. This is consequence management.

From now onwards, just watch out for the central CAG audits and the strictures of the CVC where an entire range of procurement authorities of the central government now are faced with these historic reforms of payments in 10 days, honouring arbitration awards and having the facility for QCBS in quality-oriented projects. Which is why I have called it a historic reform.

Vinayak Chatterjee is founder & managing trustee, The Infravision Foundation; and chairman, CII Mission On Infra, Trade & Investment.

The views expressed here are those of the author, and do not necessarily represent the views of BQ Prime or its editorial team.