Public procurement in India

WHY IN NEWS?

• The finance ministry recently released revised guidelines on public procurement and project management which outline innovative rules for faster, efficient and transparent execution of projects. The guidelines also permit alternative methods for selection of contractors, which can improve speed and efficiency in execution of projects.

INTRODUCTION

• In recent years, the issues concerning public procurement has received increased attention from the academia and policy makers due to its vital role in public financial management (PFM) systems
• A well-functioning and efficient public procurement system addresses issues like inefficiency, corruption, and waste and thus >> it helps the development process by improving the public administration.
• The strategic and efficient allocation of government expenditure (public procurement) is also crucial for meeting the country’s fiscal commitments.
• Indeed, a sound public procurement system is not only an ethical requirement but also an economic and social one.

STATISTICS

• Public procurement constitutes about 15% of the GDP across the countries.
• In 2013, the estimated public procurement was 29 percent in the OECD countries while it was around 20-30 percent of the GDP in India
• Government expenditure in India has grown from INR 11,973 billion to INR 16,637 billion in the last five years
• A few Union ministries, namely, Defence, Railways, and Telecom allocate approximately 50 percent of their respective budget for public procurement.
• Considering such a large-scale public expenditure on procurement, streamlining the procurement process in the country has become imperative

PUBLIC PROCUREMENT FRAMEWORK IN INDIA

• The public procurement framework in India has four broad features namely constitutional provisions, legislative provisions, administrative guidelines, and overseers
• Constitutional provisions:
  • Articles 298, 299, 300 and 300A authorize the governments to contract for goods and services.
  • Article 246 specifies the legislative powers in the federal structure of India into three lists namely Union List, State List, and Concurrent List.
  • Article 355 specifies the executive power
  • Article 282 directs the financial autonomy in public spending.
  • Beyond that, Constitution does not provide any guidance on public procurement principles, policies, and procedures
• Legislative provisions:
  • In the absence of a dedicated procurement law at the Union level, the legislative status of various procurement rules and regulations are guided by:
    • Contract Act 1872
    • Sale of Goods Act 1930
    • CAG’s Duties
    • Powers and Conditions of Service Act 1971
    • Prevention of Corruption Act 1988
    • Arbitration and Conciliation Act 1996
    • Information Technology Act 2000
    • Competitions Act 2002
    • Central Vigilance Commission Act 2003
    • Right to Information Act 2005, etc.
  • Apart from these, a few States such as Tamil Nadu, Karnataka, Rajasthan, Andhra Pradesh, and Assam follow their own procurement Acts to carry out public procurement at the State level.
  • From time to time, the Ministry of Finance has been bringing out changes in the public procurement rules and regulations so that the administrative efficiency can be achieved.
• Administrative guidelines
  • General Financial Rules (GFRs) 2017:
    • The GFR is a compilation of general rules and orders to be followed by the government entities dealing with the matters involving public financial management.
    • It aims at facilitating efficiency in government functioning in accordance with the accountability and procedure of financial discipline.
    • It was first enacted in 1947 which subsequently has been revised and issued as GFR 1963, GFR 2005, and GFR 2017.
    • The main features of GFRs are:
      • Outlines the fundamental principles of public procurement
      • Prescribes monetary thresholds for using specific procurement methods
      • Prescribes Code of Integrity
      • Specifies tender award criteria etc.
  • Delegation of Financial Power Rules (DFPR) 1978
    • It was enacted to meet the provisions outlined in the Article 288 of the constitution.
    • DFPR commends the expenditure autonomy of the different levels of authorities for decentralized procurement.
  • Sector wise:
    • Defence procurement framework:
      • The defence procurement in India appears to be complex and unique.
      • The objective is to maintain a balance between the competitive acquisition and the best value of money given the sector-specific characteristics such as supplier constraints, technological complexity, high cost, foreign exchange implications, foreign suppliers, and geopolitical ramifications.
      • Defence procurement is done under two heads: revenue acquisition and capital acquisition
      • Defence Procurement Procedure was introduced in 2002 to streamline procurement of capital equip- ment which has gone several rounds of revision, the latest being in 2020.
    • Directorate General of Supplies and Disposal:
      • The DGS&D conducts the Rate Contracts for the government entities following the DGS&D manual.
      • DGS&D also performs other procurement related activities on request of any ministry/department such as registration of vendors, drawing of technical parameters for the stores, inspection of stores whenever insisted by the user departments.
      • In 2016, DGS&D initiated an e- platform Government e-Marketing (GeM) for conducting rate contracts, which will be discussed later in detail.
    • Railway procurement framework:
      • The public procurements in Indian Railways are governed by the Indian Railway Financial Code 1998, Indian Railways Rolling Stock Code 2008 etc.
      • The Indian Railway employs a multi-level procurement system that includes Indian Railways Stores Service (IRSS), Railway Board, Zonal Railways etc.
      • The Indian railway uses Indian Railways E-Procurement System (IREPS) for procurement and also uses the arbitration mechanism for settlement of any dispute before approaching the courts
• Overseers:
  • There are five major government bodies to check procurement probity issue in India namely
    • Comptroller and Auditor General (CAG) and Central Vigilance Commission (CVC)
      • CAG and CVC address the probity issues
      • The CVC has urged for adopting Integrity Pact towards enhancing transparency, equity, and competitiveness in the public procurement system.
      • Accordingly, it approved the appointment of Independent External Monitors (IEMs) in 132 procuring entities in 2016
      • However, CVC or the CAG do not have the power of prosecution to take disciplinary action against the procurement irregularities.
      • Instead, they only advise/recommend disciplinary actions.
      • Apart from probity issue, CVC and CAG also release guidelines on public procurement, which are mostly advisory in nature, but not binding on the procuring entities.
    • Competition Commission of India (CCI)
      • CCI takes on the anti- competitive elements.
      • The CCI intends to monitor and promote competitiveness in public procurement by identifying and correcting anti-competitive elements.
      • It can impose a penalty on individuals on finding evidence for involvement in anti-competitive activities such as bid rigging, collusive bidding, cartelization, and abuse of dominance.
      • The commission alerts the procuring entities and concerned officials about the potential anti-competitive designs in public procurement.
    • Central Bureau of Investigation (CBI)
      • CBI is engaged for investigation and prosecution of the criminal cases in procurement activities upon recommended by the other procurement overseers
    • Procurement Policy Division
      • It has the mandate to undertake reforms in the procurement process in the country.
      • The PPD attempts to disseminate the best practices, provides guidance and capacity building, and issues the procurement manuals.
      • The PPD has revised GFRs, manuals for procurement of goods and services in 2017.

THEMATIC PRESENTATION OF PUBLIC PROCUREMENT SYSTEM:

ISSUES IN THE PUBLIC PROCUREMENT IN INDIA

• Complex process:
  • Complexity due to federal nature of Indian polity:
    • The public procurement process in India is quite complex given the federal framework for public service delivery.
    • The constitutional arrangements across the Union and State governments, autonomous and statutory bodies, public sector undertakings (PSUs), and the local governments demand a broad range of requirements for providing public services.
  • The absence of a comprehensive procurement Act:
    • The system in India has become more complex as the country does not have a comprehensive public procurement law guiding the procurement activities.
    • In the absence of a comprehensive law, General Financial Rules (GFRs) allow the government entities to conduct procurement activities independently.
    • It has resulted in heterogeneous procedures and multiplicity of rules across the procuring entities.
    • Many entities such as Defence, Railway, Telecom, Public Works Department (PWD) etc. separately issue procurement manuals to administer public procurement activities.
    • Although GFRs and other procurement manuals are exhaustive, they are prone to unfair practices in the absence of legislative backing.
  • Multiple interpretations of rules and regulations
    • In addition, the system in India is aimed at achieving socio-economic developmental objectives including promotion of MSEs through price and purchase preferences and reservation of sector-specific products.
    • These lead to complexities due to multiple interpretations of rules and regulations at the discretion of the procuring entities.
• 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 provisions.
  • Such ambiguities and contradictions in the bid documents stand against the principles of standardization, transparency, and accountability.
  • Many bid documents do not have clarity on the evaluation criteria which gives a rise in the complexity in the evaluation process.
• Delays in activities in procurement cycle
  • The procurement process is often delayed in the stage of need assessment, budget preparation, and approval.
  • Similarly, unavailability of sufficient procurement professionals and non- realization of the required information usually appear responsible for the delay in preparing the technical specifications.
  • A few other issues such as appropriate need assessment, the involvement of people who are being affected primarily in the construction procurements, and environmental impact assessment are often overlooked.
  • The construction and infrastructure procurements often suffer from the delay in land acquisition and the regulatory/administrative approvals from multiple authorities.
• Unfair practices and corruption
  • Given the size and the interests of the stakeholders, public procumbent is vulnerable to unfair practices imposing high costs on both the government and the society.
  • 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.
  • Although CVC guidelines urge for appointing an external monitor to mitigate the corruption and ethical risks, GFR 2017 has not prescribed the same implicitly to enforce the Code of Integrity.
  • The absence of comprehensive legislation, violation of procedural norms, and weak monitoring procedures has emerged as the major reason behind the corrupt practices.
  • In many cases, a procuring entity itself encloses bundling and non-competent clauses in the bidding documents to favour a particular bidder which opens up a scope for unfair practices.
  • While every tender incorporates clauses on prohibiting corrupt practices in the bidding process, there is no clear provision for a penalty if someone is found to engage in the unfair practice.
• Presence of 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.
  • Such anti-competitive elements have detrimental effects on the public procurement through various means such as eliminating competition, denying fair/minimum price, variation in the tender specifications, paying for fabricated work, and poor quality procurement, which ultimately undercut the development prospects.
  • Anti-competitive clauses in the bid documents:
    • In many cases, the mechanism itself facilitates unfair practices through inclusion of anti-competitive clauses in the bid documents.
    • While specifying the product characteristics, many tenders focus on product description instead of functional performances, which gives rise to specification ambiguities
  • Entry barriers:
    • Sometimes a procuring entity restricts the number of bidders to reduce the cost of bid evaluations or/and get quality supply and stability in the procurement process.
    • Such entry barriers may lead to inefficient outcomes.
• Low participation of the domestic MSMEs
  • Despite the MSMEs provisions, the participation of domestic MSMEs in the public procurement activities remains low in India.
  • Lack of human resources, low access to information and technology, lack of financial capital, etc., appear to be the major challenges in this regard
  • Apart from such resource related entry barriers, many MSEs do not also take part in public procurement due to a perception that government procuring entities often delay in releasing the contract pay- ments. This perception affects the financial stability of the MSMEs.
  • Similarly, lack of competitive practices in public procurement and rigid bureaucratic attitude also limit participation of the MSEs
• 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.
  • At the first tier, an aggrieved bidder files complaints on the irregularities to the concerned officials of the procuring entity. However, the judgement lacks credibility as the authority is from the procuring entity itself who is responsible for causing grievance.
  • As an alternative, many tenders incorporate provisions for engagement of arbitrator (Dispute Review Expert) to resolve any possible disputes, but it is a lengthy and costly process.
  • Similarly, courts appear as the second tier redressal mechanism for the aggrieved bidders, but the hierarchy of judicial process often appears to be a time-consuming and costly process.
  • Apart from that, the final judgement may be challenging in the absence of a comprehensive legislation while penalizing the individuals for unfair practices.
  • Moreover, reporting of irregularities is not allowed in each stage of procurement but only at the stage of award.
• Competency and skill of the procurement officials
  • Lack of competency of the government procurement officials:
    • There are implementation challenges concerning the skills and competency of the government procurement officials as these activities require professional skills.
  • Fear of prosecution:
    • It is found that the procurement officials are often reluctant to take a financial/administrative decision, especially while performing procurement of services due to the possible trials for any procedural error (even corruption charges) wherever specific guidelines on such procurement are absent.
  • Dependence on external capacity:
    • In addition, many entities lack in expertise in preparing technical specifications and appropriate evaluation criteria for a competitive bidding.
    • In order to overcome such issues, they tend to employ temporary consultants to carry out procurement activities. This dependence on external capacity may reduce the credential and public confidence.
• Issues with Green Public Procurement:
  • India’s Green Public Procurement efforts are primarily initiated in isolation, ad hoc in nature, and yet to replicate at a larger scale across the public procuring entities.
  • GPP is further challenged by several issues such as cost (these products are often ex- pensive), lack of environmental knowledge, lack of tools and information, and absence of a uniform approach for defining energy efficiency criteria.
• Lack of private participation in planning of procurement:
  • Unlike the countries such as USA, France, New Zealand, Botswana and Poland, the government procuring entities in India do not consult the private parties (bidders) for need assessment and procurement specifications

INITIATIVES

• Electronic Portals for Public Procurement
  • The government of India has emphasized information technology (e-procurement) as a tool for enhancing transparency, efficiency, and accountability in the public procurement.
  • The introduction of e-procurement has managed to reduce the procurement cycle especially in the stages of publication, submission, opening, and evaluation of bids.
  • Central public procurement portal (CPPP):
    • CPPP provides an e- platform to the procuring entities to publish and accept the tender and tender related documents, free access to bid documents, bid submission, communications for clarifications, and access to bid opening.
  • ‘Tenders India’:
    • Adoption of e-procurement and e-payments to reduce cost and improve efficiency in public procurement, got a boost with the creation of Indian Government Tenders Information System known as ‘Tenders India’.
    • This was developed by NIC in association with the DeitY to provide greater accessibility to the government tenders.
  • Mandates under GFR 2017:
    • GFR 2017 has mandated the use of CPPP and GeM by the procuring entities.
  • State portals:
    • State governments have been using their respective State e-procurement portal with support from the National Informatics Centre (NIC).
  • Indian Railways E-Procurement System (IREPS):
    • Indian Railways uses IREPS for conducting e-procurement.
  • Government e-marketing
    • The DGS&D developed Government e-Marketing (GeM) in 2016 as an end-to- end e-portal for common use goods and services
    • The DGS&D publishes the item-wise list of goods and services periodically to be procured through GeM.
    • Accordingly, the prospective suppliers register themselves on the portal.
    • DGS&D asks the procuring entities to project their annual procurement plans and submit them for displaying on GeM.
    • An entity selects a supplier directly with the lowest price available on the portal for procurement value of up to INR 30 lakhs, whereas, it uses bid/reverse auction for procurement value of more than INR 30 lakhs.
    • Upon receipt of goods and services by the entity, payment is made electronically.
• Procurement provisions under reservation/preferential mode
  • The Union government mandates procurement of goods and services through reserved/preferential procurement of locally produced goods and services in order to uplift the domestic sector.
  • A few of such provisions are:
    • Reserved Procurement from Khadi Goods/Handloom Textiles
    • The Pharmaceutical Purchase Policy 2013
      • It reserves the procurement of certain medicines by the Union and State procuring entities from the Pharmaceutical CPSEs
    • Preference Policy for Domestically Manufactured Electronic Products
    • Public Procurement Policy for Micro and Small Enterprises (MSEs) Order, 2012
      • It mandates every Union government entity to set a minimum annual procurement target of 20 percent from the MSEs (Out of which 4 percent is earmarked for the ST/SC owned MSEs)
    • Public Procurement (Preference to Make in India) Order, 2017
      • The order aimed at incentivising production linked through local content requirements to encourage domestic manufacturers' participation in public procurement activities over entities merely importing to trade or assemble items.
      • It was amended in 2020 to curtail investments from neighbouring countries especially China.
      • The amendment also enabled nodal Ministries/Departments to notify higher minimum local content requirement for Class-I and Class-II local suppliers.
• Green Public Procurement (GPP)
  • GPP is a response to deal with the climate change issues and promote sustainable development programs through environment friendly procurement.
  • EcoMark:
    • The journey of GPP in India began with the introduction of EcoMark in 1991 that intended to increase the awareness among the consumers including the government machinery about the environment friendly goods and services.
  • Internalizing environmental and energy efficiency criteria:
    • A few entities such as Indian Railways, National Thermal Power Corporation, Indian Oil Corporation etc. have started internalizing environmental and energy efficiency criteria in their procurement decisions.
    • For example: Insistence on purchase of Bureau of Energy Efficiency (BEE) three-star or higher star products, migration from CFC refrigeration to HFC etc.
  • National Environment Policy 2006
    • It is aimed at the adoption of Environmental Management Systems through purchase preference for ISO 14000 goods and services
  • GPP Guidelines:
    • Prime Minister’s Council on Climate Change suggest Green Procurement & Purchasing (GPP) Guidelines in 2007
  • Eco-friendly infrastructure:
    • For ex: installation of bio-toilets by Indian Railways in passenger coaches
  • GFR 2017 Rule 173
    • It urges the procuring entity to ensure electrical appliances procurements only with the notified BEE star rating.
• Integrity Pact:
  • As advocated by the CVC, GFR 2017 prescribes adoption of Integrity Pact towards curbing corruption and unfair practices.
• Online portal to file complaints:
  • The Department for Promotion of Industry and Internal Trade (DPIIT) has launched an online portal to enable companies participating in government procurement to file complaints for alleged violation of the Public Procurement (Preference to Make in India) Order, 2017.
• Liberalization of procurement process:
  • India is liberalizing the procurement activities by accessing the foreign markets, and it has been an observer in the accessions in the WTO’s Agreement on Government Procurement (GPA) since 2010
  • Allowing the international players in the public procurement activities and harmonizing the procurement policies across countries are the major features of WTO GPA.

WAY FORWARD

• Capacity building of procurement officials:
  • The officials need to be more acquainted with the procurement management, rules and regulations, legal issues, contract management issues and others.
  • They also need more exposure to cope with the best procurement norms and practices of the developed countries and the international agencies like World Bank, IMF, ADB, and UNICEF as well as the WTO GPA and UNCITRAL Model.
  • Technological competency and capabilities of the officials should also be enhanced for proper implementation of e-procurement.
• Pre-requisite before being a member of WTO’s GPA
  • India needs to improve the competitiveness of the domestic suppliers before becoming a full-fledged member of the WTO’s Agreement on Government Procurement (GPA)
• Promotion of MSMEs to participate in public procurement:
  • Promotion of MSEs is important due to their growth potential through innovations, competition, and inherent employment opportunities.
  • Public procurement from the domestic MSMEs have gained importance in many countries in recent years.
• Incorporate environmental concerns at all stages of the procurement:
  • It becomes imperative to incorporate environmental concerns at all stages of the public procurement system.
  • It is also important to create an inter-ministerial task force to overview the mechanism.
  • The government initiatives such as smart-city projects can be the vehicle to- wards promotion and adoption of GPP and innovation.

PRACTICE QUESTION:

Q. ‘Enactment of a public procurement Act is imperative to provide a structured competitive process towards ensuring the best value for public money and establishing public confidence’. Discus