A new era in public procurement

On October 29, the Department of Expenditure in the Ministry of Finance, issued a notification on the “General Instructions on Procurement and Project Management.” Unlike many recent government announcements on reforms, this was an uncharacteristic understatement, as the fresh stipulations have indeed attempted to address some serious lacunae persisting for decades in public procurement.  At a general level, the 22-page note sets out a plethora of desirable actions in government purchases of works contracts and services. But what would surely draw a cheer from the privat.....
On October 29, the Department of Expenditure in the Ministry of Finance, issued a notification on the “General Instructions on Procurement and Project Management.” Unlike many recent government announcements on reforms, this was an uncharacteristic understatement, as the fresh stipulations have indeed attempted to address some serious lacunae persisting for decades in public procurement. 

At a general level, the 22-page note sets out a plethora of desirable actions in government purchases of works contracts and services. But what would surely draw a cheer from the private sector is the tough stance taken on delayed payments. It mandates that “payments of not less than 75 per cent of eligible running-account bills, shall be made within 10 working days of the submission of a bill”. The remaining payment after final checking of the bill is to be made within 28 working days of submitting the bill. The final bill should also be paid to the contractor within three months of completion of work.

The note says that public authorities “may” put in place a provision to pay interest in case of delayed payment of bills by more than 30 working days after submission of a bill by a contractor. (In bureaucratese, there is a world of difference between “may” and “shall!”) In case of unwarranted discretionary delays in payments, responsibility is to be fixed on the concerned officers. All project executing authorities implementing contracts involving aggregate payments of more than Rs 100 crore per annum are instructed to have an online system for monitoring the bills submitted by contractors. Such a system is to have the facility for contractors to track online the status of their bills. 

On arbitration and dispute resolution logjams, it is heartening that the government officially recognises the generally negative and obstructive behaviour of public systems. It now instructs that where there is a decision against the government or a public sector enterprise, the decision to appeal should not be taken in a routine manner. The decision must first be reviewed by a special board or committee before an appeal is filed against an order. Arbitration and court awards should not be routinely appealed without due application of mind on all facts and circumstances, including realistic probability of success. In cases where a ministry or a department has challenged an arbitral award and, as a result, the amount of the arbitral award has not been paid, 75 per cent of the arbitral award (which may include interest up to the date of the award) shall be paid to the contractor or concessionaire against a bank guarantee (BG). In fact, a decision on the release of funds for such awards was taken five years ago but it is only now that the finance ministry has issued official guidelines as part of the general financial rules.

The rules for selection have been reset. For all consultancy bids, three methods of procurement are already allowed and in place. They are QCBS (Quality and Cost-Based Selection), LCS (Least Cost System) and SSS (Single Source Selection). It now allows for FBS (Fixed Budget Selection) where the price is fixed, and selection is by maximum merit.

For “works and non-consultancy services”, the notification has opened up the QCBS route, which was hitherto not generally allowed. This will now be allowed under two conditions. One, where the project has been declared to be a QOP (Quality Oriented Procurement) by a competent authority. Two, for non-consultancy services where the estimated value of procurement does not exceed ₹10 crore. Under QCBS, the maximum weight of the non-financial parameters is to not exceed 30 per cent. So, finally, the much-criticised L1 (Lowest Cost Winner) framework has sought to be dismantled!

It makes a serious break from past inhibitions by allowing single bids. Even when only one bid is submitted, the process should be considered valid provided the procurement was satisfactorily advertised, sufficient time was given for submission of bids, qualification criteria were not unduly restrictive, and the bid was found to be reasonable vis-à-vis expected values.

This is not to say that there are no unaddressed issues. The limitation of a maximum 30 per cent weightage for non-financial scores in QCBS shows a lack of boldness in propagating this format. Indian firms are quite accustomed to 80:20 (technical:financial) structures in specific bespoke bids, including those under the auspices of multilateral funding as well as consultancies. The document is silent on Swiss Challenge as a method of procurement. The scourge of arbitrarily encashing BGs or threatening blacklisting are notorious practices of public agencies — and often, not for professional or above-board reasons. The guidelines need to elaborate on acceptable practices in these two areas. Escalation formula provided in the contract documents are not suitable to cover non-routine increases in price for basic materials for construction and need to be addressed.

 
The phenomenon of “irrational bidding” exists where the Indian private sector has not distinguished itself in the past. Mechanisms need to be put in place to eliminate this through statistical measures or enabling discretionary judgement. The concept of “independent engineers” needs rectification, including who hires and pays them. “Goods” are currently excluded. But whether it is sophisticated medical equipment or drone purchases, the QCBS method needs to be made applicable to purchase of such sophisticated goods also — not just works and services. 

Bureaucrats continue to be worried about post-facto action for decisions. Safeguards on this front cry out to be added in any such procurement reform. The new provisions still beg the question of “consequence management.” What happens when public officials do not adhere to these guidelines? More elaboration on this aspect would indeed be welcome. 

What is of crucial importance now is getting states to adopt and implement these reforms. Currently, these are applicable to only Central government entities and Central public sector units.

Overall, these changes in public procurement deserve a thumbs up. What is most heartening is to see the finance ministry, NITI Aayog, Central Vigilance Commission and Comptroller and Auditor General working in tandem to make these reforms a part and parcel of the General Financial Rules of the Government. More such collaborative efforts could see scores on ease of doing business go up many notches.
/> The writer is an infrastructure sector expert. He is also chairman of CII’s National Council on Infrastructure. Views expressed are personal


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