Time to Clean Public Procurement

Himanshu Shekhar

The country is witnessing new cases of corruption by the passing of each day. Theses cases are raising serious questions over the intent and efficiency of incumbent United Progressive Alliance (UPA) government. On the one hand, government reiterates its commitment to curb corruption but on the other hand no strong steps are visible which could check this decade old ailment. However, a couple of weeks back government took a major decision which is likely to bring down the number of corruption cases, if implemented effectively. UPA government has given its go-ahead to a law that seeks to regulate all state purchases above Rs. 50 lakh to bring transparency and efficiency in graft-laden procurement mechanism. The union cabinet chaired by Prime Minister Manmohan Singh approved the Public Procurement Bill, 2012. Now, the bill will be introduced in parliament.

Wikipedia defines procurement as the acquisition of appropriate goods and/or services at the best possible ‘total cost of ownership’ to meet the needs of purchaser in terms of quality and quantity, time and location. When goods or services are purchased by a public sector, it is called public procurement. As has been rightly said, ‘it is the process by which Governments and public sector institutions buy inputs for vital public sector investments in physical infrastructure and for strengthening institutional human capacities which lay the foundation for national development’.

Despite a number of schemes meant for betterment of weaker section, the realities of ground level are painting a bleak picture. The failure of delivery mechanism can be attributed to the corrupt system, which is undermining the faith in democracy. In fact, the culprit named corruption is creating the crisis of credibility in the prevailing establishment. Today, a common man, who is struggling to fulfill his needs, is of the view than nothing can change through his so called electoral power. In that case, he is loosing his faith in the system. However, we love to claim thatIndiais the largest democracy of the world. In spite of that a common citizen of the country is taking it as an insulting joke because he feels the system is working in the favour of the elite class in the name of common people. The system in which we are living today is driven by corruption.

In fact, corruption is working as a lubricant to get things done in a certain period and public procurement system is not an exception. According to 2010 Global Corruption Barometer, a global public opinion survey of more than 91,500 people in 86 countries on the state and status of corruption in various services in different countries by Transparency International (TI), Political Parties are perceived to be the most corrupt institution by the Indians. Police and Parliament/Legislature were rated by about 97 percent of respondents as the most corrupt institutions in the country. Other institutions that were termed corrupt include the Public Officials/Civil Servants, the private sector, media and the judiciary. It is pertinent to mention that these sectors are at the core of the current system and citizens are of the view that the magnitude of the corruption is increasing by the passing of time.

The report cites, nearly three-fourths of the respondents opined that the level of corruption inIndiahas increased in the past three years. Similarly, three-fourths of the people sampled felt that the government has not been effective in addressing corruption in the country. It clearly indicates, the faith in the political system created by electoral process is blurred. When new economic policies were introduced by the then Finance Minister Dr. Manmohan Singh in 1991, it was promised that the entry and emergence of private sector is going to cure all illness related to corruption. But, the matter of fact is that the emergence and strengthening of private sector did nothing but institutionalized the corrupt practices. It nurtured and cultivated the nexus of policymakers, corporate and criminals. This very nexus is working to for personal gain in the name of social welfare and economic development.

It’s not a hidden fact that these transfers and allocations of natural resources lack fairness and transparency. Same is the story of public procurement system. Rigging of tender process is very common in procurement by government agencies. However, officials involved in these process love to claim that they are doing all these things fairly and the whole process in free of corruption. But, the country has witnessed the loot of iron ore in Karnataka. We all are aware with the issue of POSCO in Orissa. In a recent report, it was mentioned that the mining companies ofGoaare paying just Rs. 10-12 for a tone of iron ore instead of prescribed price of Rs. 250 a tone. These companies are getting this kind of heavy relief on certain logics and no one is raising any question over the open loot of the natural resources.

It’s an irony that white collar professionals and bureaucrats have converted every assignment into a cash cow and have thoroughly exploited the power structure for their own pecuniary gains. The country has been robbed of its resources not by foreigners but by its own citizens. We got independence in 1947 and but still struggling to feel it because the senior officials and those who are running the whole system are behaving in same manner. However, we have a number of anti-corruption watchdogs, including Central Vigilance Commission, Comptroller and Auditor-General of India, the CBI, anti-corruption agencies, Intelligence Bureau, Economic Intelligence Bureau, Serious Fraud Office, Securities and Exchange Board of India, Reserve Bank of India, Defence Intelligence Agency and National Security Board besides Parliamentary Standing Committees and a ridiculously excessive number of regulators in addition to State-level agencies. Despite that, the magnitude of corruption is going up by the passing of each day.

In current system, corruption is getting patronage by a nexus of politicians, administrative officials, contractors, business people and criminals. The involvement of these sections makes the nexus secure and safe. Politicians are working with administrative officials and these officials favour contractors and business people in return of bribe. Public procurement system is full of such stories. These contractors and business people involves criminals to earn more and more profit. In many cases, it has been seen that government project appears complete only in papers. We all know about the involvement of money and muscle power in Indian electoral system. A section of politician often uses these criminals in booth capturing and other ill practices to secure electoral victory.

The corruption in public procurement system is not new but the government was not showing interest in cleaning the system. However, a number of experts believe that the draft of new bill is full of effective provisions including a provision of debaring bidders found engaged in corrupt practices. Once the bill becomes law, it will route through an e-portal purchases of over 11 lakh crore goods and services by all central government departments and ministries and public sector entities. The Bill would create a statutory framework for public procurement which could provide greater accountability, transparency and enforceability of the regulatory framework. Government believes that the bill provides for codifying the fundamental principles governing procurement, essential for achieving economy, efficiency and quality as well as combating corruption and legally obligates procuring entities and their officials to comply with these principles.

At present, public procurement mechanism is guided by the General Financial Rules, 2005. However, some ministries and departments have specific procedures or manuals to supplement these rules. These rules provide for preferential treatment to earmarked sectors such as micro, small and medium enterprises (MSME), khadi and village industries (KVIs), Kendriya Bhandar, co-operative sectors etc. In absence of a central authority to oversee procurement related issues, the ministries or departments have been delegated full powers to make their own arrangements for procurement of goods. If a ministry or department does not have the required expertise, it may procure goods through the Central Purchase Organization (DGS&D).

In these circumstances, the new bill is likely to make the procurement process more transparent and effective. A couple of years back, government had constituted a committee headed by Vinod Dhall to come out with recommendations of improving the health of public procurement system. The draft of new bill comprises the recommendations and findings of Dhall committee.

According to a government release, the Public Procurement Bill, 2012 seeks to regulate procurement by Ministries/ Departments of the Central Government and its attached/subordinate offices, Central Public Sector Enterprises (CPSEs), autonomous and statutory bodies controlled by the Central Government and other procuring entities with the objectives of ensuring transparency, accountability and probity in the procurement process, fair and equitable treatment of bidders, promoting competition, enhancing efficiency and economy, safeguarding integrity in the procurement process and enhancing public confidence in public procurement. The Bill is based on broad principles and envisages a set of detailed rules, guidelines and model documents. Government says the Bill builds on national and international experience and best practices, as appropriate for the needs of the Government of India.

The new bill is aimed to maximize the competition in procurement in the interests of economy, efficiency, integrity. It provides adequate flexibility to take into account diversity of needs and types of procuring entities, types of procurement needs and methods of procurement. The most important feature of the bill is that it provides a strong framework of transparency and accountability through a public procurement portal and a grievance redressal system in which an independent mechanism, chaired by a retired High Court Judge, would review grievances.

It’s a known fact hat public procurement is one of the core elements of government operation and its agencies. The whole system of public procurement has some significant impact on key stakeholders in society and it has a place of importance in public life. Public procurement is an important aspect of international trade, given the considerable size of the procurement market (often 20-25 percent of a country’s national income) and the benefits for domestic and foreign stakeholders.

An expert of public policy says, “Section 18 of the bill provides details of successful bids, list of bidders excluded with reasons, particulars of debarred bidders and that cause of debarment action would be communicated through the Central Procurement Portal. However, there is a need to further strengthen transparency provisions by providing, on request, to an unsuccessful tenderer, the reasons why his tender was not selected, and the characteristics and relative advantages of the selected tender. Similarly, it should be considered to provide a supplier on request why her/his application to be considered as a registered bidder under Section 20 or a pre-qualified bidder under Section 19 was rejected. This is likely to inspire greater public confidence in the procurement process and lessen unnecessary challenges to the bid process.”

Section 12 of the bill describes the subject matter of procurement with reference to national/international standards/building codes, etc. In order to further ensure that there is no ‘over-specification’ which would have the effect of limiting competition it will be useful to state that technical specifications, where appropriate, will be in terms of performance, rather than design or descriptive characteristics. Section 29 (Methods of Procurement) provides that notwithstanding other modes of procurement being available, entities may make procurement by means of a rate contract concluded by a Central Purchase Organisation (Sub Section 3 of Section 29). In view of drawbacks of the rate contract system, it is suggested that rate contracts entered into by a Central Procurement) Organisation only be opted for by procuring entities only where the per unit cost of the product is low and/or likely annual off-take is also low (thresholds may be prescribed in Rules to the Act) and subject to other safeguards for limited use of this mode of procurement, as recommended in many model laws on public procurement.

According to an expert, section 6 provides well considered grounds (like promotion of domestic industry, considerations of public interest and other socio-economic considerations) on which the central government may base its preference policy, it is felt that even in this context the quality criteria should be in-built. The selected bidders in this category should possess the capacity to supply as per minimum specified standards/building codes, etc. This is likely to ensure proper quality in public procurement. In the Bill, the procedure for procuring consultancy services has been relegated to be included in subordinate legislation. It’s a well known fact that consultancy service is a critical part of public procurement activities. So, it is necessary that the Bill applies the same objective criteria for this field of procurement.

While successful bidders are expected to perform as per targets/specifications in terms of cost, quality and timeline for execution, additional financial incentives for better performance vis-a-vis timeline, cost, etc are awarded by some countries under their government procurement rules. Such provisions may be considered for incentivising efficiency and enhancing consumer welfare.

Over the past few years, public procurement has emerged as a major source of leakages in the implementation and proper utilization of national resources resulting in major loss of public money. As a result of that new scams are evident with passing of each day. It’s pertinent to mention that corruption in public procurement has increased many folds. The procedures followed for public procurement is also considered as a major hurdle for its efficiency. Experts are of the view that the prevailing procedures are improper, age-old and quite redundant now. They are raising serious questions over the existing tender procedures. Discrepancies in tender process contribute to the slower pace of procurement and lead to delays in project implementations. The faulty tender process also forces the government system to compromise on the inferior quality of service delivery to its own citizen despite making huge investments of the public money. These problems must be checked to make the public procurement system more effective.

The country has witnessed the scam of Commonwealth Games. Office bearers of organizing committee compromised on the quality of goods required for games and made money. A newspaper reported that a disposable glass of not more than Rs 1 was procured at the rate of Rs. 36. After a bidding process, organisers selected four foreign firms for their mega turnkey deal and, as it now transpires, while one vendor, Nussli of Switzerland, for instance, is charging Rs 187 for renting out each “liquid soap dispenser,” another firm, British consortium ESAJV, is charging Rs 9,379 for the same item. While the Hong Kong-based Pico Deepali Overlays Consortium is charging the OC Rs 2 for a single disposable glass, the ESAJV consortium is charging India Rs 37 per glass. The CWG-2010 has been tagged with the games of scams and scandals though, the revelation of the cost of goods which were purchased during the Commonwealth Games could make your jaw drop—garbage bags for Rs 3, 000 each, Rs 2,000 for water jug, Rs 1,800 for brush and Rs 10, 000 for plastic chairs. Such kind of malpractices was made in Rs 633 crore overlay tender. Due to lack of transparency in issuing tender, a major rigging was reported at purchasing items, budget estimation, selection of suppliers and rules for tenders. The cost of more than 150 articles was escalated beyond one’s imagination.

This is not the last scam. Same is the story of a number of scams. Procurement is at the core of the recent Army row. It’s pertinent to mention that military procurements are not in the ambit of auditing and this adds more mystery to the whole sordid saga. Kickbacks are considered to be very common in defence deals and a couple of weeks ago even Army Chief V.K. Singh revealed that he was offered bribe to favour a deal. His statement once again fuelled the demand of making defence procurement more transparent. The government should understand that the time has come to move forward in this direction.

It’s a well known fact that the Central Government as well as state governments / PSUs have been spending huge amount of taxpayers’ money into public procurement. These procurements have always been controversial with allegations of favoritism, inefficiency, quantitative and qualitative compromises and above all, corruption and kickbacks. Government is not unaware with the corruption-ridden procurement system. The high powered Group of Ministers (GoM) on Corruption formed under the leadership of Finance Minister Pranab Mukherjee in January 2011 took note of the issue and came up with suggestions to clean the public procurement system. Government officials are saying that these suggestions are included in the draft of new bill. Public Procurement Bill, 2012 will lead to a central procurement policy which is likely to help in cleaning of the whole system up to a great extent.

Public procurement accounts for a substantial part of the budget of any country. Generally, 10 to 15 percent of the national budgets in developed countries and upto 20 percent in developing countries goes to public procurements. InIndia, public procurement constitutes about 15% of the budget. However, departments like defence, railways & telecom devote about 50% of their budget to procurement, which is higher than the expenditure of most of the state governments. According to an estimate, the annual expenditure on public procurement for the Union Government is more than Rs. 3 lakh crore. It’s a fact that public procurement has been impacting the economy significantly by generating demand and consumption.

With the help of public procurement the government, by virtue of its purchasing power can steer the market in a particular direction. It also serves as an instrument to attain social outcomes. Countries across the globe often use preferential treatment in procurement to promote indigenization of foreign technology, development of backward regions or protection of small scale industry. Public procurement involves a large sum and large size of contracts particularly in those relating to infrastructure and defence. Procurement system has a significant impact on domestic industry through development, construction work, purchases and overall buoyancy in the economy.

Keeping these facts in mind, anyone can understand the importance of an effective and transparent public procurement system. But,Indiais yet to have a perfect and institutionalised system of procurements. The new bill is likely to be a big step in that direction.

However, most of state governments are yet to institutionalise a transparent and flawless procurement system. In fact, procurement procedures are not available, financial advice system is not established and audit mechanism is questionable at state level. State governments are not showing interest to counter procurement challenges and clean the messy system. This approach leads to scams and loss of public money.

Existence of multiple procurement guidelines & procedures is a major problem expressed by the procurement officials. It creates confusion which makes the public procurement system inefficient and corruption prone.

During the past few decades, a large number of countries have enacted their respective public procurement laws. They includeUSA, European Union countries,Canada,China,South Korea,Malaysia,Mauritius,Afghanistan,Bangladesh, andNepal. InIndia, there is neither a single comprehensive public procurement standard nor a single nodal agency to deal with public procurement policy. On the other hand, In USA, the Federal Acquisition Regulation is the public procurement standard which codifies a uniform policy for acquisition of supplies and services by executive agencies. It’s important to mention that the procedures issued by the various other organizations are only supplementary to these regulations and the Office of the Federal Procurement Policy which operates these regulations is centrally responsible for all policy matters relating to public procurement. This central office for procurement purpose is headed by a committee consisting of the heads of the major procuring organizations. Many experts advocate creating such a public procurement system inIndiato curb corruption and make the whole system more effective. Some are of the view that the office of the DGS&D can be reconfigured to serve as the nodal agency for all public procurement issues. It should also make arrangements to operate a help desk to provide clarifications and guide the procurement officials.

However, the United Nations have also favoured the enactment of procurement laws by the respective member nations. UNCITRAL formulated a model procurement law in 1994 and commended the same for consideration by all member nations. This has since been replaced by a revised model procurement law in July 2011. The model law provides a useful legislative framework for regulating public procurement.

Public procurement inIndiais facing a number of challenges and the quality of manpower is an important one of them. Manpower which operates the procurement system is not equipped with specialized knowledge and skills. Government should treat the public procurement as a specialized activity. It’s an irony that the most critical and complex procurements are handled in a non-professional manner. Only Railways and the DGS&D have created a specialised cadre for this purpose. The government should work to either hire qualified staff handling procurement or to provide adequate professional training to convert the procurement officials into procurement managers. The OECD has estimated that losses due to inappropriate procedures can be 20 to 30 percent.

In prevailing system, procurement is carried out through competitive bidding or tendering process with the intention of achieving maximum economic efficiency through competitive process. If any anticompetitive practices in a procurement process, such as collusion, bid-rigging, fraud and corruption take place, it could lead to artificially raised prices, or compromise on the parameters. It will have adverse impact on exchequer and the precious national resources. So, government should think that ensuring effective functioning of public procurement markets is also part of good governance. It’s time to strengthening of audit in public procurement. Vinod Dhall Committee also recommended concurrent audit for all high-value procurements as well as involve independent team from outside the purchasing department so as leave little space for ‘post-facto scam reporting’. Government should also take lessons from other developed countries to make the whole system more transparent and effective.

1 thought on “Time to Clean Public Procurement

  1. Sir,Public procurement in defence and its related organisation should also be under this ambit, as in the name of security personnels authorised for public procurement spend crores of rupees , while these items may be readily procured in the local market. Also their is a huge network / cartel of vendors and authorities , we had seen firms not worth or registered in their living premises doing bussiness. Their is no transparency and the personnels in power at various level run the institution on their whimps and wishes.

    These procurements are in no way related to security of the nation. As these items are of day to day requirement or are of general purposes, So any procurement other than secret items / equipments should be under scrutiny.

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