India’s Struggle with Public Procurement Regulations

[Jishnu M Nair is a Senior Attorney at IBM India/South Asia. The opinions are personal views of the author and do not necessarily represent IBM’s positions, strategies or opinions]

Public sector procurement forms around 22 percent of India’s total GDP, with the Government’s total procurement, spend running at around $417 billion. On an earlier estimate, the Government’s IT spend runs to approximately $9.58 billion per year, and this number is projected to grow by 3 percent every year. Much of this projected growth will be driven by the increasing adoption of cloud products and services by Indian government agencies, as India looks to make up ground on the developed countries. India’s cloud adoption is currently at 6 percent, which is lesser than the global average for developed countries at 11 percent.This trend suggests that India’s cloud adoption is at a very nascent stage. Research estimates that India’s public cloud services will grow by 38% from previous years to $ 4.1 billion in 2020.

It has become one of the top priorities for technology companies to grow in the Indian economy. The industry resolved the Government’s initial apprehensions around data residency for cloud services by creating local data centers and providing alternatives to deal with cloud services offerings. With all the other initiatives, another ambitious project by the Indian Government called ‘Meghraj’ (GI Cloud) is to accelerate the delivery of electronic services in the country and optimize government technology spending and infrastructure utilization. Technology will be the cornerstone of the story of increased access to citizen services for a remote village in the Himalayan foothills. Public sector concerns, especially the issues that I have highlighted in this post, are industry agnostic and not limited to the IT sector. 

Measurement

The Organization of Economic Corporation and Development (“OECD”) has drawn up a set of 13 point performance indicators that enable a quick assessment of the state of procurement practices’ effectiveness in a country. It suggests that India is behind in many indicators in the measurement, such as strategic leadership, efficiency, the procurement process’s openness, and the legislative framework in place, including subordinate legislation, model documents, and general contract conditions. 

This post attempts to analyze the impacts of ineffective regulations and processes on the Government’s ability to have a productive procurement process. I have divided these into the preliminary list of concerns ending with probable solutions. The list is not exhaustive and touches upon a few glaring areas of improvement. 

Comprehensive Legislation 

As India seeks to move towards a more transparent and accountable public sector procurement landscape, overhauling the existing regulations must be the Government’s top priority. The General Financial Rules, 2017 (GFR) set out the basic principles of public procurement in India, but many government departments and ministries separately issue procurement manuals, which establish further protocols for the procurement activities of their respective organizations. Alongside these, many of India’s 29 States issue their regulations and policies to cover their departments’ and entities’ procurement activities. The result is a cobweb of rules, regulations, and laws that collectively fail to provide conclusive clarity on the rules and procedures that each department should follow. Single source procurement regulations are a typical example where there is still better clarity and transparency that would be required. The discretion afforded to the procuring entity to interpret the resulting mesh of rules and regulations can sometimes lead to unnecessary complexity and confusion when global companies seek to respond to a public tender. 

There have been efforts made by the Indian Government to simplify and improve the public procurement laws but, to date, they have not gained traction as the Government grapples with what it sees as more urgent and pressing issues. The failure to focus on overhauling the public procurement landscape hinders India’s economy’s key engine rooms. The lack of clarity and diversity of regulations routinely results in bid protests and, often, litigation on critical public projects and can slow what should be routine procurement programs. The result has been long delays and, in a country in which inflation can often run at over 7 percent per year, budget increases due to inflation and other changing market conditions.While the Government’s focus is undoubtedly already spread thin as the country looks to deal with a rapidly growing Covid-19 crisis and a host of other issues, it is critical for India’s future to simplify the public procurement landscape. 

Pre Bid Engagement Process 

India does not have a defined structure or guidance on pre-tender market consultations. This ambiguity provides a space for potential misuse, and it can result in conflicts in the manner that the tender is drafted and floated. There are situations where we see a draft of tenders are released to potential bidders, and comments are sought. Generally, the draft of a tender is released to seek comments and avoid consultancy for projects. Still, it provides an opportunity for vendors to have it drafted advantageously. We have seen more mature markets like the European Union provide clarity for such market consultations. Our endeavor should mirror those regulations and give that as a yardstick for organizations to engage with the Government. 

Standard Contracts 

Indian public sector procurement uses more than 150 contract formats. Even for similar deliverables, the same agency may use different tender documents in terms of prequalification criteria, selection process, settlement of the dispute and financial terms and conditions. The Ministry of Information Technology has released a set of guidelines and contracting mechanisms, including a model contract for the procurement of information technology-related services in India. Still, unfortunately, this remains guidance that is typically not followed by other departments. Such an inconsistent approach leads to an inherent inability to assess and provide comprehensive risk analysis for India’s public procurement. In most cases, a measured approach is made impossible due to these inconsistencies. India should inspire its guidelines from countries like Germany and the USA who have devised uniform policies and procedures.

No (or limited) Deviation Bids 

Although the law or policies does not mandate a ‘no deviation’ approach, the procuring departments assume that a mandate for a ‘no deviation’ or a ‘limited deviation’ bid would demonstrate transparency. The problem is amplified when it comes to the terms and conditions, as it may be difficult to quantify the risk in many cases. Such terms and inept approach discourage quality and more qualified vendors from participating in opportunities. We have seen tenders where engineering procurement terms or construction contract terms are floated to the information technology vendors just because there is a 20-year-old policy to follow a specific set of terms. 

Auditor’s Failure 

The Indian Government’s expenses are audited and accounted for by the Comptroller and Auditor General of India (“CAG”), which looks at many issues, including whether the tendering process was fair and transparent. Over the years, the CAG has picked up many challenging problems. However, the nature of India’s public audit process means that the internal auditor is expected to flag the issues to the CAG on time and discourage bad practices. Internal audit as a control fails within government organizations and hence deeming the process of reporting to the CAG as ineffective. The Government should streamline internal audit and the CAG to deal with the ever-changing challenges in public procurement—the areas of concern range from resourcing problems to independence.

Grievances Redressal Forum 

Under the current procurement structure, a vendor can raise a protest or a challenge to the bidding process only through an Independent External Monitor (IEM) under the Integrity Pact or in a court of law. The IEM usually reports to the procuring agency, thereby creating an immediate and apparent potential conflict, leaving minimal transparency. The alternative is to appeal in court. Given the high number of pending cases in the Indian courts, any legal remedy could only be found after a long delay, which is costly. Long delays will also make the remedy insignificant to the tender concerned. 

Failure of the Integrity Pact 

The Integrity Pact in India was an effort to create a system that will contain corruption. It is an instrument that commits the buyer and the potential bidders to total transparency. Its implementation is assured by IEMs who are considered to be persons of unimpeachable integrity. Transparency International opines that they have observed worldwide that Integrity Pacts smoothen the procurement process, avoid litigation and arbitration, and the organization that uses the Integrity Pact improves its profitability.

However, independent studies have proven in India that the integrity pact as a mechanism has failed in India due to various vulnerabilities.It starts with the affiliation of the IEM to the procuring agency to low adoption by the Government to extensive delays and hesitancy in dealing with matters raised under the ambit of the Integrity Pact. We should consider abolishing Integrity Pacts as an effective mechanism of coping with Integrity related challenges and turn to effective public procurement law. 

While a lot can be said about public procurement regulations and its needed improvement, the above areas need immediate focus and change. A conservative (but crude) estimate of potential savings from a better procurement process is placed at 1.2 percent of GDP if efficiency savings were 10 percent. These compare well with the existing revenue deficit, significantly improving fiscal consolidation efforts, while improving public expenditure management. India is accelerating itself to be a five trillion dollar economy by 2025, which means increased public procurement expenditure. We would need to make a consolidated and concerted push to ensure that identified issues needs fixing immediately.

Jishnu M Nair

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