By Archit Gupta, National Law Institute University, Bhopal.

Governments devote a large share of taxpayers’ money to public procurement – purchasing goods and services from road building to school textbooks. Besides the central ministries and departments, public sector enterprises also form a major share in the overall public procurements. According to a paper by the Competition Commission of India (CCI), out of the total public procurement, public sector enterprises (PSEs) alone procure to the extent of 8 lakh crore annually (the figure relates to 2008-09)[i]. This activity is quite vulnerable to corruption and rigging with the involvement of both government officials and suppliers. Collusion between suppliers emerges in the form of bid-rigging and collusive bidding. Cartelization among suppliers with the help of government officials is a common feature and is the root cause of corruption.

Through bid-rigging practices, the price paid by public administration for goods or services is artificially raised, forcing the public sector to pay above market rates. These practices have a direct and immediate impact on public expenditure and therefore on taxpayers’ resources.

Whereas a private purchaser can choose his purchasing strategy flexibly, the public sector is subject to transparency requirements and generally is constrained by legislation and detailed administrative regulations and procedures on public procurement. These rules are set to avoid any abuse of discretion by the public sector. However, full transparency of the procurement process and its outcome can promote collusion. Disclosing information such as the identity of the bidders and the terms and conditions of each bid allows competitors to detect deviations from a collusive agreement, punish those firms and better co-ordinate future tenders. [ii]

The competent authority invites tenders with a view to purchase goods and services. Suppliers, including foreign companies, who are centrally registered with the Director General of Supplies and Disposal (DGS&D) and willing to compete, may submit tenders agreeing to supply goods of the requested specifications. Evaluation of the tenders received is one of the most significant areas of purchase management. The entire process of evaluation and contract awarding must be transparent. The Purchase Officer is required to prepare a comparative statement of quotations received, in the order in which the tenders were received. All tenders must be evaluated solely on the terms and conditions incorporated in the invitation for tenders. No new conditions may be added at the tender evaluation stage; in this way no bidder may have an unfair advantage. If a minor informality/irregularity is found while scrutinizing the proposals, the purchase officer may waive the same provided it does not affect other bidders. However, all such actions must be waived or approved by the competent authority. Upon completion of the scrutiny, tenders are consolidated into a statement, in ascending order of the evaluated prices, so as to get a clear picture of their standing as well as comparative financial impact.

Before awarding a contract to the lowest evaluated responsive tender, the purchase organization must ensure that the price to be paid is reasonable. This may be determined by comparing the contract price with the price last paid for such item, the current market price, and the price of raw materials, receipt of competitive offers from different sources, and the quantity of materials involved.

Some of the reasons behind increased cartelization in public procurement and ways to counter it are as follows-

  • No Centralized Procurement Policy- Competition in public procurement is largely misunderstood to mean “open tendering” where large number of vendors is invited for a particular work or service. There are multiple guidelines in the conduct of procurement and it creates confusion for procurement officials. There is neither a single public procurement standard nor a single department to deal with it. In India, expect for Railways and DGS&D (Director General of Supplies and Disposal), no other department has a dedicated cadre for public procurement[iii].
  • Weak Legal and Organizational Framework- Parliament has not enacted a separate law so far for public procurement. At the apex of the legal framework governing public procurement is Article 299 of the Constitution, which stipulates that contracts are legally binding on the government have to be executed in writing by officers specifically authorised to do so. Further, The Central and State governments derive their authority to contract for goods and services from Article 298 of the Constitution of India. But, except for a requirement on the government to protect the fundamental rights of citizens of being treated equally (while soliciting tenders), the Constitution does not provide any further guidance in this regard. This existing rules include General Financial Rules, 1963 (the GFRs), recently revised in 2005; the Manuals e.g. the Directorate General of Supplies and Disposal (DG S&D)’s Manual on Procurement and the CVC Guidelines for Public Procurement, which mandate compulsory “open (competitive) tender’ system under the secure “Two-bid system” beyond a certain amount of procurement. The role of DGS&D is now limited to procuring items of common use by a number of ministries (Rule.140 GFR, 2005). DGS&D identifies and maintains various lists of suppliers and consultants and finalizes the rate and running contracts for items of common use. The GFRs 2005 provide guidelines or criteria to which the procedures adopted by the procuring agencies must conform. Ministries or departments that procure are free to set their own procedures and the only requirement is that such procedures should confirm to the GFRs. The annual reports of the Comptroller and Auditor General (CAG); The Parliamentary Accounts Committee (PAC), the Standing Committees and the Legislative Accounts Committees in the States; Lokayuktas or Ombudsmen in some States.
  • Public Procurement Bill 2012- A separate Department of Procurement Policy under the Ministry of Finance was considered necessary under this bill to exercise all powers in aspects of public procurement. The Bill partly addressed this root cause of cartelization among suppliers by prosing the. The Bill entails many provisions specially designed to counter the anti-competitive concerns in procurement process, prescribing penalty for those who engage in any form of bid-rigging, collusive bidding or anti-competitive behavior – imprisonment for a term up to five years and fine up to 10% of the assessed value of procurement; ‘Open competitive bidding’ to be the preferred method of procurement and mandatory recording of reasons for choosing any other method of procurement. The Bill was introduced in May 2012 and has lapsed since then.
  • Provisions in Competition Act, 2002- Under the Competition Act, Competition Commission of India (CCI) can impose a penalty up to either 10% of the average on the last 3 year turnover upon each person or enterprise party to the cartel or bid rigging arrangement or 3 times of the profit earned by the cartel for each year of the continuance of the cartel or the bid rigging arrangement, whichever is higher. This is a sufficient financial deterrent on individual vendors / suppliers which will be apart from their blacklisting for 2 to 3 years prescribed under the various existing guidelines.
  • OECD Guidelines- Organisation for Economic Cooperation and Development has been actively working to stop cartelization in public procurement[iv]. It issue guidelines, advisories and conduct workshops. Many of its recommendations have been accepted by regulatory authorities all over the world. It has advocated for seal-bid tenders instead of going for open tenders. Open tenders, for example, are more susceptible to collusion than sealed-bid tenders. Open tenders allow members of a cartel to communicate during the course of the tender and therefore make it easier for them to reach a collusive understanding at the auction (this is known as “in-auction collusion”). In a sealed-bid tender, where each bidder simultaneously makes a single “best and final” offer, collusion is much harder, not least because it requires communication in advance that is not needed at an open tender. From the perspective of encouraging more companies to come forward to bid for contracts, sealed-bid tenders have the merit of making the selection much more uncertain than in an open tender.
  • International Precedents- Codified procurement law governs public procurement in the US, the EU, Canada, South Korea and even China, Afghanistan, Bangladesh, and Nepal. The last three countries have based their laws on the pattern of the UNCITRAL Model Law on Public Procurement. Vide the finding by the OECD in its 2010 report ‘Policy Roundtables – Collusion and Corruption in Public Procurement’, under the relevant provisions of the India’s Competition Act, when firms indulge in anti-competitive conduct in collusion with public officials, the Competition Commission lacks enforcement power to investigate the pubic officials involved. This is unlike the case of Japan, where the Japanese Federal Trade Commission is authorised to take action against public officials involved, leading to better enforcement.

[i] Arrowsmith, S. and R. Anderson (2011), ‘The WTO Regime on Government Procurement: Challenges and Reforms’, Cambridge Press, New York, USA

[ii] Sandeep Verma, ‘Domestic Preferences in Public Procurement’, the Business Standard, December 26, 2011 available at www.businessstandard.com/india/print page accessed on August 01, 2012

[iii] http://www.loc.gov/law/help/govt-procurement-law/india.php#_ftn12

[iv]http://www.mondaq.com/india/x/341248/Cartels+Monopolies/STOP+CARTELIZATION+IN+PUBLIC+PROCUREMENT

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