Report No. 27859-IN India Country Procurement Assessment Report December 10, 2003 Procurement Services South Asia Region Document of the World Bank Acronyms and Abbreviations ADB Asian Development Bank ASCI Administrative Staff College of India, Hyderabad CAG Comptroller and Auditor General of India CDC ConsultancyDevelopment Centre CIDC Construction Industry Development Council CII Confederationof Indian Industries cvc Central Vigilance Commission DFID Department for Industrial Development,United Kingdom DRB Dispute Resolution Board GDP Gross Domestic Product GO1 Governmentof India GPA GovernmentProcurement Agreement ICB International CompetitiveBidding NCB National CompetitiveBidding NICMAR National Institute of ConstructionManagement and Research NFM National Institute of Financial Management PSU Public Sector Undertaking PWD Public Works Department SBD Standard Bidding Document UNCITRAL United Nations Commission for International Trade Law WTO World Trade Organization Vice President: Praful Patel, SARVP CountryDirector: Michael F. Carter, SACIN Task Manager: Agustin Litvak, SARPS 2 COUNTRY PROCUREMENTASSESSMENT REPORT (CPAR) INDIA Phases I,11,andI11 Center, States andPublicEnterprises SummaryandRecommendations December 31,02 Modifiedon March31,03 Modified againon June 6,03, November 12,2003 andNovember 19,2003, December 10,2003 CONTENTS 1.o Preface 2.0 Country and Political Setup 3.O The Public Procurement Regime 4.0 Performance o fPublic Procurement 5.0 Weaknesses o f the Present Regime 6.0 Competence, Skills and Trainingo f Officers and Staff 7.0 Comptroller and Auditor General 8.0 The Business Community 9.0 Corruption 10.0 Recommendations 11.0 Next Steps 12.0 Annexure 1 : Government o f India's Comments on the Report INDIA COUNTRY PROCUREMENTASSESSMENTREPORT(CPAR) SUMMARYAND RECOMMENDATIONS 1.0 Preface The Country Procurement Assessment for India commenced inJanuary 2000. Inview o f the magnitude o f the task andbudget constraints it was dividedinto three phases. The first phase covered the Central Government and its agencies. The report was submitted to the Government inFebruary 2001. The second phase coveredthree State Governments' selected as representative o f the twenty-five States andUnionterritories. The reports were submitted by the Bank to the Government inOctober 2001. The third phase covered the 250 plus Public Sector Enterprises under the Central Government and the report was submitted to the Government inAugust 2002.2 The Government o f India(GOI) agreed to the study subject to a few conditions, mainly that the exercise shouldnot culminate ina `risk rating' for India and the review o f corruption should be confined to the public procurement sector (seeAnnexure I).The study was carried out by Raghavan Srinivasan, former ChiefProcurement Advisor inthe World Bank inWashington D.C., assistedby local consultants. The govemments, at the Center and States, provided all logistic support but didnot directly participate inthe study. This report combines the five reports inthe three phases, covering the Center, three States (including the state enterprises) andthe Central Public Sector Enterprises, inthe form of a comprehensive summary to present a total picture o fpublic procurement inthe country, its strengths and weaknesses and the recommendations for improvement and modernization. 2.0 Country andPoliticalSetup Indiabecame independent inAugust 1947 and adopted a written Constitution inJanuary 1950 under which it is a sovereign, socialist, secular, democratic republic under a President. The country follows the parliamentary system o f democracy on the British model. The national parliament is elected by adult franchise. The majority party forms the government under a Prime Minster. India is a Uniono f States comprising 25 States3 and7 UnionTerritories. The nationalgovernment isknownas the UnionGovernment or Central Government. Each State is under a Governor appointedbythe President and has an elected legislature. The party inmajority forms the government under a Chief Minister. The Constitution allocates some subjects to the Center and some to the States and some to both. ''Tamilrequest, Nadu, Kamataka, Uttar Pradesh At its a similar study was carried out inthe state of Maharashtra in2002 Three new States were created inNovember 2000 5 The country follows the common law system andhas an independent judiciary. The Supreme Court o f India is the apex court and itsjudges can be removed only by the Parliament. The Constitutionprovides for an independentaudit authority under the Comptroller and Auditor General o f India (CAG) who reports his findings directly to Parliament andState legislatures. 3.0. The PublicProcurementRegime 3.1 Role and Importance of Public Procurement At the time o findependence in 1947, government activities were basically limitedto maintenance o f law and order and collection o frevenues. Public procurement was confined to purchase o f office equipment and construction o f office buildings and roads. Since independence government activity has grown manifold, including setting up o f a vast number o fpublic sector undertakings inevery sector o fthe economy inpursuance o f the social democracy, planned development and command economy. Public procurement grew exponentially and now covers everytype o f goods and services and is carried out by a myriado f agencies all over the country. Since the nineties the government has changed course and is embarked upon an economic liberalization path including gradual dis- investment inthe public undertakings. However the implementationi s slow and government procurement continues to remain large involume and all pervasive. Procurement o f goods and services is carried out byministries, departments, municipal and other localbodies, statutory corporations andpublic undertakings bothinthe Center andinthe States. The total value o fpublic procurementof all these puttogether is o fthe order o f $100 billion4representing 13 % o f the national budgets and over 20 % o f the Gross Domestic Product (GDP). The public procurement policies, procedures and practices o f the Center, States andthe Public Enterprises have a tremendous impact on the economy andthe business community, particularly inthe construction sector, which depends largely on public works contracts. The public perception o f integrity and efficiency o fthe government is to a large extent swayed by the transparency and integrity o fpublic procurement. 3.2 Public Procurement Policies and Institutions 3.2.1 TheLegal and Regulatoy Framework The Constitution o f India authorize? the Central and the State governments to contract for goods and services and also requires the executive to protect the fundamental rights o f all citizens to be treated equally (while soliciting tenders), but beyond that it does not provide any guidance on public procurement principles, policies or procedures. There is Usinganexchange rate of $ l=Rs 45.00 valid at the time of the study Article 298 6 no Central or State legislation onpublic procurement either, except for two States (out o f 25), TamilNadu andKamataka, which have recently enacted Acts on `Transparency in Public Procurement'. The policies, procedures, guidelines and delegation o f authority relating to procurement are issued by the executive branch o f the government throughprimarily, the finance, but also through the industry and other ministries. Accordingly, it may be said that there is no legal authority to the public procurement procedural framework, which i s essentially a set o f executive directives. Government contracts are governed by the same laws that govern private contracts. There i s no department or agency inthe Center or State exclusively responsible for framingpolicies or regulating public procurement. Nor is any department entrusted with the responsibility o f overseeing public procurement inrespect to its compliance with the laid down policies andprocedures, or its efficiency and transparency. The Comptroller and Auditor General o f India(CAG) carries out ex-post audit o f govemment expenditures including government andpublic sector procurements, essentially checking the budget authority for expenditures and adherence to laid down procedures. The CAGYs annual and special reports highlight unauthorized andwasteful expenditures, losses to the public exchequer and unjustified departures from established procedures. The reports are publishedandare discussed inthe Parliament and State legislatures. 3.2.2 Procedural Framework The Ministryo fFinance inthe Center andthe Department o f Finance inthe States lay downbroadprinciples of financial propriety inincurring government expenditures including expenditure inthe procurement o f goods and services and leave it to the procuring agencies to expand these into detailed rules andprocedures. Besides, Finance, other ministries such as Industry,Public Works, Environment, Agriculture, State Enterprises and others also issue directives on government procurement relevant to their portfolio, e.g., encouragement o f small scale industry, environmental standards in government procurement, procedures for purchase o f commodities, preferences for state owned enterprises and so on. Initially the Ministryo f Supply inthe Centerkhe Central Stores Purchase Organization in the States andthe Public Works Department (PWD) inthe Center andthe States served as the lead agencies to formulate detailedprocedures for the purchase o f goods and works respectively, which were followed by other departments, agencies and state undertakings, However as the government expanded its activities exponentially and set up multitude o f state enterprises, each ministry, agency andparticularly state enterprise introduced innovations, embellishments and improvements as they deemed fit and appropriate from their points o fview. The basic framework o f rules andprocedures require open tenders, open to all qualified firms without discrimination, use of nondiscriminatory tender documents, public bid opening and selection o f the most advantageous tender taking all factors (preferably pre- disclosed) into consideration. Restricted or limitedtenders are permitted ifthe value i s 7 small or only limited suppliers are available and single tenders are permitted inthe case o f urgency, small value, and proprietary andinother exceptional circumstances. Inthis respect the basic procedural framework is no different from World Bank Guidelines or UNCITRAL6model law or the GPA of WT07and other good models o fpublic procurement. Inthe past two decades the procedures have been further influencedby the World Bank andthe Asian Development Bank (ADB) and the tender documents usedby the better agencies are modeled on their documents. Thus, there i s a reasonably good framework o f rules, procedures and documents anda few good practitioners as well. However, there are thousands o f agencies handling public procurement and most o fthem have added their own nuances andpeculiarities, some consistent with the basic philosophy ofnondiscriminatory open tendering, but manybendingthe basic principles to an uncomfortable degree, and few bendingthem beyond recognition. Since the genesis is the `finance rules' and not a law, nothing prevents them inthis exercise, nor has the auditor anything to say unless it finds fraud or malpractice or impropriety. 4.0 Performanceof PublicProcurement Byandlarge, the procurement bythe Central Government ministries, departmentsand sub agencies works satisfactorily when compared to public procurement inother developing countries andwhen compared to the performance inthe States. That a good part o fprocurements i s carried out efficiently using fair andreasonable procedures can be attributed to a large extent to the basic framework o f good procedures and documents, competent professional cadre inthe major purchasing ministries and agencies, well educated support staff, an efficient ex-post audit mechanism and a competitive and aggressive business community. However, the good performance i s marred by cases o f mal-practices, pervasive corruption and occasional scandals o f corruption at highlevels. The situation inthe States is worse. Though the procedural framework is the same, the qualityo fthe personnel isnot as good andthere is muchmore interventionbypoliticians andhigher incidence o fCorruption. Negotiationis practiced routinely andcontracts are divided up among many or all the bidders makinga mockery o fthe tender process. In some States there i s excessive use o f annual `rate contracts'8 which get extended year after year on some excuse or other, avoiding new tenders, thus favoring the current contract holders often for corrupt reasons. Evenamong the States, some arebetter performers thanothers. Ofthe three states selected as representative samples, the southern states o f Tamil Nadu andKarnataka were better than the northern state o fUttar Pradesh. InTamil Nadu, pursuant to a highlevel UnitedNations Commission for International Trade Law 'Government Procurement Agreement o f the World Trade Organization * Rate contracts are `price agreements' usually valid for one year, awarded after open tenders, often to more than one fm(parallel rate contracts). All user departments can place orders without tenders on the rate contract holders. The procedure gets the benefito fbulking the requirements and securing a competitive price and saving oftime for user departments by straightaway placing `call o f f orders 8 committee recommendation, the State passedan Act o f the legislature (law) called `The TamilNaduTransparency inTenders Act 1998' (which came into effect only in2000) complimentedby a unified Rules o fProcedure, which inter alia mandated the open (advertised) tender system andpublication o ftender notices andtender decisions ina weekly bulletins, and introduced an appeal procedure. Kamataka followed suit soon after, andenacted a `The Kamataka Transparency inPublic Procurement Act 1999' complimentedbyPublic Procurement Rules. These measures have enhanced transparency and will hopefully improve publicconfidence. The performance o f the centralPublic Sector Enterprises is on the whole better. The larger corporations called the `navratnas' are more efficient, business like and use more sophisticated procedures, particularly inbid evaluation for evaluating factors other than price. The level o f public complaints is less. Inspite ofamajorpart ofthe public procurement proceedingsatisfactorily, public's general perception is not good. A few highlypublicized scandalsginthe Center and States haveresulted indisenchantment with and distrust o f government procurement. Apart from favoritism inthe selection o f awardees, the execution o f the contracts is often unsatisfactory, particularly inworks contracts, due to absence o f incentives inthe contracts for good performance, indifferent supervision, malpractice, deep rooted corruption andthe inadequacy o f the current laws goveming these contracts to effectively deal with delays, claims and disputes. The Department for InternationalDevelopment o f the UnitedKingdom (DFID) carried out a review o f government procurement inthe State o f Andhra Pradeshin2002 and issueda report titled "Government o fAndhra Pradesh - Public ProcurementReview 2002". The report", by and large, comes to the same conclusions. Procurement inWorld Bank or Asian Development Bank projects have generally beeno f higher quality, mainly attributable to sound packaging o f contracts, mandated bidding/contract documents, pre-disclosed clear evaluation and qualification criteria, better technical specifications, prohibition o fnegotiations and stricter supervision at all phasesby the lending agency. However, delays andmalpractice occur inthese projects as well, albeit inmuch fewer number o f cases. As the object of this study is to identifythe weaknesses andlook for solutionsas well as to exploreavenues for improvementandmodernization,the report discusses themin much greaterdetailin the succeeding paragraphs. Telecom, Tehelka, Fodder, Tansi, etc loreferred to as the DFID report inthese footnotes 9 5.0 Weaknesses inthe Regime 5.1 Absence of a Dedicated Policy Making Department The absence of a central lead departmentor agency inthe center, dedicated to policy and oversight o f public procurement, has resulted ina multiplicity ofrules, procedures, directives andorders issued by all ministries plusthe CAGYChiefVigilance Commissioner, Central Vigilance Commission (CVC), etc. Infact, it i s difficult to assemble and check all current instructionson any one topic. Similarly, there i s a multiplicity o f tender and contract documents issuedby each agency and enterprise. The situation is similar inthe States. At one time the Stores Purchase Department andthe PWDtook the lead, but no more. Eachdepartmentand state enterprise issues directives instructions, manuals on the subject. Also, the government procurement i s more influenced by the focus to develop local entrepreneurs, small scale industries, backward regions, state enterprises, disadvantaged groups, unemployed engineers, etc., and loses sight of the main objectives, viz., economy, efficiency, transparency and accountability. There i s an urgentneed bothinthe Center and inthe States to establish a single dedicated department or agency to evolve, coordinate and oversee policies andprocedures inpublic procurement' and simultaneously support other public policies such as development of industries and social goals, without compromisingthe main objectives of economy, efficiency, transparency and accountability. 5.2. Absence of Legal Framework Inthe absenceofa Centrallaw or Stateact inpublic procurement, eachministry department, agency, local body and state enterprise, while following the basic rules o f the open tender system, feels free to devise its own variations, with its own perceptions o f public interest. The government i s the same, the procurement objectives are the same, even the specific work/goods can be the same, the biddingcommunity i s the same but the procedures and policies practiced by each agency are different. This takes away the credibility and public confidence inthe system. Secondly, the rules andprocedures are viewed more as guidelines and do not have legal sanctity and are not enforceable in a court o f law. The ministers andofficials can override any o f these procedures inthe name o f expediency andpublic interest, without a serious challenge from the public and the potential bidders. The possibility that the audit may criticize any such action inits report i s `post mortem' a few years later, and does not deter errant officials and politicians from manipulating the system. A `Public Procurement Law' complemented bya set o fPublic Procurement Regulations, to replace and consolidate the present fragmented rules, will improve the transparency o f the process and accountability o fpublic officials. The law would discourage political bosses andcormpt officials from short cutting procedures inthe name o f `public interest' `I"There is no one government body in the State ofAndhra Pradesh with overall responsibilityfor making procurement policy, developing standard documents......... "quote from the DFID report. 10 unless the action could be defended ina court o f law. The law can also define the precise scope for court intervention, thereby eliminating frivolous suits which waste time. Some States have taken a lead on this initiative. Tamil Naduhas issued `The Tamil Nadu Transparency inTenders Act 1998'. The Karnataka Governmenthas issued `The Karnataka Transparency inPublic Procurement Act 1999'. There are also international models to draw from. The UNCITRALmodel law publishedin 1980 has served as the model for the procurement law being legislatedinmost East Europeanand ex-Soviet Union countries, as well as insome developing countries inAfrica and Asia. The Government Procurement Agreement o f the WT012is another model. Infact the WTO has set up a working group to examine the utility o f andto draft an agreement on "Transparency inGovernment Procurement" to be applicable to all members.l3 The acts andmodels referred above only cover the process upto award o f contract to ensure transparency, but not the subsequent contract execution. The proposedlaw could usefilly address the difficulties presently faced duringcontract execution, by introducing incentives and sanctions to encourage goodperformance. Thus it would deal with early completion, delays, claims, dispute resolutionmechanisms and blacklisting of firms. 5.3 Absence of a Credible Complaint/Challenge/Grievance Procedure Inthe present system, any grievance from abidder that hewas wrongly deprived ofthe award is reviewed bythe superiors o f the deciding official within the bureaucratic hierarchy. Apart from the natural tendency o f officials to defend the action of their subordinates, the perceptioninthe mindof the complainant will bejust that, and hence, the process lacks credibility. The fact that the aggrieved bidder can approach the courts i s an empty consolation as courts take years to hear a case, the costs are prohibitive and it i s not good public relations for fbture business. The introduction o f a quick, effective and credible challenge/appeal procedure would be the answer to assure integrity andbuild public confidence inthe system. Most developed and some developing country systems provide for this. The recently legislatedtransparency Acts inTamil Nadu and Kamataka provide for an appeal procedure, but the appellant authority i s the government, which does not provide much credibility. The appellant authority shouldbe totally independent o f the government. 5.4 Absence of Standard TenderDocuments Inspite ofsome initiativesto standardize tender documents usingthe Standard Bidding Documents (SBDs) o fthe World Bank as models, there continues to be a multiplicityo f tender documents usedby different ministriedagencies for identical procurements. This i s more true in civil works contracting. According to one estimate, there are more than '*This isa plurilateral agreement. India is not a signatory l3Itis understood that the GOI's agreement with WTO requires introduction of aprocurement law 11 150 different contract formats used by the government and its agencies. Obviously, this causes confbsion inthe minds o fbidders and concem about the risks imposed on them. Also, some are o fpoor quality. Evenwhen instructions are issued standardizing a document, each ministqddepartment has a penchant to tailor the document, addsubtract clauses, repeat the same provisions indifferent clauses or at least reword or rephrase some clauses, destroying the purpose o f the standardization and introducing ambiguities andcontradictions inthe document. The situationinthe Statesis muchworse. Inone State, for the same work, say, for constructionof a road, the tender document is different ifitisissuedbythePublicWorks Department ortheMunicipal Corporationor the Metropolitan UrbanDevelopment Authority or the State RoadDevelopment Corporation. The qualification requirements, selection criteria, the payment terms, the dispute settlement mechanism are all different for no conceivable reason. It is essential to develop andpublisha set o f Standard Tender Documents and Contract procurements; any special concem should be addressedinthe special condition^.'^ The Conditions for mandatoryuse by all ministries, agencies and enterprises for similar documents shall be readily available inthe market and through intemet. 5.5 Preferential Treatment in the Procurement Inthe formative years o fnationbuildingandthe prevailingsocialistphilosophy, government procurement became a vehicle for various industrial and social policies. Promotion o f `small scale' industries, which promotes employment and entrepreneurship, resulted inmany items to be reserved for purchase exclusively fiom them and a preference margino f about 15 % inthe purchase o f the rest. When state enterprises were set up, government purchasers were directedto reserve some items exclusively for them, and to give a mark up o f around 15 % inthe purchase o f other items. Inthe States, the public procurement gave preference to `in State' enterprises over `out o f State', reserved items for developing backward regions, reserved items for socially disadvantaged groups and so on and so forth. Eventhough all such initiatives were intendedto apply only for aninitialperiod o f gestation, vested interests andpolitical pressure saw to it that these measures were never graduated out. Indue course many such measures have become counterproductive. Inthe current economic philosophy o f liberalization, disinvestment (privatization) andmarket mechanism, there i s no room for the reservation and preferences, and it i s hightime that most, ifnot all o f them, are gradually, ifnot straightaway phased out. 5.6 Negotiation Negotiation inthe Indianprocurement system i s to ask the bidder to reduce the quoted price without any change inthe condition o f the bid, technical or commercial. Instructions regarding negotiation o fprice with the lowest, or with others as well, are confusing. They are issued by many ministries and agencies, including the Chief l4 "Government is hampered by outdated overly complex regulations and by a lack of standard documentsI' quote fiom the DFIDreport 12 Vigilance Commissioner, CVC. Very strict reading o f all current directives gives the impression that negotiation should be resorted to only exceptionally, and indeed, a few agencies and entities follow this good principle. However, this is not the case with the vast majority ofprocuring entities. Negotiation with the lowest or with all bidders is routine. The officials andthe auditors believethat negotiationresults insavings to the public exchequer and infact encourage negotiation, at least with the lowest bidder. The purchaser believes that he has saved public money andthe auditor applauds him. They fail to realizethat allbidders include a cushion in their bidprice to give up when called for negotiation, but never give up more than what they have included, often less. Negotiationprovides the best opportunity for corruption at the cost o f the public exchequer. The bidder saves money by givingup less thanwhat he provided, but part o f it paid under the table. Ifall the bidders are absolutely sure that no negotiation will be held under any circumstance, they are forced to quote the lowest price to be competitive. There are innumerableexamples to substantiate this -that a `no negotiation' system produces lower prices - inWorld Bank procurement, inwhich negotiationto merelypush down the competitively quoted price is pr~hibited.'~ Insome agencies, negotiationsarecarriedout with all the biddersrequiring themto `match' the price o f the lowest or quote a revised lower price, and then, the quantity in the schedule is divided up, making a mockery o f the tender process inwhich the firm which offered the lowest responsive bid shouldbe entitled to the fillorder. Once the practice o fnegotiation (to merely push down the price) is stopped, it will close a major avenue for corruption and result inbetter prices andreal savings to the public exchequer. Negotiation should be permissible only inexceptional cases and only by a committee, andbased on mutualconcessions. 5.7 Delay in Tender Processing and Award Decision Delay intender processing is the most pervasiveproblem ingovernment procurement. The delay occurs at each stage, but mostly, at the time o f evaluation and selection. The larger the contract value, the more is the delay due to multiple layers o f scrutiny, evaluation, review and approval, with scant respect for the initial validity o fbids. In procurement, the longer the time taken for the decision, the more are the problems. Biddersjockey for positions, political pressures develop, each layer o freview becomes an opportunity for corruption andeventually, a decisionbecomes very difficult. This results inretender, probably the very outcome sought by those other than the lowest evaluated bidder. Good bidders are discouraged from participation. Those who bid increase the prices to reflect added risks and costs inwaiting for a decision. Equally, there i s delay indealing with issues duringcontract implementation. Government officials and auditors do not have an adequate appreciation o f the cost o f delays. The average time taken inimplementation o fprojects inIndiais much longer compared to l5Negotiationunder exceptional circumstances, e.g., single bid, very highprices, etc., are permittedbut reduction inprice can only be for reduction inscope andor reduction of contractual risks 13 countries like China, Mexico, Indonesia andBrazilmainly due to delays inprocurement. There is an urgentneed to address the problem usinga variety of reforms, e.g., delegation o f approval powers and having only ONEtender evaluationcommittee at the right level which will send the recommendations directly to the approval authority, without intermediatereviewsby officials and committees. Ifa decision i s not taken, say, within six months from the bidopening, the tender should be cancelled andthe government and the financing agency should consider cancellation o f the funds. A novel suggestion is to print (as a background) the cost of eachday of delay on all stationery dealingwith tender processing, for officials to note. 5.8 The Two-EnvelopeSystem The two-envelope system has caught on inpractically every organization. Under the system, bidders submit all administrative, qualification and technical response inone envelope andthe price inthe second envelope. The first envelope is publicly opened first andreviewed, and allbidswhich are not infull compliancewith tender requirement, are rejected. Inthe second sitting, the price envelope o f the rest are opened publicly, evaluated and decided. The purpose o f introducing the procedure was to obviate any pressure to consider non-conforming attractive bids, and hence, theoretically, the system assured a scrupulously perfect evaluation. However the procedure suffers from serious disadvantages. Inthe first place, the delay in opening price envelopes which can be a week to months inmany cases gives the purchaser the opportunity to switch envelopes, and hence, i s not always trusted by bidders; the longer the delay less is the perceived integrity. Secondly, the tender conditions andtechnical specifications may be deliberatively or otherwise skewed in favor o f some bidders. Inthe first round, bids which do not strictly comply are rejected and their price envelopes are returned unopened. The approving authority and auditors are prevented from knowingthe additional price paid for a trivial or minor or unnecessary or avoidable requirement. 5.9 Works Contracting Public works contracting, on the one hand, has an established tradition and institution, but on the other hand, suffers from antiquated procedures that once had validity but have become out o f date. The PWD manual i s the bible for works contracting procedures for all government departments, agencies, corporations and enterprises. The manual outlines procedures that were relevant when contractors were mostlyilliterate and essentially labor contractors. Some o f the problems inworks contacting are briefly discussed below. Each PWD maintains a data book, some times district-wise, which provides the rate for each standard itemofwork. The rates are worked out based on material, labor and overheads. Departmental estimates for works and the Schedule o f Rates for tendering are based on these rates inthe data book. However, the data books are generally out o f date. The situation varies. The centralPWD is reasonably up to date. Inmost States, the data books have not been updated for years. Also, whenever taken up, often the rates are 14 merely updated for inflation but not reworkedusingthe new materials, methods o f construction, plant depreciation, overheads and reasonable profit. The result i s that the departmental estimates are generally unreliable and out o f date. Works are taken up without adequate funding, often under political pressure, which languish for years. Contracts are awarded when land acquisition is far from initiation. Some PWDs even put the responsibility for land acquisition andclearance o f the site on the contractor, a risk difficult to carry. Advertised tenders are opened only to approvedregisteredcontractors, whose qualifications andcapacity have beenverified. Butthe registrationprocess has become a vehicle for political patronage and once a contractor is registered, he is automatically deemed qualified. Even for good qualified contractors, the works on hand and consequent available capacity to take on new works is not examined. Badperformers are not systematically eliminated from the list. Powers o f approval o f awards are linked to the departmental estimates, based on data books, which as mentioned earlier, are outdated. This provides one excuse for negotiation to `bring prices closer to the departmental estimate'. Evenwhen prices are below the departmental estimate, negotiation i s often resorted `to get further savings to public fimds'. Major contractors sub contract the entire works or a major portion to unqualified sub contractors with the silent support o f the department. Most o f the contracts are ad- measurement type. The payments are based on entries in"measurement books" inthe handwriting o f the supervising departmental engineer, and test checked by his superiors at the site (mostly intheory). Monthlybills are actually preparedbythe departmental engineers but signed by the contractors. Every month, each item inthe bill o f quantities is reentered inthe measurement book with full description, and then, the measured quantity. Evenifan outside consultant i s employed for works supervision, the measurement book i s still entered by the department, as stipulated inthe `public works manual'. The whole system i s antiquated, repetitive andbased on technology and office systems available fifty years ago, with practically no modernization. Contracts do not provide for adequate price adjustment mechanism and fair claim and dispute resolutionmechanisms. Contract supervision is spotty and subject to pervasive corruption. Infact, there are frequent press reports o fwide spreadcorruption inmany PWDs. 5.I O Records Management Government offices (andthose o f statutory bodies andpublic enterprises) have a tradition o fmaintaining andpreservingoriginal records such as biddocuments, bids, etc., for years. Infact when you enter any public office, particularly the ministries, the first thing which strikes you is the row after row o f steel shelves with papers betweenwhich the subordinate staff sit and work. However, not muchuse is made o f such institutional 15 memory. Also, very little i s done inthe area ofperformance indicators andother exception statements for management to monitor andcontrol. With the steady, albeit slow change over to electronic recordkeeping, the opportunities to produce such indicators andother analytical information is vast. Inadvance o fmovingto e tendering, the present database should be computerized and a set o fperformanceindicators developedto monitor Performance o fthe public procurement system. 6.0 Competence,Skills andTrainingof Officers and Staff A good framework o fpolicies, procedures anddocuments is essential, but the quality of procurement depends on the people who implement the system, their competence, training, intelligence, objectivity, motivation and ethics. The general level o f education o fboth the senior officials and the support staff i s high. However the subject o f `public procurement' i s not taught inany university course, but rather acquired on the job or learnt through special training courses and seminars. Senior officials responsible for makingpolicies, with exception, have no exposure to publicprocurement concepts and requirements, procedures inother advanced countries, international norms and practices,'6 procurementpolicies and guidelines o f the international financial institutions, etc., and hence are not equipped to frame policy. Working level staff is familiar with government rules but not their rationale, and hence, tends to apply the rules clerically, missing the objective o f the procedure. The technical staff i s not trained inthe writing o f specifications for competitive bidding, developing appropriate qualification and evaluation criteria and indealing with issues such as maintenance and operating costs duringbidevaluation andcomparison. There is an urgent need to establish systematic widespread training inall the aspects and topics mentioned earlier. With the assistance o fthe World Bank, courses on international procurement have been institutedinthe NIFM17andASCI'*, but they are essentially addressed to project implementers on World Bank/ADBprocedures. There i s a need to introduce `public procurement' inthe curriculum o f the senior administrative training institutions, e.g., the National Academy inMussorie, and more detailed tailor made courses inpublic procurement, international andnational tenderingprocedures, contract management, contract law, etc., for procurement professionals, engineers and support staff. Universities and Management Institutes should be persuaded to include the subject o f Public Procurement as part of engineering, business, and commerce courses. The above steps would generate goodpolicy makers andprofessionally competent and knowledgeable work force, andcontribute to the quality and efficiency o fpublic procurement. `6as reflected inthe UNCITRAL modellaw, the Government Procurement Agreement o f the WTO, EuropeanCommunity Rules, etc. l7National Institute o fFinancial Management, Faridabad l8Administrative Staff College o f India, Hyderabad 16 The creationof a competitively recruited class one cadre o fprocurement specialists inthe Railways andDepartment o f Supply inthe early fifties has contributed to comparatively higher professional standards inboth organizations, andneeds emulation inother ministries and sectors. Creation of such cadres fosters professional growth, pride inthe profession, cross-fertilization o f ideas, etc. Alternatively, professionals belonging to these services should be entrusted with the procurement activity inall ministries. 7.0 Comptroller andAuditor Generalof India(CAG) The IndianConstitutionprovides for the institutiono f Comptroller and Auditor General, responsible for auditingall revenues and expenditures o fthe Center and the States vis-& vis the budgetpassedby Parliament and State legislatures, and compliance with government policies and procedures. The C A G submits its report annually to the national parliament and to state legislatures. The public accounts committee o f Parliament (and the State legislature) conducts hearings and makes recommendations, including punishment to erring officials. The C A Ghas an extensive network o fwell-trained officers and staff. The audit, among other things, reports unauthorizedexpenditures, waste o fpublic funds, abuse o f procedures resulting inloss to public exchequer, etc. On the whole, the institutionis well respected for its independence and even feared, curbing initiative and encouraging avoidance o f decisions. However, the audit staff tends to take a clerical approach, demanding strict compliance o fprocedures, often missingthe objective o f the procedures. Minor aberrations and misuse o f hnds are highlightedwhile major systemic failures resulting inbig losses to the public exchequer are not identified. Audit officers and staffneedthe same trainingrecommended earlier for the government officials and staff, on public procurement concepts, objectives, processes and their rationale. The subject should be part o f the probationary training inthe Simla Institute for the IndianAudit and Accounts Services. Most o f the Public Sector Undertakings (PSUs) are governed by the Companies Act, under which, the audit is carried out by a commercial audit firm who certify the accounts andbalance sheet. Beingmajority government owned, the CAG oversees the auditor and reviews his report, and also conducts a test audit. The larger corporations also have an `audit board' which carries out a comprehensive review ofthe performance o fthe Corporation. The commercial audit does not focus on procurement. The C A G audit covers procurement, but only to identifymalpractice or frauds. 8.0 The PrivateSector Business Community The business community needs to be equally efficient, competent, healthy, honest and vigilant, ifpublic procurement i s to function effectively. The community o f manufacturers and suppliers o f goods inthe country is, by and large, well developed, sophisticated and aggressively competitive, at least inthe domestic market. The larger firms are familiar with export formalities and international trade practices. However, in order to be more successful inthe international market place, there i s need to consistently raise the qualityo f goods and infkse confidence o f the buyer on the quality front. 17 On the other hand, the constructionindustryi s yet to develop to maturity. Except for a few large firms, the majority is mostly labor contractors, without adequate finance, equipment or professional staff and i s mainly dependent on government contracts, unlike the suppliers o f goods. The government's policies, the tendering and contracting procedures, documents and above all attitude (mindset) are mostly responsible for this state o f affairs. Contractors havebeen treated as mere labor providers, with the government assuming responsibility for design, provision o f materials and technical supervision, and even preparationo fclaim bills on behalfo f the contractor. Also, for a long time, the government has tended to protect local contractors from foreign competition bypackaging large contracts insmall packages, which has constrained their growth. The industry needs a change o f environment inorder to grow to maturity. For the bulk of smaller contractors, the government should promote training inall aspects ofthe business and expose them to modedintemationalpractices anddocuments. The subjects should cover costing, risk assessment, different types o f contracts, preparationo f bids, logistics, constructioninsurance, contract and claims management, quality enhancement, dispute resolution, etc. The government should also promote creation o f equipment leasing companies and expansion o fproject/construction insurance. Inall these initiatives, the government shouldwork together with existing institutions inthe public andprivate sectors such as the CIDCt9,NICMAR2' andothers. As for the larger contractors, the government should promotejoint ventures with more experienced foreign firms by suitable packaging o f large contracts, so that local firms acquire logistics, contract management andother skills from such association. The government should also promote `design and construct' inwhich the contractor assumes fullresponsibility as ina turnkey contract for industrialplant, and `management contracting' under which an experienced firm would assume contractual responsibility providing planning, logistics, technical supervision and coordination, but execute the contract bynumerous specialist sub contractors. This approach will exploit the advantages o f large and small contractors at the same time and can cut down construction time appreciably. The consulting industry is still nascent andunderdeveloped inspite o fthe large availability o fprofessional skills, ifcompared with countries such as Mexico, Brazil and Argentina, etc. The long tradition o fbuildingin-house expertise inthe government for every activity i s largely responsible for this situation. Eventhe handful of large consulting firms inthe public sector are offshoots o fthe government, and discourage growth o f the private sector bymonopolizing government clients. Perhaps the time has come to privatize the large public firms and make them compete for government business. The vast majority o f consulting firms inthe private sector i s small and need careful nurturing. The government shouldprogressively shed activities such as design and supervisiono f works to consultants. The Consultancy Development Center (CDC) l9Construction IndustryDevelopment Council 2oNational Institute o f ConstructionManagement And Research 18 should be supported for training initiatives for consultants, particularly inthe preparation and presentationo fproposal and negotiation of contracts. The insurance sector must be encouraged to develop professionalliability coverage, which is essential for local firms to compete abroad. 9.0 Corruption" As inmanydeveloping countries, corruptionpervades all public activity andpractically every public service requires a corrupt payment. This is not new, but has its roots from pre independence days. Ofall the functions o f the government, procurementprovides the most fertile ground for favoritism and distribution o f largesse22. The tendering and selectionprocedures can be manipulated to favor a particular bidder. Supervision of contract performance can be influenced for a consideration. Inpublic works contracting, corrupt payments for timely and sympathetic inspection and for timely payments have been a well-established tradition for decades. Both the officials and the contractors, who were interviewed, confirm to its prevalence; but while the officials believe that it does not exceed 5 % o f the contract price, the contractors assert that the amount maybe as much as 15 % to cover all branches o f the government (tax, customs, excise, etc., besides the engineering), and i s built into the price. The corruption inthe States is more widespread than inthe center, and some States are worse than others. No state or central agency or state enterprise i s exempt. Itis very important to recognize that corruption inprocurementis atwo way process. The giver i s equally to blame as the taker. Contrary to popular belief, corrupt suppliers andcontractors are as much, ifnot more, to blame for the steady increase inpublic corruption, as they find it easier to do business through bribes than throughhonest competition. Honest officials are harassed andprevented from functioning honestly. The honest firms desist from competing for government procurement, ifthey can. The government has powers to blacklist corrupt firms, but this is rarely done for want o f hard evidence. Payment o fbribe i s a criminal offence, but the prosecutionis spotty, time consuming andineffective. The business community has shownno leadership to fight public corruption. The public express outrage about corrupt politicians and officials, but rarely express even criticism of the bribe giver. The free press publishes sensational news about corruption at highlevels, but has rarely mounted a `campaign' to curb pervasive corruption at the working level and inservice agencies ,which affects the common public. A CentralVigilance Commission (CVC) was set up in 1964underthe HomeMinistry,to advise and guide the central government and its agencies intackling corruption by public officials. A bill is before the parliament to bestow the CVC with an independent statutory status, as recommended bythe Supreme Court in 1998. The CVC has a strong "ThebestdefinitionofCorruptionforpurposesofthispaperis`useofpublicofficeforprivategain' ''Ina World BankIConfederation o fIndianIndustries (CII) survey o f 210 private sector firms carried out in1999, 60%respondedthat abribeof2 to 25% ofthe priceis necessaryto securegovernment contracts 19 and dynamic leadership; but apart from investigation, provision o f advice and supervision o f the vigilance effort invarious ministries, the commission has no powers to punish; it may merely suggest specific punishment. The departmental proceedings against indicted (charge sheeted) officials and subsequent court actions take years. More importantly,the CVC has no role indisciplining offending firms who are equally to blame. A committee set upbythe Central Government in 196623recommended setting up of an ombudsman inthe Center, and ineach State, to investigate charges of corruption against officials andpoliticians alike. Some States have set up the mechanism, but others, and more notably the Center, have not done so as yet. Introduction o f a public procurement law, appeal/challenge mechanism, more open and transparent procedures, elimination o fnegotiation, tighteningo f accountability, etc., can reduce the opportunities and incentives for corruption, but cannot eliminate the disease. A concerted national effort initiatedat the highestpolitical level andwith active participation o f the business community and civil society alone can effectively address the malaise o f corruption. The fullbenefits of other reforms can be reaped only when the corruption issue is effectively addressed.24 10.0 Recommendations Legal, Institutional, Procedural Framework 10.1 Create a Dedicated Agencyfor Public Procurement Policy and Oversight The absence o f a nodal agency inthe government to evolve public procurement policies and to oversee their functioning has contributed to the present multiplicity o f procedures, rules, practices and documents, and to the weak construction and consultant sectors inthe country. Ithas also resulted inthe absence o f leadership inthe government to deal with public procurement issues with the international financial institutions, bilateral donors and other international bodies. Itisrecommended that a department or division or agency becreated, inthe Center and ineachState, to exclusively dealwithpublic procurementpolicies andrelatedsubjects. The agency shouldnot be entrusted with any operationalresponsibilities. 23 SanthanamCommittee 24 "Collusion and corruption on thepart of some Government oficials andjrms is a major impediment to free andfair competition and to achieving valuefor money. I t is a corrosive influence". Quote fromthe DFIDreport 20 10.2 IntroducePublic Procurement Law and Public Procurement Regulations Introduce a Public Procurement Law which should, as a minimum, cover the objectives, substantive procedural requirements to achieve them, debriefing o f unsuccessful bidders, publication o f contract awards andan appealkhallenge mechanism. The law may also cover post award issues incontract implementationsuch as securities, timelypayment, penalties anddamages, disputeresolution andtermination o f contract for default or convenience. The law should be complemented by a set o fRegulations, which will replace the present multiplicity o f rules and orders. The law/regulations should also enshrine the five fundamental principles o f `open tendering', which are, effective advertisement, non discriminatory tender conditions and technical specifications, public tender opening, evaluation only in accordance withpre-disclosed criteria andmethodology and award to the lowest evaluated qualified tenderer without any negotiation on price or other terms. While outlining other methods o fprocurement to be chosen, when open tenderingis inappropriate, consideration maybe given to including `participatory procurement' in which the project beneficiariesparticipate incontract implementation, andthe circumstances under which this methodwould be appropriate. This set o f Public Procurement Regulations will be applicable to all ministries and agencies, and shall be widely publishedandmade available to the business community and general public. The Law and Regulations shall also apply to all Statutory Bodies and State Enterprises which are majority owned bythe govemment. States may adopt the Central Law or introduce a State Act titled `Public Procurement Act', complimented by a set o f `Public Procurement Rules and Procedures', applicable to all public institutions, including state enterprises. 10.3 Introduce a ChallengeProcedure Introduce an independent authority - Public Procurement Tribunal - outside the govemment, one for the Center, one for each State and one for Central Public Enterprises, to whom bidders can appeal or challenge an award decision. Appeals shall be subject to a reasonable fee, which would be forfeited ifthe appeal is declared frivolous. The appeal shall be filed within 15 days of the notification o f intention to award, and shall be disposed in 15 days. Initially, the procedure may apply to only large contracts, say, over Rs. 100million. 10.4 IntroduceDebriefing Procedure Unsuccessfulbidders have a right to know why they were not successful, ifthat is not readily apparent. Onrequest, say, within 7 days o f award notification - the purchaser should provide a debriefing, essentially to help the bidder understandthe evaluation process andprepare more responsive bids infuture. Once the procedure is inplace for some time, bidder confidence inthe system will go up. 21 10.5 Publish Contract Awards in News Media and the Web This is a very useful step to improve transparency. The publicandthe bidders have a rightto know the outcome o fapublic tender. The publicationwill also reveal the time taken by the purchaser in finalizing the award, which will encourage quick decisions. The Tamil Nadu andKarnatakaActs provide for this. The publicationcan be inthe official gazette, bulletin andweb site, andfor large contracts, inthe press as well. I O .6 IntroduceMandatory Standard Bidding and Contract Documents The government-center and states- should prepare and mandatea set of `standardtender documents including contract conditions and forms for goods, industrial plant, works, buildings, andprofessional services This step is o fthe highest priority andwould improve the quality o fprocurement, minimize abuses and enhance transparency. These standard documents as well as various forms used inthe tender process, should be made easily available inthe market, and through the internet. In1998, the Government ofIndia, MinistryofFinance, inconsultationwiththe World Bank, developed a set of standard documents for National Competitive Bidding(NCB) in Bank projects, andcirculated them to the central ministries andthe States, advocating their use innon-Bank fundedprocurement as well. These documents can be the starting point, and can be updated inthe light of experience gained intheir use. Inthis exercise, World Bank's current SBDs for InternationalCompetitive Bidding(ICB), the CIDC document for works, the IndianRoad Congress model document for roads andthe CDC document for consultants can be inputs. IO. 7 Initiate Regular TrainingPrograms To have a well trained work force is o fparamount importance. Also, it i s vital for senior officials andpolicy makers to understandthe concepts, the international practices and the current developments inthe subject. The courses, initial andrefresher, structured separately for senior policy makers, auditors, engineers and procurement officials should be mandatory. The courses maybe conductedby the existing administrative training institutions inthe government as well as inthe private sector. Universities and Management Institutes should be persuaded to include the `public procurement' as a subject inthe regular curriculum for commerce, engineering andbusiness management. Training courses for the business community i s equally important, particularly for works contractors and engineering and procurement consultants. Universities and professional associations should be encouraged and supported to start such courses. 10.8 Simplifi Review and Approval Process The multi-layered review and approval process, particularly for large value contracts, shouldbe simplifiedto expedite the process andminimize opportunities for malpractice 22 and corruption. The tender committee, at the appropriate level, alone, shall evaluate and compare the bids, and its recommendation should go directly to the approving authority with no intermediatereviewers. The approving authority may seek clarifications from the tender committee or reject the recommendation, givingits reasons for the tender committee to re-examine, but shall not itself re-evaluate the bids. Ifa decision i s not reached within one extension o fbidvalidity, the tender shall be cancelled. 10.9 Revamp and Enforce BlacklistingRules There is much zeal to punishcorrupt officials, but not enough to punish corrupting firms. The prosecution o fthe criminal offence i s difficult andtime consuming, andhence, not effective. The government has every right to deal only with ethical firms. Business community should be required to adhere to a "code o f conduct" ifthey wish to deal with public purchasers. Any infringement shall result insanctions. The blacklisting rules need improvements permitting exclusion from public contracts for a period, or permanently, depending on the seriousness of the offence. I O .I O Introduce Electronic TenderingProgressively The recent passageo fthe "Information Technology Act, 2000" has made electronic tendering possible by legalizing electronic bid and contract documents. Systems are now available to introduce electronic tendering inpublic agencies. This will, inone stroke, improve efficiency, and substantiallyreduce scope for mal-practices and corruption. Electronic procurement is ideal for large volume, low value procurements as inPublic Works Department, Electricity Boards, Medical Procurements, etc. IO.II Conduct and Publish Annual Opinion Poll on Corruption Perception This is an extraordinarily effective25method to focus public attention on corruption and generate incentives for improvement ina competitive spirit. The poll should ask for corruptionperception for different ministries, departments, agencies, public corporations and state enterprises, with a suitable questionnaire, andthe results should be widely publicized. I O .I2 Performance Indicators A set o fperformanceindicators shouldbe developed andmaintained, which will assist management to monitor the process time, price trends and efficiency o f the procurement system inplace, and take timely corrective action. 25 The December 2002 report of Transparency Internationalon `Corruption inSouth Asia' confirms this view 23 10.13 Introduce the Following Reforms in WorksProcurement 10.13.1 For all development projects, the executing agencies shall carry out procurement planning, logistics, contract packaging, scheduling and firmingup o f funds well before implementation commences. 10.13.2 The data book which i s the basis for preparationo fthe'schedule o fRates should be reviewed and revised to reflect present day materials, method o fworking, use of machines and their productivity, overheads, etc., preferably usingan outside consultant. 10.13.3 Registrationo f contractors shall apply only to contracts up to Rs. 10million. Larger contracts shall be open to all contractors, irrespectiveo ftheir registration status, who meet specific qualification criteria inorder to be considered. Also registration o f contractors should be centralized inone agency, say, the PWD. 10.13.4 An up to date computerized `contractors past performancedata' should be maintained for reference, prior to any award o f contract. 10.13.5 Bidcapacity inrespect o f finance, equipment, personnel andpast performance should be mandatory criteria for selection o f successful bidder. Specific requirements in this respect shall bepre-disclosed inthe tender documents. 10.13.6 Price Adjustment should be mandated inrespect o f all contracts o f value more thanRs. 5 million and a completionperiod o fmore than 12months. Price adjustment should bemade applicable from the date o f opening o f tenders. 10.13.7 The present system o fmeasurement book andbillpreparation should be reviewed andreplacedby a more modem system usingcurrent information technology (e.g., computer print out). 10.13.8 Contracts above Rs. 2 million shouldhave an Adjudicator, and contracts above Rs. 100million shouldhavea DisputesResolutionBoard (DRB)for settlement o f disputes, whose decision shall be bindingfor claims up to Rs. 2 million or 10% of contract value, which ever i s less. For higher awards ifeither party rejects the decision, the dispute will go to arbitration. 10.13.9 All contracts above Rs. 50 million, and smaller but complex contracts should have outside independent supervision. 10.13.10 `Lump sum', `Design andBuild' and `Management Contracting' shouldbe introduced wherever appropriate. 24 11. Next Steps The Government o f India has received the Phase 1report relating to the central government in2001,but i s yet to initiate steps towards implementationo f the recommendations. The States o f Tamil Nadu andKamatakahave prepared agreed action plans, secured World Bank ftnding and are implementing the recommendations, supervised by Bank staff and consultants. The States o fUttar Pradesh and Maharashtra, which are covered by individual reports, are yet to discuss the recommendations and prepare an action plan. The States o f Orissa, Punjab and Keralahaving received copies o f the reports for Tamil Nadu, etc., have initiated some steps towards reform. InAndhra Pradesh, which also received copies o fthe CPAR reports, a brief study was carried out by DFID26 early 2002, which identified similar issues. A more substantative review is in being taken up byDFIDto develop specific recommendations for reform inthe context o f the CPAR recommendations and the DFIDstudy. Itis essential for the World Bank as well as other donors to emphasize the importanceo f implementing these recommendations inthis critical area o f governance, and provide technical support and resources. World Bank and other donors may also find it useful to fund some researchonthe effect ofgood andbadpublic procurement procedures and practices usingthe enormous data andmaterial available inthe myriads o f purchasing agencies inthe country. Suchresearch and studies will assist donors intheir dialogue with the developing countries, andinthe development o fsound public procurement policies and practices. The Government o f Indiaconveyed its approval onNovember 11,2003, to publish this report subject to a disclaimer that "CPAR has been discussed with the Government o f India, but does not necessarily bear their approval for all its contents, especially where the Bank has stated itsjudgement/opinions". 26Department For International Development, United Kingdom 25 Annexure 1 26 I _- -_I 27