Public Procurement Reform for Ease in Doing Business

Introduction

India’s maturity as a nation lies in the fact that despite increased external and internal challenges, it is steadily carrying on with its economic reforms agenda such as progress on the GST and the passage of the Insolvency and Bankruptcy Code 2016. One more step in reform constitutes reformulation of the rules governing public procurement for the first time after 2005, finding expression in Chapter 6 of the General Financial Rules (GFRs) published in March 2017, ¹ dealing with procurement of goods and services.

This reform has been at the planning stage since 2010. Ever since 2010, when the Centre got mired in controversy over large-scale public procurement irregularities, the government of the day, to restore confidence in governance, established a group of ministers on corruption, which, in turn, set up a Committee on Public Procurement, under the chairmanship of Shri Vinod Dhall who had been the first Chairman of the Competition Commission of India. The committee submitted its report to the government in 2011, which highlighted abuse of public procurement regulations and recommended an overarching public procurement law containing necessary remedial measures. The Public Procurement Bill (2012), ² brought into existence, inter alia, on the basis of the recommendations of the committee and introduced in Parliament in May 2012, failed, however, to gain traction and lapsed in 2014 with dissolution of the 15th Lok Sabha.

The new government which came to power in 2014 evinced renewal of interest in the subject of public procurement and public consultations were held by the Department of Expenditure (DOE), Ministry of Finance, for an amended public procurement legislation. The consensus that emerged was against too many laws cluttering government procedures in India. Consequently, there was forward movement on amending flaws in the public procurement scenario through rules as expressed in Chapter 6 of GFRs (2017).

A new law would have been more appropriate, as one of the main problems of public procurement has been the plethora of rules brought in by different government departments which, at times, contradict each other, thus facilitating corrupt operators to follow their own agenda. Also, rules are binding only on government departments and not on bidders. A law could have brought clarity and legal consistency. Since rules are subordinate to law, any rules inconsistent with the law would not have survived.

However, even if a law has not been brought in, several features of GFRs (2017) Chapter 6 are worthy of appreciation. Several of the reforms sought to be introduced by businesses believing in ethical practices have found reflection in the new GFRs on public procurement.

Businesses, including major Central PSEs, private sector majors and small and medium enterprises (SMEs), in a consultation on an appropriate public procurement regime for India held in New Delhi in June 2016 by the UN Global Compact Network India (UNGCNI), ³ have expressed the need for a government contracting system that will be more angled than the GFRs (2005) or the draft Public Procurement Bill (2012) towards enhancing ease of doing business. These findings were communicated to several key government departments concerned with public procurement during June–August 2016, including the wing of the DOE, responsible for administering the subject of public procurement, that is, the Public Procurement Division of DOE. It is heartening to see that many recommendations of the business reflected in Chapter 6 of the GFRs (2017). The recommendations of business have been based on the following seven main elements:

Confirming who and what is to be covered by the regulations.

Coverage

The Public Procurement Bill (2012) prescribed a monetary threshold of ₹5 million for coverage under the law. Both private and public sector business felt that there should not be any monetary threshold limit for the public procurement law to apply, as otherwise there would be a possibility of above-threshold-level procurement being split into smaller contracts to escape the scrutiny of rules. It is heartening to see that GFRs (2017) have universal coverage for all types of procurement by ministries and departments of government, irrespective of monetary threshold.

Nurturing Competition

It is felt by business that the Chapter 6 of the GFRs (2017) is correct in enshrining open competitive bidding as the preferred mode of tendering.

Promotion of Transparency

Through Chapter 6 of GFRs (2017), transparency in the procedures of public procurement is promoted mainly digitally, as per global best practices. For example, regarding any tender, publication of all important procurement information, vide Rule 159, all bids must be received through e-procurement portals as per Rule 160; it is mandatory to record considerations on which procurement decisions have been taken as per Rule 144; Rule 149 establishes a government e-marketplace (GeM) ⁶ hosted by the GeM SPV online for common use goods and services; electronic reverse auction for goods is established through Rule 167 where the detailed specifications of the goods may be formulated and there is a competitive market of bidders anticipated to be qualified to participate in the electronic reverse auction and where the criteria to be used in determining the successful bid are quantifiable and can be expressed in monetary terms.

However, it is seen that a number of recommendations of the business sector were not accommodated in the new GFRs. For example, it had been recommended, following the UK Public Contracts Regulations (2015), that to obviate a digital divide between those knowledgeable about the digital technology and those less knowledgeable, the tools for e-communication should generally be ‘non-discriminatory, generally available, interoperable, using common technology products in general use’ (vide Reg. 22 of UK PCR). Also it had been recommended that there should be no obligation to require e-communication in submission where there is need for protection of sensitive information, this recommendation is based on Regulation 22 of Public Contracts Regulations (2015) of the UK.

Businesses from the SME sector had suggested that the Central Public Procurement Portal should also carry information as regards outstanding dues owed to suppliers by the procuring entities, beyond contracted time limits on undisputed bills. ⁷ The period and reason of delay should also be mentioned. A time limit for payment of bills should also be set in the public procurement Rules, especially as regards bills of the SMEs.

To overcome the problem of the ‘digital divide’ affecting the small-scale industry, which often cannot make use of bidding, there should be an e-registration system for bidders, through which an e-mail is issued automatically to all registered bidders/industry associations of the SMEs whenever an invitation for bids is invited by a public procurement entity.

Market Access

In GFRs’ (2017) Chapter 6, the market access remit (Rule 161-iv) has cleverly retained the wording of GFRs (2005). ⁸ It stipulates that non-domestic goods will be allowed into the Indian procurement market ‘if goods of the required quality, specifications, etc., may not be available in the country and it is necessary to also look for suitable competitive offers from abroad’. This wording provides policy coherence with India’s ‘make in India’ ethos by making preference for domestic goods the rule, rather than the exception. The exactly converse position prevailing in the Procurement Bill (2012) of the predecessor Manmohan Singh government drew much flak. Simultaneously, the conditions for import in exceptional circumstances are so liberal that government procurers have flexibility to import whenever the situation so demands.

Classicists argue that an open market which treats domestic and foreign players on a par is more efficient. The business community had also made recommendations on these lines. But in giving primacy to domestic goods, we are but following worldwide ‘buy national’ trends in public procurement.

It is also good to see that market access is qualified by a tilt towards make in India through Rule 153(ii), which recognises the policy notified by the Ministry for micro small and medium enterprises (MSMEs) under Section 11 of the MSME Development Act, 2006, ⁹ for preference policy which government may notify for procurement of MSME goods and services. Further, Rule 153(iii) upholds Central Government’s right to notify mandatory purchase and price preference for any type of goods from any category of bidders on grounds of promotion of local goods and services. This, for example, makes possible preferential market access to domestically manufactured electronic goods in government procurement, which is the current policy.

Grievance Redressal

In keeping with international norms, the Public Procurement Bill (2012) provides for an independent grievance redress mechanism (Clause 41), comprising a Redress Committee appointed by the government and headed by a retired High Court judge. This appeal mechanism is to be activated if review by the procuring entity does not yield satisfactory results for the aggrieved bidder.

Business stakeholders were of the opinion that it was important to maintain the independence of the redress mechanism and it was recommended that single independent ombudsman or independent external monitors (IEMs) be appointed by Government to look into the grievances of bidders of procuring entities if it was felt that a Redress Committee mechanism may be too cumbersome. For the ombudsman/IEM to be effective, it was recommended to alter the advisory role of the ombudsman, to make her/his advice legally binding on the procuring entity. The Redress Authority would, however, have to maintain a balance between ensuring fair competition and endangering public interest by unduly long suspension of contracts.

However, it is seen that the Manual of Procurement of Goods, which supplements Chapter 6 of GFRs (2017) has established grievance redress at the stage before signing of a contract only through the IEM, whose powers are only recommendatory and not legally binding. At the post-contract stage, dispute settlement has been provided for through arbitration under the Indian Arbitration and Conciliation Act 1996 in case of domestic disputes. In case of a dispute with a foreign bidder, the foreign bidder has a choice either to opt for the Indian Arbitration and Conciliation Act or United Nations Commission on International Trade Law (UNCITRAL) arbitration rules for settling disputes. In this regard, the expectations of business have not been fulfilled. The rules have also failed to fully satisfy the commitment taken under Article 9 para (d) of the UN Convention Against Corruption which India had ratified in 2011, due to our inability to set up an effective review mechanism.

Promotion of Probity

Rule 175(1) of GFRs (2017) creates a code of integrity binding on both the bidders and the procuring entity, which prohibits offer or acceptance of bribe, anti- competitive practices, false declaration, misrepresentation, coercion or threat to influence the procurement process, financial or business transaction between the bidder and an official of the procuring entity. But the mechanism to impose adherence to probity is only through debarment from the procurement process, vide Rule 151(iii) of the GFRs (2017). As per the Manual for Procurement of Goods 2017, the debarment is up to one year for less serious cases and up to two years in serious cases. In cases of very serious transgressions, there is debarment from country-wide procurement for up to three years.

In contrast, the Public Procurement Bill (2012) had provided not only for debarment but also for penalties ranging from fines to imprisonment if found committing corrupt or anti-competitive acts. Business had recommended that since certain acts under the 2012 Bill were already punishable under existing laws, the penal provisions of the Public Procurement Bill (2012) should be dropped in the revised rules. Therefore, the expectations of business in this regard have been met in the GFRs (2017). But it would perhaps be more appropriate if the debarment periods are increased to two years as minimum period of debarment and 10 years as maximum period of debarment if found in transgression of the rules.

Sustainable Public Procurement

Business stakeholders had recommended the retention of the Public Procurement Bill’s provision through Clause 21(1) that gave an option to use environmental characteristics in the evaluation criteria for award of tender. Therefore, the provisions of GFR 173(xi), which stated that the criteria for determining responsiveness to be taken into account for evaluating bids must include ‘environmental characteristics’ of the subject matter of procurement, are welcome as being aligned with the recommendations of business. The further proposal that the MSME sector would have to be aided by the government to adopt means to generate less pollution in their production processes, has, however, not found reflection in the rules.

The evaluation criteria could also include social responsibility clauses, such as the payment of living wages/extension of social security benefits to workers by suppliers. These could form part of selection criteria of any supplier for award of a public contract. These proposals were also worth considering in the formulation of Chapter 6 of GFRs (2017).

Conclusion

The Finance Minister in his Budget Speech of 2015 had posed the question as to whether a law should be introduced to check ‘malfeasance in public procurement’. If rules on the subject are considered a lighter version of the law, then the GFRs (2017) Chapter 6, with its many positive features that foster ease in doing business, can be considered a welcome first step in checking such malfeasance. The magnitude of the step may also be concluded from the fact that public government procurement, inclusive of Defence, by the Centre, States and local bodies is valued at 30 per cent of India’s GDP and covers almost every sphere of government activity. The reforms in the rules governing public procurement are likely to improve India’s anti-corruption/ease of doing business global rankings, but had the reform come in the shape of law, it could have perhaps improved India’s global image much more.

Declaration of conflicting interests

The author declared no potential conflicts of interest with respect to the research, authorship and/or publication of this article.

Funding

The author received no financial support for the research, authorship and/or publication of this article.