India has a well-designed procurement policy but it lacks flexibility and adaptability in technological processes
Annually, Governments around the world spend a large chunk of their national resources in acquiring supplies, services and capital assets. Data suggests that procurement of products and services by Government offices/agencies in the EU amount to more than 16 per cent of the EU’s GDP. In a developing country like India, this ratio is of the order of 13 per cent. Procurement outlays empower the Government to implement national policies using the same as leverage. Demanding customers are one among the most important drivers of innovation. Investment in research and development is strongly influenced by the market, particularly by the level of performance demanded by customers. The public sector, due to its large purchasing power, has significant impact as a demanding customer. Government policies and concrete decisions on procurement can determine prices, economies of scale and standards, which may affect innovation. For example, the public sector as the main or the only user of a particular good or service, can bear high entry costs, send signals to other (private) actors in the market, contribute to speed up the technology diffusion process and increase competition. This has been the case in the past. The development of semi-conductor industry in the late 1960 or early 1970s occurred due to a large defence procurement. Thus, Government procurement not only influenced diffusion of new products but also gave a huge space for the generation and development of innovation.
India’s experience is no different. Its policies on public procurement are based on the general principles laid down by the Ministry of Finance in the revised General Financial Rules, 2005. At the State level, it is the State General Financial policy that governs the procurement policy. In most States, the policy is modeled on the old General Financial rules. Public procurement in India is carried out by a number of agencies, such as railways, public works departments among others. Thus, an effective public procurement can help public sector enterprises in improving their margin. There is no separate Indian legislation for Government procurement. But the rules for all Government purchases are generally subject to guidelines established by the Department of Supply. The process of procurement is carried out by inviting tenders. To increase transparency in its bidding procedures, the Indian Government, in July 1997, adopted standard bidding documents along the line of the World Bank’s procurement guidelines. However, modifications were made in the guidelines to incorporate India-specific conditions for the procurement of goods, works, supply and installation activities. While the practice of public procurement through competitive bidding or tendering process maximises economic efficiency, the process in hindsight is not good for innovation. Any new product that is the outcome of innovation and that may have future potential, is usually priced higher in the initial stages of production. Thus, in a competitive bidding, the product would not qualify to be selected by any public sector enterprises.
Moreover, the tendering process requires at least three bids. In many cases, three bids may not be forthcoming for any innovative technology which the Government wants to promote through public procurement. Thus, competitive bidding through tendering is not a win-win game in all cases. Public procurement process needs to be flexible to promote innovation technologies in selected cases. Furthermore, there is no provision in the present system to favour innovative technologies developed indigenously. In sum, current procurement practices promote competition between vendors and not between technologies. Designed to minimise short-term financial losses, it does not statutorily bind procurement with technological processes and industrial development. In reality, the Government has by and large adopted the two bid system where vendors are requested to submit both technical and financial bid in sealed envelopes while submitting tenders for any project/service.
Technical bids of vendors are evaluated as per standard laid out criteria and financial bids of qualified vendors are subsequently opened to find the lowest bid. The contract is given to the lowest bid among the technically qualified vendors. To win the contract, a vendor can provide a low financial bid which may impact the quality of work. In this two-bid system, the procurement agency has little role to ensure quality. Of course, one can argue that technical bid evaluation criteria may be stringent to ensure quality. However, one invariably finds that the selection criteria of technical bid is more of a checklist than identifying with standard or quality. With the RTI Act in place, any rejected party under technical ground can seek reason for rejection from the tender committee, and if not satisfied, can approach the judiciary or the central vigilance commission. Consequently, members of the tender committee always play safe and eliminate subjectivity in selecting a technical bid so that it is easier for them to justify rejection. The risk-averse behaviour of a tender committee limits the scope of selecting the innovative proposal that can ensure quality. It makes more sense to discard the two-bid system and opt for a system where the score on account of both technical proposal and financial proposal is taken in totality to select a bid. Depending on the type of work, one can give higher score on technical proposal to ensure standards or promote innovation.
(The writer is Senior Fellow, National Council of Applied Economic Research)
