India: Stop Cartelization In Public Procurement

Last Updated: 27 October 2014

Article by MM Sharma, Head Competition Law & Policy Practice, Vaish Associates, Advocates, New Delhi, India

Specific Questions relating to this article should be addressed directly to the author.

Public procurement in India constitutes about 30% of the GDP, with the total annual expenditure of around 15-20 Lakh Crores and that for Union Government alone in the range of Rs. 2.5 – 3 Lakh Crores. This is the government activity most vulnerable to corruption, not only between the suppliers and the government staff but also within the suppliers themselves. The latter emerges in the form of cartels i.e. bid rigging and collusive bidding. Though integrity of the procuring staff and competition between suppliers are two sides of the same coin, yet so far, the focus has largely remained on tackling departmental corruption and, except for blacklisting / holiday listing etc. against suppliers for a few years, there is hardly any policy to report bid rigging by suppliers or to detect and punish cartels of suppliers. There has been a lack of focus on the supply side issues, particularly, cartelization due to poor awareness on the tools of competition law in India.

Cartelization in suppliers has been the norm in public procurement and is the root cause for corruption in procurement staff of which the latter is only a symptom. Unfortunately public procurement policy has so far been confined to the symptomatic treatment of the problem ignoring the root cause and is a case of apparent misplaced priorities. Let us analyze the reasons for this misplaced priority.

No Central Public Procurement Policy – There is no laid down uniform public procurement policy in India and public procurement has been largely procedure based. Competition in public procurement is often misunderstood to merely mean "open tendering" or soliciting offers from a large number of vendors to show competition among suppliers. A major problem expressed by the procurement officials is the confusion created by the existence of multiple procurement guidelines and procedures issued by multiple agencies. There is neither a single comprehensive public procurement standard nor a single nodal agency to deal with public procurement policy.Lack of standardization and skilled manpower and proper documentation is also a major hurdle .Even the most critical and complex procurements are handled in a nonprofessional manner. Unlike in most developed countries, except for the Railways and the DGS&D, no other organization has created a specialized cadre for this purpose. Though since 2004, the Central Vigilance Commission (CVC) has embarked on a programme of compelling organizations to introduce e-procurement and e-payment systems and to computerize all their activities which are vulnerable to corruption, yet the manual tendering systems still prevail, particularly in some State and Local Self Governments, facilitating cartelization among bidders.

Weak Legal and organizational framework- -"State Procurement" does not figure in any of the three Lists in the Seventh Schedule of the Constitution as a distinct subject, and the Parliament has not enacted any law on the subject so far. Public procurement was then, perhaps, considered as a "minor" subject to be left for delegated legislation. . However, my friends in the government do not agree with this and point out to the vast existing legal framework, existing in the form of the 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 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; broader oversight mechanism framework is also provided by the common law i.e. The Contract Act, the Sale of Goods Act, the Arbitration Act, the Limitations Act, and the recent Right to Information Act, 2005, etc.; active participation of civil society and NGOs in the process through the process of Public Interest Litigation where the High Courts and the Apex Court can directly intervene.

But whether the above "vast" legal framework has been successful in curbing cartelization or bid rigging in suppliers? In the absence of a detailed scrutiny of each case a survey thereafter, there are no definite answers. As a practicing competition law practitioner, I strongly disbelieve.

Even in the WTO Norms on Public Procurement the focus is on transparency of procurement related documents and non –discrimination between suppliers. India with 31 other countries has an Observer status under the Plurilateral Agreement on Government Procurement (GPA), 1994 which came into force in 1996. The other two International agreements, namely, General Agreement on Trade in Services (GATS) and the Working Group on Transparency in Government Procurement (closed during the Doha Round of Discussions), the focus has been on non discrimination and transparency in public procurement. The norms prescribed have been incorporated by State procurement agencies and there is considerable transparency in the way the tender system is now designed. Of late the e-tendering process initiated by many State governments and PSUs have further helped in strengthening these International guidelines based on India's commitments in WTO. Still the focus on tackling cartelization in a systemic manner is missing.

Public Procurement Bill, 2012- An attempt to fill in the above lacuna was made by the UPA-2 regime and a comprehensive law was proposed through the Public Procurement Bill, 2012, introduced in May, 2012. 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..

But the Bill also had some flaws such as –failure to establish an independent regulatory authority to monitor and ensure compliance of the proposed Act by all procuring agencies, to investigate any complaint relating to procurement and direct the relevant procuring entity to take necessary action and to advise the Government on diverse matters relating to public procurement. Similarly, the establishment of a separate Department of Procurement Policy, under the Ministry of Finance is considered necessary to exercise the powers to promote probity, transparency, quality and competition in procurement. Such a department could prescribe the procurement rules applicable to all procuring entities. Unfortunately, the Bill which was referred to the Standing Committee of Finance in May, 2012, which Committee was expected to give its report in August 2012 has since lapsed and is no longer under consideration of the new Parliament under the present NDA regime.

Can the Competition Act, 2002 provide the answer? 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 and also in the Public Procurement Bill 2012 (Since lapsed). This is like a dual punishment and can act as a deterrent for sustainability of existing and undetected cartels.

Since it started the enforcement of the Act in May, 2009, CCI has handed severe penalties on cartels and, till date, in 6 cases of bid rigging in public procurement but is this sufficient to be a deterrent to the cartels prevailing in suppliers of public procurement all over India? What are the reasons for this meager number of reported cases of cartelization under the Competition Act? The foremost is lack of awareness about the manner in which the competition is to be viewed on the supply side by most of the government procurement agencies.

Competition concerns in public procurement – competition concerns are largely same as in any ordinary market such as collusive agreements amongst bidders including collusive bidding, a type of bid rigging, creation of entry barriers for new entrants etc. Competition concerns in public procurement can be seen from both the demand side i.e. the procurer's side and from the supply side. However, as discussed above, the emphasis so far has been on tackling the concerns, mainly related to corruption on the demand side.

Competition concerns of the supplier's side - bid rigging, a form of cartel is the most pernicious concerns in public procurement and is nothing but a fraud in which vendors who are supposed to compete with each other on prices agree on the prices to be quoted in response to tenders floated by procuring agencies and fix the bids in advance through secret understandings or arrangements which include compensating those who lose the order. Bid rigging conspiracy usually fall in to one or more of the following categories – bid suppression, complementary or proxy bidding, bid rotation, subcontracting etc. The advocacy booklet of CCI on "Bid Rigging" available on its website: www.cci.gov.in explains these categories well. Collusive bidding is not confined to bidding patterns or price fixing arrangements alone but may also involve strategic boycotts, quantity restrictions or capacity constraints to boost demand artificially.

OECD Guidelines For Fighting Bid Rigging In Public Procurement- The Organization for Economic Cooperation and Development (OECD) which has mostly developed countries of the European Communities, the United States and Australia has published useful guidelines which are used by CCI to scrutinize bidding patterns in suspected cases of cartelization. (www.oecd.org/competition).

International experience –International experience indicates substantial gains from promotion of competition in public procurement. As per an OECD survey public treasuries saved between to 17 to 43 per cent. in some developing countries through the implementation of competitive public procurement regimes. Another study indicate cost savings between Euro 5 billion to Euro 25 billion in EU during 1993 to 2002 from increased competition. In Russia, as a result of reform in public procurement an amount of US Dollar 7 billion was saved in 2008. In Japan, promoting fair and free competition in public procurement reduced contract prices by merely 20 per cent. In Mexico, competitive procurement saved US Dollar 3 billion in 3 years. In Brazil, promoting competition in a Hydroelectric Plant Concession let to savings of around US Dollar 9 billion over 30 years of the concession agreement.

Indian experience so far- CCI has imposed penalties in hundreds of Crores of rupees on individual companies on complaints filed by or in respect of procurement in Central public procurement agencies such as IOCL, Coal India Ltd., Food Corporation of India, Safdarjung Hospital, DGS&D etc. and cases are now increasingly being filed by other large procurement agencies such as the Railways etc. However, till date no complaint from any State government or District or Municipal body has been filed in CCI.

What need to be done – There is a need to revise and modify the Public Procurement Bill, 2012 to synchronize it with the Competition Act as a long term solution. As a short term measure, there is an urgent need to sensitize the State Governments, Union Territories and local self government institutions such as Municipalities and Panchyati raj institutions at district and Taluka/ village levels on the advantages of sending information /references to CCI. There is a need to adopt a mandatory "reference to CCI" policy in all suspected cases of bid rigging. This can be done by including such provisions in the Public Procurement Bill.

There is also a need to sufficiently empower CCI to conduct "dawn raids" on the suspecting enterprises for which the proposed amendments to the Competition Act, 2002 need to be urgently taken up by the Parliament. Similarly, provisions may be included to allow CBI to assist the CCI to collect evidence of collusion to assist the investigation before the Director General, CCI, like all developed countries. For instance, in the USA, FBI is responsible to collect the evidence of collusive agreement for a successful prosecution before the civil courts by the FTC.

© 2014, Vaish Associates, Advocates,
All rights reserved with Vaish Associates, Advocates, 10, Hailey Road, Flat No. 5-7, New Delhi-110001, India.

The content of this article is intended to provide a general guide to the subject matter. Specialist professional advice should be sought about your specific circumstances. The views expressed in this article are solely of the authors of this article.

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