Public procurement is evolving towards a more efficient and inclusive model, through the adoption of new business, operational, financial and technological models
By Richa Chakravarty
Tuesday, August 12, 2014: The Government of India’s procurement accounts for approximately 29 per cent of India’s GDP. The central government is the single largest customer for the ICT industry, procuring around Rs 50,000 million worth of ICT equipment annually. “The purchase preferences and decisions of the central government significantly influence the trends of how technology is absorbed in India. We witnessed this with the launch of the Aakash tablets which led to the sudden reduction in the prices of tablets not just in India, but globally too. More importantly, it signals to the industry the direction in which the development efforts should be channelised, and therefore, the need to move to the next generation of public procurement,” said Dr Jaijit Bhattacharya, partner, infrastructure and government services, KPMG India, while addressing the seminar on ‘Facilitating Public Procurement’ held on February 20, 2014, during the EFY Expo 2014.
New trends in public procurement
Next generation public procurement is evolving towards a more efficient and inclusive model, through the adoption of new business, operational, financial and technological models for achieving outcome-based procurement, said Dr Jaijit Bhattacharya. “Governments should not be purchasing particular products but should be purchasing the outcomes. For example, government should not buy an AC but buy the service of ensuring that the room stays at 24 degrees. This will ensure that the service providers procure the most efficient cooling apparatus and will also perhaps insulate the walls to reduce their expenses, thus benefiting the government. A manufacturer will have to look into all the parameters and aspects mentioned above to qualify for public procurement,” he said.
Drivers for next gen public procurement
Demand for customised procurement solutions: There is a demand for customised procurement solutions from public agencies due to the fast paced changes in technology. “Government agencies require solutions that are customised for their needs. Procuring such solutions as per the government processes is becoming a challenge. The vendors or the suppliers, therefore, need to offer technologically advanced and customised solutions that meet the requirements of various public agencies,” said Dr Jaijit Bhattacharya.
Need for even greater transparency: There is a need for even greater transparency in the public procurement policy. From the manufacturers’ end, the complete process of manufacturing, quality adherence and delivery has to be transparent, so that it does not leave room for doubt or ambiguity. As the civil society is getting more aware of its rights, there is also pressure on the government departments and the Directorate General of Supplies & Disposals (DGS&D) to be transparent in every procurement and transaction process.
Discrepancies in pricing information: DGS&D is concerned about the discrepancies in the declared price and the price quoted in the tenders. Hence, DGS&D struggles to find the correct price information. The vendors/suppliers have to be very clear, consistent and transparent while quoting their prices. Their market price or declared price has to be close to what is being quoted through tenders, pointed out Dr Jaijit Bhattacharya.
Analytics-driven procurement: Companies are today going back to their procurement patterns, looking into them and optimising procurement based on analysis. These are the same kind of pressures that the Indian government agencies are facing.
Key challenges
Dr Jaijit Bhattacharya pointed out certain challenges faced during public procurement.
Exchange rate fluctuations: Exchange rate fluctuations impact the rupee rates quoted by Indian vendors and they are unable to deliver at the quoted Indian rates. Hence, procurement contracts must have an exchange rate variation (ERV) clause.
Standards-driven procurement: Procurement of goods should be based on standards provided by either the Bureau of Indian Standards (BIS) or as per internationally accepted standards. These standards are typically for safety, security, energy efficiency, performance, EMI/EMC, etc.
Setting mechanisms for outcome-based procurement: “We have to move away from the mindset behind the earlier procurement processes; it should now be outcome-based procurement. Manufacturers and public agencies should both focus on the outcome rather than just the product,” suggests Dr Jaijit Bhattacharya.
Some recommendations
Exchange rate variations (ERV): The ERV clause notified by the Ministry of Finance is as per the general financial rules (GFR), and provides a fluctuation buffer for contracts of 18 months and above. However, the DGS&D rate contracts (RC) are for a period of one year only. “The rupee has depreciated by almost 20 per cent in the last one year. So there is a need to modify the GFR and incorporate the changes in DGS&D’s RC. We should look at some of these financial tools rather than passing the buck to individual vendors,” said Dr Jaijit Bhattacharya.
Move towards standards: There are standards on safety, security, energy efficiency, performance EMI/ EMC, etc. There are even standards for e-governance. So, we need to procure as per standards. Also, there is a need to incorporate internationally harmonised standards in the procurement process. The vendors/suppliers, as well as the public agencies, need to be aware of the scope and limitations of standards as these have multiple effects. They can have a strategic impact on the credibility of a vendor’s product. Apart from this, various agencies involved in developing standards have to ensure that these are focused and centred around the usage requirements of the product.
Creating a mechanism for inclusive procurement: There are special provisions, whereby the government can procure products from a single vendor, in cases where national security is a concern. Generally, a minimum of three bids are required, without which the DGS&D’s RC stands cancelled. In a case where the procurement is for the defence or R&D sector, the government prefers to opt for big companies. This impacts innovation or technological advancements in the relevant sector. Since innovation is key to growth, public agencies should also look at domestic start-ups that offer innovative solutions and products. Intellectual property drain is already high as these start-ups end up selling their innovations to non-Indian entities, concluded Dr Jaijit Bhattacharya.
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