Public Procurement and Cartelization

 

I read the following piece in India Today with interest:

https://www.indiatoday.in/india/story/firms-penalised-bid-rigging-cartelisation-indian-railways-tenders-1960823-2022-06-10?fbclid=IwAR1WhuJJteF7305vzdy4NSTu5NFg_CrKqIcnmt_YBRWkJ2Tz33B5ShEiZdk

The article reports that Competition Commission of India (CCI) found evidence of cartelization by seven firms in the supply of Protective Tubes to the Indian Railways (IR) in respect of allocating tenders and determining prices, directly or indirectly, coordinating and manipulating the bidding process and the bid prices and regulating supplies. The evidence in the matter included regular e-mail communications between the parties and the filing of bids from the same IP addresses by certain parties. Ten individuals of these seven entities were held liable for the anti-competitive conduct of their respective companies/firms.

We keep hearing of such actions but the practice of allocating tenders and determining prices continues. I am remined of another article which I had read earlier and located it today:

https://www.mondaq.com/india/cartels-monopolies/970664/cci-refrains-from-imposing-penalty-in-a-bid-rigging-cartel-for-supply-of-composite-brake-blocks-to-indian-railways-due-to-covid-19

Competition Commission of India is a statutory body of the central government responsible for enforcing The Competition Act 2002 throughout India and to prevent activities that have an appreciable adverse effect on competition in India. So far so good. But has the actions by CCI helped matters? I dare say, No. Why? We have to see beyond policing to putting in place a system which is inherently conducive to a fair and effective ecosystem of procurement of quality goods.

IR follows a system of listing approved vendors for all its critical and valuable items that it procures. Although the procurement is largely through open advertised tenders, 80% of the tendered quantity is ordered on approved vendor(s) while new entrants vie for the balance 20% quantity. IR usually introduces a newly-developed item with one or two vendors and places them in their approved list; some wise people oppose it with a misplaced notion of lack of level playing field for all but that is so much tommyrot. Engineering developments do not take place through a high-hat egalitarian mechanism but through autonomy to choose competent vendors as partners. In any case, these vendors, more often than not, are competent vendors with good facilities and Quality systems and certainly make good profit in the business. The word spreads and all kinds of manufacturers, or even wannabe manufacturers, good, bad and ugly, line up to enter the fray aspiring for eventual approval. Although the vendor list mentions the annual capacities of vendors vis-à-vis the total annual requirement, it is not worth the paper it is written on and there is no system to regulate the number of vendors; a common refrain of the bureaucrats involved with the approval and procurement process is that Public Procurement policy does not permit any regulation and tenets of Transparency in government purchase demand that everyone be given an opportunity. This is only a half-truth perpetuated by self-serving or timid officialdom but I will come to that later.

So, within some years we have a large number of vendors for an item and there is every risk of some vendors getting fully booked while some others languishing without orders. The system is ripe for underquoting, with some vendors offering cut-throat prices to make sure that their capacities do not go idle. While on the face of it, IR stands to benefit in terms of lower prices, the reality is that unworkable prices cause the vendors in question to drop the quality of the product to save cost and then try to exploit the weakness, or on occasions the sheer venality, in IR’s system of inspection and quality audit to start supplying sub-standard products.

There are exceptions but this scenario generally leads to formation of a cartel which aims to ensure that all the approved vendors get a finger in the pie and the price is controlled, preventing a plummet to a cut-throat level, kept stabilized at a healthy level for profitability and, in general but not always, checked against a raise to a level of price gouging. If I go by hearsay evidence from the accounts of people who would know, it is almost a norm in the procurement system of IR.

There is a view that cartelization leads to a system of stability of price and quality. At the same time, frequent instances of breakdown of a cartel is heard of, as some vendor or the other attempts to preempt for himself a larger piece of the cake.

A large chunk of materials IR purchases is done at rates below the workable; this not only tells on the performance of the product but impacts the life cycle cost, thereby nullifying any price advantage. There is a smaller chunk which is purchased at an exorbitant rate because of unethical deals between the authorities and the supplier(s). Then, there is this large part which is cartelized; believe me, this works, with IR purchasing perhaps at 5% higher than the reasonable price, with somewhat assured quality, except that when the size of the approved vendors grows, chances of the cartel crumbling and a start of a price war increase.

There is another narrative that, If you read the IR’s stores code, it is the job of the Tender Committee(TC) to determine unworkable rates and reject them. Nevertheless, it is never done by these TCs of IR. I will leave this with a quote from my chāchā Ghālib, tongue in cheek, and let the readers interpret it the way they find it relevant and/or enjoyable: 

Maiñ ne maanā ki kuchh nahīñ Ghālib 

muft  haath aa.e  to  burā  kyā  hai

(Ghālib seems to be persuading the beloved that, although it was accepted that he was good for nothing, she would get a slave for free and so what was the harm? There's some unspoken, but still somehow perceptible, clever wordplay here: Ghālib is explicitly nothing, and so his price is nothing too, and, therefore, available for free.)

Whatever be the so called benefits of cartelization, or its drawbacks, it cannot be anybody’s case that instances of cartelization be glossed over. What is needed is to look for a system which encourages competition while maintaining the quality of products. Is there anybody out there to beard the lion in his den, a lion which has been living off the abdication by technical departments of IR? I do not know but here is what I hope happens at some point in future:

Like any other large corporation in the world, IR should create a strong costing cell with professionals, not regular railway officers and staff, so no vendor, competent or otherwise, can ever try any chicanery or sophistry in respect of pricing. While there is no case to look askance at reasonable profit margins, IR should not be taken for a ride through loopholes in the tendering system. Once it is clear that prices would be in a band, not more, not less, there would be no need for proliferation of vendors. Once you have adequate set of vendors, and the supplies and quality levels are being met, addition of vendors should be an exception, not a rule. With an insignificant investment in equipping itself with competent costing, procurement would become much easier and efficient, IR can reduce staff engaged in procurement and cut costs of long-drawn tendering and the workload of CCI would become non-existent.

I come back to Public procurement and Transparency. What exactly is transparency? Transparency, as I understand, for a government organization dealing with public funds, or perhaps even in responsible business enterprises, is a culture of honesty and openness. But transparency sans accountability and delivery is meaningless; there is an equally important flip side and that is, the obligation to deliver. If use of public money must be done in a transparent manner, then it is also necessary that the purpose for which this money is being utilized is served well.

It is easy to be transparent as long as it is divorced from delivery. It is also, perhaps, easier to deliver if there was no pressure of transparency. Merit lies in delivering while being transparent. In general, transparency is the quality of being easily seen through. A secondary connotation also refers to complete predictability, i.e., the output is entirely predictable from knowing the input. Since constructive and effective ordering of stores is not a computer game, if you follow such blind transparency, it is liable to be misused by incapable suppliers.

If interested, you can read more at:

http://anindecisiveindian.blogspot.com/2020/04/musings-transparency-delivery-must-meet.html

What about the procurement actions as such? IR, like other government organizations, has to follow the Public Procurement Policy provisions and guidelines. There are a lot of misconceptions about these policies; the prime misgiving among purchasers and suppliers being the intent and execution. Most people seem to believe that the policy prevents you from buying the best and L1 syndrome guides you to go to the lowest bidder with quality and durability of the product given a short shrift. This is far from the reality. The policy guides you to make sure that public funds are used judiciously and that some form of level playing field is available to aspiring suppliers vis-à-vis the established ones. As a government executive dealing with public money, one must have the courage of conviction to decide which product(s) would be the best for an application and then go about ensuring that with a cogent argument. The policy not only does not prevent you from doing it, it also empowers and enables you to do it. Many executives find it surprising but it enables you to decide a case even if you get one bid in a tender given certain conditions.

The problem is that many government executives want a procurement solution on a platter without them having to exercise their judgement and show firmness of purpose in the face of easy way out of going with the least controversial path; they find it safe to follow the path of least resistance and let a sense of propriety be twisted to justify sub-optimal procurement action. They would like to work like a top executive in a private firm who is entitled to do it straight and no questions asked. But they forget that such an executive also carries responsibility towards the shareholders, the board and the bottom line of the company and his decisions are not whimsical. I agree that at times even the boldest executives may take the safe option; they may find it difficult to judge what would be right or take the easier way out even to avoid complaints, complications and accusations. Remember that even the most powerful person on earth, the then President of the US, Obama accepted that the Obamacare software had issues initially as the agency assigned the job was chosen through a state procurement policy! But such cases should be exceptions, not a de rigueur.

Shakespeare speaks through Hamlet, “Why, then, ’tis none to you, for there is nothing either good or bad, but thinking makes it so.” Absolutely. If your thought is clear in what you want to purchase or develop, and do it through who and why, there is every feasibility of achieving it, even in a government set up. 

If interested, you can read more at:

http://anindecisiveindian.blogspot.com/2019/01/train-18-series-part-viii.html

And if you are interested to read even more, I recommend you get a copy of my book, ‘My Train 18 Story, Vande Bharat, India’s First Indigenous Modern Train’ my labour of love, the fifth edition of which is available again after reprint on Amazon:

https://www.amazon.in/gp/product/8194897432/ref=cx_skuctr_share?smid=A3M8O4N33XL773

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