Opinion

Cartels driving public procurement

VAIBHAV CHOUKSE RIMALI BATRA | Updated on January 22, 2018 Published on September 14, 2015

Done deal Beforehand marinini/shutterstock.com

The Competition Commission is cracking down on them. It needs to take along key procurers such as the railways

Governments today divert a large share of taxpayers’ money for public procurement (PP), which includes purchasing goods and services ranging from building roads to acquiring textbooks.

Ministries such as defence, railways, and telecommunications allocate approximately 50 per cent of their budgets to PP. But how can they be sure they are getting good value for money, and that the companies bidding for the project or tender have not transgressed the principles of competitive bidding?

The CAG of India audit studies suggest the large-scale prevalence of cartelisation (bid-rigging) in PP. In fact, in his Budget speech, Finance Minister Arun Jaitley acknowledged that the malfeasance in PP can be contained by having an institutional structure. This would entail the enforcement of competition laws and the education of PP agencies to help them design efficient procurement processes.

Due to bid-rigging, the price paid by the public administration bodies for goods or services is artificially raised. Indeed, the impact of bid-rigging on public expenditure can be devastating.

Metro Man E Sreedharan noted that cartelisation in railways procurement cost the government ₹10,000 crore annually. Brihanmumbai Municipal Corporation (BMC), which has been dealing with cartelisation by road contractors for several years, cancelled a construction contract worth ₹150 crore last month after receiving collusive bids.

Catalyst for reform

In 2004, the ministry of health and family welfare was astounded when it opened the bids received for a tender to procure Copper-T 380 A, a female contraceptive.

All six bidders, including the State-owned Hindustan Latex Limited (HLL), quoted the same price of ₹25 per piece. Also, while the bid was for procurement of 80 lakh units, HLL offered to supply 7 lakh pieces (contrary to its production of 1.7 crore pieces) and the private companies together bid for supply of 73 lakh pieces.

This was a clear case of bid-rigging but the ministry only referred the matter to the Tariff Commission and sought an explanation from the suppliers.

Today, the scenario is changing as the Competition Commission of India (CCI) has been at the forefront of the battle against cartels in PP. The Competition Act specifically deals with anti-competitive agreements and identifies bid-rigging as one form of cartelisation.

The CCI has investigated 10 cases of bid-rigging in PP, imposing a fine of ₹1350 crore on 125 companies for cartelising in various tenders floated by PSUs and government departments. In most cases, the latter made a reference to the CCI regarding the suspected bid-rigging.

Last month, the CCI penalised four PSU insurers ₹671 crore for cartelising the tenders floated by the Kerala government for selecting an insurance service provider for a social welfare scheme.

Sink or swim together

The CCI is playing a twofold role in unearthing bid-rigging: one, by effectively enforcing penalties that deter anti-competitive practices; and two, by sensitising ministries, departments and PSUs to detect bid-rigging through better tender designs and bidding procedures.

However, the CCI cannot tackle this issue alone, without support from procurement agencies.

Procurement agencies are best placed to detect unlawful bidding arrangements because it possesses knowledge of the industry and can track patterns that suggest the existence of a cartel. The CCI must consider working extensively with procurement officials in an effort to fight bid-rigging; international experience indicates substantial gains from the promotion of competition in PP.

Empirical evidence suggests that, Russia, European Union, Mexico and Brazil have saved $5 to $10 billion by infusing fair and free competition in PP markets.

India has multiple procurement rules and guidelines and not a single consolidated central procurement law. It is important that the government’s plan to revive the Public Procurement Bill of 2012 sees the light of day.

The multiplicity of rules deters transparency, competition or efficiency in PP.

The CCI and stakeholders such as the department of expenditure, CVC, CAG, the directorate-general of supplies and disposals, and large procurers such as defence and railways should join hands to eliminate bid-rigging from PP.

Vaibhav Choukse is with J Sagar Associates and Rimali Batra is with DSK Legal. Views are personal.

Published on September 14, 2015
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