Energy savings in public procurement

The Government of India is a major procurer of goods and services. A recent estimate by the Planning Commission puts the scale of public procurement between 15 and 20 per cent of GDP or about Rs 12 to 15 lakh crore per annum.

Taking note of this, the Commission has drafted a Public Procurement Bill, 2011, that seeks to lay down broad principles and procedures to create a fair, transparent and competitive environment.

The objective is to ensure procurement of quality works, goods and services at the least cost.

The preamble of the Bill lays emphasis on ‘maximising economy and efficiency, promoting competition among suppliers and contractors while ensuring a fair, transparent and equitable procurement process, and promoting the integrity of, and public confidence in, the procurement process undertaken by the Central Government, its statutory bodies and companies'. With its implementation, leakages in the present procurement process are expected to be significantly reduced, if not eliminated.

Socio-economic policies

This is a welcome step in ensuring transparency, accountability, as well as probity in public procurement processes, and takes a leaf out of similar enactments by almost 50 other countries.

The Bill, as the statement of objects and reasons attached thereto indicates, takes note of the provisions of the model regulations issued from time to time by the UN.

A noteworthy provision of the Bill is the integration of socio-economic policies in the procurement exercise.

The Bill defines “socio-economic policies” as ‘being environmental, social, economic and other policies of the Government authorised or required by the Procurement Rules or other applicable laws to be taken into account by the procuring entity in the course of any bid process'.

Thus, this enabling framework makes it possible to introduce concepts of green procurement, energy efficiency preferences, etc, which are taking centre stage in the economic processes.

Value for money

The overarching rules and procedures governing public procurement, both in Central and State Governments (including their agencies), are enshrined in the General Financial Rules (GFR).

An important amendment to GFR in 2005 made it possible for the public authorities to maximise ‘value for money' in the procurement process.

Though GFR does not define clearly the concept, it is well understood that it allows procurement based on assessment of Life Cycle Cost (LCC) in addition to least cost procurement.

This brings us to the important aspect of public procurement where maximising ‘value of money' can only be realised by accounting for reasonable operational cost in addition to the capital.

The procurement of energy driven equipment such as vehicles, office equipment, air-conditioners, refrigerators, buildings, etc would become more cost-effective on life cycle assessment as the operational costs to the government, reckoned in terms of energy bills, are many times more than the capital cost.

Needless to add, efficient equipment could reduce energy usage over their life time to provide sustained savings.

Reduced energy bill

It is estimated that about 20 per cent of all government procurement, measured in terms of purchase cost, is for energy driven items annually totalling about Rs 3 lakh crore.

These are procured by a host of agencies such as Defence, Railways, Public Sector Undertakings, specialised procurement agencies such as DGS&D, etc.

The majority of such procurement is based on least cost and therefore transition to Life Cycle Cost could reduce operating costs by 20-30 per cent, thereby resulting in a reduced energy bill, which is a significant part of the non-Plan expenditure of the government, perhaps second to salaries and wages.

To elaborate this point, it may be worthwhile to look at a simple example of comparing the least cost and Life Cycle Cost of a room air-conditioner where there are levels of efficiencies, from 1 STAR to 5 STAR.

The calculations are based on the standard efficiency levels prescribed by BEE, electricity cost of Rs 5 per KWh (commercial tariff), usage of eight hours per day for 200 days in a year, maintenance cost of Rs 2,000 over life of A/C and standard life of seven years for A/Cs.

Thus, while the least cost procurement will favour an inefficient A/C due to its lower capital cost, Life Cycle Cost will enable procurement of the most efficient product as its ‘value for money' rating is about 30 per cent better.

Further, use of 5 STAR AC will hedge against the rising electricity prices.

Thus, if tariff increases to Rs 6 per KWh, the monetary gains will increase to almost 40 per cent.

Needless to add, this will also result in reduction of non-Plan expenditure of the government in the short and medium run, while at the same time giving a major push to energy-efficiency markets.

Transparent transition

However, in order that the avowed principles of procurement are not diluted, the rules and procedures need to evolve in a manner that the procurement authorities transition to LCC in a transparent, seamless and efficient manner.

Capacity building of the entire public procurement value chain, providing easy to use and standardised tools for calculating LCC, enabling audit agencies to evaluate LCC-based procurements, preparing standard bid documents that clearly delineate ex-ante LCC-based procurement are some of the measures that are needed.

Incentives to procurement agencies for using LCC-based procurement while preserving the high values of probity could be structured.

Recent international experience has reiterated the value of energy-efficient public procurement based on LCC to avail the benefits of reduced operational cost of public authorities, stimulating demand for energy efficiency and reducing overall energy use in the economy. (see table for details)

The Public Procurement Bill as well as the General Financial Rules provide the legal mandate for Government to implement life cycle cost assessment in Rs 3 lakh crore worth energy-related procurements.

International experience has indicated the value of the preposition both in terms of stimulating markets for energy efficiency as well as cost savings for governments.

The expediency is to engage with the policy makers and relevant agencies to integrate energy efficient public procurement in the evolving rules and procedures of the upcoming legislation.

(The author is Programme Officer, OzonAction Programme, United Nations Environment Programme, Bangkok. Views are personal)

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