In a feat of digital procurement, Central Public Sector Enterprises (CPSEs) witnessed a staggering Rs 1 lakh crore procurement in FY 23-24 through Government e-Marketplace (GeM). A commendable achievement. Now, that the good news is settled, we will be discussing insights on public procurement below:
Given the enormous size and the stakeholders' vested interests, public procurement is entangled in unfair practices. This leads to an entry barrier and a cause for significant transactional costs arising from, for example, delays in payments and bribery required to get them released. One can read Insights into cartels, bid rigging, fr, ads and other corrupt practices: Collusions in Public Procurement (cag.gov.in).
Among the serious issues highlighted by private companies that work on government projects is receivables because the Indian government is an all-powerful entity with the ability to delay/deny payment. Pavithra Manivannan and Bhargavi Zaver who are the researchers at the CMI-Finance Research Group have authored a blog post: How large is the payment delays problem in Indian public procurement?
The government allocations for social welfare have increased over the years, although the utilization of funds has remained low due to procedural difficulties, straitjacketed rules, delays in payments, corruption, and political interference. This disrupts nonprofit operations and undermines nonprofits’ attitudes towards working with the government, which has a more detrimental effect on public service delivery.
This reflects the dichotomous principle of government which on the one hand advocates for greater transparency and efficiency of government organizations and on the other hand refuses to penalize these organizations for huge delays in the payment to the vendors.
Issues created due to poor public procurement:
1. Many firms do not take part in public procurement as the government procuring entities often delay releasing the payments. The firms that are part of the public procurement face working capital shortage since delayed payment affects companies' cash flows negatively. Unless this money is unlocked, the problem of the payment percolates and is reflected in banks' stressed assets.
2. This is like Gresham's law (Bad money drives out good money) but in the public procurement domain. The payment delays impose an unnecessarily heavy burden on small firms, potentially knocking them out of the competition and discouraging them from participating in other procurement processes. Now all that is left are the big firms that are either immune to corruption or the firms that adopt corrupt practices. The more valuable 'good money' gradually disappears from circulation.
3. The government is legally liable to pay on time but the firms don't enter into a dispute for the delayed payments. The dispute with the government creates bad faith for future bids and contracts. If the procuring officials are themselves responsible for causing grievance, there is little chance of the aggrieved bidder getting his due from such a redressal system. In addition to that India does not have an Independent Grievance Redressal Mechanism in the procurement system.
4. It is worth noting that India hasn’t even signed the Government Procurement Agreement (GPA) as a member of WTO. Only recently, India has included government procurement in the India-UAE Comprehensive Economic Partnership Agreement.
5. Public officials also determine which vendors will thrive and which will fail by setting the terms and conditions under which public procurement takes place. This situation creates a situation of cartelization from the supply side.
Remedies:
1. Every organization has an incentive to conceal perceived areas of poor performance in public procurement. The government has to create independent and effective oversight processes where data on delayed payments is openly & easily available for public scrutiny.
2. Strengthening the monitoring mechanisms must lead to the creation of a strong knowledge management system for establishing best practices and creating institutional memory.
3. A lot of issues can be resolved if dispute resolution and claim settlement are faster.
4. Opening up government procurement to global competition with best-in-class project management and governance practices will help improve the quality of government projects.
