Public Procurement: Policy Must Precede Law

Pressure for a unified public procurement framework is mounting on India from both within the country and internationally. While an integrated procurement structure is necessary, a broad policy architecture must precede the framing of any legislation

As India prepares to convert some of its free trade agreements into larger comprehensive agreements, it will have to re-examine some existing domestic rules and convert other rules into legislations. And in some cases, such as procurement by the government, it will have to first frame guiding principles that are aligned with global norms.

Comprehensive agreements usually include, apart from export and import rules, treaties on investment, intellectual property rights, and public procurement. All comprehensive agreements, and some bilateral investment treaties, demand that public procurement treat all vendors—foreign or domestic—equally. In keeping with these norms, India too will have to design a globally-aligned public procurement framework that is fair and equitable.

The Indian government’s annual procurement bill is enormous. If purchases by the Centre, states, local bodies, public sector organisations, and the armed forces are consolidated, various estimates put the total bill anywhere between 25% and 30% of the country’s GDP, amounting to over $600 billion. [1]

Despite this colossal bill, India does not have an over-arching policy to guide public procurement.

In theory, all public procurement is guided by General Financial Rules (1963) and Delegation of Financial Powers Rules of 1978, both framed (and occasionally updated) by the Ministry of Finance. [2, 3] The ministry has also published a manual called “Policies and Procedures for Purchase of Goods”. [4] On top of that, the centralised purchase department of the central government—the Directorate General of Supplies and Disposals—issues its own guidelines. Many ministries often tweak these rules, with government agencies developing their own rules, and framing model tender documents.

Defence procurement, on the other hand, is covered by a unique set of policies and procedures formulated by the National Security System, and the decisions are made by the Defence Acquisition Council. In addition, many states have legislated their own procurement Bills—for example, the Tamil Nadu Public Procurement Act, the Karnataka Public Procurement Act, and the Rajasthan Transparency in Public Procurement Act.

Given this wide variation in procurement rules within the government, regulation and supervision are casualties. While the Central Vigilance Commission provides supplementary regulations and oversight, with additional supervision by the Comptroller and Auditor General, there is no central authority that monitors public procurement to ensure compliance with existing rules.

A series of scandals—coupled with mounting pressure from international allies, trade partners, and multilateral organisations—forced the UPA-II government to draft a Public Procurement Bill in 2012. But that didn’t go anywhere, and the new government is now trying to resuscitate the Bill. The finance ministry has invited comments on the draft of the existing Bill. [5]

However, there is a problem with drafting legislation before articulating guiding principles, or a strategy architecture, or even a white paper. Such a model document can provide directional guidance to the Bill, and not vice-versa. Also, guiding principles enjoy greater longevity, which when incorporated into legislation, saves it from frequent, time-consuming amendments.

Tactically, such a document will help resolve numerous pending or unresolved policy-related issues in public procurement that a Bill cannot incorporate.

For starters, the proposed Bill applies to only procurement by the central government and its various organisations. Given the growing procurement costs of states and local bodies (such as municipal corporations or panchayats), this Bill then serves only a limited purpose. Any regulatory oversight over purchases by states and local bodies would need to be balanced with the tenets of federalism.

This can be debated in the guiding principles and an alternative solutions framework can be constructed. For instance, it might be instructive to integrate all public procurement—at whatever level—with the proposed technology backbone for the Goods and Services Tax (GST) regime. Aligning procurements with the GST backbone will also allow for fair comparisons between the pricing of similar goods and services procured elsewhere by private or public entities, thereby imparting transparency and accountability. This will then reduce divergence without the need to legislate a central bill.

Second, governments worldwide use public procurement strategically to drive their socio-economic agendas. In India, there is a 20% mandatory carve-out for the micro, small medium enterprises (MSME) segment. [6] This will raise questions about other exemptions, such as a legitimate gender-based quota—should it be part of the 20% or does it deserves separate reservation? With gender budgeting now well established, gender-based public procurement has the opportunity to improve female entrepreneurship, employment, and incomes. [7]

A reservation—known as offsets—has also been included in defence FDI to supplement the ‘Make in India’ programme, under which foreign companies manufacturing in India must source 30% of goods and services from local companies. Even the FDI policy on single brand retail mandates such a requirement. These exceptions might face opposition in comprehensive agreement negotiations. This reinforces the need for a national policy debate, and a broad strategy, which re-examines the extent of exemptions that can be allowed.

Any strategy’s most significant thrust will be in the geoeconomic sphere. For instance, India will probably want to exempt government’s procurement of foodgrains from Indian farmers from any comprehensive negotiations, at least till the Doha Round of discussions under the World Trade Organisation are concluded, or till the outdated WTO formula on agriculture support is overhauled.

Importantly, India also needs a strategy to gain greater market access for services in overseas markets, in exchange for a liberal, domestic public procurement policy in manufactured goods. Public procurement of services in most countries is restricted to citizens of a country, or a particular bloc (like Europe). India should leverage the growing clamour for access to its procurement market by seeking reciprocal access for its services.

This is a plan of action that cannot be included in a Bill, but needs to be outlined in a strategy document.

References

[1] United Nations Office on Drugs and Crime, India: Probity in Public Procurement,

<http://www.unodc.org/documents/southasia/publications/research-studies/India-PPPs.pdf>

[2] Ministry of Finance, Government of India, General Financial Rules, <http://finmin.nic.in/the_ministry/dept_expenditure/GFRS/index.asp>

[3] Ministry of Finance, Government of India, Delegation of Financial Power Rules, <http://finmin.nic.in/the_ministry/dept_expenditure/notification/dfpower/Purchase%20I.pdf>

[4] Department of Expenditure, Ministry of Finance, Government of India, Policies and Procedures for Purchase of Goods, <http://finmin.nic.in/the_ministry/dept_expenditure/acts_codes/MPProc4ProGod.pdf>

[5] Department of Expenditure, Ministry of Finance, Government of India, Notice: Public Procurement Bill, 6 April 2015, <http://finmin.nic.in/the_ministry/dept_expenditure/ppcell/PPDNotice180315.pdf>

[6] Ministry of Micro, Small and Medium Enterprises, Government of India, Public Procurement Policy Notification, <http://dcmsme.gov.in/notification.pdf>

[7] Kirton, Raymond Mark, Gender, Trade and Public Procurement Policy: Kenya, India, Australia, Jamaica. The Commonwealth, 2012, <http://assets.thecommonwealth.org/assetbank-commonwealth/action/viewAsset?id=22979&index=0&total=36&view=viewSearchItem#imageModal>

Do Trade Targets Work?

India has used two-way trade targets as a proxy for judging the temperature of its key bilateral and plurilateral relationships. But a deeper understanding is needed of the extent to which physical targets can help accomplish qualitative objectives

The government of India’s new Foreign Trade Policy (FTP) for 2015-2020 has set a $900-billion goods and services export target, to be achieved by 2020. Compared with the $465.9 billion achieved during 2013-14, the target is almost double of current levels.

The policy document prefaces the target with a rare pithy statement: “A vision is best achieved through measurable targets.”[1] But the fact is, most of India’s key diplomatic engagements—at bilateral, plurilateral, or even multilateral levels—are defined by targets.

Targets are ubiquitous in India’s economic diplomacy. There are many ways to judge the breadth and depth of a relationship between two countries, including cultural exchanges, defence cooperation, people-to-people interaction, and historical ties. But trade and investment targets lay out vector paths for future growth, and set concrete milestones against which progress can be gauged.

The target-driven approach is now spreading to bilateral ties with even smaller nations; for example, India and Vietnam recently agreed to a trade target of $15 billion, to be met by 2020. [2]

But targets are essentially cut-and-dry, and temporal. There is no definitive research showing whether targets have succeeded in imparting additional meaning to an existing relationship, or whether they have been effective in bringing two disparate nation-states closer. In other words, there’s no conclusive evidence showing that quantifiable bounds improve the qualitative facet of an engagement.

India’s Free Trade Agreement (FTA) with ASEAN is a good example. It has been a source of anxiety within government and key stakeholders. India signed the FTA for goods in 2009, but the one on services and investment—arguably India’s strong point—is yet to come into force. Even in the goods trade, India suffers a chronic trade deficit with ASEAN: it imports more than it exports.

In the face of this, the target for India-ASEAN bilateral trade—$100 billion by 2015—looks unattainable, especially since two-way trade (exports plus imports) between the two regions amounted to only $70.5 billion during April-February 2014-15. [3]

Confronted by this glacial pace of trade growth, India has done the next best thing: it has stretched out both the physical target as well the end-date. The India-ASEAN relationship will now be measured by a new target without having to necessarily address performance vis-a-vis the earlier target. External affairs minister Sushma Swaraj announced the new target at the inaugural session of Delhi Dialogue VII on March 11: “However, we need to make a special effort to achieve our target of enhancing trade to $100 billion by 2015, and our aspiration is to double it to $200 billion by 2022.” [4]

India has recast other targets in other strategic relationships as well. During Prime Minister Narendra Modi first state visit to the U.S. in September 2014, the joint statement he issued with President Barack Obama stated: “Noting that two-way trade has increased five-fold since 2001 to nearly $100 billion, President Obama and Prime Minister Modi committed to facilitate the actions necessary to increase trade another five-fold.” [5] In other words, to take trade to $500 billion, though the statement refrained from mentioning a target year.

In the other strategic relation with neighbour China, there is some clarity of objectives on both investments and trade. A joint statement issued by Modi and President Xi Jinping in September 2014 announced: “The Chinese side would also endeavour to realise an investment of $20 billion in India in the next 5 years in various industrial and infrastructure development projects”. [6] During the same trip, a five-year Trade and Economic Development Plan signed between the two countries has, among other targets, an unquantified over-riding objective: reduce the trade imbalance India suffers in its $65-billion bilateral trade with China. [7]

Even with Africa, the $90-billion target set for 2015 is likely to be missed. [8] It is also quite likely that the target will be bumped up—both the volume as well the year. This might be announced at the Third India-Africa Summit scheduled for October 2015.

When the foreign trade and investment landscape is suffused with a surfeit of targets, the logical questions are: How are targets fixed? What is the strategy for meeting them? No one knows the answers.

For one, there is no clarity on who should set and announce targets—the commerce ministry or the external affairs ministry? While think tanks and academic experts are known to have been engaged by both ministries to finalise targets, the research output is not available to civil society, either for viewing or for providing inputs. Inviting public comments before finalising targets, or even to assess the methodology used, can probably infuse some realism into these exercises.

Second, once the targets are announced, there is no detailed analysis of how these will be met, and no outlining of strategy, at least not in the public domain.

Finally, this year’s Foreign Trade Policy also raises a crucial issue that has bedevilled India’s trade practices: the lack of coordination between different economic agents as well as ministries operating in silo-like structures. But then the policy stops short of mentioning how “Make in India” or “Digital India” or even the policy on smart cities can be integrated with the FTP to deliver higher exports of both goods and services. That remains the biggest challenge for India’s trade regime.

References


[1] Ministry of Commerce and Industry, Government of India; Foreign Trade Policy Statement, <http://dgft.gov.in/exim/2000/FTPstatement2015.pdf>, p.14

[2] Ministry of External Affairs, Government of India, Joint Statement by Indian Prime Minister Narendra Modi and Vietnamese Prime Minister Nguyen Tan Dung,28 October 2014, <http://www.mea.gov.in/Speeches-Statements.htm?dtl/24143/Media+Statements+by+Prime+Minister+of+India+and+Prime+Minister+of+Vietnam+in+New+Delhi+October+28+2014>

[3] Ministry of Commerce and Industry, Government of India, Trade Statistics, <http://commerce.nic.in/ftpa/cntq.asp>

[4] Swaraj, Sushma, Keynote Address at Inaugural Session of Delhi Dialogue VII,Ministry of External Affairs, Government of India, 11 March 2015,

<http://www.mea.gov.in/Speeches-Statements.htm?dtl/24899/Keynote_Address_by_External_Affairs_Minister_at_the_Inaugural_Session_of_Delhi_Dialogue_VII_New_Delhi>

[5] Ministry of External Affairs, Government of India, Joint statement by Indian Prime Minister Narendra Modi & U.S.A. President Barack Obama, 30 September 2014,

<http://www.mea.gov.in/bilateral-documents.htm?dtl/24051/Joint_Statement_during_the_visit_of_Prime_Minister_to_USA>

[6] Ministry of External Affairs, Government of India, Joint Statement between the Republic of India and the People’s Republic of China on Building a Closer Developmental Partnership, 19 September 2014,

<http://www.mea.gov.in/bilateral-documents.htmdtl/24022/Joint_Statement_between_the_Republic_of_India_and_the_Peoples_Republic_of_China_on_Building_a_Closer_Developmental_Partnership>

[7] Ministry of External Affairs, Government of India, List of Documents signed during the State Visit of Chinese President Xi Jinping to India, 18 September 2014, <http://www.mea.gov.in/incoming-visit-detail.htm?24012/List+of+Documents+signed+during+the+State+Visit+of+Chinese+President+Xi+Jinping+to+India>

[8] Singhal, Rajrishi; Indian Banks in Africa: Change Agents; Policy Perspective No 8, Gateway House: Indian Counmcil on Global Relations, 9 January 2015, 

<http://www.gatewayhouse.in/wp-content/uploads/2015/01/Policy-Perspective_Economic-diplomacy-with-Africa.pdf>

Incredibly Indian, or the Travesty of Taj Tourism

The Taj Mahal is unarguably India's finest monument. It's a lover's dirge for his late beloved, set in timeless metre and rhythm. It's a lament in marble, a paean to love, that leaves visitors awestruck and enchanted.

It's, therefore, equally painful when the custodians of this great monument are callous and corrupt. A visit to the Taj is meant to be a homage to beauty, love, devotion. Instead, many visitors have come back angry and frustrated.

Arundhuti Dasgupta Singhal has written in Business Standard on the shameful appropriation of Taj Tourism by touts and how officials are aiding and abetting this. It's titled Incredibly Indian: How Taj Mahal Tourism Has Turned Into Harassment:

http://goo.gl/kUF7Hf

A snatch of a sentence from the above blog highlights the plight of ordinary tourists: "Feeling harassed, helpless and angry at the manner in which we have been dragged into a chain of unofficial payments and pay-offs..."