Procurement Methods in ULBs Rules, Procedures and Reforms By Amlan Biswas Deputy Commissioner, Chitradurga On 3rd August, 2007 At All India Institute of Local Self Government, Belgaum

Contents Conclusions The Importance of Procurement Current Scenario in ULBs Key Elements of Efficient Procurement Strategy Importance of Transparency The KTPP Act & Rules Important Procurement Issues for ULBs Types of Contract Negotiations Consultancy Standard Bidding Documents Preventing Restrictive Practices DGS & D Procurement Important 4(g) exemptions Conclusions

The Importance of Procurement 40% of the Budget of a State is spent on procurement of goods, services or works In local bodies this often goes upto 60%. It has been estimated that more than 30% of the money spent on procurement at any level can be saved and utilised for more productive purposes. The main function of Government at all levels is to manage money and men to provide key services and merit goods over which it has monopoly. Hence inefficient procurement reflects on the overall efficiency of government itself.

Current Scenario in ULBs Improper Planning of Procurement Fund release from State is time sliced yet ULBs do not plan procurement in advance Ad hocism in work selection and procurement quantities - no perspective plan or analysis of stores & stock Poor design of procurement – inadequate market information, insufficient checks & balances, Arm-chair estimation, conflict between technical considerations and populist objectives Procedures not according to letter & spirit of KTPP. Law treated like a hurdle not an enabler. Very little transparency. No follow up on warranties & guaranties Poor contingency & emergency management

Key Elements of Efficient Procurement Strategy Planning : Need, stock, fund Demand versus need : Procurement should be planned according to felt need and technical feasibility Inventory Management : Idle stock should be avoided and inventory maintained in such a way that wasteful procurement is avoided JIT : Just in time prevents stock decays, idling losses and overpricing by works contractors Budgeting & Funding Tie-up : Funding tie-up is essential before procurement launch to prevent T & C over-runs – medium-term fiscal plan required Designing : Information, Product Source, Securities & Warranties Information / Knowledge : Know exactly what you want and what you need Technical Specification : Current and correct Estimation : Detailed and Recent Checks & Balances : Multi-year, secured Transparency: Wide Publicity, Clear Communication of Needs, Fair Conditions, Scale Economies (Avoid Splitting) & Scope Economies (Multi-use Goods & Equipments) Adverse selection & moral hazard Prevention of corruption Encouraging competition Verification: Strict, Fair and Transparent Follow up : Review of AMCs, BGs, Warranties & Imposition of Penalties Specific provisioning for contingencies & emergencies Bottomline: Multi-year fiscal planning and Financial Propriety in Expenditure

Why is Transparency in Procurement Important? Government officers whether at Central, State or Local Body levels, manage public money to provide public services One of the Canons of Financial Propriety, Article 15 of the KFC states that Public Money should be managed with the same prudence as own money Transparency is “twice blessed”- It ensures the best deal for the buyer and assists the serious and competitive seller Spenders of Public Money should be accountable Transparency prevents adverse selection and moral hazard: Peaches for lemons

The “Dreaded” KTPP Act Regulation of Procurement : Exceptions : S 5 prohibits procurement except by open competitive bidding S 6 to 14 specify the procedure to be followed in tendering Exceptions : S4 (a) : Calamities declared by government S4 (b) : Single Source without “reasonable” alternatives to be certified by a Committee of 3 experts S4 © : Standardisation and compatibility with existing supplier S4 (d) : Government Suppliers like KHDC/ KLAC for 2 years S4 (e) : Value limit of Rs. 5 lakhs for works and Rs. 1 lakh for goods and services (Only indicative, any value can be tendered ) S4 (f) : DGSND Rate Contracts S4 (g) : Procurements Notified by Governments S4 (h) : Certain Bulk Purchases where there are established methods Penalty : S 23 – Imprisonment of 3 years and/or fine of Rs. 5000. Instead of avoiding the KTPP Act, its safer and easier to follow it

The KTPP Rules Rule 4 to 10 : Publicity Weekly Publication of District & State Tender Bulletin by competent Tender Bulletin Officer, Extraordinary Bulletin in case of emergency For procurement exceeding Rs 1 cr both State & Distt Bulletin Notice to contain Details of TIA, Date Time Place for Tender Forms, Receipts of Filled Forms and Opening, EMD and Scheme/Program and other relevant information. Scale of publicity to be determined by value and scope of procurement Rule 11 to 14 : Tender Document Tech Specs to be detailed, unbiased but specific, brand-name to be avoided (if necessary, “or equivalent” to be mentioned), BIS number to be mentioned if available Commercial conditions will include EMD, Performance Guarantee in form of Security Deposit, period of price validity, liquidated damages & penalty clause, quantity etc

The KTPP Rules Rule 15 to 20 : Receipt & Opening of Tenders TAA may appoint a TSC to supervise opening, preliminary examination, scrutiny and evaluation of tenders. This is a must for works above Rs. 1 crore. Minimum time for Tender Submission to be 30 days for procurement below Rs. 2 crore. Minimum time may be reduced by authority superior to TIA for specific reasons to be recorded. Rule 21 to 28 : Tender Evaluation Initial Examination to determine substantive responsiveness should include examination of eligibility criteria as per tender documents, signature on all submitted documents, EMD, responsiveness to technical specifications including sample testing where required : Failure in any aspect of Initial Examination can lead to cancellation of bid on account of substantive unresponsiveness Determination of Lowest Evaluated Price to be done for all substantially responsive bids. Evaluation and award of tender to be done within the tender period (normally 90 days). After award, successful bidder to execute contract within given time period or else tenderer may be declared unresponsive and his EMD forfeited Pre-qualification may be done if the criteria are clearly defined in the tender document. Two Cover Tenders with the first cover as a qualification condition is necessary for procurement above Rs. 50 lakhs. Rule 29 : Appeals Appeal lies to HoD against subordinate TAA and to Govt against Local Bodies.

Issues of Importance for ULBs Types of Contract Negotiations Consultancy Standard Bidding Documents Preventing Restrictive Practices DGS & D Procurement Important 4(g) exemptions

Types of Contracts Type of contract affects the subsequent stages of procurement, the content of tender document Choice of type of contract has to be made at the initial stage itself Types Lumpsum Item Rate Percentage Rate Cost Plus Supply, Erect, Commission Design & Build Turnkey PPP – BOO/BOOT

Lump-sum & Item Rate contracts Tenderer quotes a fixed sum for execution of work as per design and specification Payment is linked to stage of completion of an activity; Normally used for small, short duration, well defined, detailed works eg. standard housing, bus shelters, primary health centre etc. Item Rate Tenderer quotes unit rates for different items inclusive of the costs of labour, materials, equipment; Flexible to handle variations due to changes in design; Amenable for manipulation

Percentage rate & Cost Plus contracts Percentage Contract Contractors to submit the %age above or below the current schedule of rates; Simple to comprehend for the contractor; Irrational tender, same percentage above or below different category of items Allows unqualified Contractors to bid Not very transparent Cost Plus Periodic reimbursement of contractor’s costs of inputs plus fee to cover overheads Appropriate for open ended emergency situations Mostly used in private sector.

Supply, Erect/install, Commission And Design & Build Contracts Single responsibility; Appropriate for power plants, water pumping plants, water treatment and sewerage treatment plants; telecommunication projects etc Design & Build Innovative competitive designs are possible, which result in economy, better design and aesthetics; Pre-qualification is an essential feature Appropriate for important buildings, major bridges, complex flyover, navigation works, airports and other infrastructure works

Turnkey & PPP contracts Tenders for alternative systems and processes; Two stage tendering procedure followed; Usually Lump sum with price adjustment; Appropriate for procurement of complex industrial process plants such as steel mills, oil refineries etc. PPP (Public Private Participation) BOT (Build Operate Transfer), BOO (Build Own Operate), BOOT contracts; Concessionary turn key type of contract including financing in addition to design and construction, operation and maintenance of public and private revenue earning projects; It is a way of overcoming the budgetary constraints to acquire the needed infrastructure for growth; Appropriate for profit earning projects such as power generation and distribution, toll roads.

Consultancy Services ‘Consultancy services’ includes activities such as policy advices, institutional reforms, management, engineering services, construction supervision, financial services, social and environmental studies, identification, preparation and implementation of projects to complement Government capabilities; Selection Methods Quality and cost based selection (QCBS); Least cost selection (LCS); Single source selection (SSS)

Consultancy Services – Selection Methods QCBS (Quality & Cost Based Selection) Technical and financial proposals are received in separate envelopes, technical proposals are opened first and evaluated as per criteria given in RFP; Financial proposals of those who have scored more than the qualifying score are opened and evaluated; Consultant obtaining the combined highest score is invited for negotiations. SSS (Single Source Selection) Client selects a specific consultant and requests to submit technical and financial proposals Value limited to Rs.5 lakhs for firms and Rs.1 lakh for individuals LCS (Least Cost Selection) Technical and financial proposals are received in separate envelopes; Technical proposals are opened first and evaluated as per criteria given in RFP; Consultant with the lowest evaluated price is selected.

Steps in selection process Prepare TOR; Prepare cost estimates; Advertise to invite expression of interest (mandatory if cost is more than Rs.20 laks); Prepare short-list; Prepare and issue RFP; Receive proposals from consultants; Evaluate technical proposals; Evaluate financial proposals; Combined evaluation and select the winning proposal (QCBS); Negotiate and sign contract

Types of Consultancy Contracts Lump sum (Firm Fixed Price) Contracts Where content, length of services and required output of consultant are clearly defined; Contract payments are linked to clearly specified outputs. Time-Based contracts Consultant’s remuneration is based on agreed unit rates for consultant staff multiplied by the actual time spent by staff in executing the assignment; Reimbursable expenses using actual expenses and agreed unit rates Percentage contracts Consultants are paid on agreed percentage of the actual project cost; Example Architectural consultancy, supervision of construction etc.

Consultancy Services – Standard RFP Documents Standard RFP documents issued by GOK to be used; Instructions to Consultants (ITC), Formats for submission of Proposals and General Conditions of Contract (GCC) to be used Data sheet and Special Conditions of Contract (SCC) could be used to reflect local conditions and characteristics of assignment.

NEGOTIATIONS Free, fair & competitive tendering is the very essence of good procurement process. Negotiation should not be resorted to, even with the lowest tenderer purely for reducing the rates. Routine Negotiation vitiates competitive tendering & encourages anticipatory inflation of quoted rates. Negotiations cause delay & provide an avenue for corruption

Guidelines for negotiations for Works Contracts Avoid Routine negotiation. Negotiations are appropriate only in exceptional circumstances: i. Less than three bids indicating lack of competition. ii. Single bid iii. Suspected collusion iv. Lowest evaluated bid is substantially above the estimated cost. Even in such exceptional cases the preferred option is rejection & re-tendering.

Guidelines for negotiations for Works Contracts (Contd…) Period of contract and provision of Price Adjustment Updated* Estimated cost of the Work Upto Rs. 20 lakhs Updated* Estimated cost of the Work Rs. 20 to Rs. 50 lakhs Updated* Estimated cost of the Work Rs. 50 lakhs & above (a) Contracts where price adjustment is not provided 10% above the updated* estimate or Rs. 1 lakh whichever is more 10% above the updated* estimate (b) Contracts where price adjustment is provided from the date of opening the tenders Does not arise 5% above the updated* estimate or Rs. 5,00,000 which ever is more. *Estimate based on the current rates of labour and materials such as cement, steel & other key materials. Where tendered amount is not “Substantially high” the Tender Accepting Authority shall accept the lowest evaluated, responsive tender only.

“Substantially high” tenders The Tender Scrutiny Committee / Evaluating officer shall: i. identify the items which are high ii. get the break-up of rates from the lowest evaluated, responsive tenderer. iii. make a thorough examination of the reasonableness. If the Tender Scrutiny Committee / Evaluating Officer is satisfied with the Tenderer’s explanation it shall recommend for tender acceptance.

“Substantially high” tenders (Contd…) In other ‘exceptional cases’ (except those that are considered ‘Substantially high”): - The Tender Scrutiny Committee (TSC) / Tender Evaluating Officer (TEO) shall recommend for rejection to the Tender Accepting Authority and to re-invite fresh tenders - The Tender Scrutiny Committee (TSC) / Tender Evaluating Officer (TEO), in such a case, can also propose necessary changes needed in the estimated cost, specifications, Special Conditions of Contract or packaging before re-inviting tenders.

Negotiations in ‘Exceptional Cases’ In cases where the Tender Scrutiny Committee / Evaluating Officer decides it in favour of negotiation in all “exceptional cases” he shall obtain approval of the Tender Acceptance Authority giving reasons and the points on which negotiations are proposed. Tender Accepting Authority shall examine the proposal thoroughly & approve the points of negotiations: Change in scope Specifications Packaging etc.

Negotiation Procedure TAA shall appoint a “Negotiating Committee” consisting of: TIA, TSC Rep and TAA Rep The NC shall keep record of proceedings of negotiations. The NC shall submit the proceedings to the TAA for taking decision If Negotiations Fail : TAA shall issue orders on the future course of action to be taken by the TIA which may include adoption of revised procurement strategy like: Repackaging Execution by departmental forces / facilities etc.

Negotiations in Procurement of Goods No schedule of rates for goods / equipments. However Market Rates and DGS & D Rates can be used for comparison Rates vary widely according to the functional requirements, quality & specifications. Award should therefore be made to the tenderer: who is technically & commercially responsive. who meets the stipulated qualification criteria. If the tendered rates for goods are considered unreasonably high compared with the market rates for the same brand & specifications: Negotiate with the lowest tenderer. Follow all procedures as in case of works negotiations. Here also the preferred option is rejection & re-tendering.

Standard Tender Documents For Goods and Equipment – K/G -1 KTPP Act and Rules specify that open tenders to be invited for procurement of goods and equipment of value more than Rs 1 lakh and less than Rs.10 lakhs. Single cover as per KTPP Act and Rules; Minimum qualification criteria specified in the document; No dispute resolution mechanism, which by default goes to Courts of Law. For Goods & Equipment - K/G - 2 Supply of goods/equipment of estimated value more than Rs.10 lakhs, but less than Rs.50 lakhs by Open Tenders; Arbitration by Sole Arbitrator as per Arbitration and Conciliation Act 1996

Standard Tender Document For Goods and Equipment – K/G-3 Supply of Computer systems and allied equipment of value less than Rs.50 lakhs by Open tenders; Single cover as per KTPP Act and Rules; Minimum qualification criteria specified in the document; Arbitration by Sole Arbitrator as per Arbitration and Conciliation Act 1996; Other Documents For Goods & Equipment – K/Q-1 Supply of goods and equipment of value less than Rs.1 lakh by inviting quotations from selected reputed suppliers; Evaluation for all items put together; Other Documents for Goods & Equipment– K/Q-2 Evaluation for each item separately; No dispute resolution mechanism.

Standard Tender Document - Works Proviso in PWD Code Para 167(1) of KPWD Code Volume I specifies that contracts of value more than Rs.25,000 should be prepared on PWG-65; Para 167 (3) specifies that contracts of value less than Rs.25,000 should be prepared on PWG-65 or Piece Work Form PWG-64 at the discretion of EE; Para 168 states the Form for Lump sum contract shall be PWG-65 (a). PWG 65 has been continued till December 2007 after which all agencies should shift to STDs.

Standard Tender Documents Works STD - K/W-1 Item Rate Contract for works of value more than Rs.5 lakhs, but less than Rs.20 lakhs; Registration in appropriate class is required; There are no other qualification requirements to be satisfied except that of available tender capacity; Single cover as per KTPP Act and Rules; No Price Adjustment; No specific provision for settlement of disputes which by default goes to Courts of Law.

Standard Tender Documents – Works - K/W-2 For simple works – Item Rate; For contracts of value more than Rs.20 lakhs, but less than Rs.50 lakhs; Minimum qualification criteria along with the criteria for available tender capacity specified; Single cover as KTPP Act and Rules; No Price Adjustment, No Joint Venture; No specific provision for settlement of disputes which by default goes to Courts of Law. Works – K/W -3 For works of value more than Rs.50 lakhs, but less than Rs100 lakhs; Item Rate Contract; Two cover tender system as per KTPP Act and Rules; No Price Adjustment , No Joint Venture;

Standard Tender Documents – Works - K/W-4 For works of value more than Rs.100 lakhs, but less than Rs1000 lakhs; Item Rate Contract; Two cover tender system as per KTPP Act and Rules; Minimum qualification criteria along with the criteria for available tender capacity specified; Provision for Price Adjustment , No Joint Venture; Arbitration as per Arbitration and Conciliation Act of India.

Standard Tender Documents – K/W-5 Pre-qualification document for normal works of value more than Rs10 crores or 100 M; Minimum qualification criteria specified, available tender capacity to be checked. Threshold for other works may be appropriately fixed by HODs/MDs of PSUs depending on the nature of the works Joint Venture not Permitted.

Standard Tender Document – K/W-6 Pre-qualification document for normal works of value more than Rs.10 crores or Rs.100 M; Minimum qualification criteria specified, available tender capacity to be checked; Threshold for other works may be appropriately fixed by HODs/MDs of PSUs depending on the nature of the works; Joint Venture permitted

Standard Tender Documents – yet to be prepared Works estimated to cost more than Rs.10 crores; Tenders from pre-qualified firms; BOO, BOT and BOOT documents

Prevention of Restrictive Practices in Tendering What are Restrictive Practices Manipulation of specifications for the procurement Hindering participation of tenderers by Restricted advertising Restricting duration of Sale of Tender Document Result Defeat the purpose of competitive tenders Lead to inefficient procurement Corruption Loss to Government / Local Body Correct Procedure Specification to be fair and technically correct Publicity to be wide enough and commensurate with the value of procurement sell the tender documents from the date of publication of NIT till the day previous to the day fixed for opening of tenders

Director General of Supplies & Disposals Purchase and or/inspection of stores for Central Government Ministries/Departments Registration of manufacturers, suppliers, stockists, Indian Agents of foreign manufacturers. To utilize the expertise available in the filed of Purchase and Quality Management, the Training Directorate will act as National Institute to impart/arrange training for government departments and Industries. The purchase wing is the main functionary of the organization and it carries out procurement action for conclusion of rate contracts and ad hoc purchases. Automobiles, Computers, Office Equipment, Office Furniture, Solar Equipment, Electrical Equipment, Medical Supplies etc The ADDRESS of DGS&D Home Page on INTERNET is http://dgsnd.gov.in.

Current 4(g) Exemptions Nirmithi Kendras given exemption under 4(g) of KTPP since Nirmithi Kendras are there in every District. They are registered societies of GoI & GoK under Chairmanship of the DC and specialise in low cost, pre-cast and innovative technologies in building construction Works where such technologies may be used can be directly entrusted to NK by local bodies upto any amount. However there must be savings of at least 10% over estimate based on current SR of PWD

Conclusions After salaries procurement is the second highest expenditure in Government hence is of utmost importance. Every organisation must have a procurement plan based on its need, inventory, objectives and budget. The plan should be detailed into a schedule with a strategy which may be annual or suitably periodic. In addition there should be a contingency/ emergency management plan Procurement options like tendering, R/C, entrustment etc to be deployed strategically so that procurement efficiency is achieved The bottomline is financial propriety and absolute integrity in handling public money.

& Wish You Efficient Procuring Thank You & Wish You Efficient Procuring