Big Bang Reform, Quietly Done: 'L1' Will No Longer Be Default Way To Select Contractors For Government Projects

Prime Minister Narendra Modi, who was criticised by even his supporters and sympathisers before 2019 for being slow on economic reforms or doing tinkering here and there, seems to have put his foot on the accelerator in his second term.

The government hasn’t allowed itself to be disturbed by the Covid-19 crisis and has treated it as an opportunity to quicken the pace of reforms. The idea perhaps was to build a solid foundation during the world wide slowdown so that economy is able to fire on all cylinders when things return to normalcy.

Though the Modi government has been quite vocal in advertising all the key reforms, it went about quietly while executing one of the biggest of them. On 29 October, the Public Procurement Division in the Ministry of Finance published a notification issuing general instructions to radically overhaul the public procurement process of the Centre.

The lowest cost selection method, popularly known as L1, will no longer be the default way to select contractors for government projects in the tendering process. Industry as well as experts have been strong critics of the L1 process which has been repeatedly labelled as the bane of public procurement in the country, accused of compromising on quality because the entities that bid the lowest end up winning the project and many times delivering sub-standard product or service or even failing to finish the work on time leading to long delays, cancellation and re-tendering thereby costing the exchequer dearly.

The Economic Survey had also batted for this reform. In the chapter ‘Process Reforms: Enabling decision-making under uncertainty’ of Volume 1, it had noted that the L1 method has persisted because it’s considered as a regulatory default mechanism.

“No decision maker wants to exercise discretion for the fear of future questioning. This criteria may appear simple and quantifiable, however, in a complex world where it may not be possible to define everything in the pre-procurement process, it is advisable to leave some discretion in the hands of administrators along with maintaining enough transparency and active supervision,” the Economic Survey had stated.

With revised guidelines, all this may become history now.

“Finally !! L1 (Lowest Cost) dismantled as ONLY bidding format .Govt procurement guidelines of 29 Oct now allow all non-standard works to be bid out under QCBS method - i.e combination of technical & quality scores .Weight of non-financial scores cannot >30%. Major reform!,” (sic) infrastructure expert Vinayak Chatterjee tweeted celebrating the move.

But it’s not just the L1 method that has been revamped but other important aspects of procurement that have been changed which, if followed in letter and spirit, will drastically improve the business environment at least with respect to the government related works.

The five major changes in the latest ‘general instructions’ are as follow:

First, the government entities have now been allowed to use quality-cum cost based selection (QCBS) for procurement of works on the condition that it’s a quality oriented procurement (QOP) and for non-consultancy services if the value of the procurement doesn’t exceed Rs 10 crore. The weightage of non-financial parameters has to be less than 30 per cent.

Many would be disappointed with this cap as the majority weightage is still given to the cost, but it’s still a big step in the right direction and the upper limit can be relaxed later on. Ditto for Rs 10 crore limit regarding non-financial transactions. The amount is too less given the usual size of contracts these days but it’s a minor quibble.

Earlier, QCBS could be resorted to by the government only for consultancy services and special projects. Now, this would become the standard method for all non-standard works where quality is of concern.

Since only QOP projects can be tendered via QCBS, ministries, departments or central public sector enterprises will have to constitute a special technical committee which will comprise of experts in the work being contracted, procurement, financial management, etc and this committee will declare a certain procurement as QOP.

“A procurement should be declared as a QOP only if there is enough justification in terms of value addition or enhancement of delivery or paramount importance of quality,” the instruction says.

Second, the revised guidelines have junked the common practice of rejecting a single bid by procuring entities during open tenders. “It has become a practice among some procuring entities to routinely assume that open tenders which result in single bids are not acceptable and to go for re-tender as a ‘safe’ course of action. This is not correct,” the instructions say.

“Lack of competition shall not be determined solely on the basis of the number of bidders. Even when only one bid is submitted, the process should be considered valid provided the procurement was satisfactorily advertised and sufficient time was given for submission of bids, the qualification criteria were not unduly restrictive and prices are reasonable in comparison to market values,” the general instructions state.

The government has given three reasons for this. There is a cost attached to re tendering which puts the burden on the finances. More importantly, it leads to “delay in execution of the work with consequent delay in the attainment of the purpose for which the procurement is being done". Lastly, there is good chance that the re-bid may result in a higher bid, again increasing the cost for the agencies.

Third major change is about payment to vendors. The guidelines admit that delay in payment to contractors leads to delay in execution of projects, cost overruns and disputes and thus it has mandates that ad-hoc payments of at least 75 per cent of eligible running account bill/due stage payment be made within 10 working days of the submission of the bill by contractors and even remaining payment has to be made within 28 working days of the submission of bill. And if there is delay beyond 30 working days, there is provision under which contractors can be paid interest on the due amount.

This time-bound payment schedule and declaring a sort of self-punishment for violating the contract, the government has shown how serious it is about improving the ‘ease of doing business’. This should instil immense confidence in the industry.

Fourth, the government has noted a big flaw in how its entities operate in case of legal disputes with contractors. Whenever there is a ruling against it, the default modus operandi is to go for appeal and challenge the decision. Of course, in most cases, the end result doesn’t change and the government ends up wasting precious time and resources. If the latest guidelines are implemented, this will also change.

”In such cases, the amount becomes payable with interest, at a rate which is often far higher than the government's cost of funds. This results in huge financial losses to the government. Hence, in aggregate, it is in public interest to take the risk of paying a substantial part of the award amount subject to the result of the litigation, even if in some rare cases of insolvency etc. recovery of the amount in case of success may become difficult,” states the notification.

The latest instructions state that "decision to appeal should not be taken in a routine manner, but only when the case genuinely merits going for the appeal and there are high chances of winning in the court/higher court".

In future, procuring entities that have lost a case will need to set up special board/committee to review the case before an appeal is filed against an order and only after considering both legal merits and the practical chances of success “and after considering the cost of, and arising through, litigation/appeal/further litigation, as the case may be, it is satisfied that such litigation/appeal/further litigation cost is likely to be financially beneficial compared to accepting the arbitration/court award,“ the appeal can be filed.

It’s an open secret that the government is the largest litigator in the country. It has taken a big step in reducing the load at least in disputes related to procurement.

Fifth, even for consultancy services, the revised guidelines have provided an additional method of procurement apart from L1, single source selection and QCBS. The procuring agencies will be able to also resort to fixed budget based selection for consultancy proposals which allows them to specify a specific budget as the cost of consulting services in the tender document itself.