Modi govt considering NITI Aayog plan to change how bidders are selected for procurements

Govt think-tank suggests several alternative options to the ‘least cost selection’ method, which has been criticised for years for ‘compromising’ quality.

The NITI Aayog office in New Delhi | Photo: Manisha Mondal | ThePrint

New Delhi: The Narendra Modi government is considering a NITI Aayog proposal to review the way bidders are selected for public procurements, ThePrint has learnt.

The recommendation is part of a larger proposal to amend the General Financial Rules, 2017, a compilation of rules and orders of the Government of India that anyone who deals with matters involving public finances has to follow.

Senior government officials told thePrint that the government’s think-tank has produced a paper suggesting several alternative options for the ‘least cost selection’ method (or L1), which is commonly employed to select bidders for public procurements.

It has also suggested ways to make the L1 method more effective, after years of criticism that it compromises with the quality of products or services procured by the government, since this is done at the lowest cost quoted by a bidder.

The officials said the NITI Aayog paper, which is under the government’s consideration, has noted that the current L1 method results in suboptimal delivery, non-performance, higher life-cycle cost, delays and arbitrations, particularly in critical projects requiring state-of-the-art technology.

ThePrint reached Dhiraj Singh, official spokesperson for the NITI Aayog, for a comment through calls, an email, and a text message. Singh said he would forward the queries to the relevant officials, but there was no response received until the time of publishing this report.

ThePrint also approached Rajesh Malhotra, finance ministry spokesperson, through a text message to seek a comment, but he didn’t respond either.

Flexibility in current rules

A former finance ministry official, who did not wish to be identified, said the current rules do offer a lot of flexibility to the procuring agency.

“While earlier, bidder selections were only cost-based, the system has evolved over time and allows the bidder to exercise discretion on quality, and also eliminate non-serious bidders who quote extremely low prices for what they offer,” the official said, adding it remains to be seen what changes are being proposed to the GFR.

While public procurement is a complex process and is guided by an intricate set of rules, they can be broadly categorised into two types: The L1 method and the ‘Quality and Cost Based Selection’ (QCBS) method. A bid is usually submitted in two parts — a technical bid (covering the qualitative requisites of the tender) and then a financial bid (covering the cost aspects).

The rules mention that the L1 method is appropriate for assignments of a standard or routine nature (such as audits and engineering design of non-complex works) where well-established methodologies, practices and standards exist. Bidders selected through this process need to meet some basic technical qualifications, but the winning bidder is selected solely on the basis of the lowest price quoted.

The QCBS, meanwhile, is employed in procurements where quality is of utmost importance. There is a separate qualifying score for the quality of the proposal based on technical requirements, and a separate score on the cost. The proposal with the highest weighted combined score (quality and cost) bags the contract.

There are other rules in the GFR 2017 for products or services for which there is no competition in the market.

Former finance secretary Subhash Chandra Garg also pointed out to ThePrint that the L1 process is not a universal system, but is used only for standard commodities which anyone can sell. For other kinds of works and high-value procurement, there are appropriate processes like the “two-envelop bidding system” or QCBS.

“These other methods take very good care of procurements of complex nature requiring quality participation, including in cases of disinvestment and larger works,” Garg said.

He explained it was important to diagnose the procurement first to fix the eligibility criteria and pick the correct procurement process, instead of trying to amend the processes themselves.

“For example, eligibility criteria should be designed carefully so that low standard-products don’t come (into the picture) at all. There is also the reverse-bidding process which has been tried successfully in coal,” Garg said.

Alternative models proposed

Sources said an alternative option recommended by the NITI Aayog is the lowest reasonable cost (LRC) method.

A NITI Aayog official told ThePrint that this method could be applied for non-complex procurements where quality of the goods is critical and where bidders resort to abnormally low bids, or go for “predatory pricing” to win the contract.

The LRC among shortlisted bids would be arrived at through certain calculations on the basis of the highest- and lowest-cost bids.

The NITI Aayog official said the LRC method is important especially to weed out non-serious contenders who quote abnormally low prices to get the contract.

“In such cases, they might win a contract by virtue being the L1, but the quality of the service or goods will suffer. The LRC may help tackle this,” the official said.

Another aspect of the GFR that the NITI Aayog paper wants to change is to expand the QCBS method to procurement of non-consultancy services, goods and works where the quality factor is critical.

“It is important in specialised, state-of-the-art projects where quality is of prime concern,” the NITI Aayog official said.

Officials also said the paper looks at making the L1 method more effective, particularly to be used in procurement of products of a “standardised nature”.

The paper has recommended specifying the required quality of a product, better market research and pre-bid consultations by officials involved, and keeping the life-cycle cost of a product in mind, during evaluation of the bids.

Other suggestions

Government officials said other suggestions made by the paper include putting in a performance rating system for contractors. Incorporating it into the bid evaluation system will urge the vendors to maintain the quality of the goods and services they provide, the think-tank has recommended.

“It has been suggested that vendors with a better past performance record and fewer disputes and litigations will have a better rating and thus a better chance of getting future contracts,” another government official said.

One of the suggestions is to set a threshold rating, and only those vendors above it will be considered in further rounds of evaluation.

“This will eliminate those contractors who have a poor track record and will help shortlist only those with a proven record of performance,” the official said.

The NITI Aayog’s paper has also recommended that instead of providing separate bank guarantees for different government contracts by the same contractor or service provider, there should be a provision of an omnibus bank guarantee, the amount of which will be determined by total quantum of works being handled by the service provider.