How to overcome Hale-kallu-Hosa-billu syndrome and Rs 4.99 lakh magic!

In government, there has been a historical fear that private contractors will take public funds for a ride. And among the public, there is a historical fear that governments will award contracts to their preferred bidders, and make money through kickbacks. Both of these fears are quite genuine.

To address this, many governments have passed laws on how public procurement should be carried out. Karnataka also has passed such a law, the Karnataka Transparency in Public Procurements Act, (KTPP).

There are three broad rules under this act, which should provide the basis for better procurement, but as we will see below, they don’t do that. Which is why we need to rethink public procurement.

(1) All government contracting above a certain limit should be done through competitive bidding to select the contractor. In practice, what happens is that a lot of larger works are broken down in a much larger number of smaller works, which are then awarded without bidding. I heard one example recently where a department had carried out 500 works under the no-bid limit in the last year alone.

There is also a variant of this. In BBMP, for example, works above a certain limit have to be also approved by the Urban Development Department. To avoid that, BBMP will do a lot of work just under the limit – 4.99 lakhs worth of projects, I call them !! They’ll even break up projects in weird ways – footpath on the left side for 4.99 lakhs and footpath on the right side for another 4.99 lakhs, each as a separate project. People like Zaffar Sait and Naresh V Narasimhan have pointed to some very curious examples over the years.

(2) All competitive bids are judged on the basis of ‘lowest cost’. This is called an ‘L1’ contract. From among the bidders, you select whoever offers the cheapest solution. The problem with this is that the quality of work that different bidders can do is very different, and selecting the lowest bidder often ensures that the quality will be very poor.

In the KTPP Act, there are provisions to award non-L1 contracts also, but officials don’t use that provision. They are worried about auditors who might ask questions, and that their ‘judgment’ about choosing someone partly for quality and partly for price may turn out to be bad in hindsight. Some officials, like Manivannan Ias have suggested that we should have in-process audits, rather than post-facto audits, and this would allow better decisions by officials without fear of being pulled up later.

(3) The Act allows contracts to be awarded to government-owned entities without competitive bidding. I.e. BBMP can award a contract to the Land Army or to Keonics or such companies that are sarkar-owned without inviting bids from others. What ends up in such cases is that the work is immediately subcontracted to someone who can actually do the job – and the contracting govt agency is just a front end that collects a commission to pass contracts to a private organisation without competitive bids. I know of at least one case where a Rs.45 crore contract was sought to be directly sub-contracted to a German company at 10 times the value, and that would have happened too, if some good souls in the system had not intervened (until recently, German law allowed payment of bribes as a business expense).

Net-net, what we see is that while the law is well intended, there are many operational realities that have rendered its provisions useless. I.e. they do nothing to prevent the collusion and pilfering that made the law necessary in the first place.

Not only that, the law has made contracting with good contractors much harder. In a system that is rife with kickbacks, non-performance, low quality, and other defects, the really competent product makers and service providers simply choose to stay away. That’s why, for example, BBMP’s drains are not built by engineering companies – they are built by ‘concrete mix’ vendors, whose indsutry slogan, I jokingly say, is “halle kallu, hosa billu”.

Recognising all this, I proposed that we should enact a new public procurement law. At least a few IAS and IPS officers also feel this is necessary, and we could take all their inputs in crafting such a law.

I wrote a first draft some time ago, and plan to show it to a few people to see how it can be improved. Thereafter, we’ll need to work with legislators too, to get their support for a much stronger system of contracting and public procurement.

The Government of India, I understand, is also working on a model procurement law, and as and when that is ready, it could also provide a template for better purchasing in government. But that need not stop any of the states from doing this first.

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