Public procurement: Periodic review of preferential treatment can ensure cost effectiveness

PSU preference in public procurement
Governments should apply the principle of competitive neutrality in public procurement in cases where no participant has any competitive advantage.

The Union government is taking steps to reform public procurement. It has transitioned from a century-old directorate general of supplies and disposals system to a modern government e-marketplace in August 2016. Since its inception, the GeM has achieved a gross merchandise value of Rs 3 lakh crore with total number of transactions crossing 1.3 crore. GeM has 66,000 government buyer organisations and more than 58 lakh sellers and service providers, offering a diverse range of goods and services.

The Union and state governments give preferential treatment to public sector enterprises (PSEs) vis-à-vis private sector suppliers. The preferential treatments include price preference, purchase preference, reservation, order preference, exemption from payment of fees or bid/performance securities, exemption from payment of taxes/ concessional taxes, award of contract on single source, direct budgetary support to loss-making PSEs, and higher advance payments.

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Public procurement obligations

For instance, the Pharmaceutical Purchase Policy 2013 reserves the procurement of certain medicines to central PSEs. Similarly, the government staff are required to make their air ticket bookings only through one of the three authorised agencies – Balmer Lawrie, IRCTC and Ashok Travels. Out of these three, the first two are government enterprises. The preferential treatment was more pronounced earlier before privatisation of Air India when all government staff were required to purchase air tickets from Air India only.

There are more examples. For products that require testing of samples, the manual for procurement of goods 2017 explicitly mentions a preference for National Test House (NTH), a government of India enterprise. Such preferences exist at the state level too.

A review of available information on the preferential treatments to state-owned enterprises under the Rajasthan Transparency in Public Procurement Rules reveals preferential treatment to SoEs/PSEs in several areas. The RTPP Rules 2013 require that professional services required by state enterprises, including preparation of detailed project reports, surveys, studies, and training workshops, need to be carried out by a central university, state university, national institute of technology (NITs), Indian Institute of Technology (IIT), Indian Institute of Management, National Law University, or Rajasthan Knowledge Corporation.

Further, professional skill development training for employment is to be conducted only by Rajasthan Skill and Livelihoods Development Corporation (RSLDC). In addition, all government books and reports are to be published by government-owned agencies.

Other examples of preferential treatment are goods and services related to IT and e-governance projects from Rajcomp or NIC, wood or steel furniture from Rajasthan Small Industries Corporation, coal purchase from Coal India, fertilizers and pesticides from Rajfed, IFFCO and KRIBHCO. In addition, there are 51 types of other goods, services and materials that need to be procured only from PSEs.

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Obligation of preferential treatment

The Union and state agencies need to orient their procurement policies to ensure the development of people on the one hand, and businesses on the other. There are several goods, works and services directly linked to people’s welfare, such as pharmaceutical products which need supply security and they directly impact the public health. The utility of this was experienced during the Covid-19 pandemic.

Some other products, such as defence and related products and products related to nuclear energy, are also susceptible and require a high level of transparency and accountability. Private enterprises may not always adhere to ensure complete transparency and accountability in the matter.

There are several other reasons for the preference for public enterprises as suppliers. Firstly, they are better suited for sensitive sectors such as atomic energy or space where confidentiality needs to be maintained. Secondly, these enterprises are not driven by profit motive and are willing to supply in a business segment, or geographical area not considered attractive by private suppliers. Thirdly, PSEs have emerged trusted suppliers of goods/services where government wants some control on price (for example, food grains or petroleum products for retail consumers).

Fourthly, PSEs are necessary to maintain competitive tension in suppliers’ market, so that private sector suppliers offer reasonable price. Fifth, there is lesser possibility of corruption allegations if government procures from these enterprises as procuring agencies need not worry about product and service quality while procuring from PSEs. Lastly, PSEs are important vehicles for implementation of policies of the government and in creating employment opportunities.

Another interesting characteristic of public enterprises is that these agencies are sitting on considerable amount of resources, knowledge bases, and expertise which needs to be optimally utilised in public interest.

Fetters of private sector enterprises

This policy of preferential treatment of the PSEs/SOEs by the government may negatively impact the private sector enterprises. Private sector suppliers are not able to participate in the bidding process. They are also constrained to invest in sectors and businesses where public agencies are operating. Supply market distortion (creation of monopoly, duopoly etc.) is another issue due to which buyers resort to government purchasers, though the buying agencies end up paying a higher price in many cases.

It is true that preferential treatment does not facilitate the creation of a level playing field for the private sector enterprises, making participation in many of the procurement exercises almost impossible. This prevents private sector enterprises from scaling up their operations and businesses. Importantly, such practice in Rajasthan does not appear to be in line with the fundamental principles of the RTPP Act 2012 which seeks to promote competition in public procurement.

The way forward

While it is important to ensure public welfare, it is also important to ensure a level playing field for both public and private sector enterprises in public procurement. Creation of a level playing field is critical for an inclusive public procurement ecosystem. Following measures may be considered for creating a better public procurement ecosystem in India.

Firstly, the government should provide preferential treatment to PSEs/SOEs in procurement of goods, works and services which have a direct influence on public welfare and development. Such preferential treatment, however, needs to be justified and should be limited to critical products and sectors. Secondly, such preferential treatment should be reviewed periodically based on evolving developmental priorities.

Thirdly, to address potential market distortions, governments should carefully apply the principle of competitive neutrality where no market participant has any competitive advantage, especially in routine products and services. Competitive neutrality does not imply that PSEs/SOEs that provide essential public goods and services should not be given preferential treatment; instead, it seeks to ensure a level playing ground for private entities.

Fourthly, it is also desired that even in the case of products and services where preferential treatment is allowed, the procurement system needs to ensure that in case of so many PSEs/SOEs which are into the production of similar goods or supply of similar services should compete among themselves. This periodic review and defined measures will definitely help in achieving the cost effectiveness, quality and healthy competition in public procurement.

(Madhu Sudan Sharma is Senior Programme Officer and Suresh P Singh Fellow at CUTS International, a global public policy research and advocacy group. Views expressed in this article are personal.)

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