Presentation on public procurement and competition concern11

 Public procurement can be defined as the procurement activities undertaken by
a public authority using public funds to obtain goods, services and technologies
essential for it to carry out its business.
 Size: Public Procurement contribute 15-20% of GDP
(SOURCE The Public Procurement
Bill, 2011 Planning Commission Government of India.) It is governed by General
Financial Rules (GFR) and Delegation of Financial Powers Rules (DFPR)
 Contribution of Department like Defense,Railway,Telecom : 50%
 26% Health Budget Contributed to Public Procurement
(Source: Special address by Shri Pratyush Sinha, Former CVC-
Competition, Public Policy and Common Man,16th November 2009)
 Total annual expenditure of around 15-20 Lakh Crores and that for Union
Government alone in the range of Rs. 2.5 – 3 Lakh Crores
 Objective Of Public Procurement:
As public resource are limited the primary objective of public procurement is to
achieve value for money i.e. to procure best good and service at lowest cost.

One of most common mechanism of public procurement is
tendering system. It Involve following stages:
 Identifying prescribe technological specification or standard by
government or authority concerned.
 Invite Tender from various parties. Technical and Financial Bids
are invited separately.
 Evaluation of Technical Bid. This help to shortlist bidder whose
financial bid are to evaluated.
 Evaluation of financial bid of shortlisted bidder. After that
bidder that can provide goods and service to govt at lowest
price are identified.
 Executing legally binding contract with shortlisted bidder.

1.Railways: During the year 2009-10 the total expenses of Indian Railways were Rs.829
billion. The budget for procurement alone was Rs.279 billion
The procurement was done for items for manufacturing, fuel, and items for construction
as:
 About 40% was for purchase of items required for manufacturing
 30% for purchase of items required for repairs, operation and maintenance
 27%for purchase of fuel and remaining for purchase of items required for
construction
(SOURCE: Public Procurement- a case study of the Indian Railways
(Bodhibrata Nag Associate Professor, IIM Calcutta, D. H. Road, Joka P.O., Kolkata 700 104
India)
2.Public Health Care System: The health expenditure is about 4.5% of the GDP out of
which 0.84 % is public expenditure and 3.32 % private and the remaining from other
sources including external flow.
About 25 to 35 percentage of the Government hospital budget in India is spent on drugs
and other pharmaceuticals .
(SOURCE: http://aims.amrita.edu/school-of
pharmacy/pdfs/Emerging%20trends%20in%20medicine%20procurement%20in%20gov
ernment%20sector%20in%20India.pdf )

3.Defense:
 The Union Budget 2012-13, has allocated US $40.3 billion for the Defence Services that
include the three armed forces (Army, Navy and Air Force), the Defence Research and
Development Organization (DRDO) and Ordnance Factories.
 India’s defence budget is broadly divided into two categories: Revenue Expenditure and
Capital Expenditure
a.Revenue Expenditure: ‘running’ or ‘operating’ cost of the defence services. The
Revenue Expenditure has increased by 19.5% to $ 23.7 billion
b.Capital Expenditure: procurement of big items such as tanks, aircraft and aero engine,
ships, submarines etc. The Capital Expenditure has increased by 15% to $16.6 billion.
(SOURCE: http://www.defencereviewasia.com/articles/169/India-s-Defence-Budget-
2012-13)
4.Telecom:
 Government of India has allocated an amount of Rs.30 billion in the Budget Estimate
(BE) 2012-13 out of which an amount of Rs. 25.46 billion has been allocated for
creation of National Optical Fiber Network (NOFN) for Broadband connectivity to 2.50
lakh Village Panchayats of the country which has been approved by the Cabinet.
 Government is also going to provide Broadband connectivity at a cost of approx. Rs. 200
billion to all 250 thousand Gram Panchayats.

 Competition is another important principle which plays a pivotal role in
achievement of the objectives of a procurement system.
 The purpose of competition is that the government as a procurer gets the
best product/service at the best terms and of best quality, on one hand, and
on the other, ensures fulfilment of the objectives laid down by horizontal
policies.
 It is also argued that competition motivates suppliers to put forward the
best possible offer to win the contract which, in turn, benefits the procuring
authority by facilitating the procurement of a cost effective option.
 Hence, from the international trade perspective, competition can be said to
induce efficient functioning of markets.
 Competition perspectives can be discerned both in the domestic process of
conducting procurement, and in allowing international participation in
procurement activity by the government.

3 –Cs : I) Central Vigilance Commission (CVC)
ii) Comptroller and Auditor General (CAG)
iii) Competition Commission of India (CCI)
 CVC : Issues guidelines and instructions to curb corruption in
PPS – SOP issued by all Govt. Departments and PSUs
 CAG : Monitors the deficiency and violations in the procedures
and mechanism of PPS
 CCI : Regulates competition in PPS – prevents and punishes
anti competitive conduct or practices by Govt. Departments
and enterprises

Definition - Bid rigging : Highly pernicious form of collusive price fixing
behaviour where bids are obtained to earn and distribute higher profits
forms of bid rigging :
 Collusive bidding :Agreement between firms to divide the market, set
prices or limit production – involves, kickbacks and misrepresentation of
independence
 Bid rotation: Conspiring firms continue to bid but they agree to take
turns of being the winning bidder
 Cover bidding: also called complementary or symbolic bidding- where
the bidder agrees to submit bid i.e. Higher than the designated winner or
puts certain conditions unacceptable to the procurer to favour winning
bidder
 Bid suppression: Bidders agree to refrain from bidding or withdraw the
bid in favour of winning bidder
 Market allocation: Bidders for different geographical areas allocate the
market and based on such understanding bidding takes place as designed

The following factors are helpful in detecting bid rigging
 The same supplier is often the lowest bidder.
 There is geographic allocation of winning tenders. Some firm submit tender
that win in certain geographical areas.
 Some supplier unexpectedly withdraw from bidding
 Bid document from different company indicate numerous last minute
adjustment such as use of erasers or other physical alteration.
 A large difference between price of winning bid or other bid.
 A certain supplier bid for particular contract is much higher than supplier
bid for another similar contract.
 Only one bidder contact wholesaler for pricing information prior to bid
submission.
 Supplier meet privately before submitting bid sometime in vincity of
location where bids are to be submitted.

S.No Case Factor which established
agreement for bid rigging
1. Re: LPG Cylinder Manufacturers Suo
Moto Case
Identical price quotations.
2. Foundation for common cause and
people awareness Vs PES Installation Pvt
Ltd and Ors + Gulshan Verma V. UOI and
Ors.
Commonality of mistake in tender form
3. Re: Aluminium Phosphide Tablet
Manufacturer Suo Moto Case
 Identical bid price
 Common entry in premises of FCI
before submission of bids.
4.
5.
Coal India Ltd Vs GOCL Hyderabad
and Ors.
Shri BP Khare, Principle Chief Engineer,
Southern Eastern Railway, Kolkata Vs
M/s Orrisa Concrete and Allied Industry
Ltd. And Ors
 Collective boycott of e auction
 Identical Prices
 Controlling the supply of
explosives.
 Identical Rates
 Division of Quantity
 Similar Handwriting
 Format of covering letter
 Tender fee payment
 Past Conduct

1.Coal India Limited v. GOCLHyderabad & Ors., Case No. 06 of 2010
 An information was filed by M/s Coal India Ltd. against explosive
manufacturers/ suppliers in India along with their associations, for their alleged
anti-competitive acts.
 In this case, the Commission found the acts and conduct by the opposite parties
therein of boycott of e-reverse auction together with their past conduct of
quoting identical rates and controlling the supply of explosives as sufficient to
establish that the same was done with a view to manipulate the process of
bidding in violation of section 3(3)(d) of the Act.
 The Commission apart from issuing a cease and desist order imposed a penalty
upon each of the contravening party@ 3% of the average turnover of the
company.
 However, COMPAT vide its common order dated 18.04.2013 passed in Appeal
No. 82 of 2012 and other connected appeals after considering the aggravating
and mitigating factors reduced the penalty to the extent of total of 10% penalty
imposed by the Commission

 The commission has ordered suomoto investigation against the four public sector
general insurance companies, namely, National Insurance Co. Ltd., New India
Assurance Co. Ltd., Oriental Insurance Co. Ltd. and United India Insurance Co.
Ltd complaint alleging contravention of the provisions of section 3 of the Act. It
was alleged that these four insurance companies had formed a cartel for
increasing the premium for Rashtriya Swasthya Bima Yojna (RSBY) of Government
of Kerala.
 After a detailed investigation by the DG, the Commission imposed a total penalty
of Rs. 671.05 crore on the said four public sector insurance companies for
manipulating the bidding process initiated by Government of Kerala for selecting
insurance service provider for RSBY.
 It noted that the impugned conduct of these companies resulted in manipulation
of the bidding process in contravention of the provisions of section 3(1) read with
section 3(3) (d) of the Act.
 Accordingly, it imposed penalties of Rs. 162.80 crore, Rs. 251.07 crore, Rs. 100.56
crore and Rs. 156.62 crore on National Insurance Co. Ltd., New India Assurance
Co. Ltd., Oriental Insurance Co. Ltd. and United India Insurance Co. Ltd.
respectively for the impugned conduct.

 The Commonwealth Games 2010 have been subject to numerous charges of anti
competitive practices in its procurement process.
 The CAG has estimated the cost of creating venues and city infrastructure as well
as the operational expense of hosting the Games at Rs. 12,888 crore.
 There have been irregularities made by the Organizing Committee (OC) in the
procurement of various items for the CWG which include the hiring of treadmills
for 45 days for Rs. 9, 75,000 when such machines can be bought for Rs. 7 lakh.
 There has been subversion of fair procurement practices on the following
grounds:
 Tenders were awarded bypassing usual bidding norms.
 In many cases there was no written contract, nor was there a tendering process.
 There was no tendering made for the hiring of vehicles for example.
 In some cases, the successful bidder was allowed to tamper with the figures post
auction
 In the construction of flyovers, stadiums, lane strengthening and widening,
upgrading street light, power plants, sewage plants, water treatment plants and
bus parking lots, bidding norms were bypassed

 Works have been awarded at higher rates despite which there have been poor
site management, delays and quality compromises
 According to the CVC report, there has been scanning of sixteen Games
projects and there has been discovery of competition issues with one or more
of the scenarios manifesting themselves
a. Either open tender has not been floated.
b. Either bidders have colluded among themselves or both bidders and procurers
have colluded.
 The Common Wealth Games Case shows, how unguarded procurement leads to
bad quality works and loss to exchequer. A competitive procurement process,
guided by rules and legislative framework not only provides good quality work
but also gives value for money.
 Thus it may be inferred as learning from this case that procurement process
whether distorted by corruption or otherwise, they necessarily have
diminishing returns for money spent and competition brings increasing returns
for money spent in the procurement process.

The Commission is empowered to inquire into cases of anti-competitive
agreements and cartels :
• either on its own motion or
• on receipt of information or
• on reference made to it by the Central Government or State Govt. or statutory
authority
In case the Commission is convinced that prima facie case exists, it shall direct the
Director General to investigate and furnish report
POWERS OF THE COMMISSION
After the inquiry, the Commission may pass inter- alia any or all of the following orders under
section 27 of the Act:
 direct the parties to discontinue and not to re enter such agreement
 direct the enterprise concerned to modify the agreement
 direct the enterprises concerned to abide by such other orders as the Commission
may pass and comply with the directions, including payment of costs, if any
 pass such other orders or issue such directions as it may deem fit

After inquiry if contravention is established, the role of commission to avoid bid
rigging are
1. Enforcement:
 Direct any enterprise or associations of enterprises or person or associations of
persons to discontinue and not to re-enter such agreement or discontinue abuse
of dominant position
 Impose such penalty as it may deem fit not exceeding 10% of the average of the
turnover for the last three preceding financial years upon each of person or
enterprise
 If any anti-competitive agreement was entered into by cartel, it may impose
upon each producer, seller, distributor, trader, or service a penalty of up to
three times of its profit for each year of the continuance of such agreement or
ten percent of its turnover for each year of the continuance of such agreement,
which ever is higher .

2.Advocacy: Many competition authorities are also involved in advocacy efforts to
increase awareness of the risks of bid rigging in procurement tenders. There are many
examples of educational programs to this end. Some authorities have regular bid rigging
educational programs for procurement agencies; others organize ad hoc seminars and
training courses
 These outreach programs have proved extremely useful for a number of
reasons:
 They help competition and public procurement officials to develop closer
working relationships;
 They help educate procurement officials about what they should look for in
order to detect bid-rigging through actual examples of bidding patterns and
conduct which may indicate that bid-rigging is occurring;
 They train procurement officials to collect evidence that can be used to
prosecute better and more effectively bid rigging conduct;
 They help educate public procurement officials and government investigators
about the cost of bid rigging on the government and ultimately on the
taxpayers; and
 They warn procurement officials not to participate in bid rigging and other
illegal conduct which undermines competition in procurement tenders

 During the pendency of an inquiry, the Commission, may by order,
temporarily restrain any party from carrying on acts prohibited under the
Indian Competition Act, until the conclusion of such inquiry or until further
orders, without giving notice to such party, where it deems it necessary .
 The Indian Competition Act also empowers the Commission to grant
leniency by levying a lesser penalty on a member of the cartel who
provides full, true and vital information regarding the cartel. (Section 46)
 The Competition Appellate Tribunal (COMPAT) is established under Section
53A to hear and dispose of appeals against any direction issued or decision
made or order passed by the Commission under specified sections of the
Act. An appeal has to be filed within 60 days of receipt of the order /
direction / decision of the Commission.

 Full information about the market
 Maximize participation of credible bidders – wider choice and to reduce
unreasonable requirements/conditions
 Avoid ambiguous drafting of the specifications/terms of reference – avoid
bias or discrimination – focus on functional performance rather than
product description
 Design of tender process : Avoid joint bids, subcontracting, repeated joint
interaction, imposing reserve price
 Avoid non-compete clauses
 Evaluation criteria : Technical and financial evaluation should be fair and
transparent
 Innovative bidding models: e-auction – price transparency and avoid
corruption – Ascending clock auction (in discovery of price of 3G
spectrum)

Developing countries exhibit segmented product markets, discretionary
government regulations and considerable corruption, hence they tend not to have
a very competitive environment. There are considerable barriers to entry and exit,
and policies often favour large firms in access to finance and other measures.
There are numerous micro-enterprises, most sectors are dominated by a few firms,
providing scope for abuse of dominant position. Such abuse appears to be
widespread. Jenny (2006) lists the following for Africa alone:
 Concentration in trade and (purchasing) price fixing agreements among traders –
coffee in Kenya, cotton, tea, tobacco in Malawi, fish processors and exporters in
the Lake Victoria region
 Inflated prices for inputs, particularly chemical inputs – fertilizer tender cartel to
Kenyan Tea Development Authority
 Banking services – concentrated in South Africa and Uganda

 Chicken price fixing – Zambia
 Milling cartelization – Malawi, Zimbabwe, Zambia.
 Monopolies in foodstuffs- milk and sugar in Malawi
 Soft drinks – acquisition of local bottlers by multinational firms results in high
structural concentration – Kenya (merger part allowed by Kenyan competition
authority). Anticompetitive vertical restraints – Kenya (quantity forcing, retail
price maintenance or suggested retail price), Zambia.
 Retailing – South Africa.
 Passenger Transport (buses, taxis, airlines etc.) – Matatu owners cartel in Kenya,
Taxis in Cape Town.
 Oil company cartel-like behaviour in Kenya, Tanzania, Uganda, Zambia
(prosecutions for price fixing), Malawi, South Africa
 Construction materials – Cement monopolies or cartels - Malawi, South Africa
(officially sanctioned cartel to 1996), Tanzania and Zambia.
 Professional services – recommended Attorney fees - South Africa; health care
fees – South Africa; surveyors’ cartel – Zambia.
 Insurance services – price fixing in Kenya.

 The Commission rejected actor producer Ajay Devgn's allegation of abuse of dominant
position by Yash Raj Films (YRF) and held that there was no violation of Competition Act
in the case.
 Ajay Devgn Films Pvt Ltd (ADF) had moved the Commission alleging that YRF was abusing
its dominant position by asking exhibitors to dedicate more screens to its upcoming
release, Shahrukh Khan-starrer 'Jab Tak Hai Jaan', affecting ADF's film 'Son of Sardaar‘
 In the order, CCI observed, "The act of booking theatres by a distributor for its two films
simultaneously when the theatre owners have the liberty either to agree or not to agree
is not a restraint on the freedom of business of theatre owners. The theatre owners can
wait for other films and can refuse to book their theatres simultaneously for two films
 CCI, while issuing restraint orders, had to keep in mind the overall exhibition market and
not a particular period of the market. No enterprise can be considered dominant on the
basis of just big name. Therefore, the claim of ADF that opposite parties were dominant
players in the relevant market of 'film industry in India' was not accepted.
 ADF filed appeal in the Competition Appellate Tribunal (COMPAT) against the order of
CCI. The COMPAT also refused to stay the YRF's tie-up with single screen theatres across
the country for the release of its film 'Jab Tak Hai Jaan'. The COMPAT said, "Huge
economic interests are at stake for both the parties.

 E-Procurement of stock items has been introduced in Indian Railways to the
extent of over 70 per cent.
 Threshold limit for issue of open tenders has down in GFR, 2005. This has
increased the number of open tenders considerably thereby enhancing the
participation of new 22 entrants who would otherwise have been left out
because of higher threshold limit prescribed in GFR, 2005.
 Government of India has started Indian Government Tender Information
System www. tenders.gov.in which details tenders floated by Central
government ministries/departments, PSUs, State governments, public sector
banks and other organisations separately for goods, services and works. It is a
major step towards increasing transparency and also to ensure that no
prospective bidder misses an opportunity to participate in the tenders.

 Ensuring effective functioning of public procurement in markets is a part of
good governance. This necessitates addressing the challenge of promoting
effective competition among suppliers and preventing collusion amongst the
potential bidders.
 The competition law explicitly prohibits collusion among the bidders which
ultimately affects the public exchequer and causes loss to public money.
 Fair dealing in public procurement will not only help the procurer to get the
best deal but also help the country to use its resources effectively.
 Reducing collusion in public procurement requires efficient regulatory
mechanism, strict enforcement of competition laws and awareness among
public procurement agencies at all levels towards the adverse impacts of
collusion.
 To sum up, the policy planners, public procurement officials and CCI should
work together as a team to deter bid rigging through robust enforcement,
increased vigilance, and better designed public procurement programs.

Presentation on public procurement and competition concern11

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