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© Luthra & Luthra Law Offices Government Contractors in India: Challenges and Opportunities Mohit Saraf Senior Partner.

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Presentation on theme: "© Luthra & Luthra Law Offices Government Contractors in India: Challenges and Opportunities Mohit Saraf Senior Partner."— Presentation transcript:

1 © Luthra & Luthra Law Offices Government Contractors in India: Challenges and Opportunities Mohit Saraf Senior Partner

2 Opportunities for US companies in India Defence and aerospace  11% hike in India’s defence budget – defence budget for the year 2011-12 USD 36.35 billion  Deals worth USD 25 billion signed in the last four years  The defense ministry is also expected to spend about USD 100 billion in the next five years on defence acquisitions  Three U.S. companies (Boeing, Lockheed Martin and GE Aviation) have bagged around 42 percent of total national military contracts worth nearly USD 3.75 billion between March 2008 and October 2010

3 E governance and software solutions  The Government of India plans to spend as much as USD 10 billion only e- governance procurement and initiatives  Companies like IBM, HP and Microsoft, with their vast experience and expertise have also been the first to get the most of the home projects - most of the e- expenditures are on green field projects and US companies, which are mostly product based and provide end to end consultancy get an edge over the Indian companies which are predominantly service oriented.  50% of the e-governance contracts are bagged by the US companies Few examples IBM has won a contract worth USD 450 million for Income tax network project being implemented by the Central Board of Direct Taxes Accenture has bagged the project with Unique Identification Authority of India (UIDAI) for biometric solutions worth USD 45 million. IBM, HP and Accenture were bidding for the USD 450 million project for the management of the Unique ID program implemented by the UIDAI. Although, IBM and HP have pulled out recently, Accenture is still in the race. www.luthra.com 3

4 Infrastructure Contracts  India is investing close to 9% of its GDP in infrastructure, of which nearly half is expected to come from the private sector.  Total investment in infrastructure is expected to be USD 1 trillion. Out of this, around USD 500 billion is expected to be made by the private sector – US is expected to have a big share in the pie  Post President Obama visit, the US Assistant Secretary of State for Economic, Energy and Business Affairs Mr. Jose W. Fernandez visited India to identify opportunities in Indian infrastructure. www.luthra.com 4

5 Legal framework governing public procurement  Constitutional mandate: Article 299 of the Constitution of India mandates that all contracts made in the exercise of the executive power of the Union of India, or by a State Government, shall be made in the name of the President of India or by the Governor of the State, as the case may be, and be executed on their behalf.  General Financial Rules, 2005 (GFRs): Objective: Every authority, delegated with financial powers for procurement is required to act in such manner so as to bring efficiency, economy, transparency in matters relating to public procurement and for fair and equitable treatment of suppliers and promotion of competition in public procurement. The GFRs are further supplemented by the Manual on policies and procedures for purchase of goods and Delegation of Financial Powers Rules, 1963.  GFRs provide guidance for procurement, however they are not binding procedures for award of contracts. www.luthra.com 5

6  Procurement by state government: Procurement by departments of state governments/ state public sector undertakings are governed by specific acts and rules enacted by the states. Although specific acts have been enacted by only few states, almost all states have issued state procurement /financial rules.  Departmental Manuals and Procedures: Certain departments and public sector undertakings have their own specific manuals which govern their procurement procedure. For example, the Ministry of Defence, the National Highways Authority of India, the Public Works Department, the Hindustan Aeronautics Limited etc. have their own procurement manuals and procedures.  Guidelines issued by the Central Vigilance Commission (CVC): CVC is a body exercising general check and supervision over vigilance and anti-corruption work in ministries and departments of the Government of India (GoI). From time to time, the CVC issues circulars which are required to be followed during procurement of goods and services by the ministries and the departments. These circulars further aim at increasing transparency and objectivity in the procurement process. www.luthra.com 6

7 General Financial Rules, 2005  Rule 160: Aims at promoting transparency, competition, fairness in the procurement process: It provides the following rules, inter alia: the text of the bidding document should be self-contained and comprehensive without any ambiguities; the bidders should be given reasonable time to send their bids and the bids received should be evaluated in terms of the conditions already incorporated in the bidding documents. No new condition should be brought in for evaluation of the bids; Negotiation with bidders after bid opening must be severely discouraged; Factors to be taken into account for evaluating the bids and the criteria for awarding the contract to the responsive lowest bidder should be clearly indicated in the bidding documents. www.luthra.com 7

8  Rule 161. Aims at promoting Efficiency, Economy and Accountability in Public Procurement process: To achieve the same, the following keys areas should be addressed: Appropriate time frame for each stage of procurement should be prescribed by the Ministry or Department to make the concerned purchase officials more alert. To minimize the time needed for decision making and placement of contract, every ministry / department, with the approval of the competent authority, may delegate appropriate purchasing powers to the lower functionaries. The ministries or departments should ensure placement of contract within the original validity of the bids. Extension of bid validity must be discouraged and resorted to only in exceptional circumstances. www.luthra.com 8

9 Indian Markets: have not always been an easy road? It has been witnessed that despite all this, foreign companies have, in the past and even recently, faced challenges in India. Let us have a look at some of these instances: The Bofors Scam The Enron Saga (Dabhol Power Project) Few recent illustrations: Purchase of French Scorpene submarines; Purchase of Russian aircraft carrier Admiral Gorshkov; Withdrawal of IBM and HP from the UIDAI project upon allegations of lack of transparency – although the allegations have not yet been confirmed Allegations of Boeing and Lockheed Martin about non-transparent functioning of the MoD in the Multi Medium Role combat aircraft (MMRCA) deal www.luthra.com 9

10 Key Challenges in Government Contracts 1. Multiplicity of laws and lack of a nodal agency: Need for a national legislation and a single agency for policy formulation and interpretation. In this regard, India has a lot to learn from experience across jurisdictions. For example, the Federal Acquisition Regulations (FARs) and the functioning of the Office of the Federal Procurement Policy in the US. 2. Need for improved techno-commercial expertise in procurement process: Presently, most departments do not have specialized cadre of officers having the technical skill & knowledge/ commercial understanding. Such lack of skill/ expertise may result into several deficiencies in the procurement process, for example, inefficient formulation of Request for Proposals, technical specifications and other tender inviting documents. This also presents the risk of imperfect evaluation of bids and tenders. Another significant effect could be in the form of inordinate delays in the procurement process. www.luthra.com 10

11 Let us look at the bid-evaluation procedure for defence procurement: Every time the Service Headquarters need to procure an equipment, it is required to prescribe the trial methodology and procedure as per which the technical trial for the product would happen. However, in practice it has been observed that these directive are often prepared in a routine and general manner leaving the directions vague and open to interpretation by the trial team. Further, feedback suggests that the suitability of the trial agency and the sequence in which the trials are to be performed is not given due consideration. For the purpose of evaluating technical bids, neither the DPP nor the trials provide any weightage to additional technology / utility that the product may have. If competing products qualify all of the technical parameters decided before-hand, they are placed on an equal footing for commercial evaluations irrespective of the technological edge that one product may have over the other. The evaluation of commercial bids is conducted by a Contract Negotiating Committee (CNC) Now, the constitution of CNC is purely representative-oriented and not expertise-based. Most members are ex-officio or representational and are not included for any special qualification or skill. Most have tenures as short as three years and hence do not possess the experience. www.luthra.com 11

12 3. Need for improved transparency in procurement process: Although, we have rules, there is a need for a lot more detailing in order to improve the transparency. For instance, ironing-out of the following issues is required: (a) Presently, grounds of rejection of tenders, proposal or quotations or the announcement of bid results are not made to unsuccessful bidders. Further, the rules although require that reasons for selection of the winning bidder must be recorded, the fact that these reasons need to be communicated to all the bidders is not stipulated for. These issues need to be addressed. Further, it is helpful if the offers are opened in public or at least in the presence of all bidders or their proxies, as this will ensure that documents have not been altered or destroyed. This also allows detection of manipulations, if any, at an early stage. www.luthra.com 12

13 (b) The GFRs stipulate that the project may be awarded to the lowest bidders. However, other than the lowest bid criterion, no other criteria for selection of award are stipulated and the discretion is left to the bid formulating authority. It is however advisable that these criteria must be predetermined and, to the extent possible, quantifiable. (c) Unrealistically short bidding periods can further limit participation and possibly lead to failure of tender, collusion, and nepotism. The procurement framework prescribes a “sufficient” period for the submission of bids, which needs to be ultimately decided by the procuring authority. www.luthra.com 13

14 4. Need for an effective complaint/ bid protest mechanism: Presently, a bidder aggrieved by irregularities in procurement process can either file a complaint within the procuring department/agency, or pursue the matter in court seeking a judicial review of administrative action. Whereas the former may not be impartial, the latter certainly comes along with the risk of costly and protracted litigation. Integrity Pacts and need for further reform  A system of Integrity Pacts (IP) was introduced in the Indian procurement laws in the year 2005-06 with the twin objectives of: (a) eliminating corrupt practices; and (b) providing for a formal bid protest mechanism.  An IP is a voluntary pact between the public buyer/ government and the seller(s) wherein both parties exchange mutual undertakings. The undertakings are as follows: the public company undertakes that its officials will not demand or accept any bribes, gifts, etc. from any bidder and that its actions will be fair and free from bias; the bidder undertakes that it has not paid/ will not pay bribes or provide undue favours; Each bidder undertakes to disclose all payments made in connection with the contract. www.luthra.com 14

15 Another key element of the IP mechanism is the appointment of Independent External Monitors (IEMs) as an “Ombudsmen” to review, inspect and monitor various aspects of the procurement process such as formulation of project proposals, bidding processes, contract-award, etc. Upon receipt of complaints of irregularities in procurement procedure, IEMs are expected to organize public hearings and demand corrective measures or audits on issues affected by unjust practices. The institution of IEMs is therefore at times understood as a functional equivalent of a formal bid-protest system. But the IP and its implementation suffers from certain issues: Limited applicability: As on date, a total of 39 important Central Public Sector Undertakings (CPSUs) have adopted the IP in their procurement activity. Further, the same has been entered into by government departments at the time of making all defence purchases. However, it may be noted that IPs currently do not cover procurements by State Public Sector Enterprises or by other state government departments. Further, it appears that in practice PSUs are excluding public works contracts and are applying the IP only for contracts for purchase of goods and services. www.luthra.com 15

16 Ambiguity as regards application to sub-contractors: As per the model IP issued by the Central Vigilance Commission, the prime contractor is required to demand from all sub-contractors a commitment similar to the main IP, and to submit it to the public authority at the time of contract- signing. It is however unclear whether the prime contractor is required to merely submit an undertaking to demand such commitment from its sub- contractors at the time of contract-signing, or if the prime contractor is required to submit actual commitments from known sub-contractors at the time of contract-signing. Lack of clear monetary threshold: As per the relevant circulars, the monetary threshold value for the contracts to be covered through an IP should be fixed so as to cover 90-95% of the total procurements of the organisation. However, different PSUs have set different monetary limits beyond which they invoke IPs. This has resulted into ambiguity and inconsistent application. www.luthra.com 16

17 Bid protest mechanism – Need for reform The IP system envisages a panel of Independent External Monitors (IEMs) for each organization, who independently review parties’ compliance with their obligations under the IP. IEMs submit their reports on complaints either to the CEO of the organization, or directly to the Chief Vigilance Officer (CVO) and the Central Vigilance Commission (CVC) in the event of suspicion of serious irregularities attracting the provisions of the Prevention of Corruption Act, 1988. Limitations CVC Jurisdiction and focus on anti-corruption: The CVC is a body constituted to inquire into the offences as recognized under the provisions of the Prevention of Corruption Act, 1988, alleged to have been committed by certain categories of public servants. The CVC has therefore been empowered to exercise superintendence and vigilance over matters of corruption and therefore the focus is not on issues of lack of fairness in tendering procedures or other violations of rights and obligations of bidders by government departments. Therefore, the CVC lacks jurisdiction to give effect to one of the two objectives of the IP mechanism i.e. providing for a bid protest forum. www.luthra.com 17

18  CVC is merely a recommendatory body: After completion of their inquiry the IEM’s are required to submit their reports to the CVC. However, the CVC is a body which can merely make recommendations to the Central government and cannot directly take actions and issue orders.  In this regard, India has enough to learn from the US experience in implementation of an effective bid protest mechanism and the functioning of the Government Accountability Office (GAO). www.luthra.com 18

19 Conclusion Given the aforesaid challenges and opportunities, US companies have the option of either being a part of the growth story and benefitting out of it; or to choose to sit-out getting unnerved by the challenges. We assure India is a market with tremendous potential and the opportunities are worth the risks. www.luthra.com 19

20 Thank You Mohit Saraf (msaraf@luthra.com) Senior Partner NEW DELHI MUMBAI BANGALORE www.luthra.com 20


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