Lowest bidder criterion may not be the best choice for awarding project contracts
Earlier, there was a practice of preparing concept notes for projects, irrespective of their size. Project costs were estimated on the basis of prevailing market rates for various components viz. equipment, material, services, supervision, taxes & duties, including a reasonable margin on each item. Then the tendering process would start with a notice inviting tender. The government undertakings always followed the procurement guidelines issued by respective authorities. Usually, the lowest bid price (L1) came close to the estimated project cost. After negotiation of technical and commercial issues with a few shortlisted bidders, the letter of intent was issued to the preferred bidder. At times the L1 prices were much lower than the cost estimates, thanks to a poor understanding of the scope of work. Rarely, companies quoted a price much lower than the rationale price to establish themselves or eliminate competitors from getting any business. In such a scenario, the government undertaking would largely opt for a re-tendering, whereas privately owned companies would simply opt for the L2 vendor.
The procurement process has undergone a sea-change in the liberalisation era. Domestic and international competitive bidding largely replaced tendering. In order to raise the competition level, the qualifying criteria, in terms of technical capabilities and sound financial capability, got diluted. The selection of a bidder solely on the price factor became the order of the day. The concept notes became more of a farce and lost its importance. The cost estimation became a ritual. None bothered about comparing it with the bidding price.
Today, projects are being awarded strictly on the basis of the lowest tariff, which may not be healthy in the long-term perspective of project quality and viability. Banks and financial institutions are sceptical of funding such projects. Debt funding decisions are based not alone on project profitability, but also on factors like technical capabilities, overall financial strength, group reputation and security provided for the debt fund. However, the Union ministry of power and other regulatory bodies are pleased with their efforts in inciting competition in the space and are looking at market-determined tariffs. But what if the projects are not completed on schedule and / or without adhering to the expected quality All the stakeholders viz. promoters, banks, beneficiaries, and the nation as a whole will have to face the consequences of a shortage of power and the resultant higher tariff, impacting the overall economy.
It is high time we introspected on: how many such projects have really been completed on schedule and within the original estimated cost; how many projects have been granted time extension & other concessions, including increased tariff; whether dilution of qualifying criteria is in the interest of projects; whether the lower price would fetch desired quality; whether the safety and life of the project are being compromised; whether guidelines of the Central Vigilance Commission (CVC) are above the nations interest; and also who is responsible for consequential losses due to delay in the completion of projects awarded on an L1 basis.
So, to say there is no rocket science involved in development of power projects; be it generation, transmission or distribution projects. The components are well known and cost reduction from value engineering has a limited scope, may be to the tune of 10% to 15%. A further reduction on account of efficient operations may be up to 10%. If that be the case, any reduction in the price beyond 25% would be possible only by compromising the quality/ safety of the projects.
In my view, it is desirable to set a benchmark for tariffs for power produced from various types of plants viz. thermal using oil, coal, gas as a fuel, hydro (run of the river, reservoir type etc.), nuclear, renewable (PV solar, thermal solar, mini/ micro hydro, wind, biomass etc). It is also essential to set a benchmark for transmission projects (per km cost or transmission service charge per km per annum for different voltage levels and conductor configurations). Similarly, tariff for distribution needs to be fixed for rural/ urban areas. It is also desirable to fix stringent qualifying criteria for various types of projects. There is a likelihood that the L1 would tend to compromise on quality and timeline by deploying resources so as to be within the quoted price. Hence, the emphasis should be on achieving the desired quality, safety and implementation schedules.
Projects should only be awarded to developers whose tariff /cost does not deviate significantly from the benchmarks.
Further, to develop new vendors, some pilot projects could be offered for development by relaxing the qualifying criteria. After a performance evaluation, these new vendors may be considered for participation in the bidding process for regular projects.
(Article was originally published in the Financial Express issue dated February 9, 2011)