Public Procurement or procurement of goods and services by Government in India constitutes a large chunk. However, there are no definitive estimates of the total size of India’s public procurement. Some agencies have estimated the figure as 30 % and some others at 20% of the GDP. India does not have a single public procurement law, and at the core of the procurement framework is the General Financial Rules (GFR), currently the GFR 2017. In addition, there are sector specific manuals and procedures. The underlying principle in all these procedures is accountability, transparency, fairness and competitive prices. Therefore, there are inherent checks and balances in the process which contribute to complexities in public procurements. Another stumbling block is the high costs on guarantees and payment systems. The diverse agencies which procure goods and services range from autonomous bodies, PSUs, local bodies to Ministries/ Departments. So, it was heartening to note that the Finance Minister in her budget speech included Government Procurement as one of the areas proposed for ‘Productivity Enhancement & Investment, Ease of Doing Business 2.0 & Ease of Living’.
Of the two reform measures included, one related to an otherwise routine function namely payments, but which has been a major irritant for most vendors because the manual process was opaque and prone to delays. Such delays particularly impacted the smaller companies which operated on tight cash flows. Therefore, the announcement by the Finance Minister that as a further step to enhance transparency and to reduce delays in payments, a completely paperless, end-to-end online e-Bill System will be launched for use by all central ministries for their procurements would certainly be welcomed by all vendors. The system will enable the suppliers and contractors to submit online their digitally signed bills and claims and track their status from anywhere.
In the second reform to reduce indirect cost for suppliers and work-contractors, the use of surety bonds as a substitute for bank guarantee has been made acceptable in government procurements. IRDAI has given the framework for issue of surety bonds by insurance companies. According to GFR Bid Security (also known as Earnest Money) is to be obtained from the bidders as a safeguard against a bidder from altering or withdrawing the bid during bid validity, though Micro and Small Enterprises (MSEs) are however exempt. The amount of bid security prescribed is in range between 2 percent to 5 percent of the estimated value of the goods to be procured. In addition to ensure due performance of the contract, Performance Security for an amount of 5 to 10 percent of the value of the contract is to be obtained from the successful bidder awarded the contract. This amount was reduced to 3 percent due to requests from vendors.
Following the budget announcement, the GFR has been amended on 2 February 2022 to include insurance surety bonds as security instrument. Earlier the instruments were mainly from the banking channel either an Account Payee Demand Draft, Fixed Deposit Receipt, Bank Guarantee, or online payment. Most vendors use the Bank Guarantee. However, the Bank Guarantees involved costs like margin money and bank commission charges which according to experts are in the range of margin money at 10-25 percent and commission at 2-3 percent. However, in the case of surety bonds, a customer only needs to pay premium to the insurer. The downside, however, is that the surety bond is still a new concept and there are apprehensions that insurance companies in India do not have the level of expertise in risk assessment, and issues like the recourse available against defaulting contractors, reinsurance options etc. Its early days yet to see how the opening up of guarantees to the insurance sector will bring down the costs for the vendors especially small and medium companies. The competition may also spur the banks to cut down costs as well.