Public Procurement 2019
1 RELEVANT LEGISLATION
1.1 What is the relevant legislation and in outline what does each piece of legislation cover?
The legal and regulatory public procurement framework in India broadly comprises the following elements:
Constitutional provisions: The Constitution of India authorises the Central and State Governments to contract for goods and services in the name of the President of India or the Governor of the State (respectively), and directs autonomy in public spending. However, it does not stipulate any procurement policies or procedures.
There is no comprehensive central legislation exclusively governing public procurement. Nonetheless, various procurement rules and policies (see below) are guided by central legislations such as the Contract Act 1872, Sale of Goods Act 1930, Prevention of Corruption Act 1988, Arbitration and Conciliation Act 1996, etc.
In addition, certain states, like Tamil Nadu, Karnataka, Andhra Pradesh, Assam and Rajasthan have enacted state-specific legislation such as the Tamil Nadu Transparency in Tenders Act, 1998, Karnataka Transparency in Public Procurement Act, 1999, the Rajasthan Transparency in Public Procurement Act, 2012, etc., that govern procedure for procurement in these states.
Comprehensive administrative rules and directives on financial management and procedures for government procurement are contained in the General Financial Rules ("GFR") initially implemented in 1947 and last modified in 2017. All government purchases must strictly adhere to the principles outlined in the GFR, which include specific rules on procurement of goods and services and contract management.
In addition, the Manual for Procurement of Goods, 2017 ("MPG") contains guidelines for the purchase of goods, and the Delegation of Financial Powers Rules, 1978 ("DFPR") delegate the government's financial powers to various ministries and subordinate authorities.
This is supplemented by: (a) manuals and policies governing procurement by individual ministries/ departments such as defence and railways (see question 1.3 below); (b) guidelines issued by the Directorate General of Supplies and Disposals ("DGS&D"), the central purchase organisation which undertakes procurement on behalf of ministries/departments that lack the expertise to undertake procurement themselves.
In 2017, the government issued the Public Procurement (Preference to Make in India) Order 2017 which grants purchase preference to local suppliers based on certain conditions so as to promote manufacturing and production of goods and services in India.
Overseers: The framework is bolstered by authorities including: (a) the Central Vigilance Commission ("CVC") tasked with increasing transparency and objectivity in public procurement; (b) the Competition Commission of India ("CCI") which checks anti-competitive elements; and (c) the Central Bureau of Investigation ("CBI") engaged for investigation and prosecution of the criminal activities in the procurement process such as probity issues.
In summary, a public procurement process must adhere to: (i) GFR and MPG; (ii) sector-specific procurement rules contained in manuals published by the relevant ministry; and (iii) state-specific legislation on transparency in procurement. As between the procurer and the supplier, these rules above flow down via a tender award and a contract.
1.2 What are the basic underlying principles of the regime (e.g. value for money, equal treatment, transparency) and are these principles relevant to the interpretation of the legislation?
India's regulatory and institutional framework seeks to ensure responsibility, accountability and efficiency in the public procurement regime. The underlying principle is to procure materials/services of specified quality at the most competitive prices in a transparent and non-arbitrary manner.
This is evident in the GFR which declares that all authorities delegated with the financial powers of procuring goods in public interest will be responsible and accountable to ensure efficiency, economy and transparency, fair and equitable treatment of suppliers, and the promotion of competition in public procurement. To this end, specific measures have been set out under the GFR including requirements pertaining to contents of the bidding documents, description of the subject matter, quality and quantity specifications, preparation of an annual procurement plan by all ministries/departments, adherence to a code of integrity to address probity issues, etc.
Further, the Supreme Court of India has recognised that while the government must have freedom of contract:
all contracts by the State should only be granted by public auction/tenders to ensure complete transparency and provide all eligible persons with the opportunity to participate in the auction;
all official acts must be actuated by public interest, and should inspire public confidence;
generally, the State should not grant contracts by private negotiation (subject to certain exceptions based on the nature of the trade, emergency circumstances, single source supply, etc.); and
appearance of public justice is as important as doing justice (i.e. government actions should not only be fair but should also be seen to be fair, and nothing should be done which gives an impression of bias, favouritism or nepotism).
1.3 Are there special rules in relation to procurement in specific sectors or areas?
Defence: Governed by the Defence Procurement Procedure, 2016 ("DPP") and the Defence Procurement Manual 2009 (as amended from time to time) which envisage various modes of procurement including indigenous, capital, local purchase, etc.
Railways: Governed by a number of specific laws and uses the Indian Railway e-Procurement Systems ("IREPS") for procurement.
Energy: New Exploration Licensing Policy ("NELP") under the Petroleum and Natural Gas Regulatory Act, 2006, provides for the evaluation of bids according to a quantitative bid evaluation criteria.
Electronics: The Preference for Domestically Manufactured Electronic Products Policy (2013) applies to all ministries/departments (except the Ministry of Defence) for electronic product procurement for government purposes.
Electricity: Electricity Act, 2003 provides for the determination of tariffs through bidding processes by distribution licensees for the procurement of power.
Telecoms: Guided by the National Telecom Policy (currently in the process of being re-worked to transition from physical to digital infrastructure. See question 8.1 below).
Renewables: The Ministry of New & Renewable Energy has released a National Policy on Biofuels and a Strategic Plan for New and Renewable Energy Sector. In 2017, the government issued guidelines for wind power procurement to enable the distribution licencees to procure wind power at competitive rates in a cost-effective manner.
Micro, small and medium-sized enterprises ("MSMEs"): Under the Public Procurement Policy for Micro and Small Enterprises Order 2012, a minimum of 20% of annual value of goods/services of the Central Government and public sector undertakings ("PSUs") must be procured from micro and small enterprises (with further reservation of 4% in favour of MSMEs owned by 'backward classes').
Pharmaceuticals: Pharmaceutical Purchase Policy 2013 reserves the procurement of certain medicines from Central Public Sector Enterprises.
DGS&D: Procurement of stores for the Central Government is undertaken pursuant to the manual of the DGS&D, which is the relevant authority in respect of such procurements.
1.4 Are there other areas of national law, such as government transparency rules, that are relevant to public procurement?
Transparency, competition and curbing of probity issues is further ensured through:
Competition Act, 2002: Penalises anti-competitive activities such as bid rigging, collusive bidding, cartelisation, and abuse of dominance.
Right to Information Act, 2005: Promotes transparency in government dealings by entitling Indian citizens to expeditiously procure information from the government through a "right to information" application.
Integrity pact under the GFR and CVC guidelines: Addresses probity in procurement activities including through the appointment of an external monitor to mitigate corruption and ethical risks.
Prevention of Corruption Act, 1988 and Prevention of Money Laundering Act, 2002: Penalise bribery and money-laundering and provide for confiscation of property derived from money-laundering and other illicit activities.
1.5 How does the regime relate to supra-national regimes including the GPA, EU rules and other international agreements?
Although India has not acceded to the GPA, it became an Observer State in 2010.
2 APPLICATION OF THE LAW TO ENTITIES AND CONTRACTS
2.1 Which categories/types of entities are covered by the relevant legislation as purchasers?
Government and government agencies, or entities otherwise deemed to be 'state entities' for the purposes of the Constitution will be governed by the procurement framework. The concept of 'state entities' has been expanded through judicial review to include all ministries and departments of the Central and State Governments, corporate entities owned/controlled by central or state governments, public authorities exercising statutory powers, statutory authorities and non-statutory authorities exercising public functions, or otherwise under the direct or indirect control of the aforementioned 'state entities'.
Further, autonomous bodies that are created or owned by, or receive grants from, the Government, and entities whose services are being utilised by the entities mentioned above or to whom the procurement process has been outsourced (such as procurement support agencies or procurement agents) will also be covered.
2.2 Which types of contracts are covered?
The regulatory framework covers all contracts offered by the government at the central, state or local level. Examples of types of contracts covered include PPP contracts, concession agreements, operation and maintenance contracts, engineering procurement and construction contracts, supply of equipment, supply of services, transfer of technology, etc.
2.3 Are there financial thresholds for determining individual contract coverage?
While the GFR applies to all instances of procurement of goods required for public sector use regardless of the value of the goods, monetary thresholds are involved in the following instances under the GFR:
Purchases of up to INR 250,000 can be made at the discretion of the ministry/department by issuing purchase orders containing basic terms and conditions.
For works contracts valued at: (a) INR 100,000 – INR 1,000,000, the letter of acceptance will result in a binding contract (subject to certain conditions of contract being included in the tender document); and (b) INR 1,000,000 and above, a contract must be executed (which can be a "simple one page contract" where preceded by an invitation to tender and conditions of contract).
Goods can be purchased without inviting bids: (a) on the basis of a certificate from the competent authority, where the goods are of up to INR 25,000 in value; and (b) on the recommendation of the relevant Local Purchase Committee if between INR 25,000 and INR 250,000 in value.
A limited tender enquiry (with no advertisement necessary) can be pursued for goods valued less than INR 2,500,000.
The monetary ceilings for direct online purchases on the Government e-Marketplace ("GeM", a portal for the purchase of common use goods and services) are as under:
up to INR 50,000: through any of the available eligible suppliers on GeM;
INR 50,000 – INR 3,000,000: eligible GeM seller having the lowest price of amongst at least three different manufacturers; and
over INR 3,000,000: eligible supplier having the lowest price after mandatorily obtaining bids using the online bidding/reverse auction tool.
2.4 Are there aggregation and/or anti-avoidance rules?
These issues are typically governed by the tender documents which may, for instance, specify that the credentials of a bidder may not be aggregated with those of its group companies/holding company/JV partner, etc. for the purpose of determining compliance of the bidder with the specified qualification criteria for the supply of goods. The documents may also permit clubbing the financial standing credentials of the fully owned subsidiary bidding company with those of its holding company, with appropriate legal documents proving such ownership. Bidders may be queried during the tender process and requested to provide substantiating documents to ensure probity.
2.5 Are there special rules for concession contracts and, if so, how are such contracts defined?
Concession contracts are agreements where the right is granted to a private sector entity to undertake actions for the provision of a public good or service, which would, save for such grant, be provided by a public sector entity.
There are no comprehensive central rules or regulations governing concessions. However, states such as Tamil Nadu, Gujarat, Himachal Pradesh, Punjab, Andhra Pradesh and Bihar have infrastructure development laws that include matters pertaining to work or services concessions.
Further, Model Concession Agreements ("MCAs") have been formulated by the government to standardise terms on which licences are granted to private entities for delivery of goods and services for public benefit. MCAs have been developed across sectors (for instance for highways, metros, ports, airports, railway stations, etc.) and set out the contractual framework for implementation of PPP projects under the policy and regulatory framework in question 1.1 above. They address critical issues such as mitigation and unbundling of risks, allocation of risks and returns, symmetry of obligations, reduction of transaction costs, termination, etc. Various versions of the MCA have been formulated on the basis of the different PPP modes such as Build Operate Transfer (Toll), Build Operate Transfer (Annuity), Design, Build, Operate and Transfer ("DBOT") and Operate Maintain and Transfer ("OMT").
2.6 Are there special rules for the conclusion of framework agreements?
Yes, the GFR and MPG lay down principles pertaining to the conclusion of framework agreements, typically referred to as 'rate contracts'. Such contracts can be entered into with one or more suppliers for the supply of specified goods/services at specified prices and for a specified period of time. The contract is in the nature of a standing offer from the supplier and no quantity or minimum drawal is guaranteed under the contract. The procurer can conclude more than one rate contract for a single item and also has the option to renegotiate the price with the rate contract holders.
Typically, rate contracts are entered into by DGS&D for common user items which are frequently needed in bulk across government departments. If a ministry/department directly procures goods for which DGS&D has a rate contract in place, the price paid for the goods should not exceed that stipulated in the rate contract. The MPG further suggests that rate contracts should be entered into by DGS&D via the GeM for specialised and engineering items.
2.7 Are there special rules on the division of contracts into lots?
Yes, there is an accepted principle of division of contracts into "parallel contracts" on terms to be set out under the tender documents. The tender documents will reserve the right of the procurer to divide the contract quantity between suppliers. The manner of deciding the relative share of lowest bidder (L1) contractor and the rest of the contractors/tenderers should be clearly defined under the tender, along with the minimum number of suppliers sought for the contract. This is particularly advantageous for the procurer in case of critical/vital/safety/security nature of the item, large quantity under procurement, urgent delivery requirements and inadequate vendor capacity, to ensure security of supply.
Further, the MPG suggests that if it is discovered that the quantity under the tender is such that a sole supplier is not capable of supplying the entire quantity, and there was no prior decision/declaration in the bidding documents to split the quantities, then the quantity finally ordered may be distributed among the other bidders by counter offering the L1 rate in a manner that is fair, transparent and equitable.
However, the GFR prohibits dividing a demand for goods into small quantities so as to make piecemeal purchases to avoid procurement through L1 buying (i.e. lowest price), bidding or reverse auction requirements on GeM or the necessity of obtaining the sanction of higher authorities (which may be required based on the estimated value of the total demand).
2.8 What obligations do purchasers owe to suppliers established outside your jurisdiction?
While there are no obligations specific to foreign suppliers, the GFR and the procurement policies established under its general principles seek to ensure the transparent, fair and equitable treatment of all suppliers – whether local or foreign – and the promotion of competition in public procurement.
However, the following items are of relevance to foreign bidders and suppliers:
Certain manuals of ministries and PSUs may, under the term of the tender documents, obligate foreign suppliers to enter into the tender contract and supply via a local entity (as a JV, consortium or subsidiary).
Further performance guarantees may be sought from foreign suppliers who do not have a track record of supply in India.
Certain long-term contracts may have continuing obligations in the form of transfer of technology and warranty support from foreign suppliers.
For qualifying contracts under the Public Procurement (Preference to Make in India) Order, 2017, local suppliers will be given purchase preference if they match the winning bid of a foreign supplier within a certain margin above the L1 price (see question 3.4 below for more information).