JOIN USFor a long time now, public sector procurement and, in particular, procurement of services, has followed a convoluted process in India. Now, in view of the Narendra Modi government’s focus on e-governance and technology-enablement, the need for simplified procurement has become more intense than ever before. With the Union government moving ahead with its Smart Cities plan, the stakes have just got higher for public sector procurement.
Given the rigid clauses in public sector procurement contracts, it is no wonder that a lot of IT companies face problems in bidding for it. Here are some of the pain points in public sector procurement of technology services in India that are causing IT companies to shy away from government projects:
There is an old saying that goes, “Pay peanuts and you will get only monkeys.” When it comes to public sector procurement, one factor eclipses all other factors and that is - price. When the government procures a product or service, the focus seems heavily on the ‘lowest cost’. While this may work for products, when it comes to services, you could end up getting something that is inadequate or actually impedes the quality of government service.
Public sector procurement in developed nations gives adequate weightage to quality. Consequently, while the upfront acquisition cost may be higher, the total cost of ownership spread over the life of the project is significantly lower. This is a much better concept to follow in government procurement.
Information technology contracts, by their very nature, tend to span several years. In such cases, it is important that payment milestones recognise the progress of work and compensate the implementation agency for the effort expended, without waiting for a major part of the contract to be over before releasing payments. If payment milestones do not provide for costs to be recovered as they accrue, service providers would have no alternative but to add financing charges to offset delays in payments. This, in turn, will add to overall costs.
This is all the more so in the case of managed services projects where the private partner has to not only invest in hardware, software and infrastructure but also wait to recover payments from the downstream transactions. Added to this is the inevitable delay in receiving payments that cause severe hardship to private service providers and increase project costs significantly. For invoices to be processed, a sign-off on the milestone delivery is required which is usually not available in time.
With this in mind many service providers have started providing for ‘Deemed Acceptance Clause’ in their contracts, which states that if acceptance of a deliverable is not available within a stipulated time, the deliverable will be considered accepted on expiry of the defined time. But clauses like these, can lead to disputes as well.
Unlimited liability
It is customary to limit the service provider’s liability to the contract value. However, at times, government procurement contracts do not specify any limitation of liability for the implementing agency, or in other words, there is unlimited liability. An unlimited liability clause means that if a $100 billion company enters into a $1 million contract and if it fails to deliver the project, its existence itself could be in jeopardy. This is because there is no limit to what the client could claim from them as damages. In the process, a government sometimes loses the services of established players in the IT services market and has to make do with smaller service providers who may not have adequate capacity to implement large projects.
Equitable risk sharing is required for any project to ensure its success, and government contracts are no exceptions. Consider a project to implement a financial management system in a government department. This will entail significant amount of capacity building among government employees, as many of them may not even have the required computer skills. I have come across contracts that stipulate a certain number of employees to be trained but there is no mention of any commitment by the client to make these employees available for training.
Imagine a situation where the implementing agency is ready with its training module and infrastructure but client employees are unavailable to train, as they are busy elsewhere. Does this mean the implementing agency will wait indefinitely to complete the training? If delays occur because of issues like this, how will private sector service providers recover their costs?
In India, the continuity of tenure of public servants is often an issue. This means government officials at the helm of affairs may not be in the same position for the entire duration of a major project. So, when a new person comes in, there is a tendency to take a relook at the project from their own perspective regardless of what the contract says. This can be detrimental to the project.
This is why funding agencies such as the World Bank often stipulate that key officials involved in their funded projects cannot be transferred during the project duration.
Every project has some contingency factored into accommodate delays, increased costs or expenses that were not foreseeable. However, in government contracts, it is not uncommon for the client to change the contract interpretation from what was agreed upon, leading to a scope creep. This could happen during implementation, long after the contract has been closed. It is also not uncommon for government clients to request for additional work without providing additional payments. This puts a huge strain on the project cost.
The government needs to revamp its procurement process and simplify its contracts to encourage the best-in-class service providers to bid for and execute its contracts.
(The writer is a New Delhi-based independent consultant)