Competition Commission Of India

PRESENTATION ON:Public Procurement and Competition Concern

Submitted By: DHRUV BHATIA MA Economics Jamia Milia Islamia University

CCI Structure

Public procurement can be defined as the procurement activities undertaken by a public authority using public funds to obtain goods, services and technologies essential for it to carry out its business.

Size: Public Procurement contribute 15-20% of GDP (SOURCE The Public Procurement Bill, 2011 Planning Commission Government of India.) It is governed by General Financial Rules (GFR) and Delegation of Financial Powers Rules (DFPR) Contribution of Department like Defense,Railway,Telecom : 50% 26% Health Budget Contributed to Public Procurement (Source: Special address by Shri Pratyush Sinha, Former CVC- Competition, Public Policy and Common Man,16th November 2009) Total annual expenditure of around 15-20 Lakh Crores and that for Union

Government alone in the range of Rs. 2.5 – 3 Lakh Crores Objective Of Public Procurement:As public resource are limited the primary objective of public procurement is to achieve value for money i.e. to procure best good and service at lowest cost.

About Public Procurement

One of most common mechanism of public procurement is tendering system. It Involve following stages: Identifying prescribe technological specification or standard by

government or authority concerned. Invite Tender from various parties. Technical and Financial Bids

are invited separately. Evaluation of Technical Bid. This help to shortlist bidder whose

financial bid are to evaluated. Evaluation of financial bid of shortlisted bidder. After that

bidder that can provide goods and service to govt at lowest price are identified.

Executing legally binding contract with shortlisted bidder.

Process Of Public Procurement

1.Railways: During the year 2009-10 the total expenses of Indian Railways were Rs.829 billion. The budget for procurement alone was Rs.279 billionThe procurement was done for items for manufacturing, fuel, and items for construction as: About 40% was for purchase of items required for manufacturing 30% for purchase of items required for repairs, operation and maintenance 27%for purchase of fuel and remaining for purchase of items required for construction (SOURCE: Public Procurement- a case study of the Indian Railways (Bodhibrata Nag Associate Professor, IIM Calcutta, D. H. Road, Joka P.O., Kolkata 700 104 India)2.Public Health Care System: The health expenditure is about 4.5% of the GDP out of which 0.84 % is public expenditure and 3.32 % private and the remaining from other sources including external flow.About 25 to 35 percentage of the Government hospital budget in India is spent on drugs and other pharmaceuticals . (SOURCE: http://aims.amrita.edu/school-of pharmacy/pdfs/Emerging%20trends%20in%20medicine%20procurement%20in%20government%20sector%20in%20India.pdf )

Key Public Procurement in India

3.Defense: The Union Budget 2012-13, has allocated US $40.3 billion for the Defence Services

that include the three armed forces (Army, Navy and Air Force), the Defence Research and Development Organization (DRDO) and Ordnance Factories.

India’s defence budget is broadly divided into two categories: Revenue Expenditure and Capital Expenditure

a.Revenue Expenditure: ‘running’ or ‘operating’ cost of the defence services. The Revenue Expenditure has increased by 19.5% to $ 23.7 billionb.Capital Expenditure: procurement of big items such as tanks, aircraft and aero engine, ships, submarines etc. The Capital Expenditure has increased by 15% to $16.6 billion. (SOURCE: http://www.defencereviewasia.com/articles/169/India-s-Defence-Budget-2012-13)4.Telecom: Government of India has allocated an amount of Rs.30 billion in the Budget Estimate

(BE) 2012-13 out of which an amount of Rs. 25.46 billion has been allocated for creation of National Optical Fiber Network (NOFN) for Broadband connectivity to 2.50 lakh Village Panchayats of the country which has been approved by the Cabinet.

Government is also going to provide Broadband connectivity at a cost of approx. Rs. 200 billion to all 250 thousand Gram Panchayats.

Competition is another important principle which plays a pivotal role in achievement of the objectives of a procurement system.

The purpose of competition is that the government as a procurer gets the best product/service at the best terms and of best quality, on one hand, and on the other, ensures fulfilment of the objectives laid down by horizontal policies.

It is also argued that competition motivates suppliers to put forward the best possible offer to win the contract which, in turn, benefits the procuring authority by facilitating the procurement of a cost effective option.

Hence, from the international trade perspective, competition can be said to induce efficient functioning of markets.

Competition perspectives can be discerned both in the domestic process of conducting procurement, and in allowing international participation in procurement activity by the government.

Competition In Public Procurement

3 –Cs : I) Central Vigilance Commission (CVC) ii) Comptroller and Auditor General (CAG) iii) Competition Commission of India (CCI)

CVC : Issues guidelines and instructions to curb corruption in PPS – SOP issued by all Govt. Departments and PSUs

CAG : Monitors the deficiency and violations in the procedures and mechanism of PPS

CCI : Regulates competition in PPS – prevents and punishes anti competitive conduct or practices by Govt. Departments and enterprises

AUTHORITIES : REGULATORS

Definition - Bid rigging : Highly pernicious form of collusive price fixing behaviour where bids are obtained to earn and distribute higher profits forms of bid rigging :

Collusive bidding :Agreement between firms to divide the market, set prices or limit production – involves, kickbacks and misrepresentation of independence

Bid rotation: Conspiring firms continue to bid but they agree to take turns of being the winning bidder

Cover bidding: also called complementary or symbolic bidding- where the bidder agrees to submit bid i.e. Higher than the designated winner or puts certain conditions unacceptable to the procurer to favour winning bidder

Bid suppression: Bidders agree to refrain from bidding or withdraw the bid in favour of winning bidder

Market allocation: Bidders for different geographical areas allocate the market and based on such understanding bidding takes place as designed

ANTI COMPETITIVE PRACTICE :BID RIGGING

The following factors are helpful in detecting bid rigging The same supplier is often the lowest bidder. There is geographic allocation of winning tenders. Some firm submit tender

that win in certain geographical areas. Some supplier unexpectedly withdraw from bidding Bid document from different company indicate numerous last minute

adjustment such as use of erasers or other physical alteration. A large difference between price of winning bid or other bid. A certain supplier bid for particular contract is much higher than supplier

bid for another similar contract. Only one bidder contact wholesaler for pricing information prior to bid

submission. Supplier meet privately before submitting bid sometime in vincity of

location where bids are to be submitted.

Detection Of Anti Competitive Practice

 

S.No 

Case Factor which established agreement for bid rigging  

 1. Re: LPG Cylinder Manufacturers Suo

Moto CaseIdentical price quotations.

 

 

2. Foundation for common cause and people awareness Vs PES Installation Pvt Ltd and Ors + Gulshan Verma V. UOI and Ors.

Commonality of mistake in tender form

 

 

3. Re: Aluminium Phosphide Tablet Manufacturer Suo Moto Case

Identical bid price Common entry in premises of FCI

before submission of bids. 

 

4.

5.

Coal India Ltd Vs GOCL Hyderabad and Ors.

Shri BP Khare, Principle Chief Engineer, Southern Eastern Railway, Kolkata Vs M/s Orrisa Concrete and Allied Industry Ltd. And Ors

Collective boycott of e auction Identical Prices Controlling the supply of

explosives.

 Identical Rates Division of Quantity Similar Handwriting Format of covering letter Tender fee payment Past Conduct

 

1.Coal India Limited v. GOCLHyderabad & Ors., Case No. 06 of 2010

An information was filed by M/s Coal India Ltd. against explosive manufacturers/ suppliers in India along with their associations, for their alleged anti-competitive acts.

In this case, the Commission found the acts and conduct by the opposite parties therein of boycott of e-reverse auction together with their past conduct of quoting identical rates and controlling the supply of explosives as sufficient to establish that the same was done with a view to manipulate the process of bidding in violation of section 3(3)(d) of the Act.

The Commission apart from issuing a cease and desist order imposed a penalty upon each of the contravening party@ 3% of the average turnover of the company.

However, COMPAT vide its common order dated 18.04.2013 passed in Appeal No. 82 of 2012 and other connected appeals after considering the aggravating and mitigating factors reduced the penalty to the extent of total of 10% penalty imposed by the Commission

Case Laws:

The commission has ordered suomoto investigation against the four public sector general insurance companies, namely, National Insurance Co. Ltd., New India Assurance Co. Ltd., Oriental Insurance Co. Ltd. and United India Insurance Co. Ltd complaint alleging contravention of the provisions of section 3 of the Act. It was alleged that these four insurance companies had formed a cartel for increasing the premium for Rashtriya Swasthya Bima Yojna (RSBY) of Government of Kerala.

After a detailed investigation by the DG, the Commission imposed a total penalty of Rs. 671.05 crore on the said four public sector insurance companies for manipulating the bidding process initiated by Government of Kerala for selecting insurance service provider for RSBY.

It noted that the impugned conduct of these companies resulted in manipulation of the bidding process in contravention of the provisions of section 3(1) read with section 3(3) (d) of the Act.

Accordingly, it imposed penalties of Rs. 162.80 crore, Rs. 251.07 crore, Rs. 100.56 crore and Rs. 156.62 crore on National Insurance Co. Ltd., New India Assurance Co. Ltd., Oriental Insurance Co. Ltd. and United India Insurance Co. Ltd. respectively for the impugned conduct.

Four General Insurance Companies penalised for Bid Rigging

The Commonwealth Games 2010 have been subject to numerous charges of anti competitive practices in its procurement process.

The CAG has estimated the cost of creating venues and city infrastructure as well as the operational expense of hosting the Games at Rs. 12,888 crore.

There have been irregularities made by the Organizing Committee (OC) in the procurement of various items for the CWG which include the hiring of treadmills for 45 days for Rs. 9, 75,000 when such machines can be bought for Rs. 7 lakh.

There has been subversion of fair procurement practices on the following grounds: Tenders were awarded bypassing usual bidding norms. In many cases there was no written contract, nor was there a tendering process. There was no tendering made for the hiring of vehicles for example. In some cases, the successful bidder was allowed to tamper with the figures post

auction In the construction of flyovers, stadiums, lane strengthening and widening, upgrading

street light, power plants, sewage plants, water treatment plants and bus parking lots, bidding norms were bypassed

The Commonwealth Games 2010: A Case Study

Works have been awarded at higher rates despite which there have been poor site management, delays and quality compromises

According to the CVC report, there has been scanning of sixteen Games projects and there has been discovery of competition issues with one or more of the scenarios manifesting themselves

a. Either open tender has not been floated.b. Either bidders have colluded among themselves or both bidders and procurers have colluded. The Common Wealth Games Case shows, how unguarded procurement leads to

bad quality works and loss to exchequer. A competitive procurement process, guided by rules and legislative framework not only provides good quality work but also gives value for money.

Thus it may be inferred as learning from this case that procurement process whether distorted by corruption or otherwise, they necessarily have diminishing returns for money spent and competition brings increasing returns for money spent in the procurement process.

The Commission is empowered to inquire into cases of anti-competitive agreements and cartels :• either on its own motion or • on receipt of information or • on reference made to it by the Central Government or State Govt. or

statutory authority In case the Commission is convinced that prima facie case exists, it shall direct the Director General to investigate and furnish report POWERS OF THE COMMISSION After the inquiry, the Commission may pass inter- alia any or all of the following orders under section 27 of the Act: direct the parties to discontinue and not to re enter such agreement direct the enterprise concerned to modify the agreement direct the enterprises concerned to abide by such other orders as the Commission

may pass and comply with the directions, including payment of costs, if any pass such other orders or issue such directions as it may deem fit

Inquiry by commission into bid rigging

After inquiry if contravention is established, the role of commission to avoid bid rigging are 1. Enforcement: Direct any enterprise or associations of enterprises or person or associations of

persons to discontinue and not to re-enter such agreement or discontinue abuse of dominant position

Impose such penalty as it may deem fit not exceeding 10% of the average of the turnover for the last three preceding financial years upon each of person or enterprise

If any anti-competitive agreement was entered into by cartel, it may impose upon each producer, seller, distributor, trader, or service a penalty of up to three times of its profit for each year of the continuance of such agreement or ten percent of its turnover for each year of the continuance of such agreement, which ever is higher .

Role of Competition Agency in Public Procurement

2.Advocacy: Many competition authorities are also involved in advocacy efforts to increase awareness of the risks of bid rigging in procurement tenders. There are many examples of educational programs to this end. Some authorities have regular bid rigging educational programs for procurement agencies; others organize ad hoc seminars and training courses These outreach programs have proved extremely useful for a number of

reasons: They help competition and public procurement officials to develop closer

working relationships; They help educate procurement officials about what they should look for in

order to detect bid-rigging through actual examples of bidding patterns and conduct which may indicate that bid-rigging is occurring;

They train procurement officials to collect evidence that can be used to prosecute better and more effectively bid rigging conduct;

They help educate public procurement officials and government investigators about the cost of bid rigging on the government and ultimately on the taxpayers; and

They warn procurement officials not to participate in bid rigging and other illegal conduct which undermines competition in procurement tenders

During the pendency of an inquiry, the Commission, may by order, temporarily restrain any party from carrying on acts prohibited under the Indian Competition Act, until the conclusion of such inquiry or until further orders, without giving notice to such party, where it deems it necessary .

The Indian Competition Act also empowers the Commission to grant leniency by levying a lesser penalty on a member of the cartel who provides full, true and vital information regarding the cartel. (Section 46)

The Competition Appellate Tribunal (COMPAT) is established under Section 53A to hear and dispose of appeals against any direction issued or decision made or order passed by the Commission under specified sections of the Act. An appeal has to be filed within 60 days of receipt of the order / direction / decision of the Commission.

Power to issue interim order and leniency and Appeal

Full information about the market Maximize participation of credible bidders – wider choice and to reduce

unreasonable requirements/conditions Avoid ambiguous drafting of the specifications/terms of reference – avoid

bias or discrimination – focus on functional performance rather than product description

Design of tender process : Avoid joint bids, subcontracting, repeated joint interaction, imposing reserve price

Avoid non-compete clauses Evaluation criteria : Technical and financial evaluation should be fair and

transparent Innovative bidding models: e-auction – price transparency and avoid

corruption – Ascending clock auction (in discovery of price of 3G spectrum)

PREVENTION OF BID RIGGING

Developing countries exhibit segmented product markets, discretionary government regulations and considerable corruption, hence they tend not to have a very competitive environment. There are considerable barriers to entry and exit, and policies often favour large firms in access to finance and other measures. There are numerous micro-enterprises, most sectors are dominated by a few firms, providing scope for abuse of dominant position. Such abuse appears to be widespread. Jenny (2006) lists the following for Africa alone: Concentration in trade and (purchasing) price fixing agreements among traders –

coffee in Kenya, cotton, tea, tobacco in Malawi, fish processors and exporters in the Lake Victoria region

Inflated prices for inputs, particularly chemical inputs – fertilizer tender cartel to Kenyan Tea Development Authority

Banking services – concentrated in South Africa and Uganda

Anti Competitive Practice in Developing Country

Chicken price fixing – Zambia Milling cartelization – Malawi, Zimbabwe, Zambia. Monopolies in foodstuffs- milk and sugar in Malawi Soft drinks – acquisition of local bottlers by multinational firms results in high

structural concentration – Kenya (merger part allowed by Kenyan competition authority). Anticompetitive vertical restraints – Kenya (quantity forcing, retail price maintenance or suggested retail price), Zambia.

Retailing – South Africa. Passenger Transport (buses, taxis, airlines etc.) – Matatu owners cartel in Kenya,

Taxis in Cape Town. Oil company cartel-like behaviour in Kenya, Tanzania, Uganda, Zambia

(prosecutions for price fixing), Malawi, South Africa Construction materials – Cement monopolies or cartels - Malawi, South Africa

(officially sanctioned cartel to 1996), Tanzania and Zambia. Professional services – recommended Attorney fees - South Africa; health care

fees – South Africa; surveyors’ cartel – Zambia. Insurance services – price fixing in Kenya.

The Commission rejected actor producer Ajay Devgn's allegation of abuse of dominant position by Yash Raj Films (YRF) and held that there was no violation of Competition Act in the case.

Ajay Devgn Films Pvt Ltd (ADF) had moved the Commission alleging that YRF was abusing its dominant position by asking exhibitors to dedicate more screens to its upcoming release, Shahrukh Khan-starrer 'Jab Tak Hai Jaan', affecting ADF's film 'Son of Sardaar‘

In the order, CCI observed, "The act of booking theatres by a distributor for its two films simultaneously when the theatre owners have the liberty either to agree or not to agree is not a restraint on the freedom of business of theatre owners. The theatre owners can wait for other films and can refuse to book their theatres simultaneously for two films

CCI, while issuing restraint orders, had to keep in mind the overall exhibition market and not a particular period of the market. No enterprise can be considered dominant on the basis of just big name. Therefore, the claim of ADF that opposite parties were dominant players in the relevant market of 'film industry in India' was not accepted.

ADF filed appeal in the Competition Appellate Tribunal (COMPAT) against the order of CCI. The COMPAT also refused to stay the YRF's tie-up with single screen theatres across the country for the release of its film 'Jab Tak Hai Jaan'. The COMPAT said, "Huge economic interests are at stake for both the parties.

Commission Rejects Allegation of Abuse of Dominance by Yash Raj Films

E-Procurement of stock items has been introduced in Indian Railways to the extent of over 70 per cent.

Threshold limit for issue of open tenders has down in GFR, 2005. This has increased the number of open tenders considerably thereby enhancing the participation of new 22 entrants who would otherwise have been left out because of higher threshold limit prescribed in GFR, 2005.

Government of India has started Indian Government Tender Information System www. tenders.gov.in which details tenders floated by Central government ministries/departments, PSUs, State governments, public sector banks and other organisations separately for goods, services and works. It is a major step towards increasing transparency and also to ensure that no prospective bidder misses an opportunity to participate in the tenders.

Initiative Taken By Govt To Promote Public Procurement

Ensuring effective functioning of public procurement in markets is a part of good governance. This necessitates addressing the challenge of promoting effective competition among suppliers and preventing collusion amongst the potential bidders.

The competition law explicitly prohibits collusion among the bidders which ultimately affects the public exchequer and causes loss to public money.

Fair dealing in public procurement will not only help the procurer to get the best deal but also help the country to use its resources effectively.

Reducing collusion in public procurement requires efficient regulatory mechanism, strict enforcement of competition laws and awareness among public procurement agencies at all levels towards the adverse impacts of collusion.

To sum up, the policy planners, public procurement officials and CCI should work together as a team to deter bid rigging through robust enforcement, increased vigilance, and better designed public procurement programs.

Conclusion :

Thank You