Public Private Partnership In Procurement Practices – Analysis

By Venu Gopal

Providing basic civic service, developing sound infrastructure, creating public assets and fulfilling socio-economics objectives of the state have traditionally been the exclusive portal of government duties. For reasons political or economic, the involvement of the private sector in these important areas was neither sought nor had it been forthcoming. The crucial role of infrastructure in fostering economic growth, reducing social disparity and for larger political stability has been well recognized. However the changing economic scenario, burgeoning population pressure, increasing pressure on cities and other developmental trends have severely constrained the government’s ability to serve the state’s requirements. Hence the private sector has gained importance, world wide. It complements and supplements investments to serve the cause of the Public Private Partnership (PPP, also called P3).

PPP Policy

PPP, as per the approach paper on Defining Public Private Partnership issued by the Government of India, Department of Economic Affairs, February 2010, means an arrangement between a government or statutory entity or government owned entity on one side and a private sector entity on the other, for the provision of public assets and/or related services for public benefit, through investments being made by and/or management undertaken by the private sector, and the private sector receives performance linked payments that conform (or are benchmarked) to specified, predetermined and measurable performance standards.

The Government of India has come under a lot of criticism after a series of corruption scandals that have further stalled policymaking. Vociferous demands for cleaning up the system of awarding government contracts have forced the PM to announce a Public Procurement Bill as part of his strategy to combat corruption. The government is expected to draw from the United Nations Model Law, while drafting India’s Public Procurement Legislation, which will also cover Public-Private Partnership projects. Such a law will promote India as a stable investment destination with due importance given to receiving value for money, thereby negating abuse in the procurement process, in terms of corrupt practices.

PPP and Defence Procurement

For the present, the mandate of the proposed PPP seems biased towards the development of infrastructure (airports, roads, etc.), although it is likely to get extended to include public health and education in the near future. Researching the possibility of using the platform of PPP towards procurement process to fulfill defence requirements may yield outstanding results. It is definitely possible if the government shows the inclination to put in place an efficient, hassle free and transparent PPP policy. In addition the recent thought process of the government to increase the ceiling limit against Foreign Direct Investment (FDI) in the defence sector from the existing 26 per cent to 74 per cent (some recommend 100 per cent), when clubbed with the PPP, will ensure that entrepreneurs of repute will come forward to participate in the process of defence procurement. The reason being that the system will assure an efficient and level playing platform in the processes of contract formulation with minimum/nil avenues for mid-term corrections/amendments, due to the very nature of the contract operating period which in the case of India is planned for a timeframe of 30 years. In addition, as rightfully brought out by the PM himself, since allocation of scarce resources (be it land or material resources) is at stake while dealing with these projects, the system of PPP has to be transparent to yield the desired results while at the same time curtailing corrupt practices.

An efficient, transparent PPP policy dovetailed with an effective FDI framework is the need of the hour. It will not only ensure that state-of-the-art equipment is procured against defence requirements (in addition to other sectors), but will also be instrumental in transferring technology/R&D (a field where India is lacking). This will pave the way not only for enhanced industrial development but will also ensure indigenous production of defence equipment in the country, thereby ensuring reduction in dependency on import for these essential equipment. It will also result in greater growth of the Indian economy from the present 07-7.5 per cent to say 8.5-9 per cent, a win-win situation for all the stake holders.

Shortcomings of PPP in Defence Procurement

Factors that restrict the endeavours of the Small and Medium Enterprises (SMEs) in defence production are high cost of development, preferential treatment to Defence Public Sector Undertakings (DPSUs) and the Ordnance Factory Board (OFB), fluctuating orders being placed resulting in uncertainty and lapse in cost-effective business, unilateral changes in specifications, lengthy procedural and financial processes, reluctance to risk sharing by the Services Headquarter, especially when keeping in mind liquidated and consequential damage, adhocism in procurements and delays in payment. The private industry has expressed the need to review certain policies and core issues that hinder their greater involvement.

Suggested Solutions

The competitive bidding process is a major point of contention. Competitive bidding to leverage private partnership must become the norm as far as possible. Price preference to PSUs should be discouraged. Direct offsets that involve transfer of technology for manufacturing products should be encouraged. The existing policy of ‘No Cost No Commitment’ has to be reworked giving way to a policy of ‘Risk-sharing Gain-sharing’. The private industry inducted into defence R&D and production with due incentives like tax rebates can give rise to a fruitful environment. Long term projects must be phased out over a period of time, as is the practice in the corporate world. High accuracy, effective, assignment based and phase wise budgets and projects should be set up with regular monitoring of time and cost schedules. The monitoring and reporting should lead to variance analysis i.e. the difference (if any) between the planned and the on ground performance, further subdivided into volume and price variance. This should be followed up by enforcing accurate accountability.

Conclusion

Over the last couple of decades, the Indian private sector has evolved steadily, comparable with the best in the world and turning truly globally competitive. It has shown potential to reach the top with its capacity to innovate and adjust. All that is required is a level-playing field and a thrust for greater involvement. A positive atmosphere of cooperation, mutual trust, transparency and streamlined procedures in consonance with the vision of a truly efficient and globally competitive defence industry will help achieve India’s aim of self reliance.

Originally published by Institute for Defence Studies and Analyses (www.idsa.in) at http://www.idsa.in/idsacomments/PrivatePartnershipinProcurementPractices_vgopal_050911