Paradigm shift in procurement process

With Indian aviation infrastructure poised for dramatic growth, there is a significant change in the procurement process too. Janaki Krishnamoorthi writes about the changing scenario in the Indian aviation sector.

The Indian aviation market has been witnessing significant growth in the last few years. Currently the ninth largest aviation market, handling 121 million domestic and 41 million international passengers, India is expected to be the world’s third largest aviation market in the next few years. To keep pace, airport infrastructure has also been witnessing remarkable growth. Changing consumer expectations, technological advancements, and entry of private and international players have also contributed to the transformation of aviation infrastructure. From runways, terminal buildings, Air Traffic Control, aircraft take off/landing devices, surveillance equipment, security systems, passenger/baggage management to information systems, operational database, revenue management etc, have all undergone a sea change extending across multiple areas and services. Naturally, the whole practice and process of procurement of materials and manpower across the wide gamut of areas is also undergoing a shift.

The shift

The changing scenario has had its own impact on both the public and private procurement processes which have been slowly evolving over the years. Rajeev Mehrotra, Chairman & Managing Director, RITES Limited traces some of the changes: "Earlier, Central and state governments awarded works directly to the Public Sector Units (PSU) on nomination basis as they were considered the extended arm of the government. However, this practice has since changed and all the works are now awarded through open tenders and with the aviation sector witnessing phenomenal growth in recent years, the infrastructure development has been thrown open to even international agencies. The traditional practice of Cost Based Selection (CBS) of tenders, ie, on lowest cost basis after pre-qualification is also being replaced by Quality and Cost Based Selection (QCBS) by many government agencies giving weightage to technical capabilities and financial quotes. As a result, major airport works are being awarded to international consultants. However, this is depriving the local consultants of the opportunity."

The shifts are being observed in many other areas too. For instance, the procurement process is slowly moving away from the traditional methods of meetings, discussions and paperwork to total automation. Elaborates Ranganathan Jagannathan, Vice President & Head – Aviation, Ramco Systems Limited: "We have totally done away with the interactions and the manual process of preparing material requisition, ordering and invoicing etc through our Spec 2000, which has automated the whole process with standard formats to exchange information between airlines and their vendors. Many airlines are now using this system which saves on effort, time and money." Ramco provides solutions for key aspects of airline business operations, engineering applications and related Enterprise Resource Planning (ERP) functions. There are even more advanced solutions available but their usage is reportedly limited in India. "Many are open to technological improvements and it is happening in many areas in the aviation sector. The thrust towards automation exists in the procurement area too, but it does not have the same priority as other sectors," adds Jagannathan.

The Probity

E-procurement and automation can perhaps play a vital role particularly in the public procurement area which is an important activity in the aviation sector and accounts for a substantial amount of national expenditure. This calls for the need for integrity in public procurement, not merely as an ethical requirement but also as an economic and social one.

Recognising the importance of strengthening anti-corruption measures in public procurement the United Nations Convention Against Corruption (UNCAC) which came into force in 2005 had included public procurement and management of public finances as an important provision in preventing corruption. In May 2011, India became party to the UNCAC.

So far the General Financial Rules 2005 are followed for public procurement by government departments and ministries across the country, which does not have the status of a legislation and violations do not attract much penalty. In order to bridge this gap the Government of India drafted the Public Procurement Bill 2012 which was passed in the Lok Sabha in 2012 and now awaits clearance by the Rajya Sabha. This legislation is however applicable for procurement by the Central Government and does not apply to the states.

The Bill aims to regulate and ensure transparency in procurement process for all contracts of over Rs 50 lakh by central government departments and ministries.

It also aims to ensure fair and equitable treatment of bidders, promoting competition, enhancing efficiency and economy etc. The Bill penalises both the acceptance of a bribe by a public servant as well as the offering of a bribe or undue influencing of the procurement process by the bidder with imprisonment and a fine. How effectively the Bill will be implemented when enacted, remains to be seen.

The roadblocks

Meanwhile, the procurement industry has its own challenges to counter today as evinced by some industry players. "It is currently a challenge to obtain approvals for setting up long term facilities to meet our requirements and future growth due to paucity of space," avers Tulsi Mirchandaney, Managing Director, Blue Dart Aviation Limited. "Globally, hubs have been set up by express cargo airlines to enable efficient and speedy throughput with large airside facilities at close proximity to parking bays to facilitate simultaneous interchange of loads between various aircraft, and with airside, city side access and advanced levels of technology inputs. Such hubs have demonstrated quantum growths over the years because air express distribution has been outpacing air cargo distribution over the past two decades. Unfortunately, we do not witness the same kind of vision for efficient air logistics in India. Consequently, space for air cargo operators is low in the list of priorities for airports."

Obtaining permissions from various sources is an issue. "Basically obtaining permission from the airport authority is a major issue as there are many agencies involved from the police/security forces to airport operators. Getting a licence to be an airport vendor is equally tedious and many vendors find it non-profitable compared to the quantum of business," says Jay Davate, Asst Manager – Administration, Air Works India Engineering Pvt Ltd.

"Procuring quality personnel is a challenge in today’s scenario as the airline industry is no longer a major attraction as it was earlier due to various other opportunities available for youngsters today, particularly in the IT, hospitality and BPO sectors," adds Edmund Evans Jones, Regional Director – North India, Global Air Transport Services Pvt Ltd. Global provides personnel for security, IT operations, passenger/cargo handling at the airports in addition to sales/marketing staff.

Lack of standard bidding documents is another issue, says Mehrotra. "Standard bidding documents should be prepared by the governments for application by various government agencies. Where QCBS method is followed, association of local consultants should be made mandatory and preference in technical scores should be given for associating local consultants. A central procurement cell for all the ministries will be a good option, which is being followed in many African countries. The tendering will then take place through one system and it will be more transparent. However, this may require more time for finalisation of tenders."

The future

The number of airports in India which grew from 50 in 2000 to 125 in 2012 is expected to touch 250 by 2030. Many airports are also earmarked for modernisation and upgradation leading to phenomenal growth of the aviation sector which will open the doors for multitudes of business opportunities, say industry experts.

"These projects will provide a wide variety of business opportunities for various technology companies and equipment manufacturers including IT equipment, security systems, passenger and baggage movers, air conditioning and ventilation systems, parking infrastructure, air navigation equipment and other material suppliers. The development of new airports will also usher in investments in other airport-related ancillary business like cargo and MRO services and development of connectivity infrastructure such as rail metros and highways," predicts Dr S Vasudevan, Associate Director, Aerospace & Defense, KPMG Advisory Services.

Concurs Jones: "With the Indian government, private operators and investors (both Indian and foreign) keen on providing infrastructure of international standards at airports across the country and with the passenger and cargo loads expected to increase significantly in the years to come, companies like Global can look forward to playing a major role."

All these developments will raise the demand for quality, sophisticated, quicker and effective procurement practices. Davate says the emphasis will be more on technically sound, safe and effective systems. Evidently the procurement process in the Indian aviation infrastructure space is poised for a significant turnaround.

"Procurement agencies need to develop their own procedures" – Dr S Vasudevan, Associate Director, Aerospace & Defense, KPMG Advisory Services talks to Janaki Krishnamoorthi on the procurement practices and allied issues in the Indian aviation infrastructure sector.

What percentage of GDP is being spent for public procurement in India?
Estimates indicate 25-30 per cent of GDP is spent on public procurement by governments in India. This is likely to grow with more "development" projects in the pipeline and government’s increasing focus on encouraging public-private partnerships (PPPs) in rural, industrial, transportation, communications and social infrastructure.

What has been the procurement practice for airports?
Procurement practice for airport infrastructure projects has been generally well-defined and reasonably consistent in terms of the process, evaluation criteria and contract conditions. India’s key airports have been successfully developed through PPP contracts, despite initial hiccups in the bidding process for Delhi and Mumbai airports. We have seen global participation in these landmark projects and investments close to Rs 30,000 crore by developers who have set up world class facilities in a globally competitive industry.

What are your suggestions for improving public procurement?
There are clearly many areas of public procurement where the process and criteria for selection can be strengthened or improved to give comfort to bidders on considerations of relevance, fairness, transparency and efficiency as also in ensuring adequate competition and value for money for all stakeholders. For instance, there is scope for: 1) defining technical criteria most relevant to the project rather than following a specified norm, which obviously will have limitations when being applied to specific projects; 2) reviewing procedures for determining conflict of interest which is difficult to identify some processes followed currently; 3) bringing more objectivity in technical evaluation and scoring of bidder presentation; 4) declaring evaluation scores and tender results for both open and limited tender processes consistently and; 5) setting up an independent grievance redressal mechanism. Many government-run procurement processes typically favour the lowest (L1) or highest (H1) bidder, after the pre-qulification. But, experience has sometimes shown that bidders have tended to be too aggressive or unrealistic while bidding for some projects, which have jeopardised implementation of projects subsequently. Therefore, it would also be useful to have a framework or method for validating commercial bids which seem untenable, based on standard project assumptions.

What will be the impact of the proposed Public Procurement Bill 2012 (PPB) on the airport infra procurement practices?
The PPB is useful as it sets out the touchstone principles that should govern public procurement. However, procurement agencies will need to develop their own procedures and documents for specific types of projects, without compromising on basic requirements of fairness, transparency, equity and probity in the procurement process. It is impractical to have a "one form fits all" approach. Agencies should also have flexibility in adopting appropriate procurement options such as limited tendering, Swiss challenge, reverse auctions or other auction mechanisms as long as a reasonable justification is provided for deviating from the norm. E-procurement will also help in ensuring better transparency. The PPB allows for some of these options. There is also a need to develop a robust analytical framework for assessing wider economic benefits and value-for-money (VFM) considerations, before deciding on procurement options.

(With inputs from Shibabrata Chakraborty, KPMG. Views are personal.)