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Procurement policies and practices: At what cost our projects?

Procurement policies and practices: At what cost our projects?

With the best designing technology available, why do bridges still collapse and trains still crash in our country? How can our EPC developers and contractors guarantee the best quality material and equipment at best prices? Reforms in procurement are badly needed for infrastructure at lower costs and better technology, as we stare at an increasingly internationalising environment of purchaser-vendor associations, writes Shashidhar Nanjundaiah.

Compared to a developer's, a turnkey or engineering, procurement, construction (EPC) contractor's life seems easy: get paid for work done with no perceivable financial risk involved. Yet the slip between the cup and the lip is often one of momentous importance, it seems. Quality-conscious contractors must battle with price-conscious ones and muscle their way through bidding processes. Then, confronted with sometimes unrealistic deadlines often with no margins of error in time and cost overruns, that life can frequently be walking on a thin wire.

Often, contractors lament, this is because developers don't understand or are not updated on quality standards, available technologies or other processes – and procurement pro­cesses are usually on that block. Nee­dless control over projects stemming from either habit or vested interest is also the culprit.

EPC projects hinge on good procurement practices, and as we are discovering quickly, we can hardly boast of one that includes an all-round understanding of technologies, applications and implications. About 60-70 per cent of the cost of an EPC project goes into procurement, and in today's turbulent prices in the international and domestic markets, procurement is often dicey. More “evolved” EPC contractors have invested in research and streamlining of the procurement process. Today's procurement is really a form of supply chain management.
On the same page: Developers and owners' understanding of material quality thresholds and best equipment technologies is critical to whether a project is superior in its execution. While contractors seem to be spending time and resources researching them, developers-especially government agencies-need to catch up on theirs.

Contractual thresholds and negotiations: Although the L1 debate continues, most contractors are satisfied at its evolution from being a rather basic instrument to having laid higher, quality-driven thresholds. There is a dire need for a system of transparency at this stage. If a government committee has its way, negotiations will soon be barred from the awarding process.

Uncertainties in material availability: The rather perplexing ban on mining in Karnataka is likely to replicate itself in Goa and perhaps other mining states. Since none of the mining states is squeaking clean, more revelations are more than likely. This has resulted in not enough supply of minerals-iron for the present but manganese and other minerals will follow-and aggre­gates. The just-in-time principle, which EPC contractors aspire for to save costs, is jeopardised in the process.

Fluctuating world prices: As the economic slowdown intensifies, lack of political decision making may no longer be the major reason for slowdown in EPC projects. The biggest uncontrollable factor in an EPC contractor's bouquet of risks is increasing prices, but most contracts will not allow leeway to the contractor on this issue. Sources say this is a reason several EPC contractors have slowed down their bidding aggression in recent months.

Coping with international norms: A major EPC contractor narrated an incident whereby his company had to incur additional cost, when the company built a labour colony for a domestic developer, who turned out to expect international norms in specifics of the project. Safety, health and environment are being increasingly factored into EPC projects.

Several other issues are less tangible and can only be addressed over time by infusing better structures through the procurement process-research, tendering and execution. International contractors find Indian projects often chaotic, where every stakeholder has a say, forcing planning process to be repeatedly revised. Interference from developers is not limited to micromanagement, but can spill over to advising contractors whom to subcontract parts of the project to. Ensuring more bidders by artificially tweaking the bid parameters is another unprofessional practice. In an attempt to increase competition, the developer may be lowering quality thresholds.

In an implicit acknowledgement that corruption is at the crux of improper public procurement, Prime Minister Manmohan Singh had declared in his Independence Day speech this year that a public procurement law would be in place soon. He was speaking with the Vinod Dhall Committee's report in the background: the Committee was put together in February to draft a new procurement bill. Procurement laws are in place in most countries, and the United Nations has recommended a draft. The Indian law is likely to draw from the UN model but also tailor itself to domestic idiosyncrasies.

The government action to streamline procurement practices through a new policy and law will go a long way in making EPC more professional, quality-conscious and competitive. Although procurement is at an evolving stage in India, the evolution is likely to pick up pace in the next year thanks to some leapfrogging such as e-procurement and a realisation of a need to reform our procurement processes.

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