Tuesday, November 30, 2010

Why scams tail procurement, properties

Recently I was addressing a group of senior army officers at the ASC Centre and College in Bangalore covering the topic that seizes everyone’s attention today: procurement in defence procurement. I covered the whole gamut of revenue procurement enunciated in the Defence Procurement Manual, and mentioned en passant that with detailed procedures and processes in place we have/are still moved/moving into a regime of transparency.

I was besieged with questions. “You spoke about canons of financial propriety in making government procurement,” said one, no sooner than I had welcomed questions. “If I’ve to buy a TV for myself, I’ll opt for Sony, regardless of the amount which I know is the highest. But I can’t do that for the government. Why?” I laboured to explain that government procurement is price procurement while what he was referring to for himself was value procurement. He was right in that the lowest tender isn’t always the best buy in the long run, but in government, unless we did the life cycle costing to arrive at the ‘effective’ cost, amid the welter of factors, it is perhaps the best option possible for a variety of factors: tax-payers’ money, least discretion, and accountability; lowest common processes predicated on societal mores and benchmarked for transparency so that when decision-makers stand in the bar of history and their collegial acts anatomised post facto, this appears the most sensible.

Notwithstanding all that is obvious, I have often wondered one simple fact that has defied comprehension in government procurement. Year after year, procurement after procurement, the purchases of the same items made from the same firm(s) by the same organisation(s) keeps increasing. The ostensible reason, quite in sync with the outside world, is runaway inflation. This is the simplistic justification. To make matters worse, along with the price increase is cartelisation by firms which, in a manner of speaking, believe in and practice extortionist selling to a buyer (poor invisible person) seemingly driven to the end of his tether in exasperation. Often these very firms’ balance sheet would show that their entire earnings ever since they were set up are from the one or few government organisations which have had procured these at prices ‘dictated’ by them. It is one of those strangest cases where in a situation of monopsony — one buyer with many sellers — it should be the buyer’s market with the buyer calling the shots, it is made to morph into a monopoly (not even a duopoly or an oligopoly) where the seller pushes the buyer up the wall. Worse, the cartels flourish. This is rather intriguing.

About a decade ago in a certain case I had a gut feeling that the firm is taking us for a merry annual ride, year after year, and it was about time its bluff was called. I happened to have taken a decision instinctively much against the wishes of others in the committee, sticking my neck out, almost daring other decision-makers that they were wrong and I was right. Reluctantly, very reluctantly, they agreed, hoping and praying my plans failed. My instinct and action — much to the consternation and dismay of my fellow decision-makers — didn’t fail me: the recalcitrant supplier was made to eat the humble pie; and the overall saving to the government was in the region of about 60 per cent with the potency to cascade year after year.

I quickly came to the conclusion — already deductively ideated — that cartelisation in a monopsonic situation as in huge government procurement is an anachronism. If it still flourishes, be sure and be warned there is an unseen hand doing the rope trick! And such ‘unseen hands’ — capable of doing all sorts of smart magic — are not amused one bit when the cash outgo from government kitty is less than what they had originally envisioned. For many who work the government, spending less government money in buying the same item that can be bought at a higher price is thought of as a crime.

Now see all transgressions through this prism and the picture would become clearer. In government procurement, irrational price increases often masquerade as market trend and are adroitly touted and gracefully accepted; but be sure all this can’t be done without active insider’s connivance. The same goes with the wanton price increase through cartelisation. A young colleague recently told me an interesting case of three rates sourced from the same Original Equipment Manufacturer (OEM): the first through a tender from the OEM itself (the highest); a second one from the trader quoting the OEM’s ostensible rate plus some add-ons (the second highest); and yet a third mentioned in the OEM’s website (the lowest). Not surprisingly the organisation was rooting to buy from the OEM as per its tender. Possibly in fulfilment of its mission to ensure the maximum cash outgo from government account.

Zoom out and look around you, again through the same prism and see the findings in the latest breaking news story concerning the Adarshgate in tony Cuffe Parade of Mumbai. This is the same syndrome that afflicts nexuses that bleed the no-one’s government through criminal conspiracy though in this case the legitimate beneficiaries — Kargil martyrs and war widows — have been two-timed. And see the names of the beneficiaries to know where the rot begins and how it has a trickle-down effect. How national tragedies are turned on its head to benefit mercantilists!. Despite all the brouhaha and public outrage, you would be an outrageous optimist to imagine we’ll see light at the end of the long tunnel.

1 comment:

  1. My dear Sir

    I read your article 'Why scams tail procurement, properties".

    With the growth in economy and the economic power of the people at large due to free markets, real estate, black money, there is a perceptible reduction in the prople's ability to be patient. The ability to wait and watch is long gone. Everything should happen instantaneously, at the click of a button. It affected every activity--education, jobs, marriage, economic activities and also value systems. "Instant moksha or nirvana" is the in-thing. Means are no longer important. Make money, make more money and make only money, somehow.

    A decade ago, I know people used to talk about bribe/commission in terms of percentage of a transaction i.e. 1%, 2% or a standard rate. Today, the practitioners do not believe in these standards. It appears 'number of times' replaced the percentage system or standard rate system. Look at 2G, Adarshgate, OMC, CWG, Emaar, land scams all over the country, etc. Present concept of procurement in Government is - Buy for Government at highest rate and sell Government services/resources at lowest rates. There are any number of prople to justify increase in cost of acquistion for Government and very few against.

    Only the invisible God can help the unseen Government and its resources.