Timeliness in payments to prime- and sub-contractors, promptness in the refund of performance guarantees, and fairness in imposition of liquidated damages are recognised as intrinsic to efficient contract administration worldwide; these become critically important during financial stress, and especially during Covid-19—when execution of public projects is key to speedy economic recovery.
Towards public procurement reforms, the Centre issued path-breaking instructions, directing extension of public contracts without penalties/liquidated damages (continuing its force majeure strategy started in February 2020), and instructions for a refund of bank guarantees in proportion to public project implementation. These moves are unprecedented in scope/direction and stand in sharp contrast to risk-averse approaches adopted historically. The ball is now in states’ courts to reform their own contract administration practices.
Uncertain Budgetary Provisions
Most states claim near-perfect systems for budgetary allocation to public works; but, as a matter of practice, participating in state government contracts can be risky for contractors for reasons like (1) budgetary estimates being based on unreliable feedback from the field and sought much in advance, while procedures for re-appropriation of funds to faster-moving projects can be rigid and slow-moving; (2) states’ tendency to sanction more than what is financially sustainable, particularly before the onset of elections; (3) last-minute budgetary cuts to make space for a new high priority project/scheme; and (4) blocking of payments at treasuries can take place at the last minute to avoid an adverse ways-and-means advances position.
Other inefficiency-inducing reasons are: (1) contractors may avoid submission of running bills on time since they become liable to payment of substantial advance state taxes on date of bill-submission and not the later date of actual payment by the principal; (2) even where contractors submit running bills on time, field officers can block or avoid certification for months just to avoid taking responsibility for the work done under a predecessor’s tenure; and (3) unlike most advanced jurisdictions, most states typically do not allow interest payments on inordinately delayed payments for work done and measured/certified.
Such unpredictability creates uncertainties for contractors over a single fiscal year, let alone over the 3-10-year contract duration of a typical infra project. So, contractors have little incentive to move as contracted and planned, limiting themselves only to progress commensurate with likely payment over a given fiscal.
Unreliable Project Databases
Most states do not have reliable databases on the progression of projects, but only online databases on public expenditure. As a result, project implementation agencies can easily deflate or inflate status of progression of individual projects—to benefit friendly contractors and to penalise others. In the absence of a database where either the quantum or timeliness of running bills submitted can be monitored—and particularly in times of budgetary squeezes—this can hinder fair allocation and prioritisation of financial expenditure across hundreds of constituencies and projects vying for funding.
Non-recognition of subcontractors
Advanced public procurement jurisdictions globally allow formal recognition of subcontractors, based on their experience that timely payments by a prime to a sub ensure timely progression of large infrastructure contracts. In contrast, some Indian states tend to (mistakenly) equate subcontracting by a prime with ‘under-the-table’ deals: the result is that records of subcontracts remain either unavailable or unverified, making it impossible to monitor timely payments to subcontractors even when governments may be paying primes on time.
Most states have formal instructions to ensure contractors aren’t penalised by the imposition of high liquidated damages (LD) where hindrances are caused by government inaction and are not attributable to a contractor. But, in practice, risk-avoidance attitudes of field-level officers lead to the full imposition of LD in most cases merely to ensure that no complaints can be made against government officials for allegedly causing undue benefit to contractors. Of course, this needs to be appreciated against the backdrop that the cost of complaining against them for allegedly causing undue benefit to contractors in India is perhaps amongst the lowest anywhere—some argue it can be as low as the cost of finding some A4-size paper and putting one’s pen to it.
To make matters worse, states can have patently unfair contract clauses such as those allowing return/refund of performance bank guarantees (PBGs) to contractors only when final bills have been paid, even when a contractor should be held responsible only for timely submission or bills and verification thereof by field officers. Thus, an inherently high risk of non-payment of certified bills gets compounded manifold with an added but unnecessary risk of non-refund of PBGs in time. A study of standardised procurement rules or contract causes in some states shows a high incidence of other issues as well—some do not allow for interim price escalation to be paid beyond the originally contracted period until a final determination of time extension has been approved, even if there are hindrances not attributable to a contractor.
Conclusion and recommendation
While these problems are well-understood amongst the government contracting community, there seems to be some inertia with regard to ‘who will bell the cat’ and ‘why’. All of this becomes more interesting in face of the fact that most states have already laid down fair risk-allocation contract clauses and procurement rules in the case of externally-funded projects, i.e. standard templates are available within easy reach but the problems remain ignored.
As a reform and mutual accountability measure, much like Nudge theory, states can allow nominal interest against overdue payments to contractors: this alone could prod contractors to submit payment claims in time and also prod procurement officials who may not like to be held accountable in future audit for additional interest outgoes in case they unduly delay such payments.
Decision-making authority can be delegated to ensure timely decisions on time-extension and contract deviations/variations of quantity, so as to begin holding contract-awarding officers responsible for project completion, rather than continuing with pyramidical decision-making structures requiring higher-level approval in the name of oversight—resulting in field officers being content with merely pushing such cases to higher-level authorities and not themselves finding possible solutions.
Once inefficiency-inducing clauses and procedures start getting weeded out from public contract drafting, it should be possible within our context—where government contractors are not seen as project ‘partners’ but ‘unscrupulous businessmen’ out to make a killing—that more open dialogue, trust-building amongst public officials and government contractors can begin, benefiting timely project execution. The government of India has already set the ball rolling on public procurement reform—and that too with a bang—and it is now up to state governments to implement similar project management reforms along the lines so clearly spelt out by the Centre.
*Mr. Sandeep Verma is Director General, H.C.M. Rajasthan State Institute of Public Administration & Ex-Officio Principal Secretary to Government (Training). He holds an LL.M. specialization in Government Procurement Law from The George Washington University Law School, Washington D.C.
He is credited, while working in Rajasthan’s Public Health Engineering Department in 2019, with issuing the first-ever guidelines in India for the design of tenders for “incomplete” works, generally known as “Risk and Cost” contract awards. He is instrumental in introducing the changes to Defence Procurement Procedure (DPP) 2013, which has inspired the ‘Make in India’ preferences to date.
**Disclaimer: Views of the author are personal.
*** Originally published in Financial Express.