13 December 2021
INTRODUCTION
Cost and time overruns have long since plagued India’s infrastructure sector and given a bad name to public projects being executed in the country. According to a report[1] published by the Ministry of Statistics and Programme Implementation, as on November 1, 2021, 438 out of 1,681 central sector infrastructure projects have been affected by cost overruns, aggregating to Rs 4.34 lakh crore, and 539 projects are running behind their respective schedules. Such delays take a toll on the viability of projects. To mitigate this problem, the Central Vigilance Commission (“CVC”), Comptroller and Auditor General of India and NITI Aayog have long-advocated the need to revamp the procurement and project management procedures in India. The efforts of these premier institutions have culminated in the Ministry of Finance issuing the General Instructions on Procurement and Project Management on October 29, 2021 (“General Instructions”). By introducing provisions pertaining to additional methods of procurement, timely payment to contractors and reforms in the dispute resolution process, the General Instructions attempt to overhaul the manner in which projects are awarded and implemented by public authorities and project executing agencies (“PEA”).
SYNOPSIS OF THE GENERAL INSTRUCTIONS
The slew of reforms introduced by the General Instructions attempt to bring forth innovative solutions to overcome the challenges faced in the execution of projects in India. Some of the key changes prescribed are:
Preparation of Preliminary Project Report (“PPR”) and Detailed Project Report (“DPR”): While the Manual of Procurement of Works 2019 (“Manual”) mandated the preparation of a PPR before the execution of a project, the General Instructions have recommended that a presentation may be made to the head of the public authority for very large projects. Such presentations to the public authority have also been advised to be included as part of the preparation of the DPR and the record of discussions during such presentations shall become a part of the tender file.
Pre-Notice Inviting Tender (“PNIT”) Conference: For complex projects where there is lack of requisite knowledge to formulate the tender provisions, the General Instructions have advised that a PNIT conference may be held to gather inputs from relevant stakeholders, which could then be incorporated in the tender document. While the Manual contained provisions for holding pre-bid conferences to clarify doubts of potential bidders, the holding of PNIT conference is an ingenious suggestion, which is expected to lead to the formulation of a holistic tender document.
Tender document: The tender document assumes paramount importance in the procurement process as it becomes an integral part of the main contract after the award of the project. Recognising the primacy of the tender document, the General Instructions have set out the following prescriptions:
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The provisions in the tender document should be clear to avoid interpretational differences, and potential cost and time overruns;
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Project milestones should be identified in a sequential and optimal manner; and
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Clauses pertaining to price variation and the methodology of calculation of the same should be stipulated in the tender document.
These suggestions, if implemented properly, will go a long way in creating a discrepancy-free tender document which, in turn, will reduce the number of disputes that arise during the execution of the project.
Rejection of Single Bid: The practice of cancelling the tender process and issuing fresh tenders in cases where only a single bid is received, often leads to delay in the execution of projects. Rejecting this re-bidding approach, the General Instructions have clarified that the procurement process shall be considered valid even if there is only a single bid, provided that the procurement is widely advertised, sufficient time is given for submission of bids, the qualification criteria is not unduly restrictive and the prices are reasonable in comparison to market values. A strict adherence to this guidance will greatly reduce instances of re-bidding, along with associated costs, thereby introducing a much-required efficiency in the tendering process.
Additional methods of procurement: The General Financial Rules, 2017 (“GFR”), currently contain three methods of selection of consultancy proposals, viz. Quality and Cost Based Selection (“QCBS”), Least Cost System and Single Source Selection. General Instructions have added one more method to this list. Consultancy proposals can now be shortlisted through Fixed Budget-based Selection (“FBS”) method, wherein the cost of consulting services shall be specified as a fixed budget in the tender document itself. The FBS method can be opted when:
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The type of consulting service required is simple, repetitive and can be precisely defined;
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The budget can be reasonably estimated, based on credible cost estimates and/or previous selections, which have been successfully executed; and
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The budget is sufficient for the consultant to perform the assignment.
While the QCBS method was already provided as one of the modes of procurement for consultancy services, the General Instructions have allowed the same to be opted for works and non-consulting services[2] as well, under which a bid will be evaluated, based on a combination of technical and financial criteria. QCBS can be opted in cases where the procurement has been declared as a “Quality Oriented Procurement” by the relevant competent authority or where the estimated value of procurement does not exceed Rs 10 crore, and up to 30% weightage can be given to non-financial parameters in such bids.
Availability of land and statutory clearances: The timely completion of a project most importantly hinges upon the availability of land and prompt procurement of necessary clearances. In this regard, the General Instructions have categorically specified that the minimum necessary encumbrance free land should be made available before the award of the contract and the public authorities and the PEAs should plan for and closely monitor the progress of obtaining all the necessary clearances for the project.
Project Management Consultant (“PMC”) and expedited decision making process: There have been instances in the past where projects have been delayed due to disputes arising as a result of the PMC exceeding its authority or the ambiguous scope of work of the PMC. To minimise such instances, the General Instructions have required the role of the PMC to be clearly defined in the contracts. It has however clarified that the execution of the work shall primarily be the responsibility of the PEA and its responsibility to supervise the quality and timelines of the project shall not be absolved by the deployment of PMC. The General Instructions have further directed the PEAs to establish a system for the resolution of issues that may delay the completion of the project. This system may involve a review of the organizational decision-making flow chart and fixing timelines for taking decisions on various aspects of a project, such as variations, changes in scope and specifications, etc. The emphasis on efficacious decision-making mechanism will contribute to lowering of risks in the implementation of project and augmenting the overall viability of the project. However, the success of such well-intended directives pivots on the adoption and implementation of the same by the PEAs, which will be seen in the near future.
Engineering, Procurement and Construction (“EPC”) Contracts: The General Instructions have clarified that only general arrangement drawings and architectural control parameters shall be a part of the EPC tender document. The timelines for submission of drawings by the contractors and the approval of the same by the competent authority (along with the penalties for non-adherence to such timelines) is also required to be contained in the EPC tender document. To mitigate the risk involved in the methodology proposed by the contractor, the PEAs are required to have in-house project management experts or alternatively hire experienced engineers to examine the proposals submitted by the contractor. Over-specification of design in the EPC contracts often leads to increase in the cost of execution of the project and the guidance provided by General Instructions with respect to general arrangement drawings will offer the requisite flexibility to the EPC contractor to optimise the design based on the exigencies of the project site.
OUR VIEW
Additional methods of procurement
Public procurement in India has been traditionally driven by the least cost system (“L-1”), under which the contract is awarded to the bidder quoting the least amount for the completion of the assignment. This approach often compromised the quality of works and multiple stakeholders, including the CVC, had flagged the concern that L-1 may not be the most efficacious method of procurement, especially for infrastructure projects that require high level of technical expertise. The introduction of QCBS, in addition to the L-1 system, as a method of procurement will ensure that complex infrastructure projects offer the desired value for money, without compromising on the quality of the works. The firms having the requisite technical aptitude that did not participate in the bids earlier, for not being in a position to quote the lowest price, will now be encouraged to take part in the procurement process as well.
While the addition of QCBS as a method of procurement for works and non-consulting services is a welcome change, the threshold of Rs 10 crore may have to be reconsidered to allow more projects to be awarded through this route. Similarly, a threshold higher than 30% weightage for non-financial parameters could have served better for quality-oriented projects. In this regard, it is to be noted that Rule 192(iv) of the GFR currently permits a weightage of up to 80% to be given to non-financial parameters for the procurement of consultancy services.
Preserving the interest of the contractors
Contractors form the fulcrum of the construction industry and the General Instructions have introduced certain measures aimed at augmenting the liquidity position of contractors. The tender documents are now required to contain payment terms, which shall be commensurate with the quantum of work done by the contractor at each stage of the project. It has been provided that ad-hoc payments of not less than 75% of the eligible running account bill shall be made within 10 working days of the submission of the invoices and the remaining payment shall be made within 28 working days of the submission of the invoices. To ensure that these timelines are not breached, the liability for non-payment of contractor’s invoices has been affixed on the officers responsible for processing payments. A proper implementation of these measures will ensure the availability of adequate working capital in the hands of the contractors, which in turn will make sure that the projects are implemented within the scheduled timelines.
Reforms in the dispute resolution process
The concession agreements and works contracts prescribe an arduous dispute resolution procedure, which causes an adverse impact on the timelines and overall viability of the project. Recognising this concern, the General Instructions have advised the parties to opt for alternate dispute resolution methods such as mutual discussions, mediation, and conciliation, instead of taking recourse to the courts. Another crucial guidance from the General Instructions relates to the practice of casual appealing of arbitral awards and court orders by the government. Noting the loss to the public exchequer caused by the filing of such appeals, the General Instructions have mandated the establishment of a special board/ committee to review the merits of any case before an appeal is filed. Rule 227A[3] has also been inserted to the GFR to require the government to pay 75% of the amount of the arbitral award to the contractor against a bank guarantee in case the government opts to challenge an award. The General Instructions in fact go on to mention that responsible officers will be held personally liable for non-compliance with these directions. Rule 227A also contains a fail-safe mechanism to prevent the misuse of this amount by the contractors. The GFR provides that the payment of the 75% amount will be made into an escrow account, the proceeds of which shall be utilised first for the repayment of lenders’ dues and then for the completion of the project. The insertion of Rule 227A in the GFR represents the implementation of the suggestions made by the NITI Aayog in 2016 to revive the construction sector.[4] This reform will offer the much-needed liquidity injection to the cash-strapped construction industry, which is still recovering from the impact of the COVID-19 pandemic.
Furthering the Digital India initiative
To keep time and cost overruns in check, the General Instructions have prescribed that the PEAs should implement electronic measurement books to record the progress of works and integrate the same with IT-based project monitoring systems. This development is in line with the recent announcement of the PM Gati Shakti National Master Plan, which envisages a digital platform to facilitate inter-ministerial and inter-departmental cooperation between 16 ministries to ensure coordinated implementation of infrastructure connectivity projects. The emphasis on IT-enabled project monitoring systems is a crucial development, which can assist in keeping a vigil on multivariate factors that contribute to time and cost overruns in projects. The machine learning skills embedded in AI driven data analytics tools can assist both the public authorities and the PEAs in conducting an accurate risk profiling of the project and generating deeper insights on the value of the project during its life cycle, including while tendering the projects for participation by private players.
Other notable reforms introduced by the General Instructions
Land related reforms:
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Projects are executed over a long period of time and discovery of land-related issues during the construction phase often leads to costs overruns. The availability of architectural and structural drawings before the invitation of tenders and the inclusion of comprehensive land survey in the tender document is a welcome move, which will help in risk assessment at an early stage of the procurement process and allow bidders to make informed decisions regarding their bids.
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Some of the recent concession agreements contain clauses that provide for minimum necessary encumbrance free land to be made available by the authority to the concessionaire. While the General Instructions have granted a legislative recognition to this emerging trend, guidance notes on the implementation of time-bound land acquisition procedures could have helped further the resolve.
CONCLUSION
The General Instructions have been released at a time when the government of India is planning to invest Rs 111 lakh crore in the infrastructure sector as part of the National Infrastructure Pipeline. Given that public procurement constitutes 20% of India’s GDP, the new wave of reforms introduced by the General Instructions is certainly a step in the right direction and, with proper implementation, will go a long way in creating an efficient procurement and project management ecosystem in India.
For further information, please contact:
Ajay Sawhney, Partner, Cyril Amarchand Mangaldas
ajay.sawhney@cyrilshroff.com
[1] Ministry of Statistics and Programme Implementation, “114th Project Implementation – An Overview (October 2021)”, available at: http://www.cspm.gov.in/english/pio_report/PIO_October_2021.pdf (last accessed on: December 8, 2021).
[2] “Non-consulting services” have been defined under Rule 197 of the General Financial Rules, 2017 as “any subject matter of procurement (which as distinguished from ‘Consultancy Services’), involve physical, measurable deliverables/outcomes, where performance standards can be clearly identified and consistently applied, other than goods or works, except those incidental or consequential to the service, and includes maintenance, hiring of vehicle, outsourcing of building facilities management, security, photocopier service, janitor, office errand services, drilling, aerial photography, satellite imagery, mapping etc.”
[3] Ministry of Finance – Department of Expenditure, “Office Memorandum: Insertion of Rule 227A in General Financial Rules (GFRs) 2017 – Arbitration Award” dated October 29, 2021, available at: https://doe.gov.in/sites/default/files/Insertion%20of%20Rule%
20227A%20in%20General%20Financial%20Rules
%202017-Arbitration%20Awards.pdf (last accessed on: December 8, 2021).
[4] NITI Aayog, “Measures to revive the Construction Sector” September 6, 2016, available at: https://pib.gov.in/newsite/PrintRelease.aspx?relid=149576 (last accessed on: December 8, 2021).
