Public sector undertakings (PSUs) often face dilemmas while finalising high-value procurement contracts in a market where prices are falling. This is because there are no clear-cut government guidelines. If they scrap tender and invite fresh bids to take advantage of the decline in price, they are open to allegations. On the other hand, if they go ahead with tendering and place an order, they can end up paying much more than the prevailing market price, leading to a serious financial loss to the nation.

A case in point is Dredging Corporation?s (DCI) tendering for procurement of dredgers. DCI, which comes under the ministry of shipping, floated a global tender in 2008. However, the tender failed to elicit an enthusiastic response from bidders because of tight market prevailing at that time. IHC-Holland was the only supplier that submitted a bid against the tender. The overseas supplier quoted a price of $120 million (about Rs 600 crore) per dredger.

But the global financial meltdown of mid-September 2008 led to a severe demand contraction in the dredging industry. DCI did not award the contract and kept seeking extensions from the bidder.

Meanwhile, some international dredge suppliers approached the DCI with the proposal that they can supply the required dredges at half the price quoted by IHC-Holland if fresh bids are invited. Besides, they also said that they can deliver in a much shorter time than that committed by IHC-Holland. The Netherlands-based supplier has committed to deliver the supply over 24-30 month period.

However, DCI has rejected the proposal. Instead, it has moved its proposal seeking investment clearance through the public investment board route so that the order could be placed on IHC-Holland. The PSU has argued there is an urgency to finalise the contract.

If DCI finally places an order on the original bidder for three dredgers, it would end up paying Rs 900 crore, more than the prevailing market price. That would be a big loss to the country. However, the DCI?s management cannot be blamed for this decision because there are no clear-cut government guidelines. Rather, there is a risk that if the management scraps the tender, it could trigger a controversy and invite Central Vigilance Commission (CVC) scrutiny.

It is true that many PSUs made significant cost savings by re-tendering in the aftermath of the meltdown, which led to a drastic decline in international prices of key raw materials. But in the process, they also generated a lot of controversy.

For example, public sector gas marketer GAIL India significantly cut its estimated implementation cost for the Dahej-Vijaipur pipeline upgrade project by re-tendering. However, GAIL?s re-tendering decision also attracted a CVC probe. Besides, the decision was also challenged in the Delhi High Court by Mumbai-based Man Industries, which had emerged as the lowest bidder for the project.

The gas marketer had told the court that it has the right to scrap tender without furnishing any reason. GAIL argued that it had resorted to the move after Man Industries challenged its bid for price reduction. The court dismissed Man Industries? writ petition. Leave alone re-tendering, the CVC guidelines do not even allow price negotiations with the lowest bidder under normal circumstances. It has clearly laid down that there should be no negotiations by the central PSUs with the lowest bidder, barring certain exceptional situations. Such situations would include procurement of proprietary items, items with limited sources of supply and items where there is a suspicion of cartel formation.

The CVC?s logic is that negotiations should not be allowed to be misused as a tool for bargaining with the lowest bidder with dubious intentions, or lead to delays in decision making. And, in no case should the overall timeframe exceed the validity period of the tender and it should be ensured that tenders are inevitably finalised within their validity period.