Why policymakers must stop awarding contracts to PSUs on nomination basis

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New Delhi | Published: April 29, 2017 4:45:59 AM

The role of CPWD has been divested to the public sector undertakings (PSUs), like NBCC by the line ministry.

Policymakers need to examine and stop the wrong trend of awarding contracts to PSUs on nomination basis.

Development of public infrastructure like roads, bridges, buildings is an important mandate for the government and a major yardstick of growth. Majority of this growth can be attributed to the Central Public Works Department (CPWD), the first public works organisation (PWO) created by Lord Dalhousie in 1854. CPWD, despite its glorious past and being the main agency for all services related to infrastructure development finds itself marginalised to only maintenance and repairs of government buildings, staff quarters, government bungalows, etc, and its huge work force of qualified architects and engineers is being wasted at huge cost to the public exchequer.

The role of CPWD has been divested to the public sector undertakings (PSUs), like NBCC by the line ministry. There is need to look back and explore this decline and gross underutilisation of an important institution. And, how this is resulting into huge losses, which could have been and can still be avoided. CPWD works under strict financial principles, and selection of contractors for construction of buildings, etc, is made strictly on competitive bidding based on the CVC guidelines. The CPWD Code, is like a bible for engineers and followed by all state PWDs. CPWD and state PWDs work on “no profit no loss” basis.

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However, in early 1960’s, the central government decided to create some PSUs like NBCC, HCL, etc, to compete with large private contractors for award of mega government projects, under the “purchase preference” and “price preference” policy, which enabled “preference” to the PSU for selection for major works as a ‘contractor”, even if the rates quoted by it were higher than the private bidder L-1 by some margin. In November 2007, the department of public enterprise, in compliance with the directions of the SC in the matter of Caterpillar India Pvt Ltd versus Western Coalfield Ltd and others, withdrew the “purchase preference” in favour of PSUs w.e.f, 31.03.2008.

However, in spite of this decision, some ministries continue to suppress competition by awarding mega projects to some PSUs on nomination basis, violating the CVC guidelines on the subject.
This practice has resulted in huge cost escalation and requires a public debate. It may be pertinent to note the example of the state government of Kerala. Taking note of higher costs generated due to award of contracts to PSUs on nomination basis during 2009-12, the government conducted a thematic audit and found that absent any competition the PSUs were also not able to complete the works on time and were facing cost over-run.

There was no mechanism available with the department to ensure that quality was maintained. The department did not exercise control over the concessions and privileges extended to PSUs and was not able to ensure that the benefits were not enjoyed by ineligible contractors. Consequently, the Kerala government (Finance Department) vide a government order dated 30.7.2014 issued stringent guidelines prescribing accreditation of the state PSUs by a high level committee before becoming eligible to be considered for government projects and restricted award of project contracts by nomination by only such departments or autonomous bodies which did not have any permanent engineering wing to only such PSUs (both Central and State PSUs) which agreed to follow Kerala PWD manual.

Further, it fixed the PMC cost to 5% for all such projects with estimated cost exceeding Rs 5 crore and a maximum PMC cost of 8% for projects for all works below Rs 1 crore. The other state governments need to emulate the Kerala example. The Competition Commission of India (CCI) on a complaint from the Builders Association of India (Kerala chapter) examined the issue of preferential treatment given to the Kerala State Construction Corporation Ltd (KSCCL) in the award of projects for civil construction works for the State government and held that while a separate market for ‘provision of services for civil construction works of the government “ exists but since in the said relevant market, KSCCL competes with 2,488 ‘A” class private contractors, it could not said to be dominant, and closed the complaint in 2015.

This shows that due to steps taken by the State since 2014, the State PSU is now made to compete with private contractors. But ironically, under the central government, awarding of large mega projects to a single PSU continues unabated. This trend started in 2010 due to an amendment in Rule 126(2) of the General Financial Rules, 2005 (GFRs), which equated PSUs, such as NBCC, etc, with central government departments like CPWD, MES, BRO, etc, which was not legally correct. Consequently, various central government departments assigned project works to central and state PSUs on nomination basis citing the above amendment in GFR 126(2). A lot of, 27, PSUs now claim to be PWOs.

Further, often the same PSU is assigned both architectural and engineering consultancy as well as construction job. This means that the same PSU will first prepare the building plan and design of the project, and also construct. There is a direct conflict of interest. If both roles are assigned to the same agency, the tendency to overlook discrepancies and errors in construction are likely to be ignored. PSUs are being appointed as project management consultants in some cases without tendering process. A duly executed agreement is necessary before execution of work on commercial basis as per GFR204. It is observed in some cases, no contract is being executed with PSUs and work is being done on the basis of an MOU.

Taking a cue from the Kerala government, the ministry of finance also amended the GFR 126 vide OM dated 13.4.2016, and re-introduced the distinction between PWO and PSUs dealing in construction projects. The amended GFR 126(3) mandates that while awarding projects to PSUs the ministries, departments, etc, shall ensure competition amongst such PSUs, essentially on the service charges or PMC to be claimed. This amendment clearly prohibits award of contract by central government to any PSU on nomination basis.

Despite the above amendment in April 2016, an MoU dated October 25, 2016 was signed directly (bypassing the CPWD, the authorised central government agency) between the ministry of urban development and NBCC for redevelopment of Nauroji Nagar, Sarojini Nagar and Netaji Nagar general pool residential accommodation colonies, with an estimated cost of Rs 24,862 crore. Besides this, eight other large contracts for re-development/development of other colonies, including East Kidwai Nagar, have been awarded to NBCC alone without competitive bidding even amongst PSUs.

Nine large mega-sized projects in Delhi alone are estimated to cost Rs 43,060 crore. Let us now try to see how this anti-competitive nomination to NBCC alone has caused huge loss to exchequer.
These nine works have been assigned to NBCC at a margin of 8-10 % of the estimated cost of the works that is approx. Rs 43000 crore. The average fee obtained through price competition for PMC provided by NBCC is approximately 1.5% of project cost for “Comprehensive Engineering & Architectural Planning services” (all consultancy jobs till NIT stage) and is approx. 1% of project cost for “construction supervision consultancy” (post NIT stage). If competition was allowed to be held even within the 27 PSUs only, then the rate comes approx. 3% of project cost for such services.

Thus, an approximate direct loss between Rs 3,010 crore (7%) to Rs 3,870 crore (9%) could have been avoided. Besides above direct loss, there will be huge indirect loss due to cost escalation which is inevitable in the absence of any supervision of NBCC work by CPWD. This gives rise to suspicion, and smacks of some “PWO scam” involving the MoUD and NBCC, which needs to be investigated by the concerned enforcement agencies, including CVC and CCI with its mandate of “preventing anti-competitive practices, preserving and promoting competition in India”. Besides, the policy makers need to examine and stop this wrong trend of awarding contracts to PSUs on nomination basis without any competition besides the declining role of CPWD to avoid further losses.

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