And now, H1-itis PDF Print E-mail
Wednesday, 07 May 2014 03:24
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NHAI suffers the pain of irrational exuberance

Anyone dealing with PSUs in India is familiar with the havoc wrought by L1-itis, or the vigilance-driven rule that mandates PSUs issue tenders for most purchases and then award it to the lowest bidder. As with any law, well-intentioned as it may sound on paper, it gets distorted—and ossified—in its implementation. So, the Central Vigilance Commission now states there must be no post-tender negotiations with even the L1-bidder. And the most extreme form of this was the recent opinion of the Solicitor General in the Taj Mansingh case where, in the matter of renewing the contract, it was argued that putting the hotel up for a bid—and giving the Taj the option to match the best bid—would be tantamount to a post-tender negotiation and therefore violative of CVC guidelines.

A lesser known version of L1-itis, of course, is H1-itis, where the rule is that the highest bidder must be awarded the contract. This newspaper is a supporter of auctions, but irrational exuberance causes its own set of problems as National Highways Authority of India (NHAI) has discovered over the past year, and telecom firms over the past several years—fortunately, good auction design can largely take care of this problem. In the case of telecom, the problem was one of constrained auctions—with no spectrum in sight, firms bid the moon for whatever little spectrum was put on offer; put more spectrum on auction, and the bids will automatically get more reasonable. In the case of NHAI, firms bid all manner of amounts for road projects and then, over a period of time, used one pretext or another—it helped that NHAI was not able to procure the necessary land and/or environmental clearances—to walk out of the project. In a downturn, it is obvious any developer will find it difficult to implement projects. But given the huge difference between bidders—GMR bid R636 crore as the first-year premium versus L&T’s R303 crore for the Kishangarh-Ahmedabad expressway, FE reported Tuesday—surely the lower bidder would have found it less onerous.

Under the circumstances, the Deepak Parekh committee’s proposal that NHAI find some way of short-listing serious bidders is one that needs to be implemented. One method, recommended in the past as well, is to short-list bidders on the basis of their experience in building infrastructure, even to keep in mind their net worth. The suggestion was, however, rejected in the past on grounds it discriminated against smaller firms. But surely it makes sense to award contracts, especially the bigger ones, to firms that have the capability of executing them, the experience of handling large projects as well as the balance sheets to take the strain of a downturn? Nor is it true that smaller players are kept out completely—if the technical bids have experience as a criterion, smaller firms can tie up with larger ones to be able to qualify and, when they build enough roads/airports/ports, they can bid on their own. The principle worked well in telecom, and that’s why minnows like Bharti Airtel tied up with global majors in 1994—yes, Bharti Airtel was a minnow back then. NHAI, as well as others bidding out infrastructure projects, would do well to keep this reality in mind.


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