Bidding Riddle

GAIL India has a spectacular track record in project implementation. But now, the company is caught in litigation due to a tender-related controversy that threatens to put its key investment behind schedule

Noor Mohammad Delhi
Tendering for Central public sector projects continues to raise controversy even as companies increasingly show their commitment to bring transparency and fight bad practices in their procurement process by joining the Integrity Pact (IP) of Transparency International.
At times, even interventions by the Central Vigilance Commission (CVC) prove ineffective in checking tendering controversies. In such a situation, a court of law is the only window left for the aggrieved party to seek justice. However, legal wrangling usually leads to undue time and cost overruns in project implementation. Hardnews is of the view that a developing country like India cannot afford this mismanagement of financial resources if it is to achieve its growth potential.

Public sector gas marketer, GAIL India, boasts of its project management skills and, rightly so. The company has a spectacular track record in project implementation. In the past, it has completed many big projects ahead of time and saved on the estimated cost. But at the moment, the company is caught in litigation that threatens to derail its key investment, the second phase of the Dahej-Vijaipur pipeline project.

It seems a major setback for GAIL given that the company had earlier completed the existing Dahej-Vijaipur pipeline project in record 14 months' time and made cost savings to the tune of Rs 600 crore. This won company the coveted National Petroleum Management Programme (NPMP) Award 2005 in enterprise category.

The Mumbai-based Man Industries - which emerged as the lowest bidder for the supply of pipes for the three sections of the GAIL's Dahej-Vijaipur pipeline upgrade project - has filed a case in the Delhi High Court against the project developer's decision to cancel the tender. The gas marketer told the court that it has the right to scrap tender without furnishing any reasons. GAIL argued that it had resorted to the move after Man Industries challenged its bid for price reduction.

Earlier, acting on a complaint from the contractor, the CVC had restrained GAIL from opening fresh prices invited from bidders. GAIL had made the move, citing fall in international steel prices. On its part, Man Industries argued that if GAIL wanted to invite revised price quotes, it should not have opened submitted offers.

Out of the four sections of different diameter and grade of pipes for which GAIL invited bids, Jindal SAW emerged as the lowest bidder for one section. GAIL awarded the contract to Jindal SAW for this section. But for the other three sections, Man Industries emerged as the lowest bidder. Jindal Saw came second in what turned out to be a close bidding race. However, GAIL held back on the decision to award the contract to Man. Instead, it asked the successful bidder to further reduce the offered price. In the meantime, GAIL sought three bid validity extensions from Man, saying that it needed more time to finalize the contract. Man Industries saw it as a discrimination against it. PSL, Welspun, Ratnamani and Corinth of Greece were also in the race for the project.

This is just one case. Tendering controversies take their toll on project implementation schedule across the entire infrastructure spectrum, from civil aviation to coal mining to power to oil and gas sector. As per statistics available with the ministry of project and programme implementation, there were a total of 552 Central sector projects in various stages of implementation as of March 2009. Of these, 280 were running behind schedule. Another 80 projects had no fixed commissioning schedule. The initially estimated cost of these 552 projects has since escalated by Rs 54,339 crore. Re-tendering is cited as a key reason for the reported slippages in project schedule.

Even the Vijaipur-Dadri-Bawana pipeline project, where GAIL was able to bring down the contract price after re-tendering, is running 12 months behind schedule. If this trend continues, it is difficult to say if the developer would be able to hold on to the initial cost savings till the end.

The CVC has clearly laid down that there should be no negotiations by the central PSUs with the lowest bidder, barring certain exceptional situations. Such exceptional 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 guidelines stipulate 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 cases 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.

Cases requiring extension of validity should be rare. In the exceptional circumstances where the validity period is sought to be extended, it should be imperative to bring on record in real-time, valid and logical grounds justifying extension of the validity.
The World Bank (WB) seeks strict adherence to its bidding guidelines for projects funded by it. However, the WB's bidding documents usually provide that developers may reject all bids. Rejection of all bids is justified when there is lack of effective competition, or bids are not substantially responsive or when bid prices are substantially higher than the developer's existing budget.

The WB has stipulated that lack of competition should not be determined solely on the basis of the number of bidders. Even when only one bid is submitted, the bidding process may be considered valid, if the bid was satisfactorily advertised and prices are reasonable in comparison to market values. The developer may, after the WB's prior approval, reject all bids. If all bids are rejected, the developer should review the causes justifying the rejection and consider making revisions to the conditions of contract, design and specifications, scope of the contract, or a combination of these, before inviting new bids.

If the rejection of all bids is due to lack of competition, wider advertising should be considered. If the rejection is due to most or all of the bids being non-responsive, new bids may be invited from the pre-qualified firms, or with the agreement of the WB from only those that submitted bids in the first instance.

All bids should not be rejected and new bids invited on the same bidding and contract documents solely for the purpose of obtaining lower prices. If the lowest bid exceeds the developer's pre-bid cost estimates by a substantial margin, it should investigate causes for the excessive cost and consider seeking new bids. Alternatively, the developer may negotiate with the lowest bidder to try to obtain a satisfactory contract through a reduction in the scope or a reallocation of risk and responsibility which can be reflected in a reduction of the contract price. However, substantial reduction in the scope or modification to the contract documents may require fresh bidding.
The WB's prior approval must be obtained before rejecting all bids, soliciting new bids, or entering into negotiations with the lowest bidder.

It is not that all public sector projects get delayed only due to tendering controversy. Sometimes, hired contractors also fail to deliver on their committed schedule, causing undue delay in project implementation. For example, implementation work on various petroleum sector projects including Indian Oil's naphtha cracker project at Panipat, residue upgrade project in Gujarat, Chennai Petroleum's (CPCL) Euro-IV project at Chennai is running behind schedule due to delay in delivery of key equipment by contracted supplier Bharat Heavy Electricals Ltd (BHEL). The public sector engineering equipment manufacturing monopoly has also proved to be a big letdown for the government on the power generation capacity addition front.