Unleashing govt's procurement power

As a consumer, the government can play a crucial role in unlocking the potential for innovation in Indian companies

The government and its agencies are large buyers of a wide range of goods and services. For example, it is the sole buyer of defence equipment. Public sector undertakings procure inputs for their production processes and are all required to comply with a procurement system that has become increasingly rigid and subject to strict process oversight, including auditing and vigilance. Tenders have to be issued inviting bids for supply with precise specifications. Prequalification criteria for bidders are prescribed. The lowest bidder, or L1, has to be awarded the contract.  Retendering takes place if only one bid is received.

This process, however, has an inherent limitation, which needs to be recognised and addressed. In modern industrial society, innovative technologies and products are continuously being created. Those that provide better value to consumers succeed in the market. The innovative firm has a monopoly initially. It takes time, sometimes years, before competitors enter the market with comparable products. Our public procurement process has no space for the purchase of new innovative technologies and products from a single monopoly supplier. Procurement on a negotiated basis is not permitted. The consequence is that the government and its agencies cannot buy anything on the technology frontier. We have to wait for years for competitors to emerge so that tenders can be issued, a few bids are received, and a purchase decision can be taken. The decision to formulate new and improved specifications is a significant one in itself, better not attempted in the increasingly risk-averse organisational culture of public agencies.

Indian companies and startups may be having the potential for innovation, or may even be on the verge of one, for which the government and its agencies are the potential customers. But they do not have any market openings. Hence, the rational decision would be not to try and develop the idea and create a successful product using scarce resources. This results in a huge loss of potential gains for both the producer and government bodies as consumers. We now have a vibrant startup ecosystem and incubation centres. These can innovate to create new cost-effective and better products. Global champions could emerge on the back of successful supply to government agencies. However, these firms have to succeed in domestic markets first before trying to enter overseas markets.

A solution needs to be found, taking care of the core principles of transparency and equal opportunity. One way to proceed would be for each organisation to have an open window for receiving unsolicited offers from those who have developed a new product or process, with the proposal clearly bringing out the novelty of what is being offered, its benefits and the price. An Empowered Committee, including experts from outside the organisation, may examine all such offers every six months. In case the benefits are significantly higher than the cost, the Committee may then take up the offer, satisfy itself about the claims being made, negotiate to settle the price, and place a trial order. If the trial order is successful, scaling up to the extent required can be done. But for this to happen, there must be trust in the judgement of the members of the Empowered Committees, who, in turn, would need to be given the confidence to make decisions. What would really help would be an explicit assurance that in the absence of evidence of a quid pro quo, or assets disproportionate to means, investigative agencies would not look into their bona fide decisions.  After this process is in place and a few trial orders have resulted in success, there would be a surge in the effort by others to identify a gap, innovate, come up with an offering for which there is need, and get orders from the government and its agencies.

Further, innovation can be spurred by identifying specific problems and posing these as challenges. A problem needs to have a narrow focus. It should emerge from a real need so that if a solution is developed, procurement follows automatically. A firm, consortia, technical institution, individuals or any combination of these could be given the task of finding a solution. The effort to be undertaken in a project mode would need to be fully funded by the sponsoring agency. Failure as well as time and cost overruns are intrinsic to such an initiative and must be accepted explicitly at the outset to avoid apprehensions about subsequent audit investigations. After success, the price at which the product would be purchased would have to be settled through negotiations. There is no alternative to accepting procurement at a negotiated price and trusting the negotiators. In case the technological challenge is solved by a team from research institutions, then production responsibility may need to be given to a manufacturing firm via a search-cum-selection process. India has the benefit of successful work having been done along these lines by the departments of atomic energy, space and Defence Research and Development Organisation. But it has shied away from extending this to all its organisations. It is high time that it was extended to cover all public procurement to get the full benefit of the rapidly growing innovation capacities in the country and become a major innovation hub.

A window should be opened for receiving unsolicited innovation-based offers, considering them on merits in a transparent manner and taking purchase decisions on a negotiated price. This would be in addition to the normal competitive procurement process. Agencies may also identify specific needs for innovation, fund the effort, and, in case of success, buy the successful solution at a price that covers the cost and provides a reasonable margin. The key is to accept that innovation in the initial stage needs a negotiated price. Innovation would then start taking place across a broad canvas, ranging from waste management to recycling for a circular economy to critical materials and chemistries for the new green and hydrogen economies. India may well find itself on the global technology frontier far earlier than expected.

The writer is former secretary, DIPP, Government of India