Is the L1 tender system the best?

DEBATE

After Huawei won the BSNL bid for CDMA phones but didn't fulfil the contract, the lowest-bidder-wins (L1) tender system is being questioned.

Y L Agarwal,
Former CMD,
TCIL

With the opening up of the Indian economy and the easing of restrictions on purchase of equipment from abroad, there has been a spurt in the interest shown both by Indian as well as foreign companies as far as participation in government tenders is concerned, especially in sectors where FDI has been hiked. In the case of telecom, BSNL and MTNL continue to be among the largest in terms of equipment and services on a turnkey basis.

The procedure for inviting offers in the tenders is straight forward, with a notice of the tender appearing in leading newspapers, followed by the sale of tenders that invite offers after eight to 12 weeks "" generally separate envelopes for technical and commercial offers "" and the appointment of a tender evaluation committee. The committee examines various offers and then shortlists the vendors. The commercial offers are then opened in presence of the vendors and are evaluated. The lowest of these offers (L1) is selected and awarded the tender. This procedure is followed in most government departments for decades.

But of late there has been criticism that the government awards contracts to L1 and does not award it to a vendor with much more sophisticated equipment that may be costlier than L1. This plea, at times, is put forward by transnationals who find it difficult to cut costs for their equipment that are not manufactured in India.

The practice of selecting L1 is still relevant not only for government departments but even for private firms. If you leave the field open for the best equipment, even if they are not L1, one is treading on a dangerous path because the best itself is subjective. You land up paying more than L1 but how can this selection be done? This process is likely to invite a lot of criticism from other bidders and even legal proceedings may be initiated, resulting in stalling of the tender.

In order to eliminate the possibility of selecting a wrong L1 vendor, it may be desirable to pre-qualify vendors before offers are invited from them. This would mean that you pre-qualify the vendors after the notice of the tender ensuring that there is a sufficient number of vendors to ensure healthy competition. The criteria for pre-qualification for a equipment supplier could be the type of equipment, how long it has been in service, requirement of spares and so on. You can then permit the pre-qualified vendors to purchase the tender documents and invite technical and commercial bids from these vendors, with the process of selection of the L1 vendor continuing as is.

Thus, the present method of awarding contracts with slight modifications will help get the most suitable equipment at the minimum possible prices. 

C S Rao,
President & CEO,
Lucent Technologies Hindustan Pvt Ltd

Telecom technology procurement, particularly for telecom infrastructure on the lowest-bid method has severe limitations as the PSUs don't necessarily get global-class, proven and time-tested products from market leaders in the segment.

Telecom product investment is a long-term investment for a minimum of 10 years with a system software upgrade capability support for seven years. The cheapest product in the PSU bid would not be as competitive if the total life cycle cost is to be taken into assessment, especially for telecom infrastructure projects. Besides, if solutions are selected purely on the basis of the lowest bid, PSUs will end up with multiple technology solutions in a given territory of deployment, thus giving rise to inter-operability issues, and non-uniform service experience to the end subscribers. PSU operators will then be forced to build multiple levels of operational expertise on multiple vendor products in the network Infrastructure. PSUs face stiff competition and so the time to launch a service plays a significant role. The lowest price bidder tends to compromise and takes aggressive technical compliance commitments and then tries to buy time to perfect the product at the cost of the buyer. As custodians of public wealth , PSUs should set the standards for national infrastructure building by selecting equipment with enough weightage given to areas such as market leadership of the vendor, the global proven-ness criterion, the stability of the product and the conforming to global standards of quality and reliability. The long-term sustainability of the equipment, the vendor and global market analyst's reports should also form a part of the selection criterion, so that the national infrastructure investment is protected with reference to the operation, maintenance and control over a long time and life-cycle basis.

Simple paper-based technical compliance status should not mean technical qualifications of the vendors for commercial and price bid openings. A thorough technical trial or prior certification for ensuring absolute compliance should be mandatory. The PSU's procurement division must have a market reference price with relation to input cost of materials by a market leader. That will give a fair assessment of the price of the product in the global and Asian markets at such volumes. This would avoid predatory pricing by non-serious and short-term players and ensure that the country gets the equipment from reputed market leaders. For instance, the customs department has a reference price for imports such as, say, mainframe computers, servers, RDBMS software, NIB routers and so on. PSUs have a responsibility to maintain the procurement prices at global levels and should not be seen to encourage attempts at dumping.