Sunil Jain: Cleaning up AAI

RATIONAL EXPECTATIONS

By now, most of us are probably familiar with the guidelines of the Central Vigilance Commission (CVC) on how to avoid favouritism while awarding tenders""simply do not enter into any post-tender negotiations with anyone, the CVC says, though there's some leeway when it comes to negotiating with the lowest-price bidder, provided that the end result ensures prices come down further. But what do you do in a situation where the specifications of the original tender themselves appear to favour one particular bidder, or when they're changed in the middle of the bid? This is the question that the Airports Authority of India (AAI) is now trying to grapple with, and now that he's got a full board (see Mr Ramalingam's five fingers, June 20, 2005), AAI chief K Ramalingam is in the midst of revamping the entire tender system within his organisation.

To begin with, as a matter of abundant caution, the AAI has transferred all officers that had anything to do with the tendering system till now""if done periodically, the idea's to ensure no officer gets too close to any bidder, as happens invariably over a period of time. In addition, there's now a policy that no tender conditions are to be changed after the bid has been called for (curiously, given how common this is, the AAI never had a policy prohibiting this), and a new system is being put in place to evaluate tenders which reduce the scope for human intervention""all bidders have to submit their price bids in a certain format, and from there, it's supposed to be a simple matter of just comparing one number with another.

In the case of a tender for aircraft for testing the Automatic Flight Inspection System (the aircraft is used to calibrate the equipment on the ground from time to time) a year ago, for instance, the AAI's original tender stated the aircraft must be able to fly up to a height of at least 35,000 feet""this virtually eliminated most aircraft and, in any case, you don't need to fly to 35,000 feet to be able to test the AFIS system. So, wiser counsel prevailed, and the specs were changed to 25,000 feet. After two bids came in, one for a larger aircraft and one for a smaller one, a new criterion was brought into the specs""the AAI now decided that they would look at the life-cycle cost of operating the aircraft. Naturally, the larger aircraft lost. And, in the case of the AFIS itself, while three of the five bidders were rejected on technical grounds, the AAI paid scant attention to the fact that the two remaining bids were actually from group companies and so they really had one bid.

In another case, of aerodrome simulators for training air traffic control personnel, after the financial bids were opened, the lowest bidder (L1) was disqualified on technical grounds! The next bidder (L2) was then told he would get the bid provided he matched the L1 price. How this was done is a story in itself. One of the pieces of equipment quoted in the L2 bidder's schedule cost $40,000 and this was reduced to $2,500 during the negotiations (there were other such instances). So far, so good. During the negotiations, however, the L2 bidder was allowed the sum of $100,000 as the cost of "factory optimisation"! It's another matter that there was no such head in the original tender/bid. The idea, in this case, was to allow the vendor to reduce hardware costs on which there is an import duty and make this up by increasing software costs on which there is no duty.

What is now proposed is that, as against the earlier procedure, which allowed vendors to change their hardware-software mix to dodge duty, the AAI will simply ask for costs regardless of duties, and evaluate the project costs on this basis. Changing the hardware:software mix to impossible levels (it's like saying 95 per cent of the value of your Dell laptop is software!) to get an advantage on customs duties, by the way, is common across all government purchases. Just recently, Lucent of the US alleged Chinese competitor Huawei Technologies had done precisely this in a BSNL tender for CDMA phones.

Spares are another big problem area. Vendors typically lower the cost of the original equipment and then inflate the cost of spares since they know a certain quantity of spares just has to be bought once they're in""printer manufacturers, by the way, do much the same thing when they virtually give away printers for free and then milk you on the cost of the ink cartridges. What the AAI is planning to do is to ask companies to draw up a list of all spares (or at least the important ones) and give their prices along with the original equipment""in which case, it will be in a position to come up with a proper evaluation of the actual life-cycle cost of the various equipment which is being bid for.

Here's wishing Mr Ramalingam all success.

suniljain@business-standard.com