MANAGEMENT OF GUARANTEES GIVEN BY THE GOVERNMENT OF INDIA

INTRODUCTION:

The government provides a guarantee on behalf of an entity when it does not have the requisite creditworthiness/track record to raise capital or contract a loan on its own and therefore, seeks protection under the overall umbrella of the government. Article 292 of the Constitution empowers the Union Government to give guarantees in respect of loans raised by others within such limits as may be fixed from time to time by an Act of Parliament. Such guarantees constitute contingent liability of the Government. Central Government gives guarantee to Public Sector Banks (PSBs) for some of the transactions of Public Sector Undertakings (PSUs). Guarantees are given by the Union Government for the repayment of borrowings and payment of interest thereon, repayment of share capital and payment of minimum dividend, payment against agreements for supplies of materials and equipment on credit basis, etc., on behalf of Government companies/corporations, Railways, Union Territories, State Governments, Local Bodies, Joint Stock Companies, Co-operative institutions etc. Government of India (GOI) often issue guarantees to cover part or all of the risk that a borrower will fail to repay a loan or other guaranteed asset or that an institution will fail to fulfill its obligations. PSUs may also avail cash credit from PSB against the Govt. Guarantee e.g. Hooghly Dock & Port Engineers Ltd., Calcutta. Requirement of Government of India (GOI) guarantee as collateral security to avail cash credit facility is a statutory requirement as per Reserve Bank of India (RBI) guidelines for the companies incurring losses.

BASIC ISSUES:

Government of India has started its economic reforms with great emphasis on fiscal consolidation. Therefore the issue of fiscal deficit has come to the fore. Public debt has become an integral element of overall program of economic reforms. There has been a shift to market related rates of interest on borrowing by Central Govt. Apart from deficit and debt, the issue that has significant implication for the sustainability of the fiscal position, is that of providing guarantees. With guarantees, element of risk is always associated, hence transparency with regard to its policies and magnitude have raised concerns regarding their proper management.

Guarantees given by government carry liability on the government. The conventional debt statistics reported in the budget take into account explicit liabilities of the government arising from its own budgetary transaction. It excludes the implicit liabilities, which govt. have assumed while providing guarantees to private or public sector. Conversion of an implicit liability into an explicit one at a later date depends on the financial status of the beneficiary of the guarantee. However, it is not included in the conventional debt statistics on the basis of the presumption that all contingent liabilities are eventually vacated by the solvent borrower with no implication for govt.’s financial health.

Difference between government’s contingent and non-contingent liabilities is that nominal obligation and the settlement date of the latter are fixed at the date of issue, whereas in case of former (contingent liabilities), the contractual obligation is dependent on its timing and amount, on the occurrence of an event such as, default by the principal obligant / borrower. Former is the obligations arising out of a discrete event that may or may not arise. As mentioned earlier, contingent liabilities could be explicit or implicit. Law or contracts are two ways whereby explicit liability is recognised as to implicit obligation of the government it mainly reflects public expectations. State guarantees issued on behalf of sub-national governments and public and private sector entities fall in the category of explicit contingent liabilities. Credit guarantees, trade and exchange rate guarantees offered by the State, state insurance schemes such as, for deposits, crops, floods, minimum returns from pension funds etc., are also in the category of explicit contingent liabilities. Hence, contingent liabilities are the contractual obligations of the government to provide for any eventuality of default by the borrower either on principal amount borrowed or interest payment on such amount or both.

Implicit contingent liabilities would include, (i) Defaults of sub-national governments and public entities on non-guaranteed debt and other obligations, (ii) Liability clean-up in entities being privatised, (iii) Bank failures (support beyond state insurance), (iv) Failures of non-guaranteed pension funds or other social security funds, (v) Default of central bank on its obligations (foreign exchange contracts, currency, defence), (vi) Collapses due to sudden capital outflows and (vii) Environmental recovery, disaster relief, military financing.

Government is considered to be sovereign hence its guarantee is absolute. That is the reason why fiscal authorities are also often compelled to cover the losses and obligations of the central bank, sub-national governments, state- owned or large private enterprises, the failure of which would threaten the system. Implicit contingent liabilities are not recognised until a failure occurs. Markets expect government support far beyond its legal obligation if financial stability is at risk as the Asian crisis amply demonstrated. Implicit contingent liabilities grow with weakness as in the financial sector, macro economic policies, and regulatory and supervisory system and information disclosure. In the context of international private capital flows such weaknesses elevate risks of asset bubbles and over borrowing.

Explicit contingent liabilities are generally recorded only when the contingency is evident, i.e., when the guarantee must be redeemed and the necessary budget provision made. The general ledger system used for accounting can also have a subsidiary system devoted to registering and tracking the status of guarantees. As the guarantees become due are redeemed, the necessary action is initiated to make provisions in the budget.

Guarantee Fee

There are a number of guarantees given by various Ministries/Departments of the GOI to the PSBs in respect of various PSUs. Loans and working capital facilities have been provided by PSBs to a large number of PSUs, and some of these were covered by Govt. guarantees. These guarantees are generally given for a year and extended every year. In the past, the Govt. regularly renewed these guarantees. This exercise of extension of guarantees is carried out by analyzing the merits of the case. Though terms and conditions of these guarantees are not uniform, government ordinarily charges fee from PSUs/Inst. to offer these guarantees. Rate of fee varies from type, quantum and nature of guarantees.

Government charges guarantee fee on a per annum basis. There is however, no uniformity in the charging of such fees i.e. there are cases where guarantee fee is not at all charged or charged at different rates. Guarantee Fee thus charged is deposited in the Consolidated Fund of India (CFI) with no linkage with the invocation of guarantees. Guarantees are given by Govt. and its effect in not taken into account. This year a Guarantee Redemption Fund has been created with a nominal contribution of Rs. 50/- crores. Keeping the volatility of market in view, assessment of likely redemption needs to be made more pessimistically. Hence, calling for and providing guarantees need to be done more selectively. Normally fee itself should be so structured to reflect the risk and ensure that receipt of fees would be enough to take care of devolvement under the guarantees.

In a circular issued by the Ministry of Finance in April 1992, the guarantee fees to be charged on guarantees given by the Central government were prescribed. Borrowings under the market-borrowing program were to be charged fee of 0.25 per cent per annum whereas in case of guarantees covering public sector borrowings the fee was were fixed at 1.00 per cent and for other sectors it was 2.00 per cent. Problems associated with timely payment of guarantee fees are common. Instances of lack of proper management of guarantee fees have also been reported. There are cases where Institutions are not paying guarantee fee on one pretext or the other.

Outstanding cash credit availed by Hindustan Shipyard Ltd. (HSL) from State Bank of India was converted into `term loan’ against the Govt. Guarantee. This term loan came into existence on 31/3/1995. The converted amount of term loan was Rs.173.23 crores and it was to be paid over a period of 10 years with a moratorium of 3 years. Obviously it called for extension of Govt. Guarantee for a period of 13 years. Government agreed that HSL would pay guarantee fee @ 1%. This was done in the process of capital restructuring of HSL. HSL did not remit the guarantee fee and requested for overall reduction in it. Initially guarantee was extended for a year subject to payment of guarantee fee @ 1%. However HSL represented subsequently to extend guarantee for 13 years and guarantee fee to be charged should be only 1% for the entire period of guarantee. It has not paid the guarantee fee nor has the condition of HSL improved enabling it to repay the loan.

HONOURING OF GUARANTEES

In the past, cash losses of sick and poor functioning PSUs were funded from the Budget. This practice has since been discontinued but many of such PSUs are still getting working capital etc. from the banks on the strength of guarantees. Banks are ready to extend credit/loan to such PSUs because they have full confidence in Central Government Guarantees. In general banks assess the risk while giving credit/ loan on the basis of following parameters:

The company should be commercially viable with a stable position in the market

The profitability record for the last three to five years should be good and there should be a prospect of continued profitability.

The debt equity ratio should be at a maximum of 2:1 and the current ratio1:3 and

Reasonable inventory levels should support the credit built up.

If above criteria is followed, most of the PSUs would not get credit/loan without the cover Central Government Guarantees. However, this practice of relying heavily on Central Government Guarantees has resulted in increase in the cases of default of regular payment by PSUs leading to increase in guarantee invocation.

As per the practice in Banking industry, the guarantees are invoked when the borrower does not pay the interest on principal on due date after giving required notices and following the recall process. In many cases government approached court of law seeking its help in deferring/disallowing the payment demanded in lieu of the guarantees. It has been made clear by the courts of Law that amount guaranteed by Govt. is as good as amount committed to be paid in the event of failure of the Public Sector Undertaking. The solvency of the principal is not a sufficient ground for restarting execution of the decree against the surety. It is a duty of the surety to pay the decretal amount. A guarantee is a collateral security usually taken by a Banker. The security will become useless if his rights against the surety can be so easily cut down. (AIR 1969 Supreme Court The Bank of Bihar Ltd. vs. Dr. Damodar Prasad.) Similarly, as per the decision given by Supreme Court in SBI V/s Saksaria Sugar Mills Ltd. & other (AIR 1986) under section 128 of the Indian Contract Act, 1872, save as provided in the contract, the liability of the surety is co-extensive with that of the Principal debtor . The sureties thus become liable to pay the entire amount. Their liability is immediate and it is not deferred until the creditor exhausted his remedies against the principal debtor. Kerala High Court, too, gave the verdict in the case of V. Velayudhan V/s SBI stating "when a guarantor gives an undertaking to a person for advancing money to a third party, the guarantor knows that the other person would not advance money without such a guarantee. In other words, the money is advanced on the strength of the confidence reposed in the guarantor of the performance promised or undertaken. In that view, the position of a guarantor is very near to that of a trustee.”

Due to the above type of judicial verdicts govt. is left with no option but to pay the money to the bank, whenever a guarantee is invoked. That is precisely the reason behind phenomenal increase in such cases. The information on invoking of guarantees by banks is being regularly collected by Reserve Bank of India. However the figures thus collected may not reflect the true picture. There may be cases where the unit is before BIFR and any recovery proceedings are under suspension.

 NATURE AND PATTERN OF GUARANTEES

Contingent liabilities of the Union Government is increasing because of its role in promoting investment with reduced credit risk for investors, especially in those activities where the nature of investment is characterized by long gestation periods. Total outstanding guarantees of Govt. of India from 2002 to 2006 are presented in the Table-1 below. There is a significant growth in the guarantees in last 5 years. Total guarantees given by central government in nominal terms has risen from Rs.96,859 crores to Rs. 110,626 crores. However, in terms of percentage to GDP, it has gone down from 4.0% to 3.13%. This drop does not appear significant but keeping the growth in GDP in mind it may reflect an altogether different picture.

TABLE-1

STATUS OF GUARANTEES GIVEN BY GOVERNMENT OF INDIA
		(Rs. in Crores)
GUARANTEES AS ON	SUMS GUARANTEED OUTSTANDING	RATIO TO GDP
31ST MAR,2002	96,859	4
31ST MAR,2003	90,617	4
31ST MAR,2004	87,780	6.7
31ST MAR,2005	107,957	4.27
31ST MAR,2006	110,626	3.13

Indian Parliament has set no limit on the guarantees given by Government. Ideally guarantees should be extended upon the security of Consolidated Fund of India. These liabilities should always be analyzed in terms of receipts accruing to the Fund. Outstanding guarantees and receipts have been tabulated as under (Table-2), guarantee as percentage to receipts has also been shown in the same table. Outstanding guarantee as percentage of receipts is declining but it indicates higher growth in receipt in comparison to outstanding guarantees. This significant amount of guarantees is a cause of concern. Level of guarantees may not imply immediate obligation but could imply a large burden on finances in future. Therefore government will have to be extra vigilant in extending guarantees.

TABLE-2

STATUS OF GUARANTEES VIS-A –VIS RECEIPTS ACCRUED IN CONSOLIDATED FUND OF INDIA
			(Rs. in crores)
GUARANTEES AS ON	SUMS GUARANTEED OUTSTANDING	RECEIPTS ACCRUED IN CONSOLIDATED FUND OF INDIA	OUTSTANDING GUARANTEE AS PERCENTAGE OF RECEIPTS
31ST MAR,2002	96859	265278.8	36.51%
31ST MAR,2003	90617	299826.1	30.22%
31ST MAR,2004	87780	319100.1	27.51%
31ST MAR,2005	107957	376871.1	28.65%
31ST MAR,2006	110626	430939.8	25.67%

 Accounting of Guarantees:

Ministry of Finance has issued guidelines even for the record maintenance and accounting of guarantees. When guarantees are invoked, the expenditure involved should be treated as loan to the persons/parties on whose behalf the guarantees were given and recoveries there against should be watched. Both the expenditure and recoveries, if any, should be classified in the Government account under a distinct heads. If in due course, the whole or a part of the loan amount is finally held to be irrecoverable, the same should be adjusted in the manner indicated below: -

a.    Where a Guarantee Reserve Fund already exists, the amount of loan held to be irrecoverable should be adjusted by debit to the Fund by following the accounting procedure prescribed for accountal of expenditure financed from Reserve Funds.

b.    Where a Guarantee Reserve Fund does not exist, the amount or loan held to be irrecoverable should be adjusted as ‘Irrecoverable loans written off’ against the purpose or function it is raised. Where, however, the loan cannot be identified with any purpose/function, the amount should be adjusted as ‘Miscellaneous General Services’.

c.    Guarantee Redemption Fund: Government has decided to set up Guarantee Redemption Fund (GRF) for settlement of claims arising out of invocation of Govt. Guarantees. Every year provision would be made for building up the corpus of the fund. Every year, provision thus made, may be used for settlement of claims and net amount raises balances under GRF. GRF is a non-interest bearing Fund. PSBs invoke guarantees given to PSUs. Amount thus invoked is paid by the MINISTRY/ DEPT having the administrative control of PSU. For this purpose budget is provided in the Demand of that Ministry/ Dept. A lump sum provision is made by Dept. of Economic Affairs. Effect of the transaction on respective Ministry/ Dept. would lead to no deficit. On the basis of the a brief budgeting and accounting procedure prepared by Director, Budget, following accounting procedure was suggested by the O/O CCA, Ministry of Finance:

ACCOUNTING PROCEDURE

1. GRF would be created under Major Head 8235- General and Other Reserve Fund with a new minor head with the nomenclature ‘Guarantee Redemption Fund’. The amount provided as transfer to the fund will be accounted for under the minor head ‘Transfer to Guarantee redemption Fund’, MH-2075 – Miscellaneous General Services, minor head 797.

Receipt to the MH –8235-xxx-GRF would, effectively be, the amount decided by Government. However, payment from the same would be resultant of transaction arising out of invocation of guarantees by PSBs.

Debits to the MH-2075-797- Transfer to GRF shall be covered by budget provision made in the Grant of Department of Economic Affairs, Ministry of Finance.

Accounting entry:

Dr 2075- Miscellaneous General Services - 797 -Transfer to GRF

Cr. 8235-- General and Other Reserve Fund -xxx -GRF

2. Demand of respective Ministry would show budget provision against their loan head.

MH xxxx- Loan to ministry / Department

xxx- Transfer form GRF

3. If guarantee were invoked by PSB against any PSU, payment would be released by the Ministry/ Dept. having administrative control over the said PSU. Ministry would issue sanction to their PAO for releasing payment out of the budgeted provision. Thus, PAO would watch the budget at its disposal.

Accounting entry:

Dr MH xxxx- Loan to Ministry / Department

xxx- Transfer form GRF

Cr. MH 8670 - Cheques and Bills

4. As transaction should have no effect on loan head of the Ministry/ Dept. a minus debit is passed to the above loan head and corresponding debit is passed to the final head i.e. GRF.

Accounting entry:

Dr MH 8235- General and Other Reserve Fund

xxx -GRF

(-)Dr MH xxxx- Loan to ministry / Department

xxx- Transfer form GRF

5. Once the guarantee is invoked, respective PSB gets the payment. This payment is made on behalf of concerned PSU. It is booked as loan with no net effect on the loan head of the concerned Ministry/Dept. The case where repayment of such loan takes place has not been covered in the brief procedure.

6. Guarantees given by GOI are accounted for and managed by the respective Ministry/Dept. Record of invoked guarantees should also be available with them. Concerned Ministry/Dept should monitor payment and repayment of invoked guarantees.

 POLICY ON GUARANTEES:

There is no explicit policy on management of guarantees. In the interest of prudent financial management and credibility of the guarantees issued, there is a need for a policy on guarantees. Not only this, the interest of govt. also needs to be protected in scientific and efficient manner. Therefore, ensuring a responsible policy and honoring of guarantees once issued is of paramount importance. However, in order to have a sound system of offering guarantee and honoring them as well as analysis of cases where extension of guarantee is allowed there must be a responsible policy.

Process of policy formulation may start with collection of relevant information and subsequent analysis of the same. To start with, firstly, it is of great significance to know the quantum of guarantees issued by the Govt. for various purposes. If possible the impact of such guarantees on govt. may also require an assessment. Secondly, cases where govt. has to honor these guarantees are also required to be found out along with its impact on PSBs/ inst.

Though guarantees do not form part of debt as conventionally measured, these have in the eventuality of default the potential of exacerbating an apparently sound fiscal system. Conventional fiscal adjustment programme aims at reduction of fiscal deficit and debt. It does not necessarily prevent fiscal instability, as it does not emphasize the hidden fiscal risk associated with contingent liabilities of the government. Both at national as well as international fora, it has been recognised that in the context of fiscal stability and sustainability, the policy makers should identify, classify and understand the full range of fiscal risk involved in contingent liabilities. Thus, a meaningful analysis of guarantees issued by Govt. would also require an assessment of the finances, particularly, the debt burden and related issues. To carry out this analysis, information is required in a structured form on guarantees given by Government. In this direction Government Accounting Standards Advisory Board (GASAB) has come up with standards and format for disclosures. If information is collected category-wise, purpose-wise etc., then guarantees’ risk assessment and consequent provisioning in accounts as well as revision of existing policy on guarantees can be done in a more scientific manner.

At micro level, the criteria to be followed while giving Central Government Guarantees need to be decided in detail. This may cover the entire gamut of guarantees given in respect of borrowings etc. of public sector and private institutions, as well as the levels at which the decisions are to be taken. The cases, depending upon their merit should be handled at different levels. Approval must be granted after scrutinizing the case in great detail.

Some general guidelines may be handy while deciding on Guarantees. i

1. Any proposal for guarantee by Government must be justified by public interest.
2. The proposal for a guarantee, which amounts to undertaking contingent liability, should be examined in the same manner as a proposal for a loan.
3. Individual cases should be decided at different levels depending upon the amount and nature of guarantees.
4. In the case of Guarantees in favour of private institutions, all cases should be got approved by the Ministers concerned (Minister in-charge of the Ministry as well as the Finance Minister). If the amount involved exceeds Rs.10 Lakhs in each case (each institution or group of institutions if the same party is connected with it, the limit being applied after taking into account the guarantees already given in respect of the institution or group of institutions) may be considered for being submitted to the Cabinet for approval.
5. Cases involving borrowing from banks and issue of guarantee to public sector financial institutions or borrowings from foreign lending agencies should be handled by Ministries in consultation with Department handling the related technical issues.
6. Where public sector undertakings require guarantees to be given to foreign suppliers they should normally approach banks for guarantees. Only where the banks are not satisfied about the viability or the finances of the projects and bank guarantee is not available, a proposal for counter guarantee by Government is likely to be made. In such cases it will be preferable for Government to give straight guarantees to the foreign lending agencies/suppliers provided the agencies/suppliers find this arrangement acceptable.
7. Public Sector Undertakings, now days, undertake works in foreign countries which involve furnishing of guarantees counter guarantees for the tenders, mobilization advances retention money, performance guarantee etc. Such cases should be dealt with the Ministries concerned.
8. Budget Division; Ministry of Finance should be consulted on all proposal of market borrowing. Insurance Division of the Ministry of Finance should be consulted on proposals of negotiated loans from LIC & GIC.
9. The Administrative Ministry undertakes a consolidated review of all the Government guarantees given during a year. Such reviews help to assess the actual performance of the guarantees and would enable a decision laid down whether any modification in the criteria already laid down is necessary or whether the guarantee could be discontinued.
10. All cases of guarantees outstanding at the end of a calendar year are reported to Budget Division, Ministry of Finance by the concerned Ministry/Department. All payments made in pursuance of the guarantee are also reported. These should be monitored closely.
11. It is important to link the issue of extension to performance of the PSU. The real issue is whether lending to the public sector is equivalent to Govt. security or it is to be based on commercial judgement.
12. It has been noticed that number of guarantees and the amount guaranteed have increased manifold over the years and that once a guarantee is given it tends to be a perpetual guarantee. In respect of sick PSUs the guarantees have not been related to any turn-around packages/measures. Possibility of such linkage must be explored.

 CONCLUSION

Till recently, loans and advances guaranteed by the Central and State governments carried zero risk weight. Vide credit policy 1998-99, 20 per cent risk weight was introduced for such advances where guarantee has been invoked and the concerned State Government has been in default as on March 31, 2001. Several states e.g. Karnataka have come up with legislation to manage and control state guarantees. Similar provision needs to be introduced for the guarantees given by Central Govt.

Excessive counter guarantees given by Government to public sector, especially to enterprises which are not viable e.g. Hindustan Shipyard Ltd., could raise concern due to its potential adverse implications for the financial sector balance. The hidden subsidy to the beneficiary of a guarantee, and the subsequent potential cost to the government, is positively correlated with the coverage (part risk, size, and duration of the underlying asset. In addition, the probability of default may be very high if the guarantee contract does not specify risk sharing by both the government and the other parties in terms of both the financial coverage (part versus all of the loan) and risk coverage (specific political or commercial, versus all risks). Government guarantees routinely cover all risks fully. Such guarantees distort the markets and are called with high probability. The risk a government assumes can be estimated based on the experience, absorption capacities, simple rules, and, where appropriate, more sophisticated methodologies such as actuarial, econometric, loss estimate, and option pricing models. Assessment of risks allows governments to reflect the potential fiscal cost associated with guarantees in their choices of policies and forms of support and in the design of a guarantee contract. In this context it would be advisable to have a limit on calling for and providing for guarantees.

Explicit policy on the management of guarantees is highly desired. Though guidelines and circulars have been issued from time to time there is a need to take a fresh look on the issue of management of government guarantees. While framing/ re-framing a policy on guarantees a holistic approach needs to be taken.

Guarantee fee is charged on guarantees given by Government. Fee collected is credited to a separate head. It does not have any linkage with the Guarantees redeemed. It would be advisable to levy appropriate fee on guarantees and credit it to the Guarantee Redemption Fund. This would enable the fund to grow out of its own resources.

References:

1. Budget documents of Government of India.
2. Civil Accounts Manual, Published by Controller General of Accounts, Government of India.
3. Annual Reports of RBI.
4. Finance Account 2002, 2003, 2004, 2005 and 2006
5. General Financial Rules of Government of India
6. Indian Contract Act,1872
7. Report 1 , 2003,2004,2005,2006 and 2007 of Comptroller and Auditor General Of India
8. Various orders and instructions issued by Ministry of Finance on the issue of Government Guarantees.

Chart-1

Procurement in Public Organizations in India:

1.1       Introduction:

Procurement in public services is special, as it requires transparency, economy and efficiency. All procurements are required to be done by following due process which is not elaborate and there are several concerns in the minds of the purchase managers. Organizations look forward to attain best value for money taking into account principles of efficiency, economy and transparency. Best value for money implies the use of optimum criteria which incorporates total cost of ownership of the goods necessary to satisfy the long term goals of the organization, along with satisfactory performance in use. A better procurement process is expected to provide:

(i)     Robust contract monitoring and control mechanisms to ensure effective assessment of all the options in specified circumstances throughout the life of the contract.

(ii)    Transparent and fair Procurement process facilitating optimum competition possible in procurement of goods.

(iii)   Providing sufficient notice & opportunity to bidders and hence provide equal opportunity to market players to do business with the organisation.

(iv)  Ensuring proper diligence and accountability in all procurement decisions.

(v)   Achieving a uniform, systematic, efficient and cost-effective procurement process. The process should also be in accordance with the applicable rules & regulations of the Government.

1.2       Canons of Financial Propriety

There are fundamental canons of Financial Propriety for competent financial authorities (CFA) in Government and Public Sector that they must pay due regard to the following principles, while sanctioning financial expenditure: -

(i)   The expenditure should not prima facie be more than the occasion demands, and that every CFA should exercise the same vigilance in respect of expenditure incurred from public moneys as a person of ordinary prudence would exercise in respect of his own money.

(ii)   No authority should exercise its powers of sanctioning expenditure to pass an order, which will be directly or indirectly to its own advantage.

(iii)  Public moneys should not be utilised for the benefit of a particular person or section of the community unless –

a)   The amount of expenditure involved is insignificant; or

b)   A claim for the amount could be enforced in a Court of Law;

c)   The expenditure is in pursuance of a recognised policy or custom;

(iv)  The amount of allowances, such as travelling allowances, granted to meet expenditure of a particular type, should be so regulated that the allowances are not on the whole, a sources of profit to the recipients.

2.1                       Basic Aim of the Procurement Function

The basic aim of the procurement function is to ensure five essential parameters in every procurement decision (these are called the 5 R’s of Procurement):

(i)     Right quality

(ii)     Right quantity

(iii)    Right ‘price & value' for money

(iv)    Right ‘Time & Place' of delivery

(v)    Right source of supply.

2.2                       Laws/Guidelines governing Procurement

While India has no separate legislation for the specific purpose of public procurement, there exist various rules, legislations & directives which guide public procurement process, key among them being:

(i)             Constitution of India

(ii)            General Financial Rules (GFR),2005, Government of India (GOI) and Delegation of Financial Powers Rules, 1978

(iii)           Ministry of Finance, GOI, Manual for Procurement of Goods and Services, 2006

(iv)          Indian Contracts Act, 1872

(v)           Sale of Goods Act, 1930

(vi)          Arbitration and Conciliation Act, 1996

(vii)         Competition Act, 2002 as amended with Competition (Amendement) Act, 2007

(viii)        The Information Technology Act, 2000 (IT Act, regarding e-Procurement and e-Auction, popularly called the Cyber Law)

(ix)          Export Import Policy of Government of India

(x)           Foreign Exchange Management Act (FEMA) and FEMA (Current Account Transactions) Rules, 2000

(xi)          Central Vigilance Commission (CVC) guidelines related to public procurement

(xii)          Right to Information (RTI) Act 2005

These guidelines and directives have been studied, and appropriately incorporated into this manual.

2.3                       Special obligations of Public Procurement

Over and above the principles of Procurement, Public Procurement places onerous obligations on the Public procurement Organizations – which distinguish Public procurement from Procurements done by Private Organizations.

2.3.1     Equality for Bidders

Right of equality before law (Art. 14) and the Right to carry out any profession (Art. 19 (1) g), are as follows:-

“FUNDAMENTAL RIGHTS

Right to Equality

§14. Equality before law. - The State shall not deny to any person equality before the law or the equal protection of the laws within the territory of India.

Right to Freedom

§19. Protection of certain rights regarding freedom of speech, etc.-

(1) All citizens shall have the right-

(a) to freedom of speech and expression;

(b) to assemble peaceably and without arms;

(c) to form associations or unions;

(d) to move freely throughout the territory of India;

(e) to reside and settle in any part of the territory of India; [and]

(g) to practise any profession, or to carry on any occupation, trade or business.”

These have been interpreted by Courts in such a way, so as to ensure that every citizen of India has a right to get equal opportunity to bid for and be considered for a government/public contract.  However this provision does not debar the organization from laying down reasonable eligibility or prequalification criteria for selection of successful bidders in a contract. Thus a Public Procurement Organization should be ready to prove in court that no bidder has been denied equal opportunity to bid and be considered for the concerned contract.

2.3.2     Transparency and Disclosures of Procurement Decisions

Under the Right to Information Act, 2005 (RTI Act); every citizen has the right to demand transparency and information in Public Dealings including Procurements. Thus a Public Procurement Organization should be ready to provide Documented Record of its Procurement Process/ Decisions to general public who may not be conversant with intricacies of Public Procurement.

2.3.3     External Accountability

Apart from internal accountability to which even Private Sector Procurements are subject to, Public Procurements are answerable and accountable to a number of external organizations, like Parliament and Parliamentary Committees, CVC, CBI, C&AG, Concerned Ministries etc. Thus a Public Procurement Organization has to conduct its procurements and keep records in such a way that the decisions can be explained to Organizations who may not be fully conversant with peculiarities of its operations.

2.4                       Fundamental Principles of Public Buying

Every authority delegated with the financial powers of procuring goods in public interest shall have the responsibility and accountability to bring efficiency, economy and transparency in matters relating to public procurement and for fair and equitable treatment of suppliers and promotion of competition in public procurement.

The procedure to be followed in making procurement must conform to the following yardsticks:-

(i)     The specifications in terms of quality, type etc., as also quantity of goods to be procured, should be clearly spelt out keeping in view the specific needs without including superfluous and non-essential features, which may result in unwarranted expenditure. Care should also be taken to avoid purchasing quantities in excess of requirement to avoid inventory carrying costs;

(ii)    Offers should be invited following a fair, transparent and reasonable procedure;

(iii)   The procuring authority should be satisfied that the selected offer adequately meets the requirement in all respects;

(iv)  The procuring authority should satisfy itself that the price of the selected offer is reasonable and consistent with the quality required;

(v)   At each stage of procurement the concerned procuring authority must place on record, in precise terms, the considerations which weighed with it while taking the procurement decision.

3.1       Committees

3.1.1     Bid Opening Committee (BOC)

Role & Mandate: Bid Opening Committee (BOC) shall be responsible for opening of bids and ensure that EMD, if required is there and bids are submitted in due format.

Composition: The bid opening committee shall comprise of one purchase officer, one officer from the Finance department and one officer from technical section. The day wise (Tuesdays and Fridays) standing committees should be constituted for opening of bids. The committee approved for a particular day shall open the bid due to be opened on that day. Committee shall be approved for every quarter with the approval of Head of Department.

3.1.2     Tender Evaluation Committee

Role and Mandate: Tender Evaluation Committee (TEC) members, wherever required shall be approved by CFA. Approval shall be accorded on the recommendation of Purchase Officer. The key role and mandate of the TEC will be as follows:

(i)     The TEC will check whether the participating bidders satisfy the eligibility criteria in respect of the Tender Notice and declare the eligible parties (responsive tenders). Bids of only the eligible bidders shall be processed for evaluation thereafter. The evaluation criteria for evaluating the tender should be predetermined, pre-disclosed and documented in the tender documents.

(ii)    To evaluate the techno-commercial responses of the bidders and ensure that they meet user requirements in a comprehensive manner, in cases where two bid system is used.

(iii)   To mark the scores of the bidders as per the tender terms and conditions of the Tender Document.

(iv)  To rank the bids by scores/ marks awarded or prices and identify the preferred bidder to be considered for approval by the competent authority.

(v)   Make comparative statement in case of both Technical and price/Financial Bid.

(vi)  The TEC shall have the mandate to carry out the evaluation of all eligible tenders and select the preferred eligible bidder, duly monitoring compliance of laid down purchase procedures in all stages of the tender, reasonability of estimates and bids (e.g. ascertaining whether rates are fair or not) and, if required, associated technical details of the tender.

(vii) To prepare a report and forward its findings to the competent authority.

3.1.3     Condemnation Committee (CC)

CC members, wherever required shall be approved by CFA. Approval shall be accorded on the recommendation of Purchase Officer.  Condemnation Committee will recommend disposal of surplus/ obsolete items and condemning capital and security items.

Role & Mandate: The key role and mandate of the Condemnation Committee (CC) are as follows.

(i)     Evaluate users’ request for disposal against available data on book value.

(ii)    Decide whether the goods recommended for disposal by competent authority or inventory audit, should be disposed-off, or retained in inventory, and categorize disposable goods into surplus/ unserviceable/ condemned/ obsolete/ unusable / scrap with reasons for disposal.

(iii)  The Committee will recommend condemnation and CFA, on the basis of recommendation of the committee issue Condemnation Certificate as acceptance to the condemnation report.

3.2       Types of Procurement

Seen from budgetary point of view, procurements can be categorized into following types:

·         Capital Procurement

·         Revenue Procurement

·         Indigenous Procurement

·         Foreign Procurement (Import)

3.2.1    Capital Procurement

Expenditure of a capital nature shall be an expenditure with the object of increasing assets of material and it should include charges for first construction and equipment of a project as well as charges for immediate maintenance of the work while not yet open for service.

3.2.2    Revenue Procurement 

Revenue procurement should bear all subsequent charges for maintenance and all working expenses; these include all expenditure on working and upkeep of operations. The revenue procurement, therefore, is for items and equipment including replacement equipment (functionally similar) assemblies/sub assemblies and components to maintain and operate already sanctioned assets in the service, the necessity of which have been established and accepted.

3.2.3    Indigenous Procurement

Procurement from indigenous sources is called indigenous procurement.  Proper loading criteria for all taxes, duties and other expenses involved in procurement of an item need to be applied to provide level playing field to the indigenous manufacturers. Payments against indigenous procurement are normally made in rupee terms.

3.2.4    Foreign Procurement (Import)

For such equipment and assets, which are of foreign origin, items required to maintain and operate the equipment also need to be procured from suppliers abroad. Payment against foreign procurement is made in foreign currency through a Letter of Credit (LC) or Direct Bank Transfer (DBT)

3.3       Modes of Procurement

The following are the various mode of procurement that can be resorted to, with details:-

·         Nomination Basis Tenders

o    Proprietary Article Purchase (PAC)

o    Single Tender

·         Open Tenders

o    International Competitive Bidding (ICB)

o    National Competitive Bidding (NCB)

·         Limited Tender Enquiry (LTE)

·         Purchase of Goods by Purchase Committee (Local Procurement)

·         Rate Contracts (RC)

·         Repeat Orders

3.3.1    Proprietary Article Purchase

·         Certain items, particularly equipment and spares, are the Proprietary product of a manufacturing firm. Such items are only available with that firm or their dealers, stockist or distributors as the detailed specifications are not available for others to manufacture the item. In such situations, a Proprietary Article Certificate (PAC) is issued in favour of the original equipment manufacturer (OEM) and items procured on PAC basis from that particular firm or their authorized dealers or distributors. While PAC is issued only in respect of the concerned OEM, the item may be bought from any supplier listed in that particular PAC provided supplies are accompanied by a proper manufacturer certification. PAC once issued will be valid for one year from the date of issue unless cancelled earlier.

·         PAC bestows monopoly and obviates competition. Hence, PAC status must be granted after careful consideration of all factors like fitness, availability, standardization and value for money.  Even if last procurement was on PAC basis, the next PAC certificate may not be issued without a fresh review.

·         It is clear that PAC certificate will be given only when this item is manufactured only by the recommended firm but there are two different circumstances:

(i)     There may be no other firm who manufactures similar or alternative items.

(ii)    There may be other firms manufacturing similar or alternative items but no other make/brand is considered to be suitable for reasons that may be recorded. This also can be for two types of reasons:

(a)   There could be tangible reasons - like in case of spares for specialized Machines, it is necessary to buy items from OEM only for reasons of warranty and so as not to endanger the functioning of the machine.

(b)   There could be other reasons which may not be tangible.

3.3.2    Single Tender

Invitation to one firm only is called ‘Single Tender’. Single Tendering for non PAC items may be resorted to only on the grounds of existing or prospective emergency relating to operational or technical requirements. The reasons for single tender enquiry (STE) and selection of a particular firm must be recorded and approved by the CFA prior to single tendering.

3.3.3    International Competitive Bidding (ICB)

ICB procedures should be adopted in following situations if any of the conditions mentioned below is true:

(i)     Non-existence of local representative of the global principal of the manufacturer/ supplier.

(ii)    Requirement for compliance of specific international standards in technical specifications.

(iii)   Absence of sufficient number of competent domestic bidders likely to comply with the required technical specifications.

(iv)  Goods contracts exceeding the threshold of Rs Twenty Five (25) Crores.

(v)   ICB is similar to open tendering but involves participation of foreign firms in the bidding process.

Terms & Conditions

(i)     ICB tenders shall be openly advertised and copy of the NIT should be sent to the embassies of the prospective bidders and posted on website and the Indian Trade Journal - ITJ. All bidders shall be allowed to submit bids, and after pre-qualification shall be used to determine responsive tenders.

(ii)    ICB tender documents must be in English and express a freely convertible currency.

(iii)   ICB tender documents must contain technical specifications which are in accordance with national requirements which are also based on an international trade standard.

(iv)  The bidding period shall not be less than 6 weeks from the date of advertisement or the date of availability of the tender document whichever comes later.

(v)   Relevant Inco Terms should be included in the tender  

3.3.4    National Competitive Bidding (NCB)

NCB procedures should be adopted for all annual tenders in any of the following situations:

(i)     All common use items with clear technical specifications.

(ii)    Items which are ordinarily available in open market but it is found necessary to evaluate competitive offers to decide the most suitable and economical option available. 

(iii)   Goods contracts exceeding the threshold of Rs twenty five (25) Lakhs.

Bidders already registered are also free to participate in NCB. NCB is normally a two-stage bidding, first stage of which evaluates credential of bidders.

Terms & Conditions

(i)     All interested parties should be allowed to bid for the tender, and after pre-qualification shall be used to determine responsive tenders.

(ii)    Invitations to bid shall be advertised in at least one widely circulated national and local newspaper of wide publication and on website.

(iii)   Deadline for submission of bids shall be at least thirty (30) days from the last date of issue of the Tender Documents. Extension of deadline of submission shall not be allowed without prior concurrence of Head of Department when:

(a)     for the first request from the bidders for extension if it is longer than eight (8) weeks; and

(b)     for all subsequent requests from the bidders for extension irrespective of the period;

(c)     Re-tendering shall not be carried out without the prior concurrence of the HoD.

3.3.5    Limited Tender Enquiry (LTE)

LTE procedures should normally be adopted, for procurements when estimated value of procurement is upto Rs. Twenty Five (25) Lakhs. Copies of the bidding documents should be sent directly by speed post/courier/e-mail to firms which are registered suppliers.

Prospective bidders for LTE should be selected in a non-discriminatory manner from its registered bidders’ data-base and it should also select a sufficient number of suppliers or contractors (at least three) to ensure effective competition.

Terms & Conditions

(i)     The minimum number of suppliers to whom LTE should be sent is six. In case less than six approved suppliers are available, LTE may be sent to available approved suppliers with approval of the competent authority duly recording the reasons.

(ii)    In case it is proposed to exclude any registered/ approved supplier, detailed reasons like failure in supply should be duly recorded and approval of competent authority be taken before exclusion.

(iii)   Adequate time should be given for submission of quotes, which should not be less than three weeks. Longer period (six weeks) could be given in case of import of the materials and in complex cases, if justifications are given and allowed.

(iv)  In limited tendering, suppliers or contractors should be selected from whom to solicit tenders in a non-discriminatory manner and it shall select a sufficient number of suppliers or contractors to ensure effective competition.

(v)   Before resorting to limited tendering it would be essential to ensure that the demand is not split into small quantities for the sole purpose of avoiding the necessity of taking approval of the competent authority required for sanctioning the purchase of the original demand or for avoiding NCB mode of Procurement.

3.3.6    Local Procurement: Purchase of Goods by Purchase Committee

Purchase of goods upto Rs.1,50,000/- only on each occasion may be made on the recommendations of duly constituted local purchase committee consisting of three members as follows:

One member from the user department/ administration/ associated/affiliated, one member from finance and accounts department and one member from purchase. Purchase department representative shall act as member secretary of the committee. Such purchases shall be approved by concerned CFA of the level as per delegation.

Terms & Conditions

(i)     Quotations shall be solicited from as many different suppliers as possible but in any case not less than three.

(ii)    Depending on circumstances, quotations may be submitted via email, telex or fax if so specified.

(iii)   Before resorting to local procurement, it would be essential to ensure that the demand is not split into small quantities for the sole purpose of avoiding the necessity of taking approval of the higher authority required for sanctioning the purchase of the original demand or for avoiding LTE or NCB mode of Procurement. If in any case it is essential to split the work than the approving authority shall be same (who has given the approval for the work)

(iv)  Annual review of such procurement shall be done to ensure that in future procurements are done by following open tender.

3.3.7    Rate Contracts (RC)

RC procedures should be adopted for procurements in following situations:

(i)     Commonly used goods of low value needed on recurring basis by various user departments.

(ii)    Goods for which Rate Contract is convenient to operate economically.

However, RC should not be operated in following situations:

(i)     In case of goods of low value and which are required by the users in very small quantities, rate contracts should not be concluded.

(ii)    Rate Contract may not be resorted to for the scarce/ critical/ goods in perpetual short supply.

Examples of RC based procurement are spares, cartridges, Towels, Brooms etc.

Rate contract of DGS&D or any other agency approved by Government such as Kendriya Bhandar and NCCF may also be operated. In case items are not covered in such RCs or if it is decided to have own RC then it should be finalized through open tendering adopting NCB procurement procedures. As far as feasible termination period of different RC should be fixed in such a way so that tax rate changes during annual budget of the Government are avoided – since any adverse effect may frustrate the RC. Moreover termination period of RCs of different items should be staggered so that work load is evened out during the year. RC essentially is an agreement with the supplier at a specified price and terms & conditions (as incorporated in the agreement) during the period covered by the Rate Contract. No quantity is mentioned nor is any minimum commitment guaranteed in the Rate Contract. The Rate Contract is in the nature of a standing offer from the supplier firm.

Terms & Conditions

(i)     Rate Contracts shall be awarded to the firms who are registered for the goods in question and fulfill the laid down eligibility and qualification criteria including availability of ISI mark, service centers across the country etc. Suitable stipulations are to be incorporated in the tender enquiry documents to this effect.

(ii)    In respect of new items being brought on rate contract for the first time where there is no registered supplier (for the subject items), the requirement of registration can be relaxed with the approval of competent authority. The award of such rate contracts will, however, be subject to the suppliers’ satisfactory technical and financial capability.

(iii)   Some of the bidders (who are otherwise registered for the subject goods) may also be holding current rate contracts and/or held past rate contracts for the required goods. Their performance against such earlier/current rate contracts shall be critically reviewed before they are considered for award of new rate contracts.

(iv)  Specific performance and achievement criteria as on a selected cut-off date is to be evolved for this purpose and incorporated in the tender enquiry document. The bidders will be asked to furnish the relevant details (along with their tenders). Their performance and achievement should be judged against the past/ current rate contracts. These criteria are to be evolved and decided by the purchasing department during procurement planning stage for incorporation in the corresponding tender documents.

(v)   The purchase department should post the descriptions, specifications and other salient details of all the rate contracted goods, appropriately updated, on its web site and forward a hard copy for use by the procuring user departments

3.3.8    Repeat Orders

Repeat Orders is an extraordinary exceptional process and is not normally resorted to. Repeat orders against a previous order may be considered for approval by the respective CFA under exceptional circumstances subject to the following stipulation, recording the reasons for the same: -

(i)     It should be exercised only after exhausting the provisions for option clause in the original contract and only in extra-ordinary unforeseeable cases of existing and prospective emergency for which there is not enough time to procure the material by processing the procurement case in the normal manner. 

(ii)    In case of security items, if there is a delay in finalizing a tender due to non-receipt of security clearance from relevant Govt. Deptt, a Repeat Order may be exercised.

(iii)   Concerned items ordered have been delivered successfully, in the original contract.

(iv)  Original order did not cover urgent/emergent demand.

(v)   It is not placed to split requirement to avoid sanction of the next CFA.

(vi)  That there is no falling trend in prices for this item as evidenced from the fact that in the intervening period neither orders have been placed at rates lower than this contract nor any tender has been opened where such rates have been received even though tender is not yet decided.

(vii) The firm is prepared to hold the same prices terms and condition including delivery schedule as per requirement.

(viii)The requirement is for stores of identical nature/specification, nomenclature etc. Minor improvements in spec(s) or phasing out of products due to obsolescence should not be precluded from purview of repeat order.

(ix)  It is placed within 9 months (12 months in case of security sensitive machines/ items) from the date of last supply against previous order and only once.

(x)   Repeat order quantity is to be normally restricted to a maximum of 50% of last order quantity, both in case of indigenous procurement and import orders. In case of S.O/contract where option clause has been availed of, total of both option and Repeat order quantities should not exceed 50% of the originally ordered quantity.

(xi)  The original order placed should be on the basis of lowest (negotiated) price and was not on delivery preference.

(xii) Repeat Order should not be exercised in case of Development orders.

(xiii)This provision could also be exercised in case of PAC/Single Vendor OEM case.

(xiv)   However, where multiple vendors are available, necessary care should be taken in exercising Repeat Order so that the original tender decision of splitting quantities and differential pricing is not upset or vitiated. Other things being equal, repeat order should first be considered on the vendor with lower rate.

Exercise of Repeat Order provision should be a rare occasion. Since the circumstances of operation of Repeat Order are unforeseeable, provision for repeat order should not be made as a matter of course in the Tender as these clauses have an impact on price. In the absence of a clause in the Tender, repeat order exercise may be treated as procurement under PAC.