India needs to move government contracts from L1 to T1 format

As someone working in close proximity of the tender-driven public infrastructure space since three decades, I am developing a lot of sympathy for Nitin Gadkariji, as he is trying the almost-impossible, i.e., change the deeply corrupted non-performing government contract ecosystem into a performing one.

I can see that he is aggressively driving the infrastructure construction and hence will obviously be facing the eternal problem that has plagued our construction sector since ages, i.e., the need of price discovery and awarding the project to the lowest bidder (L1).

We all know that L1 method rarely yields the right contractor or the right cost of the project. As we have only focused on saving money while ignoring everything else, L1 is a complete disaster and a large part of India’s infrastructure built using public money is a proof of its failure.

If we admit honestly, the L1 path has been the root cause of a triple whammy, i.e., bad construction quality, corruption and, worst, the Kafkasque delays.

With contractors offering practically unworkable rates, L1 method has made contract-administration in India a stressful juggling act for the government officials. Once a contract is won, a contractor turns into a son-in-law of the government with onus on completing the project passed on to the government officers.

As Gadkariji is a pragmatic grassroots leader in touch with the ground realities of India, I am not going to waste my time explaining how L1 leads to the aforementioned and instead suggest an alternative worth considering if one really wants results.

From the changes ushered in Gadkariji, I can see that he is now trying to shift public sector contracts to Engineering, Planning and Commissioning (EPC) mode. It is surely a good option where the central idea of price discovery is protected, but it comes with one big limitation that will prevent it from being universal.

EPC will work very effectively in projects like roads and even bridges where the scope of design and work is simple and parity between bidders is easy to achieve but it is not a viable route for complex projects where various design alternatives can offer different solutions for one project, as it will be difficult to compare oranges, apples and other fruits that different contractors can offer on the plate.

As EPC will need qualitative and hence subjective evaluation in complex projects, it can turn into a new route for corruption that can get worse than the existing L1 route.

While EPC can still be used in projects where design and scope is clearly defined, we need to find a workable alternative for other complex projects and for that I want policy-makers to consider a key advantage that is available in case of civil engineering for identification of the best agency for the project without violating the expenditure framework.

The reason why the option I am proposing is practically possible is because construction engineering is a highly evolved branch where costs and quantities of items to be executed is easy to work-out beforehand. So, it is not at all difficult to do a theoretical price discovery without the help of the market. As reasonably correct cost estimation is completely possible, we can move away from our obsession for L1.

This is also a wiser move because if we look at the real problem with infrastructure building in India, it is not cost overrun.

Our problem is time overrun, and in infra-space, time overrun will actually turn out to be far more expensive for the nation than any cost overrun.

A large public hospital built at 100 crores in 5 years is cumulatively far more “expensive” than the same hospital built for 500 crores in 1 year.

As time is the real essence of any contract, I suggest the following:

All public domain projects must be fully designed and estimated by either the state or central public works departments or private consultants.

All estimates must be market-linked for key items (that form 70 % of the material value).

The bidding must NOT be on the price but must be based on the construction duration offered by the contractor.

Instead of L1, the project must be awarded to the T1 bidder who has offered the shortest time-frame for completing the project.

All T1 based projects must have clearly defined stages of time-linked performance and steep penalties for violation including termination of contract with liabilities for the delay.

To make it fair, the entire schedule must also be linked with a dynamic model (fixed beforehand) where any delay in payment from the government will automatically adjust the time frame accordingly.

And, if I am to have my wish list completed, a dedicated and only-arbitration-based dispute resolution mechanism must be put in place for all government contracts. With arbitration system in place, we can not only prevent the delays that generalist courts end up causing in disputes, we can also have international players putting more faith in the sector that can surely do with FDI inflow.

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