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Friday, January 15, 2021

Inflation got back into the target zone

by Ajay Shah.

On 20 February 2015, MOF and RBI signed the `Monetary Policy Framework Agreement', and the power of monetary policy (i.e. setting the short term rate) got connected to an objective (get y-o-y CPI inflation to 4%, with a permissible range from 2 to 6 per cent). For some time thereafter, it worked rather well.

From late 2019, we have had problems with inflation. In December 2019, the bound was breached, when inflation reached 7.36 per cent. In the 12 months from December 2019 to November 2020, there was only 1 month (March 2020) where the value at 5.84 was within the 2-to-6 range.

There was considerable angst about this. For many people, aggregate demand was clearly adversely affected by social distancing, and the task of monetary policy was to stimulate demand. In this period, headline inflation being above 6 per cent was an irritant. It even proved, to some, that the very concept of inflation targeting was flawed.

RBI eased monetary policy using the many instruments that it possesses, including the repo / reverse repo rates where the votes of 3 external members of the MPC also count.

In my research network, we felt comfortable about the stance of monetary policy. Our models, which work with seasonally adjusted data, suggested that headline inflation would drop in December. The easing of supply restrictions that comes with post-pandemic normalisation would help address glitches in the price system. Our macroeconomic common sense suggested that at a time of weak aggregate demand, inflationary pressure was going to be low. This fed into our writings of this period: 7 Apr, 24 Jul, 24 Aug, 4 Dec, 11 Jan (the day before the December CPI release).

We now have a data release for December 2020 and headline inflation was reported at 4.59 per cent, which is close to the target of 4 per cent, and well below the upper bound of the target range, of 6 per cent:

Headline inflation, in the inflation targeting period


It speaks well for the Indian economic policy process, that the Ministry of Finance and RBI stayed the course through this period, and protected the inflation targeting system.

Wednesday, January 13, 2021

Announcements

Roundtable on public procurement and its impact on firms in India

The Finance Research Group and the Chennai Mathematical Institute are organising a web-roundtable on 'Public procurement and its impact on firms in India' on 22nd January, 2021 from 9:00 am to 12:30 pm. The roundtable will focus on identifying key issues in public procurement in India, distinguishing the symptoms from the causes and the pathways to building greater capacity in commercial contracting by the state.

Context

The Indian state is a large procurement body. Beginning with the central government and its agencies, CPSEs, state governments, SPSEs, municipal bodies, the state has a large presence in commercial contracting. Estimates suggest that the size of public procurement in India ranges from anywhere between 15-20% of GDP.

The discourse on public procurement in India has conventionally focused on issues of red tape, corruption and payment delays. Dues of the government to private enterprises are reported to have reached a magnitude large enough to be a drag on the economy. However, much of this discourse has been largely anecdotal. Over the last few years, digitisation of large parts of the Indian economy has created new sources of data that could support research-based analyses of the problems of public procurement and its impact on the financial health of firms.

This roundtable brings together academic researchers, practitioners and policymakers, to present and discuss their research to an interested group of peers and experts to elicit views and comments on their work.

Agenda

08:55 - 09:00 Welcome address
Susan Thomas, Economist
09:00 - 09:35 A cross-country comparison of procurement laws
Diya Uday, FRG-CMI and Anjali Sharma, S.P.Jain Institute of Management and Research
        Discussant: Sudha Krishnan, Department of Atomic Energy, Government of India (Retired)
09:35 - 10:10 Inefficiencies in government procurement processes: a demonstration
Anjali Sharma, S.P. Jain Institute of Management and Research and Shubho Roy, University of Chicago
        Discussant: Santhosh Mathew, BMGF
10:20 - 10:55 Break
10:10 - 10:20 Dispute resolution in public contracts: evidence from courts
Devendra Damle and Karan Gulati, NIPFP, Anjali Sharma, S.P. Jain Institute of Management and Research & Bhargavi Zaveri, FRG-CMI
        Discussant: Surya Prakash B.S, Daksh
10:55 – 11:55
Presentation:
Moderator:
Panelists:
Panel: Payment delays in public procurement contracts
Susan Thomas, Economist
Ajay Shah, Economist
Junaid Ahmad,World Bank
Rajiv Mehrishi, Former Comptroller and Auditor General of India
K.P. Krishnan, NCAER
Pradnya Saravade, Maharashtra State Police Housing Corporation
11:55 - 12:10 Summing up
Devesh Sharma,, BMGF
12:10 - 12:15 Closing remarks
Susan Thomas, Economist

For those interested in attending the roundtable, please get in touch with Shyna Adhia on shyna.adhiya@gmail.com.

Saturday, December 19, 2020

Announcement

Position for researchers in Public Policy

IDFC Institute is a research-focused think/do tank to investigate the political, economic, and spatial dimensions of India’s ongoing transition from a low-income, state-led country to a prosperous market-based economy. We provide in-depth, actionable research and recommendations that are grounded in a contextual understanding of the political economy of execution. Most of our work is directly with the government, both at the centre and state level. Our research is oriented towards informing policymaking and implementation within the government. We do not undertake research of an academic nature. Our research, reports, databases, and recommendations are in the public domain and freely accessible through our website: www.idfcinstitute.org.

IDFC Institute is seeking candidates for two roles:

  1. Junior Fellow
  2. Associate

Requirements for the Junior Fellow role

The Junior Fellow’s role will involve shaping the research question as well as communicating and institutionalising the solutions. This entails leading research teams for delivering outputs. The role requires strong leadership and problem-solving skills to tackle pressing policy challenges at the national and state level. Typically, you will be in charge of a research project, which can be a government engagement or an independent study that broadly fits within our pillars of work. You will be working as a team with other researchers at the Institute. Your key responsibility will be to deliver research reports, working papers, and briefing papers. While this is primarily a research role, your other responsibilities may include writing proposals, managing project and/or grant deliverables, institution building, providing inputs to senior fellows on strategy and process management. Below are the requirements:

  • A Masters degree and at least eight years of work and research experience
  • A PhD degree in the fields mentioned below is a plus
  • Candidates must have strong research, writing, and communication skills
  • Candidates with solid experience managing project teams and research teams will be given preference

Requirements for the Associate role

Typically, you will be working in a team on a project, which can be a government engagement or an independent study that broadly fits within our research pillars. Your key responsibilities will be to work on research reports, working papers, policy briefs, and manage research projects. Other responsibilities will include providing research inputs to senior management, liaising with government officials, donors and other stakeholders, and helping organise seminars, webinars, or meetings together with other institution building responsibilities. Below are the requirements

  • A Masters degree and at least five years of work and research experience
  • Candidates must have excellent research, writing, and communication skills
  • Should be comfortable taking initiative and working in a high paced environment

General Requirements

Candidates must have a degree in either Economics, Public Policy, Political Science, International Relations, Law, History, Sociology, Psychology, Statistics, or Mathematics from reputed universities. Candidates are expected to have the ability to formulate research questions, interpret and write about the findings, and communicate research to a generalist audience. Data analytic skills are extremely desirable. Proficiency in using statistical software and programs such as R, Stata, SQL, and Python is a bonus.

How to Apply

Please fill out the application form here.

Sunday, December 13, 2020

Emerging markets conference, 2020

The Emerging markets conference has come together, over the years, as an annual institution.  The 2020 conference is 14-18 December, in the evening IST every day. To attend, get in touch with shyna.adhiya@gmail.com

Thursday, November 26, 2020

What ails public procurement: an analysis of tender modifications in the pre-award process

by Shubho Roy and Anjali Sharma.

One source of low state capacity in India lies in the ability of the state to contract with private persons. The contracting process starts at procurement and runs till the final payment or dispute resolution. This process suffers from delays and disputes, to the point where managers in government feel uncertain about whether a given contract will work correctly, and private firms feel that doing business with the government is problematic. While difficulties in the last step (payment delays (link, link) and/or contract disputes (link, link) tend to loom large in the discussion, these are the final manifestations of weaknesses of the overall process of government contracting.

Research on government contracting is required in order to diagnose the sources of difficulty and design solutions. As an example, Lewis-Faupel et. al. (2016), analyse a database of 35,600 contracts awarded by the government under the Pradhan Mantri Gramin Sadak Yojana (PMGSY) to understand whether electronic procurement is associated with better procurement outcomes. They find some improvement in quality but not much impact on costs and delays. While state capacity in government contracting is an important problem, in the Indian context, there is a limited empirical literature on the subject. Due to difficulties with data, most studies rely either on small data sets (Goyal (2019)) or on the case study approach (Nag (2015)).

In this article we use a new dataset about the public procurement process in India to measure one aspect of the public procurement tender process: modifications made by the procuring entity to tender documents. We analyse the frequency and nature of these modifications and the possible impact these modifications might have on entities that participate in government tenders. We find that a large proportion of tenders that are published see modification and that government procurers make frequent modifications, especially in high value tenders. We offer some speculation on the causes and consequences of tender modifications.

Difficulties of measurement of the public procurement process

The Indian state buys through various entities and at various levels. Each government department or entity is responsible for following the General Financial Rules (GFR) and purchasing the goods and services it needs to meet its operating requirements. Most government departments or entities do not have a centralised purchasing office. Purchasing is, often, distributed geographically and by value. Small value purchases (relative to the entity's budget) are usually carried out by lower rung offices, while larger value purchases are carried by regional or even the national headquarters. Similarly, purchases of goods or services may be carried out at the location where it is required. For example, a contract to maintain an agency's local office may be advertised only in the city where the local office is situated. The fact that purchasing takes place at many locations makes it harder to assemble datasets about it.

The first step in the process is tendering for bids. Advertisements for government procurement called Notice Inviting Tenders (called NITs in this article) are typically published in local newspapers where the government entity is interested in procuring goods or services. If the proposed procurement is above a certain threshold, it is advertised in newspapers with a national circulation. Any attempt to get data from NITs would call for scanning hundreds of newspapers, every day.

A new opportunity for measurement

In 2011, a website called the Central Public Procurement Portal (CPPP) was established. From 2012 onwards, all central government organisations, including Central Public Sector Enterprises (CPSEs) and autonomous and statutory bodies under the Central government, are required to publish their tenders on the CPPP. Since then, in addition to publishing of tenders and awards information online a large part of the tendering process has also been automated using the portal. The mandate has evolved from e-publish to e-procure.

This website allows us to observe tenders from the date they are published till they are awarded. That is, from the time that the general public/interested bidders are informed that the government is interested in purchasing some goods or service or works, to the time that the government selects a supplier and awards the contract.

The problem of tender modification

In this article, we focus on one measure of state capability in the procurement process: modifications that are made to the NIT during the procurement process. When the government issues the NIT, interested vendors respond by submitting a bid document to the government. The NIT contains details about: (1) the item being procured (including details such as procurement category, technical specifications, bill of quantity, estimated value of procurement, delivery specifications and period of work), (2) qualifications for eligible bidders (financial and technical eligibility conditions), and (3) critical dates for the tender process (publishing date, submission date, opening date). Any modification that is made to the NIT after it is first published is a source of substantial cost on all entities interested in bidding for the government procurement. For instance, if the government modifies the qualification requirements for the bidder after publishing the NIT, those who originally qualified for the NIT may not qualify after the change. The effort taken to develop a bid is then wasted. Once tender modifications are endemic, at every stage in the process, bidders build in expectations about future fluctuations through tender modifications, and this reshapes their decisions to try to sell to the government and the price at which engagement with the government could be profitable.

The government often requires potential bidders to submit 'earnest money deposits' or EMD with their bids, which is a financial guarantee. Potential bidders need to take steps to tie up the funds required for this EMD. This typically involves an explicit cost, such as getting a line of credit from a bank, or an opportunity cost, such as keeping this money aside and not using it for any other purpose. If the period of the tender process is then extended by the government procurer, the period for which this cost has to be borne by the potential bidder also gets extended. In large value tenders, this cost can be substantial. This cost has to borne by all potential bidders. For instance, if six firms bid for a civil works tender where the EMD requirement is Rs.1 million, the aggregate cost to the economy is the cost of keeping Rs.6 million of capital aside till one supplier is selected. The selected supplier can internalise this cost in its bid. But for the five that are not selected, this cost does not have the offsetting benefit. It will influence the supplier's overall business, not just its current or future government engagement.

Similarly, modifications in the original technical specification of the goods and services in the NIT, may require interested bidders to substantially change their bid documents or even drop out of the process after incurring the costs of putting together the bid documents. If the date of the delivery of goods or services is modified, the ability of the supplier to manage its supply chain is hampered. Even when a firm feels confident that it will win a contract, unpredictable delays in tendering hamper efficiency in the production and supply process.

We find three mechanisms through which the NIT can be modified: (1) cancellation, (2) re-tendering, and (3) corrigenda. An outright cancellation is where the government procurer retracts its decision to purchase some goods or service. A re-tender is where a published NIT is withdrawn and replaced with a new NIT. This fresh NIT usually has substantially different provisions and requirements for the bidders. Corrigenda are issued when the government procurer wishes to make changes to the NIT that it deems as not so substantial as to warrant a re-tender, and instead amends certain terms of the NIT. Each of these three mechanisms of modifying NITs introduce uncertainty and costs for all potential bidders in the public procurement process.

These three mechanisms also make the tender process uncertain and costly for the government procurer. Procurers have to spend time and resources to prepare NIT documents, and frequent document changes add to this cost. For instance, if a tender is published and then cancelled, the effort and the resources go to waste. Similarly, frequent corrigenda also require time and resources to manage and monitor the change management process. If modifications to the NIT create disputes and complaints about probity from potential bidders, additional costs of investigation and enforcement alongside possible litigation arise. If frequent modifications to the NIT create an outcome of too few or no bidders, there can even be an extreme outcome of a failed procurement.

Given the uncertainty and costs that modifications to NIT can impose on both the government procurers and the bidders, we think of these three mechanisms for making changes as sources of errors in the tender lifecycle. Our dataset makes possible the measurement of the `modification rate' which is a metric of the friction in the procurement process.

A few entities account for most of the procurement

In November, 2020 there were more than 26,000 government procuring organisations registered on the CPPP. An average of 0.225 million tenders were published on the portal in FY 19 and FY 20 each. These tenders had an estimated value of Rs.8 trillion in each of these two years. We find that 11 procuring organisations within the Union government accounted for around 50% of the NITs by count and more than 80% of the NITs by value in both FY 18-19 and FY 19-10. Table 1 gives the details of the NITs published by these entities.

Table 1: The largest organisations by NIT count and value across FY 19 and FY 20

Organisation Share in count (%) Share in value (%) Average tender size (Rs. million)

Airports Authority of India 2.0 1.8 32
Border Roads Organisation 2.1 0.7 12
Defence Research and Development Organisation 3.3 0.2 3
Delhi Metro Rail Corporation 0.2 1.2 188
E-in-C Branch of Military Engineer Services 24.8 2.8 4
Engineers India Ltd 0.5 31.4 2,163
Food Corporation of India 2.1 14.6 241
IHQ of MoD (Army)-(OSCC) 14.9 1.3 3
Ministry of Road Transport and Highways 1.1 8.5 263
National Highway and Infrastructure Development Corporation 0.1 2.0 893
National Highway Authority of India 0.9 19.6 795

Total 51.9 84.2 57


The modification rate is high

For each of these entities, we study all three mechanisms for making modifications to NITs: cancellation, re-tendering and corrigenda. For cancellation and re-tendering, we examine the data from the CPPP analytics dashboard over the two year period, i.e. FY 2018-19 and FY 2019-20.

For corrigenda, we find that there is no aggregate data available and it has to be hand collected at the level of each NIT. We focus on collecting corrigenda data for NITs published by the organisations in Table 1. The tenders for which we collect data are those that are currently not active. A tender that is not active is one which has either been awarded or cancelled. We focus on NITs published in the period of January to March, 2020. We pick this period for our analysis as it is before to the start of the Covid lockdown and allows us to study the corrigenda pattern in normal times. In this period, we record which NITs have no corrigenda and which NITs have at least one or more corrigenda. This analyse a set of 11,714 tenders across the 11 procuring organisations in Table 1 for the presence or absence of corrigenda.

Table 2 gives a summary of the modification rate for the three mechanisms. It shows that across the 11 procuring organisations, potential bidders face substantial uncertainty due to tender modifications. Since the corrigenda data is from a period different from the tender cancellation and re-tendering data, these three modification rates cannot be added up to arrive at the aggregate modification rate. However, it is clear that a large proportion of NITs see changes, and that issuing corrigenda is the most frequent mechanism through which NITs are changed. Corrigenda are issued for nearly 20% of the NITs that get published in our analysis period.

We may expect that organisations that do more tendering would develop greater organisational capability to do this well. We might expect that difficulties of contracting in the past would have triggered off feedback loops into organisation design that address these difficulties. However, across these 11 entities, we see the reverse relationship. This raises concerns about the extent to which difficulties faced by these organisation have generated feedback loops into modified organisation design and reduced tendering inefficiencies.

Table 2: Sources of modifications in NITs (in %)

Organisation Re-tender Cancellation Corrigendum
(FY 19 & FY 20) (FY 19 & FY 20) (Jan-Mar 2020)

Airports Authority of India 4.4 13.0 26.6
Border Roads Organisation 2.8 8.0 7.5
Defence Research and Development Organisation 4.4 7.0 18.3
Delhi Metro Rail Corporation 0.1 25.3 56.3
E-in-C Branch of Military Engineer Services 16.6 5.7 17.2
Engineers India Ltd 5.7 4.3 43.0
Food Corporation of India 1.4 7.3 35.6
IHQ of MoD (Army)-(OSCC) 6.0 10.4 10.5
Ministry of Road Transport and Highways 7.8 15.3 43.1
National Highway and Infrastructure Development Corporation 1.7 28.2 78.7
National Highway Authority of India 0.5 16.0 19.5

Total 10.5 8.1 19.5


Corrigenda are frequent

We turn to the nature and the frequency of the corrigenda being issued. For this, we identify a sample of active tenders with corrigenda for the entities listed in Table 1. Our analysis in Table 2 relied on tenders that were not active. However, on the CPPP website, corrigenda details are only available for tenders that are currently active. An active tender is one for which the tender lifecycle is yet to be completed. In this analysis, we identify 104 tenders. These tenders had 536 corrigenda issued against them when the sample was collected. Since, these are active tenders, more corrigenda may have been added to them subsequently.

While a cancellation terminates the procurement process and the re-tender starts it afresh, a corrigendum keeps the process running. The government procurer may make incremental changes to terms of the NIT with a corrigendum. For example, the government may add details to the technical specifications on the item being procured. Or it may change the date by which bids have to be submitted. Or it might demand additional documents from bidders as proof of eligibility. While the changes introduced by a single corrigendum may be small, over time, with many corrigenda, these changes may become substantial. So while corrigenda do not terminate the process, they introduce significant uncertainty in the procurement process.

Our analysis of 536 corrigenda across 104 tenders shows that changes by corrigenda are common. Table 3 presents some of the features of these corrigenda. We observe:

  • On an aggregate basis, around five or more corrigenda are issued for every tender. This number varies across organisations, with entities like NHAI issuing as many as 30 corrigenda per tender.

  • Around 60% of these corrigenda are issued to change the bidding dates. The remaining 40% are to make changes such as alterations to the technical specifications, the bill of quantity or for issuing more details or clarifications than were given in the original NIT document.

  • There is a systematic under-estimation by procuring organisations of the time it will take to get bids. Across the 11 procuring organisations, the original estimate of the time it will take to receive bids was 16 days. However, through frequent issuance of corrigenda this period was extended to 81 days. And since these are active tenders, the bid period may increase even further.

  • Some entities, like NHAI and NHIDC not just have more tenders with corrigenda but also more corrigenda per tender.

Table 3: Frequency and nature of corrigenda

Avg. tender size (Rs. million) Avg. corri-genda /tender (No.) O/w Date change (%) Original bid period (Avg. in Days) Revised bid period (Avg. in Days)

Airports Authority of India 504.2 2.5 60 17 33
Border Roads Organisation 264.5 4 63 22 64
Defence Research and Development Organisation 9.7 1.6 63 18 26
Delhi Metro Rail Corporation 2,811.9 1.3 77 7 14
E-in-C Branch of Military Engineer Services 1.9 1.2 8 7 7
Engineers India Ltd NA 3.3 33 16 31
Food Corporation of India 1.6 2 - 16 19
IHQ of MoD (Army)-(OSCC) 2.0 3.8 89 16 49
Ministry of Road Transport and Highways 1.9 1 100 7 7
National Highway and Infrastructure Development Corporation 1,561.9 4.4 20 10 24
National Highway Authority of India 7,620.3 29.7 67 44 584

Total 1,848.2 5.2 60 16 81


An illustration of changes through corrigenda for a complex project

Table 3 presents a subset of a larger set of parameters on which the original tender is modified through the corrigenda. We illustrate the extent to which original tenders can experience change using one example of a tender for a complex procurement: the NHAI Contract to upgrade a stretch of road at Panipat from two lanes to four lanes. The estimated value of the tender is Rs. 2.1 billion and the estimated period of work post award is 2 years. Potential bidders are required to submit an EMD of Rs. 21 million, 1% of the tender value.

Table 4 is a brief summary of the timeline of the NIT. As of the date of data extraction, the NIT has been amended 31 times, and has been active for 693 days as against the original bid period of 44 days.

Table 4: An example of frequent changes to a tender

Date NIT change event Time elapsed (in days)

10th Dec. 2018 Original NIT published on CPPP website. Original bid submission timeline: 23rd January, 2019. Bids to be opened on on 24th January, 2019. -
11th Dec. 2018 NHAI publishes first corrigendum. This adds a new set of information about the procurement. Additional documents added to the NIT by NHAI. 1
21st Jan. 2019 NHAI issues second corrigendum two days before the final date of submitting bids. This corrigendum extends the submission timeline from 23rd January to 12th February, 2019. 42
11th Feb. 2019 One day prior to the submission deadline, bid submission date extended by 7 more days to 19th February, 2019. 63
13th Feb. 2019 NHAI publishes three corrigenda on a single date. They are titled "Revised Tender Documents", "Financial Proposal", and "Letter". After nearly two months of publication of original NIT, NHAI makes substantial changes to the planned procurement. Interested bidders would have to go back to the drawing board and redo their bids. On 13th February, the deadline to submit the bids was 19th February, so the bidders would have just six days to absorb all the changes, make fresh documents and submit them. 65
14th Feb. 2019 The NHAI publishes another corrigendum. This one contained replies to queries raised by the bidders. The clarifications may have required the bidders to redo their bids or make substantial changes. 66
18th Feb. 2019 One day before the bid submission deadline, NHAI changes the deadline for the third time. Now, the final date for submitting bids would be the 25th of February, 2019. 70
22nd Feb. 2019 to 19th Oct. 2020
The NHAI goes on to publish 25 more corrigenda, each extending the deadline for submitting bids by about two weeks. The bid submission timeline is now 17th November, 2020. 679
2nd Nov. 2020
We extract corrigendum data for this tender. The tender is still active so more corrigenda can be added. 693


Conclusion

In this article, we have used a novel dataset and discovered some new facts about the public procurement process.

While there is significant decentralisation in the procurement process across government entities, there is a possibility of improving public procurement by initiating reforms at a few entities that make up the bulk of procurement activity.

A large proportion of the tenders published are modified by the government procurer, either through a corrigendum or through re-tendering and tender cancellation. These tender modifications are taking place at a scale that increases uncertainty in the procurement process. There is a need for organisational reform within government organisations, so that better analysis is done before the first document is unveiled, so that the need for changes thereafter is minimum.

How the state contracts with private persons is one important element of the overall problem of state capacity. There is a need to build knowledge, and a literature, on this subject. This article constitutes one small element of that overall research program.

References

Sean Lewis-Faupel, Yusuf Neggers, Benjamin A. Olken and Rohini Pande (2016), Can Electronic Procurement Improve Infrastructure Provision? Evidence from Public Works in India and Indonesia, American Economic Journal: Economic Policy, Vol. 8, No. 3.

Bodhibrata Nag (2015), Combating Corruption in Indian Public Procurement - Some Exploratory Case Studies, The Journal of Institute of Public Enterprise, Vol. 38, No. 1&2.

Yugank Goyal (2019), How Governments Promote Monopolies: Public Procurement in India, American Journal of Economics and Sociology, Vol. 78, No. 5.


Anjali Sharma is a researcher with the Finance Research Group. Shubho Roy is a doctoral candidate at the University of Chicago. The authors would like to thank Susan Thomas for discussions and useful inputs and Charmi Mehta and Sejal Gajjar for assistance with collecting the data.

Monday, November 23, 2020

The problems of public procurement and payment delays: A review of the recent literature

by Sourish Das and Rabia Khatun.

Introduction

'Public procurement'- the purchase of goods and services by the state from private enterprise -- tends to be a large part of economic activity in any country. The World Bank estimated that globally, public procurement in 2018 amounted to USD 11 trillion or 12 percent of global GDP(Bosio and Djankov, 2020). In India, these estimates are higher at 30 percent (Khan, 2017) and recent budget announcements suggest that these estimates are likely to increase.

Such magnitudes have a large multiplier effect on economic activity and economic growth. But the multiplier effect is dampened by the 'marginal cost of public funds' or MCPF which is the cost incurred by a rupee of public spending (Kelkar and Shah, 2019). In an ideal world, public procurement works well, and goods/services that are available in the private market for Rs.1 are purchased for Rs.1 by the government. In the real world, public procurement processes introduce an additional friction, an inefficiency, where the government pays Rs.A when purchasing something worth Rs.1. Every deficiency of public procurement procedures drives up the A.

There is a friction in taxation (the MCPF which Kelkar and Shah (2019) refer to as a cost of Rs.3 upon the economy when the government obtains Rs.1 as taxes). Similarly, there is a friction in contracting-out (the government pays A when obtaining services worth 1). These two come together in shaping the overall effectiveness of government action. A government that wishes to purchase (or contract-out)goods/services worth Rs.1 ends up with a true total cost for society of 3A. On the taxation side, this motivates research on understanding and reducing the MCPF. On the expenditure side, this motivates research on understanding and improving public procurement so as to obtain a reduced value for A.

The conventional processes of government do not produce information about these two elements of inefficiency. Researchers have to create mechanisms through which these estimates can be obtained. For example, there is a widely held perception that delays of payments are a persistent problem in public procurement. Such delays in payment translate into higher costs of doing business by the private enterprises that render services or deliver products to government or public sector enterprises, and raises the MCPF of public procurement. As has been happening elsewhere, the perception of the higher cost of doing business with the public sector is increasingly occupying the public discourse in India as a critical element of what is driving stress in the financial health of the corporate sector. At present, we have informal estimates about the difficulties faced in public procurement in India. As an example, Sahu (2020) recently estimated the size of the delayed payments from the Union government as totalling Rs.9.5 lakh crore, an estimate that was culled from public sources. The data presented included pending dues to road projects at NHAI, from power generating companies and power grid, in the sugar and fuel ecosystem, food distribution at FCI and to the micro, small and medium enterprises. But beyond such broad, aggregate estimates, there is little that is understood about the mechanics that drive this quantum of delay. What needs to be set right to solve the problem is not well understood.

In the present literature, two key features emerge. One is the issue of late payments by the state. This has become increasingly recognised as a major problem after the Financial crisis of 2008 and after the European debt crisis of 2009. Perhaps as a consequence, almost all of the studies are based on data from countries of the EU. A second central concern appears to be the effect of such late payment by governments on the financial health of firms, particularly Small and Medium Enterprises or SMEs. SMEs have been in the policy headlights over the last decade as a critical base of employment growth. Any factor influencing their financial health has also been highlighted as an important area of reform. SMEs are particularly affected by any adverse impact of payment delays.

In this article, we survey the literature on delays in payments by government and their consequences. We find it useful to classify this literature into two lines of thought about delayed payments in public procurement: (1) these hurt the profit of the private sector and increases the probability of bankruptcy, particularly for smaller businesses; and together (2) such delays have a significant negative impact on economic growth. Additionally, this literature shows pathways for setting up measurement systems that can then be used to regularly monitor the impact of public procurement processes on economic agents and the economy. Four papers appear to be the basis of understanding, which are Connell (2014), Checherita et al. (2016), Obeng (2016), and Conti et al. (2020).

Much of the work uses two components to measure late payments: payment delays and the duration of payment delays. Payment delay is calculated over agreed contractual period and it is the ratio of absolute delay (in days) to the agreed contractual period. Payment duration refers to agreed contractual period plus the absolute delay in days over agreed contractual period and is the sum of agreed contractual period plus payment delay. The data for payment delay and payment duration is obtained from Intrum Justitia, a private credit management firm which conducts an annual written survey among several thousand firms in 29 European countries. The survey results are published as the annual European Payment Index Report. Among other statistics, the survey reports the average annual payment duration and the average annual contractual payment period, both of which are further disaggregated into consumer, business-to-business, and public sector debtors terms.

The impact of delayed payments in public procurement on the health of firms

Connell (2014) attempts to estimate the economic effects of late payments that firms face in some European countries (Greece, Italy, Portugal, Spain) regarding delays in payments in Business to Business (B2B) and Government to Business (G2B) transactions with two questions:

  1. How can the cost to firms associated with government late payments be approximated? This cost is estimated as the short-term financial cost of firms associated with late payments. In order to calculate this, they use the volume of claims against the public administration, the average annual interest rate for loans to non-financial corporations and the average government payment delays expressed as a fraction of a year.
  2. Do liquidity constraints associated with payment delays put the firms out of business? A panel regression is run between payment delays and the firm's exit rate. This was done for B2B and G2B transactions separately. The exit rate is defined as the ratio of death firms to the total number of active firms. The regression controls for size of the firms involved, country fixed effects to control for national time-invariant characteristics, and business cycles variables to control for changes in financial conditions.

The paper finds that payment delay is statistically significant and negative across all the countries studied, with higher payment delays being seen with higher exit rates. The estimated financial cost as a percentage of GDP in 2012 ranges from 0.19 percent in Greece to 0.005 percent in Finland. A one point reduction in the payment delay ratio would reduce exit rates by about 2.8 or 3.4 percentage points in a B2B transactions. As expected, these effects are exacerbated with business cycle effects. The results also show that bigger firms, with a larger number of employees, are more likely to survive the deleterious effects of payment delays. In G2B transactions, a one point reduction in the delay ratio leads to a decrease in exit rates of about 1.7 to 2 percentage points. The effect is lower than payment delays in B2B transactions which is suggested as being due to the different representations of SMEs in these different types of transactions. The overall findings of this study suggest that payment delays in commercial transactions by the public administration and private entities have detrimental effects on the health of a firm, and exacerbate the burden of already financially constrained firms which ultimately push them out of business.

Delayed payments in public procurement and its impact on the economy

Checherita et al. (2016) analyze the impact of government payment delays on private firms and on economic growth. They argue that increased delays in public payments can affect private sector liquidity and profits and hence ultimately economic growth. This study defined payment delays by including various measures of the accounts payable data from government accounts (as defined in ESA 1995 code AF.7) along with the other measures of payment duration defined earlier. In addition to the short-term impact of payment delays from government on real GDP growth, the study also analyses profit growth measured by economy wide gross operating surplus, and bankruptcy measured by the probability of default (using Moody's measure of distance to default) over the period spanning 1993 to 2012.

Using a panel regression analysis, they find a negative relation between delayed payments and growth. The results show that a one standard deviation change in delayed payments reduces the growth rate by 0.8-1.5 percent, and a one percent increase in arrears reduces growth by 0.6-0.9 percent. The paper finds a statistically significant impact of delayed payments on the growth rate of operating surplus of firms. A one standard deviation increase in delayed payments reduces profit growth by 1.5-3.4 percent. Finally, their results suggest that delayed payments reduce the distance to default. In similar work, Fiordelisi et, al. (2012) show that economic growth in Italy would have been an additional 0.38 per cent if the government paid its trade loans within 30 days.

Obeng (2016) investigates the impact of payment delays caused by a liquidity crisis in the European Union, using changes in the pattern of late payments among EU companies between 2005 and 2014. The paper finds the following features about payments delays during the financial crisis: payment delays increased across the board; delays had a higher negative impact on SMEs, low profitability firms, and low liquidity firms; significant variation in how delays increased depending upon the sector that the firm operated in. The paper analyses the variability of firm late payments under different macroeconomic conditions using data for 54,277 EU firms over the period 2005 to 2014 from the AMADEUS database, a commercial European firm database. A fixed effects regression model to estimate the impact of selected macroeconomic shocks on payment delays finds that the financial crisis has a significant negative impact on payment delays of accounts receivable, even after controlling for firm characteristics such as profitability, liquidity, size, sector, country, credit collections, and credit period.

This literature establish that impact of delayed payments by the government on firms and economy is negative and significant. The next strand of the literature asks what can be done to reduce the economic cost of delayed payments, and to improve the MCPF of public procurement.

Conti et al. (2020) analyze the regulatory framework of the EU (called the Directive on Late Payments or DLP) concerning delayed payments by government. This paper focuses on G2B commercial relationships, starting by investigating the impact of the DLP on firm survival, employment and investment. They use sector level data for a sample of 23 EU countries (and Norway) from 2008-2015, using 38 two-digit sectors from the Structural Business Statistics(SBS) database (an Eurostat firm database which provides information on European firms). The authors construct the exit rate of firms for a given sector in a country as the ratio between the number of enterprises that cease activity and the stock of active enterprises in a given year and for a given country-sector unit. A difference-in-differences analysis finds that after the introduction of the Directive, the exit rate of firms decreased in sectors that sell a larger fraction of their output to the government. They also find that there is an increase in employment in those sectors more connected with the government, and conclude that more discipline in government payment terms can have considerable positive effects on economic activity.

Implications

The results of the above studies present the first empirical estimates of the quantum of the negative impact on the economy when the government delays payments for procurement transactions.Some indicative estimates of the economic impact include:

  1. One standard deviation worsening in delayed payments reduce firm profit growth by 1.5-3.4 percent.
  2. One point reduction in delayed payments reduce firm exit rates by 1.7-2.0 percent.
  3. One standard deviation worsening in delay of payments reduce economic growth rate by 0.8-1.5 percent.
  4. Paying trade loans in 30 days imply an additional 0.33 percent economic growth.

Even with the caveat that these are values estimated for countries and firms operating in the countries in the EU, where contract performance and enforcement tend to be some of the best in the world, these are useful benchmarks to frame the impact of problems of public procurement for us in India. Such an exercise is particularly pertinent for the current times, where the COVID-19 pandemic has resulted in a severe reduction in GDP growth and there is a large scale loss of jobs. One estimate puts the reduction in the Indian economy at 23.9 per cent in the April to June quarter of 2020 (Choudhury, 2020).

India has followed the global response to such a systemic shock, with the state becoming the saviour of last resort and rolling out economic interventions in the form of income support schemes and various public expenditure programs. However, the present situation of the Indian fiscal conditions place constraints on the credibility and sustainability of new spending. What the above literature suggests, in addition to these recent interventions, is that India would do well to find ways and means to clear her dues to direct and indirect suppliers, particularly given that a large fraction of Indian enterprises are micro, small and medium enterprises. Sahu (2020) reports that INR 5 lakh crore out of the reported INR 9.5 lakh crore of dues from the government was due to MSMEs. If reducing the delays in payments can reduce the distress related bankruptcy of such firms by even one percent, it can have a material impact on the health of these firms and continued availability of avenues for employment. More importantly, such an action will improve the confidence of small traders and vendors across the country in participating in G2B transactions. If payments can be made on time, it will reduce the MCPF and strengthen the channels through which the state can deliver a positive impact on economic growth at the time when it is most required, and to those who need the support the most.

One path suggested in international literature is to put in place a regulatory framework on public procurement. However, there is no clear evidence that indicates that this can be successful in reversing payment delays. For example, Banerjee et al. (2020) show that e-governance reforms of the MNREGA system does deliver a positive impact on reduced leakage in social benefit programs but fails to reduce payment delays. Further, Roy and Uday (2020) analyse the link between the presence of a legal framework and the corruption and they find no correlation between the two.

Conclusions

What the existing studies show is the importance of establishing systems through which the impact of the public procurement processes can be understood. Unlike in the various EU countries where these studies have been carried out, there are no systematic empirical studies that have been done in India to quantify the economic cost of delayed payments on firms and the economy. A first step towards solving the problem of delayed payments and the overall processes of public procurement would be to facilitate opportunities to gather information of the impact of these process on the operational health of firms. Such information needs to developed for India and made largely available to the research community to get a sound empirical understanding of the process of public procurement and how to improve the cost of doing business with the Indian State.

References

Abhijit Banerjee, Esther Duflo, Clement Imbert, Santhosh Mathew and Rohini Pande (2020), 'E-governance, accountability and leakage in public programs: Experimental evidence from financial management reform in India', American Economic Journal: Applied Economics, 12(4).

Cristina Checherita-Westphal, Alexander Klemm, and Paul Viefers (2016), 'Governments payment discipline: The macroeconomic impact of public payment delays and arrears'. Journal of Macroeconomics, 47: 147-165.

Erica Bosio and Simeon Djankov (2020), 'How large is public procurement?', World Bank Blogs, 5 February.

Franco Fiordelisi, Davide Mare, Nemanja Radic, Ornella Ricci, Philip Molyneux, and Thomas Weyman Jones (2012). 'Government late payment: the effect on the Italian economy', Doctoral Dissertation, School of Economics and Business, Loughborough University, UK.

Gaurav Choudhury (2020), 'India's GDP contracts 23.9 per cent in Q1FY21 as lockdowns, restrictions bludgeon economy', 1 September.

Isaac Kwame Essien Obeng (2017), 'Delaying payments after the financial crisis: evidence from EU companies', Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, 65(2): 447-463.

Maurizio Conti, Leandro Elia, Antonella Rita Ferrara and Massimiliano Ferraresi (2020), 'Government late payments and firms survival: evidence from the EU', Technical report, Societia Italiana di economica pubblica, Working paper No. 753.

M. H. Khan (2017), 'Public procurement issues with government of India', Lal Bahadur Shastri National Academy of Administration (LBSNAA).

Prashant Sahu (2020), 'Forget stimulus, clear your dues: Rs 7 lakh crore unpaid dues to industry by central govt depts and PSUs', in Financial Express, 8 September.

Shubho Roy and Diya Uday (2020), 'Does India need a procurement law?', The LEAP Journal blog, 19 August.

Vijay Kelkar and Ajay Shah (2019), 'In service of the Republic: the art and science of public policy', Penguin Allen Lane.

William Connell (2014), 'Economic impact of late payments', Technical report, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.

Rabia Khatun is an independent researcher and Sourish Das is associate professor at the Chennai Mathematics Institute. The authors would like to thank Susan Thomas for comments and suggestions on the article.