## Friday, November 19, 2021

### The lowest hanging fruit on the coconut tree: India's climate transition through the price system in the power sector

by Akshay Jaitly and Ajay Shah.

The world is projected to emit about 50GT of CO2 per year by 2055. Climate scientists say (net) emissions need to be ended by 2055, in order to avoid catastrophic events with reasonable probability. At present, India is emitting 2.5GT per year with a long term trend growth rate of about 5%. India is the 4th largest source of CO2 in the world, accounting for 7\% of emissions, with emissions that are roughly as large as those of the European Union. In a new paper,, we engage in strategic thinking about India's decarbonisation.

Decarbonising any economy is a large and complex problem. The electricity sector is a key site of the carbon transition, as it directly makes CO2 (e.g. by burning coal and gas), and because decarbonisation in other areas (e.g. cooking) involves switching away from fossil fuels to electricity. The sector is formally organised, which makes it more susceptible to policy intervention. Thus, in every country, decarbonisation calls for a large modification of the resource allocation in the electricity sector. Technical and business model decisions are required at each location in an economy about the optimal mix of renewables, storage and demand-side adjustment for the zero emissions world.

The Indian electricity sector is poorly placed to perform the required modification of this resource allocation. At present, it is a centrally planned system that is under growing financial stress. The process of private investment in electricity has lost momentum. Resource allocation is inefficient owing to multiple prices and a command-and-control system, rather than one based on producers and users that respond to prices. The command-and-control system works poorly in steady state, and particularly poorly when large changes in the resource allocation are required. By imposing enlarged costs upon the economy, a centrally planned decarbonisation runs the risk of greater political difficulties. The electricity sector is thus the critical choke point in India's climate transition.

Looking forward, the problems of the electricity sector are likely to deepen. Rising Indian emissions in coming years will sit uneasily alongside a decarbonising world. Regardless of the speed at which Indian policy makers might desire a change in course, there are forces reshaping the behaviour of Indian firms which are narrowing the options. Indian firms now operate under international asset pricing, and ESG investment has changed the incentives of Indian firms to favour buying and selling renewables. Some large economies could, in coming years, introduce trade taxes upon the carbon content of Indian exports. This would additionally induce Indian firms to desire reducing emissions in their supply chain. The cross-subsidy system within the electricity sector will come under increasing stress when buyers see renewables inducing some combination of a lower cost of capital, a lower operating cost and reduced trade barriers.

For 30 years now, political and fiscal resources have been expended in periodic incremental reforms of the electricity sector. These have not delivered the desired results. It is unlikely that similar efforts will work in coming years. In the meantime, 2021 is likely to be a turning point in the demands made upon the electricity sector owing to the carbon transition.

The climate transition is one of the most complex problems in Indian public policy and will now be subject to the new commitments made at COP26. A coherent strategy needs to be established and articulated, which can reshape the behaviour of a billion private persons across space and time.

This involves going with the grain of the price system, i.e. stepping away from the command-and-control system. All firms in the electricity sector need to be creatures of the market economy, which constantly reshape technology and business models in response to prices. Such firms have the incentive and the ability to look at the changing landscape of technology, financing and carbon taxation, and solve local maximisations that yield the correct engineering and business solutions all across the country. This distributed intelligence, this self-organising system, processes information better, values profit over conservatism and populism, engages in a process of search with risk-taking where some win and some lose, and avoids the state capacity constraints that hamper the central planning system. It will achieve the required Indian climate transition at a lower cost to the economy when compared with a centrally planned path.

Under an electricity sector that is grounded in the price system, there is a clear pathway to the climate transition: the single instrument of the carbon tax. Following a 5-10 year reform process of the electricity sector, the Indian state would announce levels of carbon taxation for the next 25 years, based on international commitments towards decarbonisation and net zero. Private persons would respond to these numerical values with business and technological strategies that are optimal at every location in the country. Every five years, policy makers would review the emissions, and modify the trajectory of taxes for the coming 20 years. Policy makers would control this one lever -- the carbon tax -- and the decarbonisation of the economy would be achieved through private decisions on the demand side, in generation and in storage.

Without a carbon tax, the union government lacks instruments for carbon policy, and intricate regulatory activities will induce enhanced costs upon the economy. Without an electricity sector that is organised around the price system, the resource allocation will be distorted thus enhancing the economic cost of decarbonisation. The optimal way forward is a combination of electricity regulation at state governments, a carbon tax led by the union government, and a private electricity sector organised around the price system.

While this appears to be an attractive vision, it is also a difficult policy project. Immense effort has been put into electricity reform in the past, by insightful policy makers. These leaders of Indian electricity reform, of the last 30 years, stayed within the strategy of a centrally planned electricity system. Why do we believe that things could work differently today?

There are six aspects in which the present situation is different, which creates a pathway to the fundamental reform that was elusive for the last 30 years: (1) There is greater understanding of the political economy landscape, and it is possible to design bargains where the losers from the reform are compensated. (2) State capacity in regulation is essential for the operation of an electricity sector organised around the price system, and there is now a greater understanding in India of how to establish the objectives and methods of regulation. (3) There is a path to electricity reform, one state at a time, which is more tractable and feasible when compared with grand schemes led by the union government which apply to the entire country. (4) The materiality of climate policy in the international discourse has shifted the political salience of domestic electricity reforms. Alongside this, the domestic policy envelope on establishing more market-led solutions has improved. (5) It is possible to fund the transition. (6) The fiscal cost of upholding the status quo in the electricity sector is likely to rise.

## Monday, November 15, 2021

### Lessons from the COVID-19 vaccine procurement of 2021

by Charmi Mehta and Susan Thomas

### Introduction

The recent announcement on procurement and project management shows a heightened policy interest in improving how government contracts with private parties for projects. However, several problems in public procurement in recent times have been in the procurement of goods. The most visible were the failures in vaccine procurement in the first half of 2021.

In the middle of 2020, at the time of the first pandemic lock-down, Serum Institute ("SII"), an Indian firm, had been gearing up to manufacture the Astrazeneca vaccine (a.k.a. Covishield). The union government placed advance orders with SII and Bharat Biotech in January 2021 for doses that would cover 0.6% of the population with two doses. Deployment of Covishield began in the UK on 4 January 2021 and the first vaccination took place in India on 16 January 2021. The union government's vaccination program was the only one available in the country, and it was delivering about 2 million doses a day in April and May 2021. The surge of the disease raised questions about the efficacy of this program. The union government changed course with a press release on 19 April 2021 through which state governments could also work on vaccination if they desired and the procurement could be done directly from global suppliers and manufacturers (Agarwal and Shah, 2021).

It was a difficult time to buy vaccines. The Union government had a unique power to indemnify an overseas vaccine producer against legal liability, without which no overseas firm was willing to sell into India. Sub-national governments did not have this power, and were thus not able to purchase from firms like Moderna or Pfizer. Some global firms refused to transact with sub-national governments.

A certain set of state/city governments started on the process of procuring vaccines directly, in an attempt to do better on managing the disease within their states. Tenders to procure COVID-19 vaccines were published by 14 para-statal agencies. Of these, five were successful in attracting bids. Vaccine purchase by states largely ended by June, when the union government declared on 6 June 2021 that it would buy 75% of the total vaccines manufactured in India, and supply vaccines to states.

From a research perspective, this was a natural experiment where multiple state governments tried to solve the identical problem at dates that were just a few days apart. While the union government had negotiated contracts for vaccine purchase, the state governments chose to engage in open, competitive, global tendering. We hand-collected a data-set by breaking down published tender documents, and extracting fields that gave us insights into the procurer details, details of the bidding process including tender timelines, eligibility criteria for bidders, quantities to be procured and quality/storage requirements, procurement price constraints, payment features, delivery schedules and locations.

We do not observe whether a state government actually purchased vaccine or not. Information in the public domain stops at observation of responses to tenders.

This dataset gives us an opportunity to see differences in purchasing strategy and to look back at these experiences, in order to obtain insights on many questions: What kinds of states tried to buy vaccines? What were the features of their attempts? What states appeared to fare better? What lessons can we draw, from this episode, for better government contracting, in an emergency and in normal times?

We find that existing contracting processes have significant flexibility, particularly when procuring in emergency situations. The tenders published had flexibility of awarding contracts at prices away from the default L1, as well as in choosing efficient delivery schedules and locations. These were evident across all the tenders we studied. But this flexibility was not sufficient to attract bids for the tenders. Instead, what appeared to matter was the speed to tender and speed to award. Further, this was the first episode of direct procurement by state governments. The lack of prior experience and standing in the global vaccine market place was the essence of low state capacity.

### What is the legal framework governing vaccine procurement in India?

I. Procurement of vaccines In India, there is a legal framework for the procurement of drugs, but not one to directly procure vaccines (Kaur et al, 2021). In the National Vaccine Policy (2011), Section 6.4 states the following on vaccine procurement:

1. All UIP (Universal Immunisation Programme) vaccines are purchased at the central level for distribution to the states.
2. While the UIP vaccines are purchased by the central government from indigenous sources, Oral Polio Vaccines (OPV) for mass immunization campaigns as well as Japanese Encephalitis (JE) vaccine is procured through other mechanisms. OPV immunization was conducted as part of a World Bank, WHO and UNICEF joint campaign that sought to eradicate polio in India (World Bank 2014). Likewise, the JE immunization programme was coordinated by WHO, UNICEF and PATH, who negotiated vaccine supplies from China (PATH 2019).
3. There are three takeaways about the Indian vaccine procurement from this: (1) Vaccines are usually procured only by the Union Government; State Governments do not routinely procure vaccines. (2) The Union Government usually procured vaccines solely from domestic suppliers. (3) The Union had additional support from international agencies for both vaccines that are globally tendered.

II. Procurement in emergency situations Several provisions in the Manual of Procurement of Goods (2017) ease competition requirements in an emergency cases.

1. There is a relaxation of the requirement to procure solely from domestic sources. Conditions for Global Tender Enquiries are listed in Section 4.3 and 4.4 of the Manual as Where Goods of required specifications/quality are not available within the country and alternatives available in the country are not suitable for the purpose; in case of non-existence of a local branch of the global principal of the manufacturer/vendors/contractors;or Requirement for compliance to specific international standards in technical specifications; or the absence of a sufficient number of competent domestic bidders likely to comply with the required technical specifications, and in case of suspected cartel formation among indigenous bidders.'

2. There is also a relaxation in using L1 tendering as the sole mode of tendering. The Manual states that Limited Tender Enquiry procedures should be default mode of procurement when the estimated value of procurement is between Rs. 2.5 lakh to Rs. 25 lakh.'

3. Section 4.7 of the manual permits single tender enquiries in case a situation of emergency warrants goods/services to be procured from a particular supplier. 'In case of emergency procurement, facility of withdrawing requisite advance cash amount and its subsequent accountal may also be considered', whilst procuring through a direct contract. In case of emergency, the purchaser may purchase the same item through ad hoc contract with a new supplier.

4. In all these cases, there is a greater onus on the procuring entity to ensure that value-for-money is ensured.

### Observations about the vaccine procurement by states

Who procured?

Of the 33 states and union territories in the country, 14 published tenders between May to June. The others were either unresponsive to the situation or concluded that purchase was infeasible. As an example, the Punjab Government approached manufacturers but Moderna refused to contract with them. Punjab was not one of the states that put out a tender for vaccines.

Eleven out of 14 tenders were issued by independent medical services agencies, and three were issued by government ministries/departments. The literature suggests that organisational efficiency is often better in independent agencies as compared to ministries or departments, owing to their internal capacity, audit mechanisms and higher accountability mandates. Three out of the five tenders that received responses were issued by independent agencies/societies/corporations in charge of medical services procurement for the state. However, most of the states that did not receive bids procured through independent agencies.

Did tender timelines matter?

The figures show the tender timelines as the number of days from the starting date of 19 April to the 23 June 2021 (which is the day after the Uttar Pradesh closed its tender on 22 June). The coloured portion of the time line shows the period from when the tender was published to when it was closed. Figure 1 shows the states that received bids, and Figure 2 shows the states that received no bids.

#### Figure 1: States that received bidsFigure 2: States that did not receive bids

From the starting date of 19 April, most states took 25-30 days to issue tenders. Uttar Pradesh and MCGM published tenders within 12 days, while Madhya Pradesh, Haryana and Delhi took more than 30 days. Uttar Pradesh kept the process going for the longest period, i.e. 34 days. In contrast, MCGM and Maharashtra closed within 6-8 days. The Maharashtra state tender was issued the day the MCGM tender first closed.

There is considerable variation in tender timelines. For example, Odisha had a 21-day tender open period and received responses, while Delhi had a 10-day tender period but did not receive responses. But from Table 1, we see that the average values of the timelines are different for the two samples. For example, on average, the states that did not receive bids took 4 days more to publish the tender compared to those that did receive bids. The difference is larger for the days that the tender remained open. States that did not receive bids kept the bids open for almost two weeks longer on average than those who did receive bids. In a period of great supply shortage, speed in closing the tenders appear to be more attractive to bidders.

Table 1: Comparison of timelines

Median days to start 25 29
Average days to start 25.4 29.9
Median days of tender being open 8 21
Average days of tender being open 10.2 19.22
Median number of corrigenda 1 1
Average number of corrigenda 1.1 1.2
Average quantity (million single doses) 25.6 17.6

Our research in government contracting has revealed the common procedure of weak preparatory work followed by numerous corrections to the tender documents, termed corrigenda (Roy and Sharma, 2021). There were corrigenda to some of the vaccine tenders. However, the number of corrigenda to a tender does not serve to differentiate between states that received bids or not. The median number of corrigenda issued across both sets is 1.

Finally, we compared the average quantity tendered for, and the states that received bids had a larger quantity requirement on average than those that did not receive bids.

Did payment terms matter?

The problem of payment delays in public procurement is significant (Mannivanan and Zaveri 2021). This has adverse effects on the perception of participating bidders and the cost of doing business with the government. We know from public reports that the Union Government was paying an advance to manufacturers are part of its negotiated contracting approach. However, most of the 14 tenders did not have advance payment, other than Odisha (which did receive bids) and Tamil Nadu (which did not).

Was there flexibility in the tendering process?

Rigidity in tendering processes such as adherence to L1 (lowest price bid) awards is often cited as leading to constrained optimisation for procuring entities. In contrast, the tenders for COVID-19 vaccines showed flexibility in the procurement process, from awarding contracts to bids beyond L1 to allowing for significant differences in tender parameters such as quantity, delivery, and who can bid. We find the procurers were empowered to empanel a larger number of suppliers to distribute their total requirement amongst bidders.

Was there expertise to design complex, non-standard tenders?

A reading of the tenders suggest a mechanical replication of standard drug procurement tender. In certain cases, tenders contained text referring to drugs rather than vaccines. So while there were specific areas where there was considerable expertise deployed (such as the variation in delivery schedules where manufacturers were required to submit a schedule of delivery and there was a clearly stated preference for the soonest supply), such lapses suggest that greater state capacity needs to be developed to handle complex goods procurement. In a simplistic view, standard tender templates that minimise ground-level discretion are favoured, e.g. as a pre-requisite for international funding agencies (World Bank 2021). However, there is no escape from deep rooted capabilities in contracting for every contracting organisation; mechanical use of templates is unlikely to work well.

In summary, our analysis finds some covariates that differentiate the states that were able to attract bids for the supply of the vaccine. What stands out is the speed to tender and to have a short tender period. In our data-set, we see a minimum time taken of 20 days for the most speedy tender issuance. While procuring entities must take adequate time to ensure value for money on contracts, lengthy tender cycles also tend to discourage bidders who must lock-in capital and resources in the anticipation of an award (National Audit Office 2007). Even in India, the Manual of Procurement of Goods 2017 prescribes a period of 30-45 days for tender processing, as delays in finalising procurement deprive the public of the intended benefits and results in lost revenues and cost over-run. If speed to issue tenders is important for procurement efficiency, then it is important that procurers must have the capacity to do so.

### Conclusion

In this article, we have looked at a moment of sharp change in the rhythm of government contracting in India. At the height of the second wave of the pandemic, there was a rush of vaccine purchase by at least 14 Indian sub-national government organisations, within days of each other. Only five of these got bids. Within weeks after, sub-national governments stopped trying to buy vaccines.

We have documented the numerous constraints these organisations faced. Contrary to popular perception about the rigidity enforced by procurement laws and rules in India, our examination of different tender documents reveal that there was significant variation across tenders. There were important constraints in the form of private firms who were skeptical about dealing with Indian government organisations. Private firms are not confident about timely payments. Some overseas vaccine sellers required an indemnity which could only be issued by the union government. Some overseas firms refused to deal with sub-national governments.

### References

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### Acknowledgements:

Charmi Mehta is a researcher at xKDR Forum and Chennai Mathematical Institute and Susan Thomas is a researcher at xKDR Forum and a Research Professor of Business at Jindal Global University. We thank Diya Uday and Bhargavi Zaveri-Shah for their enthusiastic support and intellectual inputs into the design of the tender dataset, and Harsith Ravichandran for research and data assistance.