Spending as Planned: Efficiency of Drug Procurement in Tamil Nadu

by Pavithra Manivannan, Aakriti Narang, and Susan Thomas.

Introduction

A robust public financial management (PFM) system ensures that resources allocated in the budget are deployed as planned. One way to test this is the spending gap: the difference between what a state budgets for an item and what it actually spends. This gap offers a useful measure of a state's fiscal marksmanship. When looked further, a large spending gap may indicate that the state has either misestimated demand or struggled to manage suppliers, including ensuring timely delivery and payment. Both are critical to effective public procurement. The spending gap, therefore, offers one measure of a state's capability to procure well.

We apply this test to drug procurement. Tamil Nadu is widely regarded as the gold standard for drug procurement in India, and many researchers attribute this to the institutional design of its procurement agency, the Tamil Nadu Medical Services Corporation (TNMSC). Following TN's lead, many states have since set up similar bodies. In this article, we compare Tamil Nadu's spending gap in drug procurement with Karnataka, a state of comparable budget size, and population, that set up its own corporation in 2019. We ask - has Tamil Nadu's institutional development of its public healthcare system translated into capability in budgeting efficiency, for drug procurement?

Data and Methodology

We use the Detailed Demand for Grants (DDG) released by each state, to get the annual budgeted and actual expenditure numbers. "Drugs" include medicines, medical supplies and medical equipment¹. Hence, to identify expenditure on drugs we extract each of these specific line-items from the Department of Health and Family Welfare's budget of both the states.

This is not a straightforward exercise. State budgets are published only as PDFs running into hundreds of pages, and the data in them is, therefore, not research ready. Without structured data, there is no practical way to trace a budget line item across years and states. We overcome this with the India Public Finance Lab Portal, developed by XKDR Forum, which uses LLM pipelines to convert these budget PDFs into granular, research-ready data. Every line item sits in neatly labelled columns, so the data can be sliced, filtered and manipulated as needed. This lets us isolate and aggregate the different heads for both states and follow them year by year.

The portal covers data of ten years for Tamil Nadu and nine for Karnataka. To keep the comparison robust, we start in 2018-19, the first year with data for both states. Additionally, the actual expenditure for a year appears in the budget documents with a two-year lag, so actuals for 2025-26 and 2026-27 are not yet available. Therefore, we stop our analysis at 2024-25.

For each state and year, we calculate the spending gap from 2018-19 to 2024-25 (Study Period) as:

Spending gap_year = 100 × (Actual Expenditure_year − Budgeted Expenditure_year) / Budgeted Expenditure_year

A positive gap means the state's actual spending is more than its Budgeted Estimates (BE), and a negative gap means it spent less. We then compute the average and the standard deviation of the annual gap for each state. This helps us test our hypothesis; if Tamil Nadu has greater state capability for drug procurement, its average spending gap and variability of spending gap must be lower than Karnataka's.

Finding 1: Tamil Nadu has a higher budget for drugs

In absolute figures, we find that Tamil Nadu budgets a higher amount for drugs than Karnataka in every year of the Study Period, and by more than twice as much in most years. In Figure 1, we report the per capita drug expenditure of both the states. We find that, over the Study Period, Tamil Nadu's per capita drug expenditure averaged to Rs. 114 per person, about 2.2 times that of Karnataka's average of Rs. 53.4 per person.

Figure 1: Per capita drug expenditure for Tamil Nadu and Karnataka

Finding 2: Tamil Nadu's spending stays closer to its budget

Tamil Nadu's actual spending on drugs tracks its budget far more closely than Karnataka's, with a spending gap that stays within a much narrower band around zero. Over 2018-19 to 2024-25, Karnataka's average spending gap is more than three times Tamil Nadu's. The variability differs even more. The standard deviation of the gap for Karnataka is about nine times higher than for Tamil Nadu. Karnataka's gap peaked at over 400% in 2020-21, while Tamil Nadu's highest gap was 48%, in 2018-19.

Figure 2: Spending gap for Tamil Nadu and Karnataka, BE v. Actuals

	Average spending gap	Standard deviation
Karnataka	56.1%	184.7%
Tamil Nadu	17.3%	21.2%

Finding 3: The difference is not just COVID

Plausibly, much of this volatility in spending may just be driven by the unanticipated shock of COVID-19. We therefore recalculate the summary statistics after excluding 2020-21 for both states.

Without the year 2020-21

	Average spending gap	Standard deviation
Karnataka	-7.8%	81.7%
Tamil Nadu	13.4%	20.2%

Without 2020-21, Karnataka underspends on average, and its standard deviation falls by more than half. Although, it still remains about four times Tamil Nadu's. Tamil Nadu does not see as drastic a difference as Karnataka's. Figure 1 also shows that the two states responded differently to COVID. Tamil Nadu roughly doubled its drugs budget in 2020-21, while Karnataka raised its budget only gradually over the following years. This early increase may explain why the COVID year hit Tamil Nadu's spending gap far less: its budget absorbed the surge, whereas Karnataka's did not.

Finding 4: Karnataka corrects itself

We also know that the states publish revised estimates (RE), which update the budget estimate with more realistic figures. After looking at these numbers along with the budget and actuals, we see that Karnataka's revised estimates track its actual spending far more closely than its original budgets do.

Figure 3: Karnataka: BE vs RE vs Actuals

We also repeat the calculation against the RE:

(Revised) Spending gap_year = 100 × (Actual Expenditure_year − Revised Expenditure_year) / Revised Expenditure_year

	Average spending gap (vs RE)	Standard deviation (vs RE)
Karnataka	-18%	24.4%
Tamil Nadu	0.38%	15.9%

Against its revised estimates, Karnataka's gap falls. It spends about 18% less than its revised estimate on average, and its standard deviation falls from 184.7% to 24.4%. However, Tamil Nadu still seems to do better. Its actual spending lands almost exactly on its revised estimates, with a lower deviation as well.

Discussion

The main finding of this article is that Tamil Nadu's average spending gap (17.3%) remains substantially lower than Karnataka's (56.1%). The difference becomes even more pronounced during a crisis, when procurement systems are tested hardest. In 2020-21, Karnataka's spending gap rose above 400%, while Tamil Nadu's remained below 50%. The ability to estimate expenditure requirements accurately and spend broadly in line with budget allocations, even amid unexpected shocks, is an important marker of state capability and procurement efficiency. The pandemic emerged in December 2019, while the budgets for 2020-21 were presented in February 2020. It is plausible that Tamil Nadu anticipated the increased demand for medicines and budgeted accordingly. Although the spending gap alone cannot establish whether this was the case, Tamil Nadu's performance during this period suggests a greater capacity to maintain alignment between budgeted and actual expenditure under uncertain conditions.

We conjecture that this capability rests on two complementary sets of institutional capabilities: the budgeting capability of the TN Department of Finance and the procurement capability developed within TNMSC. The former ensures that resources are budgeted and released in line with requirements, and the latter enables the state to estimate demand accurately and manage the supply of medicines effectively.

First, the Department of Finance must have the capability to budget and spend as planned. Even when a procurement agency estimates demand accurately, the treasury must translate those estimates into realistic budget allocations and ensure that funds are available for expenditure as and when they are needed. Tamil Nadu's consistently narrow spending gap suggests that its Finance Department's broader budgeting framework is effective at aligning planned expenditure with actual spending. The inverse is also true. That is, procurement efficiency depends not only on the capabilities of the agency procuring medicines but also on the state's ability to finance and execute its plans. The spending gap is therefore an outcome of both procurement and budgeting capabilities.

Second, TNMSC appears to have developed three institutional capabilities that support more accurate demand estimation and effective supply management:

• First, is a rigorous approach to planning demand. Karnataka bases its demand on the requests raised by public healthcare institutions. TNMSC uses these requests too, but it also draws on a wider set of variables such as past consumption patterns, the changing demographics of the population served, the frequency of outbreaks and the disease profile of the population, and a 10% contingency stock on top of the estimated requirement.
• Second, these practices are not left to the discretion of individual officials. They are written into TNMSC's manuals and policies, so the forecasting method survives changes in personnel. Karnataka, by contrast, does not have a drug procurement manual.
• Third, Tamil Nadu's approach is also supported by technology. TNMSC uses a customised management information system, the Drug Distribution Management System (DDMS), which tracks stock and consumption at each warehouse and facility, and feeds it back directly into its demand estimates. Karnataka uses e-Aushadhi software, a standard platform used mainly for indenting and inventory management rather than for forecasting.

Tamil Nadu's experience suggests that procurement capability cannot be created through agencification alone. Establishing a dedicated procurement corporation modelled on TNMSC is an important first step, but it does not automatically confer the capabilities required to make the model work. These capabilities are built over time through experience, institutionalised procedures, and systems that enable decisions to be informed by reliable data. TNMSC, incorporated in 1994, has had considerably longer to develop these capabilities than Karnataka's Karnataka State Medical Supplies Corporation Limited (KSMSCL), established in 2019. This difference in institutional experience may help explain the gap in their performance, although it does not, by itself, establish causation.

This article compares two states, and the comparison could be extended in several directions. One, the same test could be applied to more states with different procurement models (such as long standing corporations vis-a-vis states that procure through their health departments) and varying information management systems. This would show whether the gap between Tamil Nadu and Karnataka reflects a broader pattern linked to institutional design, procurement planning and technology or experience and expertise. Second, states differ in how their health spending is funded. Where a larger share of drug spending depends on external funding, such as central schemes like the National Health Mission, the timing and size of fund releases are partly outside the state's control. The spending gap in these states may then reflect delays in funding as much as the state's own capability, and separating the two would sharpen the measure. Third, TNMSC procures only drugs, so a further question is whether Tamil Nadu's capability extends beyond them. How does Tamil Nadu perform on public healthcare procurement as a whole, and separately for goods, services and works?

Notes

¹ Section 3(b) of the Drugs and Cosmetics Act, 1940, read with the Drugs and Cosmetics Rules, 1945 and the Medical Devices Rules, 2017. ↩

References

Aggarwal et al (2025), Information Extraction from Fiscal Documents using LLMs, XKDR Forum.

Chitgupi, Gorsi and Thomas (2022), Learning by Doing, The Leap Blog, November 2022.

Hart, T., et al (2025), Rewiring public finance for the health sector, ODI Global Report, London: ODI Global.

Manivannan, Mehta and Thomas (2024), Improving supply chain management of medicines for public healthcare in India, XKDR Forum.

Manivannan (2026), Designing procurement information systems for improved access to public healthcare, Public Finance in the Digital Era: Emerging Themes 2026, ODI Global Report.

Parthasarathi, R. and Sinha, S. (2016), Towards a Better Health Care Delivery System: The Tamil Nadu model, National Library of Medicine.

Pavithra Manivannan, Aakriti Narang, and Susan Thomas are researchers at XKDR Forum. We thank Jay Kulkarni, Amrita Aggarwal, Ajay Shah and all the participants of the Roundtable on {X}ray of State Finances in India at XKDR Forum for their valuable suggestions and comments on this work.

An evaluation framework for public procurement processes

by Karan Gulati and Anjali Sharma.

Governments require and use goods and services to operate their machinery and deliver schemes and programs to their constituents. However, self-production cannot meet this need for goods and services. As a result, governments rely on public procurement. However, India does not have an optimal public procurement system. Tenders often undergo modifications, the government incurs significant debt due to payment delays, competition is limited, and contract execution is frequently delayed. Procuring entities also tend to favour large private companies by setting eligibility criteria that exclude small and medium-sized enterprises or providing them with private information that offers a competitive advantage.

Given this experience and the limitations of existing literature, integrating international and best practices can facilitate strategic evolution and ensure that the Indian public procurement system is conducive to achieving broader objectives of efficiency and effectiveness in public resource allocation. By methodically aligning with these practices, India can foster a competitive market environment, attract better vendors, and achieve effective and sustainable procurement outcomes. Specifically, such methodological alignment can help establish an evaluation framework with clear benchmarks and indicators that enable the measurement of procurement processes across departments, identify systematic weaknesses, and explore opportunities for reform.

In a new TrustBridge Rule of Law Foundation Working Paper, we propose "An evaluation framework for public procurement processes" that recognises the government's dual role as the state and a market participant throughout the procurement life cycle and can be deployed to evaluate public procurement across sectors and procuring entities. It contributes to India's growing field of evidence-based literature and policy interventions. Based on the UNCITRAL Model Law on Public Procurement, OECD Recommendations of the Council on Public Procurement, the World Bank's Benchmarking of Procurement, FIDIC, ADB, and NEC standard contracts, and relevant literature, the evaluation framework includes the following benchmark:

• Transparency
• Integrity
• Documentation
• Capacity

• Timeliness
• Negotiation
• Monitoring
• Dispute resolution

It divides these benchmarks along two axes. The first pertains to the role of the procuring entities, either as (i) the state or (ii) a market participant. The second pertains to procurement stages: (i) pre-award to award, (ii) award to completion, and (iii) completion to payment. For instance, as the state, procuring entities must ensure transparency before awarding a tender. To evaluate transparency, the framework assesses whether procuring entities publish procurement plans, which aids in planning and reduces the need for emergency procurement. It also evaluates whether the entity conducts pre-bid consultations, which are beneficial for identifying suppliers early in the process.

To assess the effectiveness of the framework, we evaluate the procurement processes of the National Highways Authority of India (NHAI), India's largest public procuring entity, with tenders worth over 3,70,000 crore rupees (USD 44.5 billion). Its parent ministry, the Ministry of Road Transport and Highways, accounts for over half of India's capital expenditure on procurement. This operational experience should have endowed NHAI with expertise that reflects a spectrum of procurement processes and methodologies. Furthermore, the government's focus on infrastructure development, especially in road transport, underscores the NHAI's role as a driver of public procurement by the Indian state. Thus, evaluating NHAI can provide insights into public procurement processes in large-scale procuring entities and the efficacy of our framework.

Through this first-of-its-kind and illustrative evaluation, we identify several areas for improving India's public procurement system, thus optimising the allocation of public resources, curtailing opportunities for rent-seeking, and fortifying public trust. This includes better estimation of project timelines, improving the role of independent monitoring, and conducting performance evaluations. It also highlights that procuring entities need to enhance transparency not just in their operational processes but also in their data collection and reporting practices. These results validate the efficacy of our evaluation framework. Its comprehensive nature, encompassing a range of benchmarks, allows for a detailed evaluation of public procurement processes. Its application to NHAI demonstrates its potential to evaluate and improve procurement processes across procuring entities.

Extending this evaluation framework is essential to building on this foundational work. The task now involves evaluating other large-scale procuring entities. This endeavour is about identifying areas for improvement and understanding the patterns that define public procurement processes. The insights from this work can inform policy-making and catalyse systemic improvements, contributing to enhancing and refining the public procurement system.

References

Anirudh Burman and Pavithra Manivannan, Delays in government contracting: A tale of two metros, Leap Blog, 23 December 2022.

Anjali Sharma and Susan Thomas, The footprint of union government procurement in India, XKDR Working Paper No 10 of 2021.

Charmi Mehta and Diya Uday, How competitive is bidding in infrastructure public procurement? A study of road and water projects in five Indian states, Leap Blog, 29 March 2022.

Karan Gulati and Anjali Sharma, An evaluation framework for public procurement processes, TrustBridge Rule of Law Foundation Working Paper No 4 of 2024.

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

Shubho Roy and Anjali Sharma, What ails public procurement: an analysis of tender modifications in the pre-award process, Leap Blog, 26 November 2020.

Yugank Goyal, How Governments Promote Monopolies: Public Procurement in India, The American Journal of Economics and Sociology, 26 November 2019.

The authors are researchers at the TrustBridge Rule of Law Foundation. We are grateful to Akshay Jaitly, Renuka Sane, Charmi Mehta, and participants at the Joint Field Workshop on Public Procurement for their valuable comments. Views are personal.

Learning by doing and public procurement in India

by Aneesha Chitgupi, Abhishek Gorsi, and Susan Thomas.

Introduction

State objectives can feature a mix of `make' (i.e. build an organisation, recruit people) vs. `buy' (i.e. contract to a private person for the same task). While private persons are, in general, more efficient than a comparable government organisation, the `buy' pathway is not a panacea when there are bottlenecks in state capacity to contract. Understanding how to achieve capacity in government contracting is one of the critical components of the overall question of enhancing state capacity in India.

How has this tradeoff evolved over time? Generally, when contracting capabilities go up, the fraction of work that is contracted-out goes up. Chitgupi and Thomas (2022) find that the government procurement spending has been at a steady 17 percent of the total expenditure across multiple years, which suggests a lack of movement on contracting capabilities.

What about cross-sectional variation in contracting capability between spending units? Sharma and Thomas (2021) finds that procurement expenditure varies significantly across ministries in 2016-2017, with a few ministries accounting for the larger share of procurement. This would, of course, largely reflect differences in the nature of their work.

In this article, we obtain insights into contracting capabilities by examining procurement under-spend across ministries and across time. We recognise that state capacity in procurement includes multiple dimensions: achieving a targeted level of quality at the minimum cost and on time. Our question is a more basic one about whether the spending happens at all. It requires a certain level of contracting capability in order to actually achieve the budgeted procurement expenditure. We then consider the role of learning by doing in procurement.

An insight in the field of state capacity is that it is extremely sticky; changes to state capacity arise only slowly (Kelkar and Shah, 2022). State capacity emerges from the organisation design (mandate, governance, organogram, processes, the feedback loops of accountability mechanisms). Repetition of the same task, over and over, under the influence of accountability mechanisms, induces the slow process of building capability. By this reasoning, we hypothesise that state entities which procure on a sustained basis will build the organisation design and capacity to doing procurement efficiently, and vice versa. The lack of sustained procurement activity will then predict procurement underspend.

Approach

In previous work, we developed the methodology to estimate the fraction of procurement in the accounts reported in the Detailed Demand for Grants (DDG) document published by a ministry. The DDG for a given year reports two sets of numbers by item head: the amount budgeted for the year, the amount actually spent two years previously. So, the DDG in 2016 for (say) the Ministry of Health and Family Welfare will report the budgeted amounts for 2016, as well as the amount spent in 2014. These are reported by item head, and allows us to calculate the actual amount spent but with a lag of two years.

For our current analysis, we calculate what was budgeted and what was actually spent on procurement, across ministries and across years. We use these to estimate the procurement spending gap for the ministry as:

100 x (actual procurement spend - budgeted procurement) / budgeted procurement

A negative spending gap has the ministry spending less than planned. If procurement capacity is the dominant factor driving the ability to procure, then we would say that a ministry with good procurement capacity will have a procurement spending gap close to zero. Further, if the learning-by-doing hypothesis holds, then those ministries that budget consistently for procurement will have built procurement capacity, and be able to show procurement spending gap close to zero.

Other than procurement, a ministry spends on operational expenses like salaries and pensions, and on grants-in-aid and schemes. These do not depend upon specialised capacity as with the contracting capacity required in the case of procurement spending. As a benchmark, we also calculate the total spending gap as the difference between the actual and budget total spending of the ministry, as a fraction of the total budgeted spending. We use the total spending gap of the ministry to benchmark their overall spending capacity.

We calculate the total spending gap of the ministry as:

100 x (actual total spent - total budgeted) / total budgeted

For our analysis, we do the following steps:

1. Estimate the amount of procurement expenditure for each ministry for each year for which we are able to obtain the DDG. We use this to identify which ministries have consistently higher fraction of their expenditure in procurement.
2. Estimate the procurement under-spend for each ministry across different years.
3. Examine whether there is a link between the ministries with a higher fraction of procurement expenditure and a relatively lower procurement under-spend.

Data

We collect the DDG published by the ministries of the Union Government to estimate the procurement and total spending gaps. The estimation procedure described in Sharma and Thomas (2021) requires the object head wise expenditure to be disclosed in the DDG. This level of information has been consistently disclosed across all ministries (other than for the Railways ministry which has a more complicated accounting structure) from 2014-2015 onward. The latest available DDGs are from 2020-2021.

There remains challenges in accessing the DDGs reliably for all the Union government ministries. In our exercise, we are able to locate the DDGs consistently from 2014-15 to 2020-21 for 10 ministries: Civil aviation, Coal, Environment, Finance, Health and Family Welfare, Home Affairs, Housing and Urban Affairs, Rural Development, Road Transport and Highways and Law and Justice.

For seven of these ministries, the DDGs contain ministry level object head wise expenditures directly. For three ministries, we had to sum up the expenditures across department DDGs. These include: the Ministry of Finance which is the sum of Economic affairs, Financial services, Revenue, Expenditure, and DIPAM. The Ministry of Health & Family Welfare is the sum of Health & Family Welfare, and Health Research. The Ministry of Home Affairs (MHA) covers Home Affairs, Cabinet, Police, and 8 departments for the UTs. The expenditure of Home Affairs, Cabinet and Police make up 74 percent of the MHA expenditure. In our analysis, we report the procurement expenditure for the MHA as the sum of these three departments, and do not include the UT departments in the analysis.

All rupee values used in these calculations are adjusted for inflation using the CPI index. The spending gaps are calculated for each year, from 2014-15 to 2018-19.

Is there a link between consistent procurement and lower procurement under-spend?

We organise our findings into three figures, where each is in the form of a heat map. In these graphs, each row is a ministry, where the values going from left to right are those for 2014-2015 to 2018-2019. The deeper / stronger the colours, the higher the values. In all three figures, the order of the ministries stay the same: in descending order of estimated procurement expenditure in 2014-2015. The ministry with the highest procurement spending is on top.

In Figure 1, we present the estimated procurement spending of the 10 ministries. The Ministry of Road Transport & Highways had the highest estimated procurement spending (in Rs. billion) in 2014-2015, and the ministry of coal had the least. There is large variation in the procurement spend across the 10 ministries, as described in Sharma and Thomas (2021). Ministries such as Coal and Rural Development spend less than Rs. 1 billion on procurement and have consistently done so over last 5 years. Ministry of Road Transport & Highways is the top procuring ministry followed by Home Affairs, of which Department of Police is largest procurer. There is more variation across the years for the remaining ministries. For example, the ministry of Health & Family Welfare shows an increased estimated procurement expenditure in 2017-2018 compared to other years in this period. The Ministry of Law & Justice has a steadily increasing procurement expenditure during this period.

 

Figure 1: Estimated procurement expenditure by ministry, 2014-15 to 2018-19

 

Figure 2 presents the estimated procurement spending gap from 2014-15 to 2019-20. Green stands for positive values (which is over-spending or under-budgeting). Red stands for negative values (which indicates under-spending or over-budgeting). Except for a few years, most ministries tend to under-spend. The exception is the Ministry of Road Transport & Highways, which is also the top procuring ministry.

 

Figure 2: Estimated procurement spending gap (%) by ministry, 2014-15 to 2018-19

Figure 2 also shows a sharper amount of under-spending towards the latter part for some of the ministries. These include Finance, Civil Aviation, Rural Development and Coal. This contradicts the proposition that procurement capacity is systematically increasing over time.

These ministries also have a lower fraction of procurement in their spending. These ministries are less likely to develop procurement capacity. Among ministries with similar procurement spending patterns, the Ministry of Environment appears to be building procurement capacity, with a procurement spending gap closer to zero.

Lastly, Figure 3 presents the spending gap for total expenditure for these ministries across time. There is much more capacity among the ministries in managing to spend their overall budgets. Most of the heat-map shows colours mapping to values closer to 0. In fact, there is more evidence of over-spending than under-spending compared to Figure 2. The ministries of Finance and Rural Development have more instances of over-spending in their overall spending, while these are ministries which have estimated procurement under-spend.

 

Figure 3: Total spending gap (%) by ministry, 2014-15 to 2018-19

Alternative explanations

Underspend can be driven by other compulsions also. In a public choice theory worldview, state organisations would give the highest priority to wage and pension expenditures, and sacrifice procurement expenditures when faced with formal or informal budget constraints. This makes procurement budgets the most vulnerable to sudden cuts.

However, this argument should apply equally across all ministries. In fact, the ministries which do higher amounts of procurement should be the prime target for mid-year budget cuts. This argument predicts that under-spend should take place roughly everywhere, and maybe to a greater extent in the high-procurement ministries. The evidence, however, shows that under-spend is more prevalent in low-procurement ministries.

Discussion

The main finding of this article is that ministries that tend to procure consistently, tend to have smaller procurement spending gaps. This is consistent with the idea that there is learning by doing, where doing procurement on a sustained basis gradually creates organisational capability for procurement.

If the key claim of this article is true -- that there is learning by doing in procurement -- this has a few interesting implications. In a department where there is low experience with procurement, the early years where procurement work begins will work poorly. In such a department, procurement under-spend is likely, with consequential failures in public expenditure programs and budgeting. In a department with low experience with procurement, a sudden jump in the procurement budget is likely to be associated with failure to spend. If the political leadership decides to push up the procurement spend of a department by three times, it would make sense to (a) increase the budget by only 20% and (b) initiate a capacity building program for procurement capability within that department.

Procurement is an expertise. No government organisation can sporadically do this well. It is an expertise which can be built, albeit over many years. In any government organisation, people and processes can be organised to focus on this expertise, and to devote time and effort on the entire pipeline of government contracting. The process of developing this capability can be accelerated by bringing in people with this specialised expertise. Strengthening the entire life cycle is required to successfully spend budget amounts. But this is only the beginning of success in procurement where government can contract to deliver quality projects efficiently, on time and at low cost.

References

Aneesha Chitgupi and Susan Thomas. The make vs. buy decision of the union government, The Leap Blog. September 10, 2022.

Vijay Kelkar and Ajay Shah. In service of the republic: The art and science of public policy. Second edition, 2022.

Shubho Roy and Anjali Sharma. What ails public procurement: an analysis of tender modifications in the pre-award process, The Leap Blog, November 26, 2020.

Anjali Sharma and Susan Thomas. The footprint of union government procurement in India, XKDR Working Paper 10, November 2021.

Aneesha Chitgupi is a Research Fellow at XKDR Forum, Abhishek Gorsi is a doctoral candidate at the IGIDR and Susan Thomas is a Senior Research Fellowe at XKDR Forum and a Research Professor of Business at Jindal Global University. We thank Josh Felman, Sudha Krishnan, Ajay Shah and Anjali Sharma for feedback and comments.

The make vs. buy decision of the union government

by Aneesha Chitgupi and Susan Thomas.

Introduction

Like every organisation, the government faces the question of make vs. buy in carrying out its functions. Should it recruit people, and take on management responsibilities of directly making goods/services? Should it enter into contracts with private persons who already specialise in this production? Each choice has a different cost when using public funds. Managers in government face a Markup in State Production, which is the inefficiency of the state in direct production, and the state has to deal with a Markup in State Contracting, which is its inefficiency when contracting for procurement (Kelkar and Shah, 2022).

This question needs to be set in some basic facts. How large are the magnitudes of make vs. buy in the Indian state? Over the years, is there a bias towards producing goods/services in-house? Is there a process of growing maturation where the buy ratio is going up, or have the spate of difficulties in government contracting of the recent decade led to a certain retreat from buy in favour of make? In this article, we collect evidence for the union government, to offer some answers to these questions.

Methodology and data constraints

We use the methodology in Sharma and Thomas (2021) to estimate what the Union Government spends on procurement in a year. This uses the annual statement of accounts (Accounts at a glance) published by Controller General of Accounts (CGA). The books of accounts of government follows cash based system, recording only cash transactions (as opposed to accrual based system where transactions are recorded upon becoming payable).

The calculation of what was spent on procurement uses the expenditure under various ``object heads''. This is only feasible from 2015-16 onwards, when the CGA started disclosing expenditure under object heads in their annual reports. In the work presented here, we undertake this measurement from 2015-16 upto 2019-20. We ensure comparability by converting nominal values to real using the CPI.

Our calculations differ from the methodology employed by Sharma and Thomas (2021) on three counts:

1. We only report the procurement expenditure of the Union Government, which includes only the expenditure under its ministries. We do not include expenditure in Central Public Sector Enterprises (CPSEs), which accounted for 3.5x the procurement of the entire Union Government.
2. We calculate procurement expenditure for the Railways Ministry using a combination of its annual reports and the capital expenditure reported in the CGA annual reports for the Ministry.
3. We include only those items that can be unambiguously classified as procurement for the Union Government.

Results

Figure 1 shows the real actual spending of the Union Government for 2015-16 to 2019-20. The fraction of procurement spending has been quite stable at around 17-18 percent of the total expenditure. The remaining 82-83 percent of budget each year is spent on salaries and pensions and payments in the form of Grants-in-Aid, which are about 20-25 percent of the budget each year.

 

Figure 1: Union Government spending, with fraction of total procurement, inflation adjusted, 2015-2019

Figure 2: Union Government procurement expenditure, with fractions of capital and revenue, inflation adjusted, 2015-2019

 

 

 

Source for both figures: Annual statement of accounts by CGA, Annual report of the Indian Railways, and authors' calculation.

While the share of procurement within total expenditure has been stable, there is a small shift in the composition of Union Government procurement. In Figure 2, we see that share of capital in total procurement increased from 53.7 percent to 57.5 percent between 2015-16 to 2019-20.

Table 1: Changes in share of total and procurement expenditure of Union Government as GDP (in %), 2015-2019

	Total expenditure	Procurement expenditure	Capital procurement
	/ GDP	/ GDP	/ GDP
2015-16	14.36	2.42	1.30
2016-17	14.37	2.50	1.38
2017-18	13.92	2.37	1.31
2018-19	13.55	2.40	1.39
2019-20	14.23	2.39	1.37

Source: Annual statement of accounts by CGA, annual reports of Indian Railways and authors' calculation.

How have these changed as a share of overall GDP? Table 1 shows that these fractions tend to be stable, whether it is the total spending by govt, or the spending on procurement or on capital procurement spending. There are some changes during 2017-18. This is likely a result of lack of maneuverability to reduce revenue expenditure, and an emphasis on items such as subsidies (RBI, 2020).

Discussion

Government contracting is a critical part of state capacity that influences how the government chooses between make or buy in providing public goods. Given the more intractable problems faced by the Indian state in its attempts at recruiting people and producing internally, the possibility of contracting out to private firms is appealing. In the best examples, capabilities in public procurement have fostered innovation. But, this requires state capacity in government contracting. The evidence in India points to weak capacity in government contracting. Whether it is high levels of public litigation at courts (Mehta and Thomas, 2022; Damle et al, 2021), increasing levels of delayed payments at PSEs to vendors (Manivannan and Zaveri-Shah, 2019) and delays in project completion (Burman and Manivannan, 2022). Private parties are increasingly withdrawing from contracting with state (Mehta and Uday, 2021). This hampers purchase by the state as there is an inferior landscape of potential sellers.

A strategy of procurement reform could potentially put the Indian state on a path to higher capacity. The foundations of the field, of procurement reforms, lies in establishing basic facts:

1. How large are the magnitudes of make vs. buy in the Indian state? About 17% of the expenses of the union government work through buy, the remainder work through make.

2. Is the buy ratio something that is stable or does it fluctuate from year to year? The buy ratio is remarkably stable; it changes very little from year to year.

3. Is there a process of growing maturation where the buy ratio is going up? Or alternatively, have the spate of difficulties in government contracting of the recent decade led to a certain retreat from buy in favour of make? The buy ratio is highly stable; it shows no time trend. What has changed is a small shift towards a increasing spending for capital procurement.

This shows that, in real terms, the allocation between the make vs. buy choice of the union government has remained the same. But there has been a rise in the share of capital procurement spending. This tends to involve spending in projects with longer maturity, with greater risks to the project during the contract implementation and management phase being the underlying driver for procurement failure. Bottlenecks to resolving problems in this stage of procurement will become an important area to focus on as the government reforms public procurement rules and processes.

References

Vijay Kelkar and Ajay Shah. In service of the republic: The art and science of public policy. Second edition, 2022, forthcoming.

Pavithra Manivannan and Bhargavi Zaveri. How large is the payment delays problem in Indian public procurement?. The Leap Blog. 22 March 2021.

Charmi Mehta and Susan Thomas. Identifying roadblocks in highway contracting: lessons from NHAI litigation. The Leap Blog. 13 July 2022.

Devendra Damle, Karan Gulati, Anjali Sharma and Bhargavi Zaveri. Litigation in public contract: some estimates from court data. The Leap Blog. 26 May 2021.

Pavithra Manivannan and Bhargavi Zaveri. How large is the payment delays problem in Indian public procurement?. The Leap Blog. 29 March 2022.

Perun. Defence economics, and the U.S. production advantage, YouTube, 31 July 2022.

Charmi Mehta and Diya Uday. How competitive is bidding in infrastructure public procurement? A study of road and water projects in five Indian states. The Leap Blog. 22 March 2021.

Anirudh Burman and Pavithra Manivannan. Timeliness in government contracting: Evidence from the country's largest metro-rail network. The Leap Blog. 12 August 2022.

Anjali Sharma and Susan Thomas. The footprint of union government procurement in India. XKDR Working Paper 10, November 2021.

Aneesha Chitgupi is a Research Fellow at XKDR Forum, and Susan Thomas is a Researcher at XKDR Forum. We thank Abhishek Gorsi for excellent research assistance, Josh Felman, Sudha Krishnan, Anjali Sharma and Ajay Shah for their inputs and comments.

The footprint of union government procurement in India

by Anjali Sharma and Susan Thomas.

Difficulties of government contracting are one important source of low state capacity. When capabilities in government contracting are low, problems that involve purchase from the private sector prove to be daunting (e.g. Covid-19 vaccines), and the decisions of make vs. buy are distorted (e.g. arms manufacture by the Indian state). This has motivated research in the field of government contracting. Along with a few other fields, government contracting constitutes a `horizontal' field which influences state capacity in all specialised domains such as defence, health, etc.

A foundational fact of this field is the magnitudes involved. A few researchers have worked on the problem of measuring the size of government procurement. In a recent paper, The footprint of union government procurement in India, we develop an estimation strategy based on public finance data that is available in the public domain, for the union government and for central public sector enterprises ("CPSEs").

We analyse the fiscal documents produced by the ministries and public sector enterprises of the union government: the `Detailed Demand for Grants' (DDG) submitted by various departments and ministries to the Ministry of Finance of the Union Government and the annual statement of accounts published by the Controller General of Accounts (CGA). Object head level data is collected from the DDGs, the heads that constitute public procurement are identified. and each expenditure is classified as procurement or non-procurement. Procurement expenses are further classified into procurement expenses of goods, services and works, and operating or revenue expenditure and capital expenditures. This results in an estimate for the total operating and capital procurement expenditure for a given ministry or department in a year.

This methodology generates estimates for :

1. Total procurement in a year
2. The magnitudes which are operating expenditures vs. capital expenditure.
3. The procurement magnitudes in goods, services and works.

In this work, some records are not amenable to the approach used and are excluded from the analysis. This could contain procurement activity, which is missed out. Therefore, the resulting estimates are biased on the downward side.

The paper uses 2016-17 as an example where these methods are applied. The main findings for 2016-17 are:

1. The total purchases of the union government are about Rs.3.9 trillion, and the CPSEs additionally purchase Rs.13.8 trillion. These add up to around 12% of GDP.
2. Of the total purchases by the union government, Rs.2.2 trillion are capital goods and the remainder are operating expenses. The CPSEs added Rs.2.2 trillion of fixed assets. The remaining Rs.13.67 trillion were operating expenses. This indicates that a little over 13% of public procurement by union government and CPSEs are capital expenses.

This research fits into the emerging literature on government contracting. Obtaining a sense of the empirical magnitudes involved is a critical building block of this field. We build on, and enhance, the measurement of public procurement which includes the preface to the draft `Public Procurement Bill, 2012', work by the research group at Consumer Unity & Trust Society (CUTS, 2012), and research work based on the World Bank Global Public Procurement Database (Djankov et al 2016).

Alongside this (conservative) estimate of union government procurement activities at about 11% of GDP, there are purchases by state and city governments. Khan (2012) places this total at around 30% of GDP. The magnitudes involved underline the importance of this field, of measuring, diagnosing, and improving the capabilities of government in contracting.

References

CUTS (2012), International, Government Procurement in India Domestic Regulations and Trade Prospects, CUTS, October 2012.

Simeon Djankov, Asif Islam and Federica Saliola, How large is public procurement in developing countries?, Peterson Institute for International Economics blog, November 2016.

M. H. Khan, Public procurement issues with Government of India, Presentation at LBSNAA, March 2017. 

Anjali Sharma and Susan Thomas, The footprint of union government procurement in India, xKDR Working Paper 10, November 2021

 

Anjali Sharma is Head of Strategy and Regulatory Affairs at National E-Governance Services Ltd. Susan Thomas is Research Professor of Business at Jindal Global University and Researcher at xKDR Forum, Bombay.

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.

What was the buying organisation?

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.

Who received bids?

Of the 14 that published tenders, Karnataka, Odisha, MCGM, Maharashtra and Rajasthan received bids. Andhra Pradesh, Delhi, Haryana, Kerala, Madhya Pradesh, Tamil Nadu, Telengana, Uttar Pradesh and Uttarakhand did not receive any bids.

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 bids

Figure 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

	Received bids	Did not receive bids
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.

The main finding of this article is that even when presented with supreme urgency and the highest prioritisation of the political leadership, it was often not possible to successfully buy vaccines. Given that vaccine procurement has always been undertaken by the union government, state governments were permitted to procure a commodity that they had scarce experience in doing, and in a market where they had no previous experience or credibility. Fire-fighting and "mission mode" works poorly. There is need to develop state capacity in calm times before they being asked to perform in an emergency (Kelkar and Shah 2019). State capacity can only arise slowly. A stable team of policy practitioners needs to engage in a given fixed activity (e.g. vaccine purchase from the global market) repeatedly. An ongoing relationship needs to be established with dozens of private firms. There needs to be continuing and repeated interactions through which learning takes place, and further, gets encoded into purchase manuals and document templates. Once such a framework is in place for many years, it would become possible to readily purchase vaccines in a given government organisation. If such a framework is not in place, episodic government contracting in a crisis management mode is unlikely to succeed.

References

Amrita Agarwal and Ajay Shah, An important change of course by policy in Indian Covid-19 vaccination, The Leap Blog, 20 April 2021.

Matt Apuzzo and Selam Gebrekidan, Governments Sign Secret Vaccine Deals. Here’s What They Hide, New York Times, January 2021.

Centre for Vaccine Innovation and Access, Indias leadership in the fight against Japanese encephalitis, PATH India, 2019.

Chartered Institute of Public Finance and Accountancy, Good Governance in the Public Sector, 2013.

Ruchika Chitravanshi and Sohini Das, Covid-19 vaccination: Govt books 440 million doses with 30% advance, Business Standard, June 2021.

Department of Expenditure, Ministry of Finance, Manual of Procurement of Goods 2017, Government of India, 2017.

Atul Dev, COVID-19: ‘Panic’ among India health workers over PPE shortages, Al Jazeera, March 2020.

Harleen Kaur, Ajay Shah and Siddhartha Srivastava, How elements of the Indian state purchase drugs, xKDR Working Paper 5, August 2021.

Vijay Kelkar and Ajay Shah, In Service of the Republic, Penguin Random House India Private Limited, 2019.

Pavithra Manivannan and Bhargavi Zaveri, How large is the payment delays problem in Indian public procurement?, The LEAP Blog, March 2021.

Ministry of Health, Family and Welfare, National Vaccine Policy Government of India, 2011.

Ministry of Health and Family Welfare, Revised Guidelines, Government of India, May 2021.

Ministry of Statistics and Programme Implementation, Government of India, 2021.

Atri Mukherjee, Regional Inequality in Foreign Direct Investment Flows to India: The Problem and the Prospects, Reserve Bank of India, 2011.

National Audit Office, Improving the PFI process, Office of the Comptroller and Auditor-General, National Audit Office, United Kingdom, 2007.

Press Information Bureau, Government of India announces a Liberalised and Accelerated Phase 3 Strategy of Covid-19 Vaccination from 1st May, Ministry of Health and Family Welfare, Government of India, April 2021.

Vikram Rajan, A Polio-Free India Is One of the Biggest Achievements in Global Health, World Bank, 2014.

Shubho Roy and Anjali Sharma, What ails public procurement: an analysis of tender modifications in the pre-award process, The Leap Blog, November, 2020.

Arup Roychoudhary, Centre should share some financial burden of states' vaccine procurement, Moneycontrol, May 2021.

Pankaj Shah, Uttar Pradesh amends global vaccine tender, Pfizer, Moderna can now bid, Times of India, May 2021.

The Hindu, Moderna refuses to sell vaccines directly to Punjab, 23 May 2021.

World Bank, World Bank PPP - Legal Resource Centre, 2021.

xKDR Forum, Government vaccine procurement, August 2021.

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.

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

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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.