Improving electricity regulation in Tamil Nadu

by Akshay Jaitly, Charmi Mehta, Rishika Ranga, Renuka Sane, Ajay Shah and Karthik Suresh.

The Indian electricity sector is a centrally planned sector that faces increasing financial stress. In other words, a centrally planned decarbonisation would result in enlarged costs and political difficulties. The path forward for electricity reforms is to make changes one state at a time. We have started this journey with the state of Tamil Nadu.

The case of Tamil Nadu is particularly interesting. It holds great potential when it comes to the energy transition with high potential of offshore wind and solar. However, poor quality of supply along with indiscriminate subsidies for domestic and agricultural consumers has led to deep levels of fiscal stress on the Tamil Nadu state exchequer. Fiscal stress harms investibility in electricity, which is particularly a challenge for renewables. Due to multiple reasons, some of which may be attributed to the political economy at the state level, the state of Tamil Nadu has also revised tariffs only four times since the Electricity Act was enacted in 2003. These tariff revisions have often not reflected the cost of supply of electricity (e.g., the tariff revisions in 2017).

While the electricity sector in Tamil Nadu has recently undergone institutional changes in the form of TANGEDCO's demerger, the present state of regulatory challenges has not been adequately addressed. In a new paper, Improving electricity regulation in Tamil Nadu, we present evidence on regulatory failures of the electricity regulator in Tamil Nadu (TNERC) and contextualise the impact of this on associated aspects of public finance and private finance. We bring the knowledge of regulatory theory to bear upon the possible causes of these failures. We discuss the TNERC's performance on elements that make up a well-functioning regulator, such as clarity of purpose, separation of powers, selection of board members, fair adjudication, public consultations and financial independence.

Many aspects of regulatory reform require amendments to the Electricity Act, and hence the problem statement lies in identifying the levers available to make progress in Tamil Nadu. We identify several levers that the state government can use to undertake reforms, well within its powers under the Electricity Act, to make Tamil Nadu a turnaround story and a model for good electricity regulation nationwide. When these improvements are put into motion, they will materially change the views of private investors on the feasibility of investment in the Tamil Nadu electricity sector. This paper offers ideas on how this can be done.

Akshay Jaitly, Rishika Ranga and Renuka Sane are researchers at Trustbridge Rule of Law Foundation. Charmi Mehta, Ajay Shah and Karthik Suresh are researchers at XKDR Forum.

Author: Charmi Mehta

Charmi Mehta is a Researcher at XKDR Forum, Mumbai.

On this blog:

• Improving electricity regulation in Tamil Nadu, 9 February 2025.
• The electricity chokepoint in Tamil Nadu public finance, 26 February 2024.
• Offshore wind in Tamil Nadu: from potential to reality, 13 January 2024.
• The difficulties of asset monetisation in the transmission sector, 9 January 2024.
• Identifying roadblocks in highway contracting: lessons from NHAI litigation, 13 July 2022.
• How competitive is bidding in infrastructure public procurement? A study of road and water projects in five Indian states, 29 March 2022.
• Lessons from the COVID-19 vaccine procurement of 2021, 15 November 2021.

The electricity chokepoint in Tamil Nadu public finance

Charmi Mehta, Radhika Pandey, Renuka Sane and Ajay Shah

Each state in India can be visualised as an entity in itself. Vast magnitudes of finance will be needed to put the states on an energy transition pathway. While this pathway will be different for every state, the electricity sector is likely to be the recipient of much of these funds. The investibility of the electricity sector is thus an important field of study.

Many states in India face fiscal distress and many states in India have difficulties in the electricity system. In a new paper, 'The electricity chokepoint in Tamil Nadu public finance', we bring the two streams of knowledge together for the state of Tamil Nadu, and offer fresh insights for fiscal policy and for electricity policy.

The formal toolkit of a `debt sustainability analysis' (DSA) is brought to the standard Tamil Nadu fiscal data. This involves a first stage of comparing a group of fiscal indicators against normative benchmarks, and a second stage of forecasting the debt/GSDP ratio and the interest payments to revenue receipts ratio (IP/RR ratio) for five years; till FY 2028. These results, which we term the `baseline DSA' translate the mainstream intuition towards Tamil Nadu's fiscal difficulties into tangible numbers and forecasts.

A consolidated financial picture is drawn by integrating the two electricity sector utilities -- TANGEDCO and TANTRANSCO -- fused into the Government of Tamil Nadu debt stock. This yields a modified DSA that we term a `Corrected DSA'. This is done to acknowledge the implicit guarantee that state governments hold towards the debt of state-owned entities. This modified picture is thus a truer depiction of the fiscal problems of the state.

The fact that large debt servicing expenditures were successfully achieved for the last decade has helped create a confidence that the fiscal strategy of Tamil Nadu is deplorable but feasible. Of essence in the fiscal outlook of every highly indebted entity is the problem of sustainability. There are three concerns:

1. Sustained large scale borrowing, from the financial system, may potentially face difficulties through the risk appetite of lenders, changes in regulations, systemic crises in the financial system, etc.
2. The most important assumptions that shape the results of this paper are the nominal interest rate ($r$), estimated at 7%, and nominal GSDP growth rate ($g$), estimated at 9%. This has a $r-g$ of -2: it is a very positive environment from the viewpoint of fundamental fiscal dynamics. In the future, if $r-g$ becomes less benign, the debt dynamics could change significantly.
3. The conventional notion of fiscal stress is phrased in terms of bond default. In India, fiscal distress is known to manifest itself as unplanned budget cuts (that disrupt the working of the government), defaults on payments to private firms, and even the deferrals salaries or pensions. We look back upon three instances when state governments faced high fiscal stress in 2001, and find that the present projections for Tamil Nadu for FY 2028 are partially similar to these values.

The fiscal knowledge of this paper has implications for electricity policy. The electricity system requires two large blocks of investment. A big block of capital is required to rebuild the grid for the post-carbon world. And, a big block of capital is required for the investment in renewables and storage that are required to sustain economic growth in the post-carbon world. Of particular importance is the economic upside from exploiting that remarkable natural resource which is found off the coast of Tamil Nadu in the form of offshore wind generation. These investments will not arise in the environment of chronic fiscal stress in the electricity system.

The electricity knowledge of this paper has implications for fiscal policy. Through simulations where electricity subsidies remain constant or they are completely eliminated, we find that the electricity system is material in solving the fiscal problem. Thus, we extract the electricity subsidy problem from the sector, and place upfront its impact on the public finance parameters and the development trajectory of the state. A complete electricity sector reform versus business-as-usual translates into an FY 2028 outcome for the debt/GSDP ratio of 32.47% vs. 43.53%, and an IP/RR ratio outcome of 19.71% vs. 26.12%. These are large differences. They encourage us to prioritise electricity sector reform as a part of the medium-term fiscal strategy.

Charmi Mehta and Ajay Shah are researchers at XKDR Forum. Radhika Pandey is a researcher at NIPFP. Renuka Sane is a researcher at Trustbridge.

Offshore wind in Tamil Nadu: from potential to reality

by Akshay Jaitly, Charmi Mehta, Renuka Sane and Ajay Shah.

Foundations

The world of renewables is comprised primarily of solar and wind. Of these, solar electricity suffers from the limitation of dwindling away in the evening, at precisely the time at which electricity demand rises. This makes wind particularly important. There is a good deal of onshore wind generation in India. What is different and potentially superior about offshore wind?

1. Wind speeds tend to be higher offshore than on land. A wind turbine operating at a wind speed of 24 kph can generate twice as much energy as a turbine operating at a wind speed of 19 kph (American Geosciences Institute, 2023).
2. The wind offshore tends to be more consistent, with higher power capture for a greater number of hours per day.
3. Onshore wind requires land resources. Offshore wind is built in the open sea where land rights are cheaper, and it is easier to go to bigger blades.
4. Offshore wind does not impose noise pollution upon the human population.

These benefits, of course, come with a problem, that construction of windmills in the high seas is more difficult when compared with building on land. Windmills are best placed at locations with high wind. Figure 1 shows that Tamil Nadu is a hot spot for offshore wind in India. It is interesting to notice that Sri Lanka is also a hotspot for offshore wind (Figure 2).

Figure 1: Wind speeds off the Indian coast

Source: India Wind Potential Atlas (NIWE, 2019).

Figure 2: Wind speeds off Sri Lanka.

Source: Technical Assessment by World Bank, IFC and ESMAP (2020).

There is an analogy between offshore wind in Sri Lanka, and hydel resources in Nepal and Bhutan. Given the correct arrangement of foreign policy (Subramanian, 2023), the Indian private sector can possibly play a leadership role in building electricity generation in Sri Lanka, as has been the case with Bhutan.

Putting these facts together, there is an important natural resource in Tamil Nadu, and its vicinity, through which vast renewable electricity generation can become possible, given the correct configuration of policies and state institutions that create conditions of investibility. We can dare to hope that very large offshore wind generation can take place off the coast of Tamil Nadu, which would attract energy-intensive firms to operate in the region, and enabling sale of electricity into locations far from Tamil Nadu.

Public economics for offshore wind

We can imagine an uncoordinated rush by the private sector to venture out into the seas and put up wind turbines. They would jostle with each other to build on the best sites. Each wind turbine would have to face the problem of transmitting energy to the mainland. There are three areas where policy makers can be useful:

1. Ownership of the sea-bed and property rights: In a world without clarity on property rights, the private sector would experience conflicts when building wind turbines. There is a negative externality as multiple construction projects which are physically near each other impose a certain amount of chaos upon each other, and the presence of a windmill diminishes the energy production of nearby windmills.The sea-bed should be treated as a scarce natural resource, akin to the electromagnetic spectrum. There is a role for the state in establishing property rights, and auctioning off ownership of the sea-bed to private persons. The coercive power of the state would be used to create property rights for private persons, following which private persons would trade in blocks of sea-bed (akin to transactions in privately owned land or on the electromagnetic spectrum), and the government would enforce against encroachment. The negative externality problem during construction can be addressed by modified property rights which decongest each construction site for the construction period, by expanding the notion of property rights associated with each geographical location, to exclude other persons for the period of construction.
2. Economics of transmission: Each wind turbine would have to face the problem of transmitting energy to the mainland. Every generation company would benefit from more convenient access to high capacity transmission lines. There is a natural monopoly problem in the transmission infrastructure - it is likely that a single transmission company will emerge within each geographical area. There is merit in using state power to coerce this firm on open-access rules (so it cannot deny transportation to any private person) and on price regulation.
3. Data as a public good: The government can add value by spending taxpayer money to construct a dataset on wind speed and releasing this into the public domain. This activity involves no use of coercive power, other than the coercion that undergirds taxation. The government would merely release data on a website as a public good, and in no way preclude private persons from expending resources to create data on their own. For the government released data to be credible, it would have to be collected by trusted agencies, experienced in offshore wind data collection; the role for the government should be one of only contracting-out the construction of the data.

While electricity in India is largely a state subject, the sea-bed falls under the union government jurisdiction through Article 297 of the Indian Constitution through which the Parliament has enacted the Territorial Waters, Continental Shelf, Exclusive Economic Zone and Other Maritime Zones Act, 1976. Thus we can envision a two-part policy story for offshore wind, where the union government auctions off blocks of sea-bed, and the state government deals with everything connected with electricity. Once the energy reaches landing stations at the shore, it is just ordinary electricity and fits into the mainstream electricity market exactly as with onshore wind turbines.

How the Indian journey has unfolded

The union government has decided that offshore wind production will commence in Gujarat and Tamil Nadu. A union government agency named the National Institute of Wind Energy (NIWE) plays an important role in this field including that of being the designated counterparty for contracts. It plays a expansive role, akin to an offshore wind central planner. Transmission will be run by a union government PSU, the Power Grid Corporation of India Limited (PGCIL). No role is envisaged for state governments.

In 2018, NIWE published its first tender for an offshore wind block auction off the Gujarat coast. However, it did not receive bids and consequently had to be called off after multiple extensions (Deshpande, 2021). Since 2022, the Union Government has released (i) a national Strategy Paper for the Establishment of Offshore Wind Energy Projects and (ii) a draft tender for Sea bed leasing for offshore wind energy projects which pertains to locations off the coast of Tamil Nadu. These releases help improve policy predictability.

The proposed contracting model

Project costs in offshore wind are high, particularly in contrast to developing renewable energy plants onshore. Costs also vary as per the depth of waters and distance from shore. Operating offshore wind turbines involves higher maintenance requirements (Koch, 2012). First movers face higher costs on account of uncertainty and the inevitable mistakes.

NIWE has proposed three alternative contracting models in its strategy paper. Model A is for projects where surveys and assessments have been completed, and the site is ready for development. Model B is model A without viability gap funding ("VGF?). Model C is a fully bundled model with end-to-end responsibility placed upon the project developer, including site identification. The tender released (for the sea bed off the coast of Tamil Nadu) follows model A (NIWE, 2023). Table 1 summarises this proposed contract design.

Table 1: Risk-responsibility allocation across proposed offshore wind contracting models

Factors	Risks/responsibility	Model A
Government support	Bridging financing gaps	VGF (Union; unallocated)
	Transmission charges	Waived
Strategic and commercial risks	Identifying sites for offshore wind farms	Gov (Union)
	Site assessment surveys	Gov (Union)
Local factors	Transmission infrastructure	Gov (PGCIL)
	Evacuation of power	Gov (PGCIL)
	Licenses	Private
	Power offtake guarantees	None

Site characteristics have a substantial impact upon the prospective return on equity. The MNRE/NIWE supplies its assessment of each site. A careful examination of the data released by MNRE/NIWE is required. Potential developers may invest significant time and resources in constructing private sector data if there are limitations in the government-released data.

The selected bidder must set up the turbines offshore and connect each turbine to the offshore agglomeration facility (which will be constructed and managed by PGCIL). While the model mentions accessing VGF from the union government, the mechanism is not adequately spelled out. Is this policy strategy conducive to investibility?

i. Site selection and exclusivity:

Site selection is best done by potential wind farm developers. Developers face the consequences of, and are best placed to take decisions on sites when faced with a certain amount of data. They will commission the creation of additional data optimally. Under Model A, sites have been selected by NIWE. We expect that serious developers will construct their own datasets and may chafe at the locations pinned down by NIWE.

The next issue is that of exclusivity. Developers like to have a certain exclusive period, where no other construction takes place, in order to reduce the complexities of coordination across multiple construction projects. The exclusivity period for the sea-bed is set to five years, with a maximum extension of one year. The average time taken to set up a mid-size offshore wind farm, globally, is four years. In India, this is likely to attain a higher value (MOSPI, 2023).

Auctioning the exclusivity period itself can be a way to decide what a 'sufficient' period should be. In countries where confidence in offshore projects has been high, auctions are witnessing site tenures being awarded based on an auction in which the highest bidder wins the site (Exeter, 2022). For example, the Round 4 auction for sites (held in 2021) in England and Wales saw the highest bidder paying Euro 1bn upwards in option fees, payable annually (for ten years) for exclusive sea-bed rights on an 8 GW of offshore wind.

ii. The problem of transmission:

In offshore wind contracts in Northern Europe, the evacuation infrastructure for the electricity is generally created by the developer (and in some cases such as in the UK, later carved out and sold to a third party) or contracted out (separate from the offshore windfarm contract) to a private transmission service provider. Under Model A, this function has been assigned fully to the state-owned transmission company - PGCIL. PGCIL has no prior experience in developing transmission for offshore wind and it carries the burden of being a public sector organisation.

Whether managed by PGCIL or some other firm, regulation is required so that future developers are provided access to non-discriminatory evacuation infrastructure and services, perhaps using common carrier principles. While one block / site is up for auction today, numerous offshore plants will come up in the future in close vicinity. There may be shortages or exorbitant pricing of transmission, particularly in the absence of non-discriminatory access.

In addition to the risks from power evacuation, risks from unscheduled downtimes can induce losses, and contract terms will determine who bears this risk. For example, in Germany, the costs of curtailments/incapacities were transferred to the consumer. In contrast, costs remained with the project owner in China despite their lack of control over the risk (Gatzert, 2016). The government's decision to manage the complete evacuation responsibility may prove problematic in the event that higher transmission losses or shutouts imposes important risks upon the developer. If the preference is for power evacuation to be managed by PGCIL, contractual provisions on liquidated damages must adequately cover for downtimes that are not caused by the fault of the developer and other transmission losses.

iii. Regulatory burdens

Unlike transmission and distribution, power generation has no market failure problem. It is hence important to envisage a contract design that harnesses private sector expertise, without added layers of government involvement. At present, establishing an offshore wind farm will require a set of seventeen different clearances and licences from a host of ministries, including the prerequisite of block approval from the Ministry of Defence. Seven of the seventeen clearances are necessary even before one can make a bid, and the rest are post-award. The sector also includes a specific licensing regime that extends to how new offshore assets connect and interact with the grid. This requirement for multiple permissions detract from the vision of property rights in the hands of a private person.

Further, approvals and no-objection certificates may be required from State Governments for transmission and evacuation infrastructure-related provisioning and any other clearances as may be legally required to establish and operate offshore power plants - as in the case of oil and gas pipelines (NIWE, 2022a, NIWE, 2022b).

It might be useful to consider if some project-related (as opposed to bidder related) approvals can be obtained ahead of time and made part of the bid package. This will reduce risk for bidders and may lead to more attractive bids.

Lastly, as with any nascent industry, policy and regulatory frameworks are likely to evolve and change over time - and existing concessionaires should be contractually protected from this through adequate 'change in law' and 'change of scope' provisions.

Under the present policy strategy, offshore wind generation requires the firm to have a high level of government engagement, and exposure to policy risk. This problem may encourage foreign firms to find local partners and enhance the required rate of return, i.e. hamper investibility.

iv. The role of the union government:

The present policy strategy suggests a offshore wind industry that is run out of the union government. This vision will sit uneasily with the primary role of the state government in electricity regulation and the electricity business once the energy hits the shore. Since vessel availability and transport infrastructure are critical to offshore wind farm development and often contribute to delays, cost overruns ((Koch, 2012), and litigation, the State's port infrastructure can be adapted to facilitate project management. Proximity of the Thoothukudi port to the proposed site is an advantage, and logistics facilities such as (i) storage areas for component assembly and manufacturing, and (ii) berth infrastructure can be developed to support upcoming offshore wind plants (Auroville Consulting, 2022). Such thinking is downplayed in a union-dominated policy process.

Assessing the outlook

Our analysis suggests that there is a considerable gap between the natural resource potential for offshore wind in South Asia and its tangible translation into RE capacity. The sea-bed lease tender was released in September 2023 with a deadline of 28 November 2023. In our knowledge, no bids have emerged.

Electricity is a concurrent list subject under the Indian Constitution, with both the union government and the state government having the right to make law over aspects of the sector. Sea-bed jurisdiction appears to clearly lie with the union. It would make sense to rely on the state government to a greater extent.

There are significant manufacturing and transportation challenges associated with the bulky parts of offshore wind facilities. Both Tamil Nadu and Gujarat are strong in manufacturing, and are natural sites where a private industry could develop that will undertake this manufacturing, and play a role in offshore wind sites hundreds of kilometres away.

The arguments presented earlier in this article show that thinking from first principles, the role of the state in this field is (a) Establishing property rights with auctions of chunks of sea-bed, including a special kind of exclusivity during construction; (b) Ensuring open access and price regulation for the natural monopoly of transmission; (c) Possibly adding value by constructing and releasing a robust dataset with wind speed. There is merit in evolving the policy strategy towards these three pillars.

References

American Geosciences Institute. 2023. What are the advantages and disadvantages of offshore wind farms?, National Academy of Sciences.

Deshpande, T. 2021. Why India's Offshore Wind Energy Potential Remains Untapped, IndiaSpend. 26 November 2021.

NIWE. 2023. Strategy for Establishment of Offshore Wind Energy Projects, Ministry of New and Renewable Energy, Government of India. September 2023.

Koch, C. 2012. Contested overruns and performance of offshore wind power plants, Construction Management and Economics, 30:8, 609-622.

Infrastructure and Project Management Division, Ministry of Statistics and Programme Implementation. 2023. Quarterly Report on Mega Projects.

Laido et al. 2022. Impacts of Competitive Seabed Allocation for Offshore Wind Energy, University of Exeter. April 2022.

Gatzert et al. 2016. Risks and risk management of renewable energy projects: The case of onshore and offshore wind parks, Renewable and Sustainable Energy Reviews, Volume 60. July 2016.

Auroville Consulting. 2022. Unlocking Offshore Wind in Tamil Nadu. Sustainable Energy Transformation Series.

Subramanian, A. 2023. Answers in the offshore wind.The Indian Express. 23 March 2023.

Akshay Jaitly and Renuka Sane are Co-founder and Research Director, respectively, at TrustBridge Rule of Law Foundation; Charmi Mehta and Ajay Shah are Research Associate and Co-founder, respectively, at XKDR Forum.

The difficulties of asset monetisation in the transmission sector

by Akshay Jaitly, Charmi Mehta, Rishika R, and Ajay Shah.

Introduction

About 95% of nationwide transmission assets in India are presently owned by the government company, Power Grid Corporation of India Limited (PGCIL). A transformation of electricity transmission systems is required to achieve decarbonisation, reflecting the distributed geography of renewables generation in India, and the eventual de-commissioning of present coal-based power generation. Several estimates suggest a total required investment, for electricity transmission, of over INR 2 trillion over the next five years.

Given the public finance and managerial constraints in the Indian state, private investment is critical to achieve the required investments. Land, compliances and clearances impede pure private greenfield transmission projects, so one method there is for the government to do development and then monetise the assets. Existing assets are relatively straightforward to operate and risk-free, with a steady stream of user charges, where private sector participation is then readily achieved.

While attempts at attracting private investment in this field have taken place from 2006, the outcomes so far have been poor. One response to this was in October 2022, where the Ministry of Power issued guiding principles for states to monetise 14% of transmission assets that are currently owned and operated by state-owned transmission utilities. This involved a new contracting mechanism: the "Acquire, Operate, Maintain and Transfer (AOMT) model".

This is the temporary transfer of asset ownership (i.e. not a sale) to private firms in exchange of an upfront payment. Firms are expected obtain cash from the operations (user charges) of the asset, depending on the model deployed for monetisation. Asset monetisation has twin benefits for governments - first, it provides short-term liquidity to the public sector entity in the form of upfront payment for the asset(s); and second, it allows the government to delegate the operations and maintenance (O&M) to the private sector, enabling public sector entities to harness private sector capabilities and reduce their scope.

How previous asset monetisation models worked

Asset monetisation has been used as a contracting model for O&M since 2018 when the National Highways Authority of India (NHAI) began using the toll-operate-transfer (TOT) model, which draws on ideas from Australia, North America and Europe. Besides this, InvITs have been used in the transmission sector. There is significant knowledge and experience around InvITs and TOT contracts in India: they constitute the baseline against which the new AOMT can be understood. Table 1 provides a comparison of the three models on key features.

Table 1: A comparison of key features across contracting models - InvITs, TOT and AOMT.

	InvITs	Toll Operate Transfer	AOMT
Description	Transfer of assets to listed registered trusts regulated by Securities Exchange Board of India which issues units to multiple investors. Comparable to equity for a limited time period.	Temporary transfer of asset ownership for an upfront payment from the private party who is granted this concession. The private party is also granted rights to collect user charges, and other charges to finance the O&M of the asset.	Temporary transfer of ownership of assets for upfront payment from the private party, in turn allowing them to operate and maintain the asset, and generate revenue from it.
Regulation of investment vehicle	Trust to be registered by SEBI; existing licences applicable	SPV/ investor entity regulated by contract terms	Transmission licence transfer/re-registration to be approved by State electricity regulator
Regulation of user charges	Approved by electricity regulator and governed by Transmission Service Agreement	As per National Highway Toll Determination Rules	Approved by electricity regulator and governed by Transmission Service Agreement
Mode of returns	Returns from dividends, interest and capital gains on units	Toll charges	Transmission charges (varied across states)
O&M	Public	Private	Private
Ownership	Pooled; investors	Single or consortium	Single or consortium

The Toll-Operate-Transfer model in Indian Highways

In 2018, the NHAI bundled approximately 500 km of highways for the first auction, and potential investors were to bid the upfront payment they would make for the bundle. In return, investors receive the right to operate the highway and collect tolls generated from it during the concession period. This model provides the awarded party autonomy on operations and revenue generation, eliminating the involvement of the public authority in O&M.

The NHAI has so far attempted to monetise ten bundles (rounds) of assets with varied rates of success. The lack of bids, undervalued bids, and low price recovery led to auctions being stalled, bids annulled and fresh auctions being called, several times. Most recently, the 9th and 10th TOT bundles up for auction were halted as they did not meet the reserve price set by NHAI. Despite using a familiar model, the implementation has not yielded positive outcomes. Large value disputes in highway contracting, low standards of public disclosure and the inability to make accurate revenue growth projections are some of the reasons for its substandard outcomes.

The InvIT model in the transmission sector

In 2020, the PGCIL became the first publicly owned company to set up its own investment trust (InvIT). The PGCIL InvIT holds transmission assets worth INR 7500 crores and it opened for subscription in early 2021. Within two days of the offer, 59% of the units were subscribed. When the session was closed, PGCIL benefited from a 3% premium over the issue price and the initial public offer was subscribed 4.83 times. During this period, investor perception was also positive with analysts predicting that the InvIT would yield steady long-term returns. PGCIL eventually auctioned 27.41 crore units, earning INR 2,736.02 crore in May 2021. However, concerns with the lack of transparent price discovery and taxation norms on long-term capital investments have prompted PGCIL to rethink its InvIT plans. Additionally, the retention of O&M as a function of the public sector entity may create a hesitation to investment by private entities.

Neither of the two distinct asset monetisation models that India has experimented with achieved the outcomes it set out to achieve. On one hand, InvIT provides a diversification of risk but O&M remains with the government. On the other hand, TOT provides autonomy over O&M but ownership is not diversified. This serves as a case study for the design of new models for asset monetisation, and whether it can address the concerns of previous models used.

There is no reason why an InvIT structure cannot be augmented to also include the contracting out of O&M functions to a private entity. This will bring in private sector efficiency and allay the fears of investors. There are two ways in which the InvIT could be presently undertaking O&M: (i) it is possible that PGCIL is charging the InvIT a fee and doing the O&M, or (ii) O&M staff may have been transferred with the assets and the InvIT is doing its own O&M. Either way the function is retained with the government, making it a potential point of concern for investors. To eliminate this friction, a third model is preferable, where O&M functions of an InvIT are contracted out. This could have been a plausible design option since InvITs have been around for a while, instead of opting for a fully different model.

Concerns about the AOMT

The importance of private investment in transmission is well taken. The question lies in the pathway to a solution. We recognise the immense complexities of getting up to a well-functioning institutional mechanism. We also recognise that different sectors may warrant different approaches to doing the same things. There are two main concerns with the AOMT model:

1. The contract design is not suited to state government assets due to problems of state-level electricity governance; the overall lack of control on streams and decisions of revenue (user charges) is a factor that models should solve for; and
2. The unfamiliarity with the model among state governments (and asset monetisation generally). There are two existing mechanisms for doing this, with precedents and understanding within infrastructure, finance and government establishments: InvIT and TOT. These represent natural pathways to take for electricity transmission assets.

It has been over one year since the introduction of the model and it has seen no uptake from states so far. States have expressed concerns with the design and feasibility of the model. When the Ministry of Power proposed AOMT, there was a need for a first principles argument and public consultation, about why a third strategy was proposed. They needed to show the difficulties that would arise through the three existing pathways, and how the modifications chosen under the AOMT model addressed these difficulties.

References

Ministry of Power, Guiding principles for Asset Monetisation in the Transmission sector for state governments, October 2022.

Utpal Bhaskar, Power firms finalize models for asset monetisation plan, Livemint, 2022.

KPMG, Global Infrastructure Asset Recycling and Infrastructure Capital, June 2020.

Charmi Mehta and Bhargavi Zaveri, Monetisation lessons from NHAI, The Business Standard, March 2021.

Surya Sarathi Ray, NHAI cancels two projects on low bids, Financial Express, March 2022.

P Manoj, NHAI annuls highest bid of Sekura Roads for ToT Bundle 10 as it was below reserve price, The Economic Times, Sept 2022.

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

Shreya Jai, PowerGrid's asset monetisation via InvITs gets Cabinet go-ahead, Business Standard, Sept 2020.

Sundar Sethuraman, PowerGrid Infrastructure Investment Trust ends debut trade at 3% premium, Business Standard, May 2021.

Sunil Shankar Matkar, PowerGrid InvIT IPO opens: Should you subscribe?, MoneyControl, April 2021.

Utpal Bhaskar, PGCIL drops second InvIT tranche plan, LiveMint, Jan 2023.

Akshay Jaitly is co-founder of Trustbridge Rule of Law Foundation and Trilegal, Charmi Mehta is a researcher with XKDR Forum, Rishika R is a researcher with Trustbridge Rule of Law Foundation, and Ajay Shah is co-founder of XKDR Forum.

Identifying roadblocks in highway contracting: lessons from NHAI litigation

by Charmi Mehta and Susan Thomas.

Introduction

Government contracting is an important foundational process which shapes state capacity. Under Indian conditions, there is limited state capacity in government contracting, which leads to a significant rate of contracting failure. One manifestation of contracting failure is litigation. Defects in the contracting process are often associated with litigation. In addition, litigation leads to delays in project completion, and the prospect of litigation deters some private firms from working with government thus hampering competitiveness in government contracting (Mehta and Uday, 2022). The study of litigation is, therefore, a pathway to creating knowledge in the field of government contracting. An example this was Damle et al, 2021.

In the `contract life cycle approach', government contracting is a pipeline that runs through four phases: I - Contract design, II - Contract award, III - Contract management and IV - Contract closure. We must measure the incidence of defects across the four phases, so as to prioritise resourcing, in the field of policy research, and in the activity of government contracting.

In this article, we construct a novel data-set about contract related litigation at the National Highways Authority of India (NHAI), which is the single agency that does the largest number of government contracts. Using this data-set, we measure the share of each of the phases of the procurement life-cycle in litigation. In our knowledge, this constitutes the first empirical evidence about the role of the phases of the government contracting life cycle in inducing litigation.

Methodology

We hand-construct a data-set which draws upon information from three sources.

Delhi High Court case orders

NHAI contracts and concession agreements give the Delhi High Court exclusive jurisdiction over its contractual disputes from anywhere in India. We find 1165 cases in 2007-2020 that emanate from NHAI contracts. For each case, we observe the date of initiation and disposal, and the names of parties involved.

Extracting facts from court documents

We read 635 out of the 1165 (65 percent) court documents. Using these, we extracted the cause of dispute whenever it was available. These were found to be one of the following: Interim relief, Appointment of arbitrator, Challenging arbitration award, Seeking extension of time, Seeking award enforcement, Restraining NHAI, Reimbursement of costs/Compensation, Challenging claims demanded.

The NHAI Draft Red Herring Prospectus (DRHP)

While filing for the NHAI Infrastructure Investment Trust listing with SEBI, MoRTH was mandated to disclose all large-value disputes involving the NHAI (that are in arbitration), along with a list of all outstanding claims. This had 40 disputes listed, with information about the dates of initiation, cause of disputes, the model of contracting used for the project under dispute, and the names of parties involved. As a self-disclosed data source, this served as a tool to validate observations from the Delhi High Court case orders data.

We find that NHAI accounts for almost 40% of the cases that the Union Government is party to (1165 out of the Union Government's 2912). We also find that cases involving the NHAI have grown at a rate of 17.15% on average during this period. NHAI is the petitioner for about 45% of the cases, while the corresponding figure for other government agencies is about 30%.

NHAI is such a large scale litigant, that reducing the litigation intensity at NHAI would make a different to the working of the judiciary. This work is thus relevant not just for the field of government contracting, but also for the field of the judiciary.

We develop a two-step process for classifying NHAI contract related litigation orders into the four phases of the government contracting life cycle. In the first step, we categorise cases based on causes of dispute as follows:

1. Related to arbitration proceedings: One set of cases pertain to petitions that (1) seek interim relief from the court under Section 9 of the Arbitration and Conciliation Act 1996, (2) seek the court's intervention in selection of the arbitrator (on account of delays or disagreement in appointment), and (3) appeal awards announced by the arbitral tribunal, which accounted for a significant fraction of the arbitration related matters.
2. Payments related: This could be about payments, revision of payment terms, price estimation due to changes in scope/ additional components midway into the construction phase or changes in law or policy leading to adverse conditions of work for the private party. Changes in terms of the contract result in parties disagreeing over revised cost estimates or the method of calculating these revisions. In several cases, the delays were related to reimbursements to the private party on account of delays in land acquisition, or operationalising toll plazas. In some cases, the private firm sought restraining orders from the court against the NHAI invoking bank guarantees when there was a delay in the firm achieving financial closure.
3. Related to wrongful termination/debarment of contractors: Concession agreements embed the terms of contract termination. Prior to the 2020 amendment in the model concession agreement (which allowed a mutual exit clause), the contract perceived termination as default by either side, with the opposite party having a right to compensation and damages. In the process, NHAI often debarred/black-listed contractors from bidding for tenders, a decision that contractors appeal in court.
4. Reason unclear: For 253 cases, we were unable to classify the cause of dispute since the order was unclear for interpretation. This may reflect blemishes in the Delhi High Court website. We are conservative and classify a case under `Reason unclear' when we are not confident about placing it into the other three categories.

We go on to classify cases into the four phases of the life-cycle of a contract. This mapping is sensitive to the domain; our classification processes are specific to government contracting in highways and infrastructure.

In all the cases that we studied, there was none in the first phase (the "Contract design" phase).

Litigation associated with defects in the pre-award phase involves disputes on the tendering/awarding processes. For example, this includes disputes regarding unfairly awarded tenders, wrongly classifying bids as non-responsive and irregular financial bid-opening processes, all of which are placed within the pre-award phase.

Reading the orders shows that arbitration-related and payments-related causes of disputes take place once the contract has been awarded. This is also true for some of the cases that are classified as wrongful debarment/termination which arises because of the non-performance of contractual obligations. Since these disputes arise after the contract is awarded, we classify these cases in the post-award phase. Some of the orders contain details about the type of contract between the parties. For example, SPVs are often formed for the construction of a highway, and are named '... Tollway Pvt. Ltd.' which indicates a legal entity that was formed for the purposes of executing a contract or an award. This can be identified from the names of the parties, even if the specific causes of dispute might be unclear in some cases. We use this information in classifying cases under the post-award category.

Traditionally, cases pertaining to payment delays are categorised within the post-completion phase. But in the case of NHAI contracts, payment schedules vary across the commonly used models of Hybrid Annuity (HAM), BOT-Annuity models and EPC. Payments are made to the concessionaire either at the start of construction, or at regular frequencies such as semi-annually, with payments usually linked to the achievement of project milestones. We place such cases in the post-award phase rather than in the post-completion phase. Similarly, case orders that seek to resolve arbitration-proceedings related disputes are also categorised as post-award since these disputes arise from a contractual relationship between two parties to approach alternate dispute resolution mechanisms, which can only exist in the event of a contract being awarded.

Findings

Table 1: Number of cases by drivers of litigation

Cause of dispute	NHAI as petitioner	Firm as petitioner	Total
Arbitration proceedings related	123	137	260
Payments related	15	75	90
Wrongful termination/ debarment	1	31	32
Total	139	243	382

In Table 1, we summarise the number of cases falling under Categories 1-3 listed above. We further break up the cases under each category as the number of cases where NHAI was the petitioner and where the private firm was the petitioner. A large volume of cases are a) arbitration-proceedings related, and 2) payments-related (delayed payments). We see that arbitration related matters are nearly 70 percent of the sample of case orders. In this category, both the NHAI and the firm are almost equally likely to petition an arbitration matter. In the other two categories, NHAI is more likely to be litigated against.

The analysis based on case classification into phases of the contract life-cycle is presented in Table 2. This shows the number of disputes which we classify as falling within the pre-award, post-award, and post-completion phase. In this table, we present both the actual number of cases identified in a given phase, as well as the share of the cases as a fraction of the total.

Table 2: Share of disputes by the phase of the contract life-cycle

Phase of the contract life-cycle	Share (% of Total)	Number of cases
Pre-award	1.75	11
Post-award	66.14	420
Post-completion	0.15	1
Unclear/No data recorded	31.95	203
Total	100.00	635

Table 2 shows that over 65% of the cases are concentrated in the post-award or the contract management phase.

Discussion

In this article, we have analysed one important government contracting organisation, and attributed its litigation into the four phases of the contract life cycle. The results diverge from the commonly held view that the problems in public procurement arise because of problems with Phase 2 or L1 tendering. This analysis suggests that the hot spot in litigation is Phase 3 or the Contract management phase. This suggests that policy researchers and policy practitioners should allocate greater resources on strengthening this phase.

Another finding is that there is a large volume of arbitration-proceedings related disputes, which indicates the limitations of alternate dispute resolution (ADR) mechanisms. Strengthening ADR mechanisms in India would result in less litigation.

Recent reforms of the government contracting process have initiated movement on this front. The General Instructions on Procurement and Project Management (2021) built provisions to address concerns around arbitration and dispute resolution. It acknowledges that the majority of the cases appealed by government agencies end up being awarded in favour of the opposite party. In this context, the General Instructions emphasize the need for the government to actively take steps to minimise litigation. Further, it inserts Rule 227A in the General Financial Rules (GFRs) 2017 for Arbitration Awards, which mandates that the concerned ministry pay 75% of the amount of the arbitral award against the bank guarantee, even if it contests the award in a court of law. This is a step in the right direction as it takes away the incentive for either party to benefit from prolonging a dispute or appealing to a higher authority to delay payment of claims awarded by the arbitral tribunal.

References:

Damle D., Gulati K., Sharma A., and Zaveri-Shah, B. Litigation in public contracts: some estimates from court data., The LEAP Blog, May 2021.

Mehta C., and Uday D., How competitive is bidding in infrastructure public procurement? A study of road and water projects in five Indian states, The LEAP Blog, March 2022.

Charmi Mehta is a researcher at XKDR-Chennai Mathematical Institute and Susan Thomas is professor at the Jindal School of Business and a researcher at XKDR Forum. The authors thank Shailesh Pathak and Bhargavi Zaveri-Shah for their inputs in shaping the study, and Yajat Bansal and Diya Mal for their research assistance in this study.

How competitive is bidding in infrastructure public procurement? A study of road and water projects in five Indian states

by Charmi Mehta and Diya Uday.

Introduction

Competition is central to the functioning of a market economy. Market power is a market failure, and governments around the world work hard to fight anti-competitive behaviour and market capture by firms. When competitive pressure is lacking, firms fail to achieve efficiency in production.

An efficient system for government procurement is one where the government obtains purchases for the lowest possible price. In the international literature, studies have shown the linkage between higher competition and lower procurement prices (Estache et al. 2008; Hanak and Muvchova 2015), greater efficiency (Adam et al. 2021) and a lower rate of corruption and kickbacks (Knack et al. 2017).

It is difficult to make normative claims about what is the adequate level of competition. Economists have emphasised contestability of a market as the underlying source of efficiency; simple proxies like concentration ratios do not correctly evoke the level of competition. Researchers in the field of competition levels in government contracting have used the number of bids received for a tender as an empirical measure.

There is some international evidence from developing countries about the desirable numbers of bidders in infrastructure public procurement. There are thumb rules, such as desiring eight-or-more bidders for a roads contract (Gupta 2002, Estache et al. 2008) or seven-or-more for water projects (Estache et al. 2008). These normative numerical values would of course, not readily carry forward across locales, but we use them cautiously in the present work.

In the field of government contracting in India, there is anecdotal evidence of anti-competitive behaviour in the market with reports of bid-rigging and collusion. In this article, we aim to step up from this to some statistical evidence. We ask: How much competition do we see in Indian infrastructure procurement? How does this vary across states and sub-sectors?

Methodology

We hand-construct a novel data-set with a sample of tenders from five states: Tamil Nadu, Odisha, Maharashtra, Uttar Pradesh and Kerala. This choice of states was shaped by the levels of spending on infrastructure, geographical heterogeneity, and data availability. We extracted data from 1000 randomly sampled, awarded e-tenders published by state governments on the Central Public Procurement Portal (CPPP) in the water and roads sector for 2018 and 2019.

CPPP is a centralised repository of tender data at the union and state level. Procuring entities across union and state tiers are obliged to publish their tenders on the portal. We use data solely from this portal to ensure consistency in variables and recording. The data-set includes:

1. States in the sample: Kerala, Maharashtra, Odisha, Tamil Nadu, Uttar Pradesh
2. Sectors covered: roads, water
3. Years covered: 2018, 2019
4. Total sample size for each sector: 500 tenders
5. Key words used while searching through the CPPP to select tenders: "road", "water".

We extract the number of bids received for each tender in order to examine the level of competition.

In the research literature, it is argued that three factors shape competition in public procurement:

The value of the contract

Larger contract sizes require greater capital and expertise, which act as an entry barrier for small/mid-size players in the market (Estache et al. 2009; McEvoy 2020).

Structure of the tender

Bundled tenders, where multiple works of different types are bundled into a single tender document, restrict competition to only those firms that can undertake the varied components of bundled tender (Estache et al. 2009). Dividing contracts into smaller lots bolsters MSME participation and thus competition (Hoekman et al. 2022).

Time taken to award contracts

Lengthy award schedules require participating firms to lock-in capital and resources for the bid amidst the uncertainty of winning the bid; this adversely impacts private sector enthusiasm towards bidding (World Bank 2020).

We will examine the extent to which the number of bids per tender correlates with these features.

Results

Table 1 summarises the statistics on the number of bids received across the five sample states for the years 2018 and 2019.

Table 1: Number of bids received in the infrastructure sector

	In the Roads sector
	2018				2019
	Min	Max	Median	Average	Min	Max	Median	Average
Maharashtra	1	4	3	3.26	1	11	3	3.94
Uttar Pradesh	1	11	3	4	2	9	3	3
Tamil Nadu	1	3	2	2	1	3	2	2.08
Kerala	1	8	2	2.08	1	7	2	1.80
Odisha	1	27	5	7	1	55	6	9.96
	In the Water sector
	2018				2019
	Min	Max	Median	Average	Min	Max	Median	Average
Maharashtra	1	34	3	5.56	1	17	3	4.17
Uttar Pradesh	1	8	3	3.04	1	16	3	4.05
Tamil Nadu	1	4	2	1	1	12	3	2
Kerala	1	5	2	2.08	1	5	3	2.28
Odisha	1	52	2	2.45	1	27	3	4

Source: Authors' compilation and calculation from CPPP data

 

Q.1. How competitive is infrastructure procurement?

We find that, with the exception of the road sector in Odisha, the level of competition in terms of the average number of firms bidding for the projects is lower than the normative thumb-rules from the literature. This holds across all states, sectors and years. Further, two features about the lack of competition in this data-set merits discussion:

1. Tenders where bids satisfy the thumb-rules of the literature

   We examine the fraction of tenders in our sample that satisfy these thumb rules, and count the tenders that got more than seven bids in the water sector and eight bids in the roads sector. Table 2 summarises these results. Here, we see that the roads sector fares worse than the water sector.

   Table 2: Fraction of tenders that receive bids meeting normative thumb rules (share in per cent of tenders)

   	Maharashtra	Uttar Pradesh	Tamil Nadu	Odisha	Kerala
   Roads	5	5	0	34	1
   Water	14	7	1	8	0

    
2. Tenders that received only one bid and were awarded

   We find several awarded tenders that attracted only single bids. This is true even in states with relatively higher levels of competition such as Uttar Pradesh, Maharashtra and Odisha. But there are more tenders with single bid awards in the states with the lowest levels of competition, namely, Tamil Nadu and Kerala. We find that single bid awards are more prevalent in the water sector.

Table 3: Fraction of awarded tenders that received only one bid (% of tenders in the sample)

	Maharashtra	Uttar Pradesh	Tamil Nadu	Odisha	Kerala
Roads	6	2	4	6	40
Water	8	6	52	8	21

Q.2. How do the findings vary across states and sectors?

The results are fairly consistent results across sectors and years. For instance, three states -- Uttar Pradesh, Maharashtra, and Odisha -- have higher levels of competition across both sectors when compared to the other observed states. Kerala and Tamil Nadu have lower levels of competition across both years for both sectors.

Q.3. What features of tenders correlate with a low number of bids?

In the literature, there has been interest in three features that may shape the level of competition: the value of the contract, the structure of the tender and the time taken to award contracts. In our data-set, however, these three factors do not correlate with the number of bidders.

Discussion

This evidence suggests there is a low level of competition in public procurement, in two sectors and five states. There are some systematic patterns, where some states and sectors fare worse in getting competitive bidding than others.

Competitive conditions seem to be the feature of a given state. This suggests that there are some features in states like Kerala or Tamil Nadu, which are inhibiting competition, and can be addressed in a way that would impact on government purchases across sectors.

A large number of tenders with a single bid that get awarded are a curious phenomenon and merit further research. These tenders are awarded under the previous Central Vigilance Commission (CVC) guidelines, which require that state Public Works Departments (PWD) cancel tenders that receive single bids at the first instance. Single bids could be accepted only if the procuring entity received only one bid, even after re-tendering. However, the recent General Instructions on Procurement and Project Management, allows the acceptance of single bids under certain conditions. These include: (i) the procurement was satisfactorily advertised and sufficient time was given for bid submission; (ii) the qualification criteria was not unduly restrictive; and (iii) the price in the bid is reasonable in comparison to market values.

Further research is required in extending this kind of work to other sectors and locales, to assess the extent to which the lack of competition is a more general phenomenon in public procurement in India. The source of this lack of competition also merit exploration.

There are limitations in how state organisations do procurement (Mehta and Thomas 2021), including potential gaps in the capacity of implementing rules (Roy and Uday 2020), inefficiencies of processes and timelines (Roy and Sharma 2020), and delayed payment of invoices (Mannivanan and Zaveri 2021). Such problems could create an inhospitable environment for bidding firms, and deter many good firms from taking interest in state purchases. Well incentivised state actors should solve these problems. This raises questions about the feedback loops that impinge upon state actors.

References

Antonio Estache and Atsushi Iimi, (Un)bundling Infrastructure Procurement: Evidence from Water Supply and Sewage Projects, Policy Research Working Paper No. 4854, World Bank, March 2009.

Antonio Estache and Atsushi Iimi, Procurement Efficiency for Infrastructure Development and Financial Needs Reassessed, Policy Research Working Paper No. 4662, World Bank, March 2008.

Bernard Hoekman and Bedri Taş, Policy and SME participation in public procurement, Vox EU - CEPR, 23 March 2022. 

Charmi Mehta and Susan Thomas, Lessons from the COVID-19 vaccine procurement of 2021, The LEAP Blog, 15 November 2021. 

Emma McEvoy, Small and Medium-Sized Enterprises (SME) Participation in Public Procurement, Maynooth University, 2020. 

Isabelle Adam , Alfredo Hernandez Sanchez and Mihály Fazekas, Global Public Procurement Open Competition Index, Government Transparency Institute, Working Paper Series: GTI-WP/2021:02, April 2021. 

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

P. Manoj, Govt lifts the ‘fear’ on accepting single bids during public procurement tenders, The Hindu, 2 November 2021. 

Srabana Gupta, Competition and collusion in a government procurement auction market, Atlantic Economic Journal 30, 13–25, 2002. 

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

Shubho Roy and Diya Uday, Does India need a public procurement law?, The LEAP Blog, 19 August 2020. 

Stephen Knack, Nataliya Biletska and Kanishka Kacker, Deterring Kickbacks and Encouraging Entry in Public Procurement Markets : Evidence from Firm Surveys in 88 Developing Countries, World Bank Working Paper, May 2017. 

Tomáš Hanák and Petra Muchová, Impact of Competition on Prices in Public Sector Procurement, Procedia Computer Science, Volume 64, Pages 729-735, 2009. 

World Bank, Contracting with the government, World Bank Doing Business, 2020

 

 

Charmi Mehta and Diya Uday are CMI-XKDR Forum researchers. The authors thank Shailesh Phatak, Susan Thomas and Ajay Shah for their valuable inputs on this work; and Abhinav M from the Indian Institute of Human Settlements for his valuable research support.

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.

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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.