Sunday, April 18, 2021

Not Just A Flyover, India’s Whole Government Contract System Collapsed In Kolkata (Mr L1 Consumes Over 34 Human Beings)

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On 31 March 2016, a span of the under construction flyover in Girish Park neighbourhood in Kolkata came crashing down, crushing to death over 34 persons and injuring many others.

This accident at a construction site in India was not the first, nor would it be the last. It got media attention because death toll was high. Otherwise, similar accidents occur at one or other construction site in India every year, even in case of sites of very well managed Corporations like Delhi Metro Rail Corporation.

Of course, in this case as well as in every such case, it is possible to pinpoint the immediate cause of the accident: this or that lapse during the work, inadequate design, wrong execution at site, substandard material, lax supervision, etc.

But such causes are not the real cause of accidents at the construction sites in India. These causes are symptoms of a disease, just the manifestations of an underlying rot, the inescapable consequences of ignoring the sickness that is crying out for attention for at least two decades now.

Fact is that whole system of government contracts in India has collapsed. It is not visible to the government only because that is how government in India works: a group of human beings, some elected, rest selected, each trying to promote himself, almost each trying to mint as much money as possible as the good times last, each out to keep his post safe and therefore averse to doing anything that would draw attention to him, each thinking of his next posting/tenure and not of the present one, and each determined to keep the present corrupt system going.

Government contracts are one of the biggest sources of bribe money. Therefore, everybody in government wants the present system of awarding government contracts going. So, at every such accident, some highhanded and illegal arrests are immediately made, compensation for the dead and injured is announced, and the public is thus pacified. Media’s OB vans also speed away to some other scandal/suicide.

At present, whenever a public work needs to be carried out, procedure is to invite tenders from the prospective bidders. The bidders make the offer, stating the total cost at which they would execute the work. Most tenders keep qualifying criterion to weed out the incompetent contractors. Those who qualify are listed, the total cost offered by each is compared with that offered by the rest, and the tenderer that has offered the lowest cost (the L1 bidder) is awarded the contract, and he becomes the contractor for the work.

Above system of awarding contracts for the execution of public works has been followed for many centuries in almost every country. But during last many decades, many countries have moved away from this system, for the reasons discussed in the following paragraphs.

This system assumes that each tenderer would independently work out the cost of the execution of the work, and thus, most competitive offer, based on the current market rates would be received. But the contractors also want to stay in business, and for that they need to get the contract, so they not only need to work out the cost as exactly as possible, they also need to keep the cost lower than everybody else. That is, to obtain the contract, they need to offer not the cost that they have worked out based on market rates, but the the cost which is lower than everybody else. And so, the contract goes to the contractor who has best guessed the cost likely to be offered by the others, not the one who has best worked out the cost of the work at current market rates.

With contract in place, profit margins get fixed. The only way to increase profits from here onward is to compromise on quality, and cut corners on procedures and practices. Quality in most cases is subjective, and the contractor colludes with the corrupt officers to get the poor quality work passed. Where objective tests are available, they can be beaten by delivering good quality for the test samples, keeping over all quality poor. Effects of the poor quality manifest themselves many years and decades later, and at that time, it becomes difficult to attribute such manifestations to the poor quality of initial construction, as poor maintenance during the service of the structure would also result into similar deterioration. Further, it is customary to keep in design some margin for errors, known as factor of safety, and the contractor eats into this margin to maximise his profit, again in collusion with the corrupt government officers overseeing the execution of the work.

If the officers overseeing the work are honest and do not allow poor quality work, or the contractor in his desperation to get the contract has quoted really low rates, and is not able to execute the work as a result, he abandons the work, requiring whole procedure to award the contract to be repeated again, delaying the whole work by months and years. In fact, procedure to award the contract again is so tedious that even the honest officers prefer to look the other way as far as quality is concerned, and get the work completed somehow. Cutting corners and bypassing the procedures are overlooked in desperation to get the work completed, and though in most cases the work gets executed without any mishap, occasionally the short cuts and compromises with quality go so far, and accidents like Kolkata flyover collapse happen.

Of course the government contract system has many problems peculiar to India alone: criminals become contractors, they make sure that others either do not compete at all, or do not dare to become L1. So they get the contract, and even without having to quote low cost to become L1, they proceed to compromise on quality in any case, to maximise profits which are needed to keep them in the business of contracts and crime combined. To give poor quality, they normally do not bother to bribe government officials also, they just threaten them with murder.

In many cases, particularly in case of big contracts, politicians become interested to get the contracts for their cronies, and threaten government officers into manipulating the whole bidding process, making sure that crony becomes L1, who then proceeds to deliver poor quality, secure in the knowledge that the fear of his politician mentor would keep the government officers overseeing the work in their place.

Even in cases where above factors are absent, total costs being quoted are going down without any relation with the market rates, because in a highly regulated socialist economy of India, contractor-ship   remains the easiest business to start, and with raging unemployment and no other avenues to earn one’s livelihood available, more and more persons are entering into government contract system. With competition becoming ever tougher, and desperation to get the contract increasing, the lowest costs being quoted for the execution of the works are getting ever lower. Such contractors then proceed to take the quality to new lows, and make bigger short cuts, and commit more flagrant violations of safety procedures. Officers do not want to forego their bribes, they do not get chances to earn bribes every day, so they also become ever bolder to allow such mockery of the whole system.

So, it is only pure luck that Kolkata type big mishaps do not happen more frequently. But silent mishaps happen non stop: mishaps like works not getting completed within the target time, works being executed with very poor quality, daily disputes at sites which affect progress of works, accidents not involving loss of life, and so not getting media attention.

The sickness of government contract system was on full display in case of works for the Commonwealth Games of 2014 in Delhi. But in that case also, the whole talk got limited to the corruption, not the underlying problem of L1. The government officers were also castigated roundly for the delays, but what choices they had? They had to award the contracts to L1, and then live with the poor quality and slow progress. With the dates of the Games sacrosanct, they did not have the luxury to terminate the contracts showing poor quality or slow progress. They had to live with their abusive marriage with the L1 contractor.

In India, system of awarding contracts to the lowest bidder (L1) was working somewhat more satisfactorily in the decades before liberalisation, because the contractors had two advantages: 1. Of government controlled prices during execution of the work, so he had no worry to factor in the likely price rise after award of contract; 2. Most of the Indian population was happy working in agriculture, and few who wanted to leave the village, got government jobs. So, the competition for the contractors was not that stiff. They could cartelise and prevent dog-eat-dog type low costs being quoted for the works. Bribe amounts were also low.

With liberalisation, stability of prices was gone. Population exploded, forcing people to seek livelihood elsewhere than agriculture. Government jobs dried up. Economy was not opened to the extent to allow private manufacturing and services sectors to develop to the extent enough to absorb people who were no longer able to work the land as the land was no longer available. And so, profits of contractors became very uncertain, and competition became cut throat, bringing in all the ills described in the preceding paragraphs.

And so here we are, with government works getting delayed indefinitely, quality getting ever poorer, ingress of mafia and politicians into the contract business, and with sickening regularity, accidents happening causing loss of life.

So what are the solutions?

We need solutions to two problems. First, how to devise a system that does not lead to drastic cost cutting by the bidders to become L1; and yet still remains objective and competitive. And second, how to make sure that the contractor makes profit even without the advantage of government controlling prices during the execution of the work.

The statement of the second problem may raise some eyebrows. In a free market, why should we make sure that the contractor stays in profit? That should be dependent upon his skills and his luck. But we forget a very important distinction here: Contractor-ship is not a business. Businesses may make profit, they may make loss, they may get started, they may get shut down. But contracts are awarded to get public works executed. If the contractor incurs losses, and goes out of business, the works do not get executed. And the contract to get the work executed was awarded because the work needed to be executed, not to create business. The most important point that distinguishes a contract to execute a public work from a business is that contractor is supposed to work on cost-plus basis. That is, the contractor is not supposed to take risk of failure, because his failure does not remain personal, it affects execution of a public work, which can not be delayed in this manner. Since ancient times, and in case of private contracts for works even now, this has been the underlying philosophy of the contracts – that the contractor is not businessman risking his Capital, he is hired to execute a work because that work is needed for some other purpose, and the contractor is therefore to be paid actual cost of the work, plus his profit.

Coming back to the first problem of how to choose the contractor for a public work. Because, unlike a private entity, government has to be fair and objective to the prospective bidders also, therefore government officers can not be allowed subjective powers to pick up the winner in a bidding process. Firstly, that would be unfair, secondly, that would leave the door for corruption open far wider than at present. Not just for corruption, once the criminals come to know that the officers have subjective powers to choose contractors for the public works, all of them would become contractors forcing officers at gun point to award contracts to them. Politicians would also smell the blood, and we may find that all government contracts are going to their cronies.

There is one very simple procedure which is wholly objective, which discovers actual cost of the execution of the work very accurately, which would put a stop to dog-eat-dog type destructive competition among the contractors,  and which would put paid to criminals and cronies of politicians becoming contractors. It would also not only prevent destructive cost cutting among contractors in the race to become L1, it would force them to work out cost of the work more accurately than everybody else. And that procedure is: Work out the cost of the execution of the work by averaging the cost offered by all the bidders, then award the contract to the bidder whose cost offered is closest to this average. The average cost so worked out is the best estimate of the cost of the execution of the work, and the bidder whose cost offered is closest to this average cost is the most accurate in estimating the cost of the execution of the work.

This may raise heckles of the Gods of audit, who may claim that lower offers were available, and by not awarding contract to the lowest, loss has been caused to the public fund. But all the problems cited earlier in this post should be pointed out to them, and they should be told that they are to audit as per government policy, and are not to frame the policy itself.

This procedure will take care of the unworkable costs being quoted in the bids for executing the works, and would also make entry of criminals and cronies of politicians into government contracts very difficult.

To eliminate losses to contractors during execution, which lead to compromise on quality and safety procedures, price variation clauses adequate to take care of all variations of prices in the market during execution of the work must be compulsory part of all the contracts. Finance and audit, if they object, should be reminded that contractor-ship is not a business; the contractor can work only on cost plus basis, as detailed in previous paragraphs.

With these two reforms, Kolkata type mishaps would become a thing of the past, and government works will get executed on time, and with the best quality. Criminals and cronies will get weeded out of the system, and truly competent contractors will only be left in the system.



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