Bidding Regime: Intervention needed to avoid abnormally low bids

Praveen Sethia, Founder & Director, Infrastructure Advisors Private Limited

Abnormally high bids (in terms of payme­nt of premium to the procuring authority) were responsible to a great extent in contributing to the financial ruin of many in In­dia’s roads sector during the days of the build-operate-transfer (BOT) model. Today, we are at risk of history repeating itself. This time, the models are different, with the government having sw­i­tched to turnkey contracts and the hybrid annuity model (HAM), where the lowest bidder wins.

While the models have changed, the frantic rush to win contracts remains. In the recent past, this has been visible beyond justification and commercial prudency on either side of the table. Since the last financial year, the widest deviation has been seen in highway contracts with bids for one of these – a project in north India – being 44.7 per cent lower than the au­thority’s estimate. Another project in Maha­ra­s­h­­tra received a bid 45.9 per cent lower. This data pertains only to projects tendered in the EPC mode by public sector authorities.

The National Highways Authority of India (NHAI) alone hands out contracts exceeding Rs 1 trillion annually, including the hybrid model-based contracts. According to a report by JM Financial, in July 2023, the combined capital expenditure of the central, state governments and union territories is likely to reach Rs 17 trillion in 2023-24, increasing to 5.6 per cent of GDP from 4.8 per cent (2022-23 estimate).

Call for action

Project procurement in India is guided by the Manual for Procurement of Works, last updated in June 2022, which contains a dedicated sub-section on abnormally low bids. The catch, in my view, is in the last sentence, as quoted in the ex­cerpt: “An abnormally low bid is one in which the bid price, in combination with other elements of the bid, appears so low that it raises material concerns as to the capability of the bidder to perform the contract at the offered price. Procuring entity may in such cases seek written clarifica­tio­ns from the bidder, including detailed price analyses of its bid price in relation to scope, schedule, resource mobilisation, allocation of risks and responsibilities, and any other requirements of the bid document. If, after evaluating the price analyses, the procuring entity determines that the bidder has substantially failed to demonstrate its capability to deliver the contract at the offered price, the procuring entity may reject the bid/proposal. However, it would not be advisable to fix a normative percentage below the estimated cost, which would automatically be considered as an abnormally low bid.”

While the issue has been identified, a fra­mework for firm decision-making has not been provided. Since there isn’t any guideline on what can be considered to be an abnormally low bid, any further action is at the discretion of the concerned procuring authority.

If bids are lower than the estimate, and the procuring entity rationalises and accepts this, it raises a serious doubt on the project’s cost estimate methodology.

Damage control

In 2018, the Asian Development Bank (ADB) published a note on abnormally low bids. It starts by defining what can be construed as an abnormally low bid and prescribes three broad steps in dealing with such situations. The first step is to accept the bid, if the evidence supplied justifies the low level of prices and costs. Second is to accept the bid and increase the amount of performance security to a level sufficient to protect the authority against financial loss in the event of contract default. Alter­na­tively, reject the bid if the evidence supplied do­es not satisfactorily account for the low price or costs proposed.

In India, despite having safeguards, projects are being awarded to abnormally low bidders. In the case of EPC projects, there is a ne­ed to introduce some regulation, whereas for projects tendered under HAM, NHAI prescribes an additional performance guarantee amount if bids fall below 15 per cent of its projections. The latter only shifts the risk from the procuring entity to the banking sector and does not en­sure that the project will be delivered in adherence to cost estimates, agreed timelines and quality standards.

It is important to set an internal undisclo­sed benchmark for every bid process. If a proposal is lower, it should be summarily rejected. In PPP projects, the bidder must be asked to additionally submit a financial model to ensure that a proper provision has been made for O&M. It has been observed that the O&M part in bids is fairly under-provisioned, leading to poor service levels and upkeep of the asset.

Bouncing back

Building any physical infrastructure must be done with a long-term planning and perspective. Assessments must be futuristic, designed to last long and reduce operational costs. Exe­cu­tion should reflect workmanship and operations must deliver value. This is not a game of short cuts.