India's expanding public procurement opportunities, together with the scope of government projects, present greater economic possibilities for local and international firms. This is due to many factors, including the liberalization of investment, the upgrading of existing infrastructure, and new initiatives such as "Digital India" and "Make in India." There will be opportunities and challenges when working with the government, but there are legal and compliance obligations associated with business dealings in the public sector. Here are some highlights we have learned by advising clients on public tender processes and vendor engagement with the government.
Public Procurement Regime – Overview
India's public procurement practice is embedded in a nuanced overlay of complicated administrative guidelines, rules, and statutes, each one specific to the state level. The General Financial Rules (GFR) first brought in by the Government of India in 1947 included instructions regarding government procurement designed to create a structure that any goods acquired by government contractors would use GFR principles as a basis for service consumption. The Manual for Procurement of Goods 2017 and the Delegation of Financial Powers Rule 1978 provide procedures that enabled the separation of the government's financial authority by those in each ministry and streamlined the requirements within. The policies also included taking into consideration having economies of sales limits, undertaking competition & open practices, and treating suppliers equitably. Other manuals and policies regulate individual ministries departments procurement practices, e.g., the Defense Procurement Manual 2009, the Telecom Manual for Procurement 2020, and an exhaustive manual on railways and procurement. Compliance with these frameworks is subject to audit by various entities. For example, the Central Vigilance Commission, the Competition Commission of India, and the Central Bureau of Investigation are also examples of auditing compliance with GFR rules. As mentioned, rules and agreements are then transferred through a process of tendering, award, and contract process between procurer and vendor.
Challenges and Concerns in India's Public Procurement Regime
1. The procurement regime aims for the acquisition of quality materials and services at competitive prices.
2. The lack of a central procurement regulation leads to confusion and rigidity.
3. Vendors supplying to the Indian government must navigate the complex procurement framework carefully.
4. Failure to comply with procurement conditions could result in the tender award being challenged, the contract rescinded, and the vendor being blacklisted for up to 3 years.
Parent Guarantees
• Typical procurement tenders illustrate pre-set terms and conditions that will remove a locally incorporated company or special purpose vehicle (SPV) from bidding.
• In many situations, the procurer may allow bidding based on both the financial and technical abilities of the foreign parent as long as the overseas parent will guarantee its financial and performance obligations.
• This exposes the overseas entity to legal and financial risks, especially back-to-back liability for breach of performance.\
Sub-contracting – Liability Flow Down
• Subcontracting arrangements may not eliminate flow-down liability issues arising from the main contract with the end customer.
• The ability to have contractual and tortious recourse will depend on the prime contractor's ability to make reparations to the overseas subcontractor.
• Specific commercial requirements, including but not limited to technical qualifications, production timing, escrow, etc., will flow down to the overseas subcontractor on an immediate back-to-back basis.
• The overseas vendor may expect letters of comfort and/or corporate guarantees relating to assurance of after-sales support, warranty fulfillment and spares.
Transfer of Technology and Procurement Process in India
Transfer of Technology
1. The vendor's control of intellectual property (IP) will be governed by the level of technology transfer required under the tender documents and applicable sectoral policies.
2. Vendors may be restricted by the terms of their ToT or licensing agreement regarding use, disclosure, etc.
3. It can be challenging and expensive to enforce the terms of use of IP.
4. The procurer may be required to place certain key technical documents/blueprints into escrow.
5. Some procurement agreements can give the client (government) the right to take over the assembly line when the vendor stops producing that particular part.
6. Governments may claim "march-in rights" over the IP for reasons associated with national safety and security.
Bottlenecks in the Procurement Process
1. The tender process in sectors such as defense, railways, and telecom took a long time and was arduous to complete, and there were difficulties in the procurement process.
2. You may require a dedicated project team to follow the tender process to its conclusion.
3. There may be many levels of decision-making and approval processes that can cause delays.
4. The average time between the release of a request for proposal and an actual contract could take several months, and possibly years for sectors like defense.
Limited Scope for Negotiation
• Vendors have very limited flexibility to negotiate contractual terms at the point of tender award.
• There can often be a significant disconnect between those experts writing government contracts and those responsible for executing the procurement project.
• Any departure from the tender's terms may constitute a breach (which can attract penalties, blacklisting, and years of arbitration/litigation).
Conclusion
The public procurement ecosystem offers enormous opportunities to businesses in all sectors, especially as the Indian government continues to invest in infrastructure, support digitization efforts, and promote self-reliance through flagship programs such as "Make in India" and "Digital India." Public procurement regulations are complicated and must be followed strictly. Likewise, vendors are generally not allowed much flexibility to negotiate. Therefore, both domestic and international vendors need to strategically prepare before participating in India's public procurement processes.
Acquiring goods or services from, or supplying goods or services to, a public sector entity is not a simple process. Companies should have dedicated legal and commercial teams to provide detailed reviews to determine how a layer of approval systems, parent guarantees, subcontracting liability, and technology transfer are just a few examples of considerations or risks that vendors may want to pay attention to. By preparing adequately and being aware of the associated risks, companies can create viable pathways into this significant market.
