The bottleneck of government contracting

Business Standard, 25 January 2021

The Indian state is beset with constraints of state capacity. Low state capacity is the cross-cutting problem that influences all domains. There are strong incentives for experts to specialise in a domain, and focus on the internals of that domain, thereby failing to see problems that cut across the Indian state. When a policy expert in one field in India takes a good look at another field, she is often surprised to discover the extent to which things are going wrong there also. I have often heard the refrain I thought only my field was so messed up.

Why are so many verticals in public policy faring poorly? There are five elements of capability which influence all government organisations:

  1. Reining in coercive power into a rule of law system,
  2. Government contracting,
  3. Financial operations,
  4. Human resources, and
  5. Transparency.

Weaknesses in these areas are the common factor influencing all verticals in public policy. When we make progress in these five areas, the gains will be felt all across government, across all domains.

Government contracting is the pipeline from procurement to contract renegotiation to contract disputes to payments. This is of great importance all across government. Examples where contracting capabilities hold the key include the purchase of defence equipment, the purchase of drugs and vaccines, the purchase of PPP or EPC infrastructure contracts, etc. Weaknesses of government contracting are adversely impacting upon state capacity in all these areas. As an example, Covid-19 was the greatest challenge ever posed for health policy in India. The ability of government to purchase was required for buying PPE, tests, health care services, vaccines, and vaccination services. Greater capabilities in government contracting would have given us better health outcomes in the pandemic.

In private organisations, the phrase "make-or-buy" is used, where a firm decides whether to make something internally or to enter into an arms-length contract to source it. When policy makers are gloomy about the feasibility of contracting, there is an excessive bias in favour of internal production by government organisations. But ordnance factories will always be inferior to private defence manufacturers on cost and on cutting edge engineering. High state capacity is (say) the ability to get the best submarine deployed at the lowest cost, and the path to this lies in learning how to do government contracting. Excessive internal production by government, and the consequential inefficiency, is one of the harms imposed by lack of capability in government contracting.

There is angst about difficulties of government payments. However, payment delays are just the manifestation, at the last stage of the process, of failures in contracting. Flaws in the earlier stages (procurement, renegotiation, dispute resolution) all add up to delays in payment. We need to address the problem of government contracting in its entirety, to solve delayed payments.

Three elements of this problem are widely discussed : a procurement law, more anti-corruption effort, and computerisation. However, the evidence on corruption or the tax/GDP ratio shows that India is in the middle of the international experience of countries at India's level of per capita GDP; it is not clear that corruption is out of line in India compared with similar countries.

Laws are tools through which the state coerces private citizens, but coercing private persons is not of essence to the problem of government contracting. Roy and Uday 2020 find little correlation in the cross-country evidence between having a procurement law and having corruption in procurement.

Computer engineering is seldom useful in and of itself, in policy reform. In the process of a deeper organisational transformation, the leadership might find it useful to utilise computers. But we should not have high hopes from mere computerised plumbing absent a transformation in the surrounding landscape of government organisations, their organisation design, and the structure of rents. Process re-engineering has to be owned by the leadership, and a small element of that larger policy problem is the computerisation.

Early research suggests that there is a bottleneck in organisational capability in procurement. Government organisations need to put in considerable work in understanding what they require, and the private market from which they are purchasing. A superficial approach induces skimpy and incorrect early stage documents, which leads to process failure. Addressing these problems will require the development of teams that have a sustained focus on the task of procurement, that develop expertise in how procurement is done, and greater capability inside the organisation for what it is that they wish to buy.

Every country needs to learn the sound organisational and process design for these foundational five cross-cutting areas. Achieving capability in each of these areas requires the usual rhythm of working through the policy pipeline: data -- research -- creative policy proposals -- public debate -- decisions inside government -- policy implementation.

When early states were achieving capacity in Europe in the 19th century, there were existential threats from neighbours, and states which fared poorly tended to get destroyed. In this darwinian process, the cultures that fostered economic and political freedom got to greater GDP and thus more military resourcing. Success in the 19th century, for a European state, required learning the five elements, including government contracting, for the purpose of waging war, conducting diplomacy and raising taxes. In similar fashion, rising to the Chinese challenge requires undertaking many such organisational changes in the Indian state.

While government contracting takes place in all state organisations, a small number of organisations account for a disproportionate amount of activity. Roy and Sharma 2020 find that 11 procuring entities account for over 80 per cent of purchases. Big gains can be obtained through greater contracting capabilities in just 11 organisations. The path to progress thus lies in first building out a mature research process and developing a community of practice, followed by pilot implementations in 10 small government organisations, and then obtaining big gains by rolling out out the change in these 11 organisations. These steps could potentially be achieved in five to ten years.

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