From an integrity perspective, the First-Come-First-Served (FCFS) system is undoubtedly the most problematic method of awarding government contracts and licenses, but over the years, many other anti-competitive practices have gradually found their way into public procurement systems around the world, particularly in jurisdictions with poor acquisition planning capabilities or with poor oversight mechanisms. This article examines some of these anti-competitive methods, together with possible alternatives and reforms for improving their procurement practices in general.
The FCFS system involves grant of a first right to buy to the first claimant, and in terms of auction theory, it is strikingly similar to the Dutch auction. Procedurally, it resembles stores sales, where the first person to pick up a pair of jeans on sale gets to buy it, notwithstanding the presence of many other shoppers wanting to buy the same article at reduced prices. Obviously, a prospective buyer with advance insider information on the precise time of start of the sale, or the exact location of the specific articles on sale, can gain an unfair headstart in the process.
While the FCFS method is usually a preferred practical option in matters such as allotment of government land for industrial development in backward areas, it has severe anti-competitive consequences in cases where the demand far outstrips the supply. It is for these reasons that it is generally unsuitable for government contracts and licenses; limiting its utility only to cases such as permissions for change of land use or issue of passports, where the supply (as in the number of passports or the number of possible land use change permissions) is conceptually close to infinity. Useful alternatives to the FCFS system are open, ascending-price auctions and other more complex variants used in disposals of land in urban areas or spectrum auctions. Where it is important to keep the costs low for buyers, conducting lotteries amongst eligible bidders, such as allocation of EWS housing, usually leads to more fair and reasonable outcomes for both parties.
Some other emerging anti-competitive practices in government contracts in a number of countries are the extensive use of “bundling” and “non-compete” clauses; inappropriate use of “unsolicited proposals” while awarding PPP contracts and infrastructure concessions; and the introduction of mandatory e-procurement systems.
Inappropriate bundling happens when contracts that can be easily disaggregated and awarded separately, are instead clubbed together into one single contract or concession. While it makes sense in certain situations to bundle the purchase of an equipment with its after-sales maintenance from an efficiency viewpoint or in order to obtain economies of scale, unbridled bundling, as in combining port concessions with commercial land development—activities that have entirely different markets and require entirely different skill sets—can severely limit competition in bidding, with consequential adverse implications on achieving best-value-for-money for the Government.
Most advanced legal jurisdictions therefore impose strong “unbundling” requirements on their contracting officers, who are required to examine the potential for disaggregation in every procurement proposal, with the ultimate objective of enhancing competition at the acquisition planning stage and with a view to retain government flexibility in future (or simultaneous) allocation of scarce public resources.
Another anti-competitive practice in infrastructure concessions is the inappropriate use of the “non-compete” clause, ostensibly for improving financial attractiveness of large infrastructure projects. While its use can be somewhat justified in low demand situations, its blind application is problematic from a public interest perspective, particularly when citizens and users have no viable alternative to choose from. The US, for instance, has used this clause in only one major infrastructure concession, and even in that one case, the contract was subsequently renegotiated and the clause deleted.
The “unsolicited proposals” method of allocating government contracts grants a price bonus (as in the “bonus” system), or a right of first refusal (as in the “swiss challenge” system), to the first party declared as the “original proponent” of an “innovative” proposal. For obvious reasons, it suffers from the same integrity problems as the FCFS method, namely, through potential abuse by a contracting authority declaring proposals from friends and family alone as “innovative” and hence eligible for preferential treatment. As a result, while some countries like Columbia impose a complete prohibition on the acceptance of unsolicited proposals, some others such as Sri Lanka tweak them strongly to address integrity concerns, while the US has simply put this practice into actual disuse even though its Federal Acquisition Regulation allows some limited application.
Mandatory e-procurement is another emerging anti-competitive practice in some developing countries, and its uncontrolled use, particularly through the reverse auction route, can potentially edge out small businesses from the procurement marketplace because of their relatively higher costs of accessing electronic auction platforms. It therefore comes as no surprise that Multilateral Development Banks all require that paper bids be treated at par with electronic bids, without any preferential or mandatory eligibility for the latter method of participation.
Given the ease of cartelisation in various spheres of government activity, it is becoming increasingly important for governments to regularly monitor their procurement practices so that efficiency and best-value in public contracts can be continually enhanced.
If public interest is to continue to remain at the core of regulatory policy, it becomes incumbent upon government officials to constantly identify and weed out such anti-competitive practices before they can acquire any halo or a degree of permanence.
The author holds an LLM with Highest Honours, having specialised in Government Procurement Law. In 2009, he established www.BuyLawsIndia.com—a website dedicated to fostering state-of-the-art research in this area. Views expressed are personal.
