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NEWS  EDITORIAL

Time to reject L1

EM NEWS BUREAU ,  Wednesday, April 27, 2011, 12:58 Hrs  [IST]

Perhaps the most controversial term that one encounters in the context of government-related procurement of goods or services is "L1". It represents the archaic but still prevailing practice of awarding a contract to the bidder that quotes the lowest rate—L1 stands fpr the lowest quote, followed by L2 and so on. One must accept that despite all its pitfalls it has guided government-related procurement for decades. However, it is about time that L1 is given a fresh thought and a revised system put in place—sooner than later.

If one looks at the power sector, which still is largely government dominated, tendering for supplies and services is a huge activity. It is a continuous and ever-expanding process on which hundreds, if not thousands, of businesses survive. In the context of the power T&D sector, L1 is looked upon with abject notoriety. State government utilities are hopelessly bound by the L1 criterion in awarding tenders. This has resulted in absolutely substandard equipment finding its place in the country's power infrastructure—all resulting from a seemingly fair and justifiable exercise! Of course, the collusion between suppliers and government utilities in "arranging" L1-related supplies is, by itself, a messier issue.

The biggest casualty of an L1-related procurement exercise is that it is almost oblivious to quality. The method, by its intrinsic design, cannot account for the fact that quality will come at a price. An intangible aspect like quality cannot be quantified whereas price can. Here lies the pitfall. Industry experts and company chiefs maintain that the government can do much to revise and revamp the L1 method. L1 does have its merits, but the demerits are overwhelming. By factoring in the fuzzy subject of "quality", it is possible to procure quality goods or services at prices that are fair, not necessariy the lowest.

L1 has one more negative aspect. As part of the L1 procurement exercise, suppliers need to fulfill some rudimentary qualifications, mainly to do with prior experience. This preempts first-time suppliers, thereby militating against the very essence of entrepreneurship.

When it comes to private sector procurement, where there are no public funds involved, there is no compulsion to tender. Deals can be negotiated, and equilibrium between price and quality can always be attained. However, payment to suppliers can often get stuck, unlike in government procurement where payment is known to be very prompt. It is hence ironical to note that suppliers, for whatever their reservations against L1, prefer dealing with government agencies!

Despite the growing involvement of private sector entities, the volume of business generated by government utilities will continue to be on the upswing. In such a scenario, anachronous practices like L1 should make way for a procurement regime that is fair, transparent, and which promotes quality, innovation and entrepreneurship.
 
                 
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