CCP directs procuring agencies to encourage competition

The Competition Commission of Pakistan (CCP) has directed procuring agencies to encourage competition and avoid drawing technical specifications and bidding requirements that may hinder competition in public procurement, favour only specific vendors and put the competing bidders at a disadvantage. These directions have been issued in a detailed order passed by the CCP on December 15, 2017 declaring a tender issued by the Utility Stores Corporation of Pakistan (USC) for the procurement of Enterprise Resource Planning (ERP) in violation of the Competition Act, 2010 and directing the USC to hold fresh bidding after addressing the competition concerns.
An IT company, M/s Digital Research Labs (Pvt) Ltd, had sent a complaint to the CCP about USC's tender of May 19, 2016, inviting bids for the purchase of the ERP software and related hardware implementation services. According to the complaint, unfair terms and conditions had been imposed through certain clauses in the request for proposal (RFP) to exclude, discriminate and restrict fair participation of local vendors in the bidding process. Furthermore, the RFP was tailor-made to select only specific international vendors.
In its order, the CCP stated that it is abreast with the universal principle of public purchase/procurement of goods or services ie to secure best value for public money. Given the magnetite of purchase/procurement of the ERP solution and related IT equipment in question, on both sides of the market ie supply side and demand side, it can impact the market structure and competitive dynamics of the relevant market. Therefore, it is critical to ensure transparency, integrity and a level playing field in the bidding process in order to maximize societal benefits and enhance economic efficiency as well as the competitiveness in the overall market.
The order stated that one of the means of achieving these goals is by encouraging and promoting healthy competition amongst the potential bidders by eliminating information asymmetries, irregularities and other corrupt irregularities. The cardinal principle of public procurement is to procure the goods or services of a specified quality at the most competitive price and in a fair just and transparent manner.
While referring to the public procurement laws of Pakistan and the directives of the European Parliament and the Council in 2014, which provides certain adhering principles to the procuring agencies while drawing technical specifications and evaluation criteria of a bid, the CCP directed the procuring agencies to adhering to the following principles:
The technical specifications drawn up by public purchasers need to allow public procurement to be open to competition as well as to achieve the objectives of sustainability. To this end, it should be possible to submit tenders that are reflective of the diversity of technical solutions standards and technical specifications in the market place including those drawn up on the basis of performance criteria linked to the life cycle and the sustainability of the works, suppliers and services.
Consequently, the technical specifications should be drafted in such a way which avoids artificially narrowing down competition through requirement on a specific economic operator by mirroring key characteristics of the supplies, services or works habitually offered by the economic operators.
Drawing up the technical specifications in terms of functions and performance requirement generally allows the objectives to be achieved in the best way possible. Functional and performance related requirements are also appropriate means of favoring innovation in public procurement and should be used as widely as possible.
Technical specifications in a bidding document should be based on relevant characteristics and performance requirements. References to brand names or similar classifications should be avoided. If it is necessary to quote a brand name, etc, to clarify an otherwise incomplete specification, the words "or equivalent" should be added after such reference. The specification must permit the acceptance of an offer of goods or services by the bidder which have similar characteristics and is able to provide performance at least substantially equivalent as specified.
With regard to the evaluation criteria, the aforementioned directive provides that "...it should be set out explicitly that the most economically advantageous tender should be assessed on the basis of the best price-quality ratio which should always include a price or cost element. It should equally be clarified that such assessment of the most economically advantageous tender could also be carried out on the basis of either price or cost effectiveness only ... to ensure compliance with the principle of equal treatment in the award of contracts. Meaning thereby, the procuring agencies must ensure transparent evaluation criteria or scoring methodology."
With reference to the procurement laws of Pakistan, the CCP noted that the Rule 10 of the Public Procurement Regulatory Authority Rules, 2004 also mandates that "specifications shall allow the widest possible competition and shall neither favor any single contractor/ supplier nor put others at a disadvantage. The specifications shall be generic and shall not include references to brand names, model numbers, catalogue number, or similar classification. However, if the procuring agency is convinced that use of a reference to a brand name or a catalogue number is essential for competing otherwise incomplete specification, such use or reference shall always be qualified with the words "or equivalent". Where reference is made to an international or national standard, tenders based on equivalent arrangements ought to be considered by the procuring agency. It should be the responsibility of the economic operator to prove equivalence with the requested label.
The CCP's order stated that in terms of Section 38 of the Competition Act, 2010, the CCP is empowered to impose such financial penalties upon the contravening party(ies) as deems fit in the circumstances which may be up to Rs 75 million of 10% of the annual turnover of the undertaking concerned.
While analyzing the facts available on the record, it is observed that the in the instant case the abuse of dominance in the "procurement market" is alleged, wherein the respondent (USC) is acting as a "dominant buyer" or procurer and the affected market is the market for "procurement of ERP software and related IT equipment for large scale retail stores" vis-à-vis the suppliers' ability to offer or switch to substitutable products. In the procurement market, if one supplier has better procurement conditions than the rest, a dominant procurer can also use its power to strengthen and squeeze out competing suppliers. According to the Enquiry Report, owing to its size, resources and certain economic benefits and competitive advantages ie in the form of state subsidies available to the (USC) respondent and its outreach which are rarely available to any hypothetical competitor ie retail network in Pakistan; the respondent has significant market power which enables it to favour one or more suppliers over the others.
It is on record that the respondent (USC) has a retail network of around 6,000 stores with annual revenue of approximately Rs 60 billion (in 2014-15) which makes it the single largest retail network dealing in household items targeting the lower strata of consumers across the country. The respondent also avails direct or indirect state subsidies on a regular basis. In the retail sector, the enquiry report has suggested that over 90% of grocery and daily essentials are sold via traditional kiryana (grocery) stores and other retail chains such as Metro, Hyperstar, and Punjab Cash & Carry, CSD, etc, serve a small urban niche, however, this analysis is not apt for the instant case as the matter is not with reference to the sale and supply of daily essentials rather the relevant market in the instant matter is the procurement of ERP solutions for the large scale retail outlets. As we are aware, kiryana stores do not procure ERP solutions for the purposes of maintaining or running their retail operations, rather the same is carried out through manual working owing to the financial constraints faced by them. Even otherwise, the RFP floated by the respondent is a one of its kinds tender based on the number of stores operated by it. The respondent has a network of around 6,000 stores, out of which 1,000 stores are initially being automated. The respondent is a dominant retailer in the large scale retail chain market, which also makes it a dominant buyer in the relevant market with an ability to operate independently of market forces and is capable of affecting the relevant market and its competitive dynamics in favour of one supplier over others. The next closest retail chain is operated by CSD with around 120 stores in the entire country. The comparison of numbers makes it clear that the respondent is a dominant player in the relevant market. Post-implementation of the project in question ie ERP software and IT equipment in around 6,000 stores, the respondent would be the largest entity in the market in question when the number of PoS terminals integrated with ERP software is taken into account both quantitatively and qualitatively.
The Commission's view is strengthened by the respondent's (USC) submission where it has repeatedly contended that it is not an ordinary chain of stores because it is mandated to serve the lower strata of society by providing them with daily essentials at cheaper prices than in the market. Hence, Hyper-star, Metro Cash & Carry, CSD and other retail chain are not comparable with the respondent. Furthermore, it has been submitted that it is the only retail chain, which is mandated to provide daily essentials at a subsidized rate during the month of Ramadan and other crisis-like situations. In addition, the Commission observes that a determination of the respondent's dominance or market power based on its assets, turnover (sale), volume (quantity), number of competitors, suppliers, or customers would not be a correct metric in the instant situation because of pricing and business model and the product category sold at respondent's stores, which undoubtedly affords it an exclusive competitive differentiation, not found in the case of other local/ international retail chain stores, including individual kiryana stores in the market. Each of these facts has its merits and limitations and the Commission is of the considered opinion that none of them might be appropriate in relation to the case at hand because the relevant market is to be viewed from the procurement scenario and not the retail sale of goods or services, the CCP order added.