Performance Audit on Procurement of Stores and Inventory Control in Department of Space by CAG

Planning for procurement

• Out of a total procurement budget of Rs.8636.18 crore of Departmentof Space (DOS) during 2001-02 to 2006-07, the unutilised budget increased consistently from Rs.83.28 crore in 2002-03 to Rs.438.28 crore in 2006-07. The extent of savings was as high as 30 to 38 percent in some years in certain Centres, indicating serious deficiencies in procurement planning and management.[Para 2.6.1& 2.6.2]
  
• Procurement planning of DOS was deficient as it placed orders on piecemeal indent basis. Assessment of requirement and cost estimations by indentors were inaccurate, leading to large number of indents not resulting in purchase orders and wide variations between indent value and order value. Non-consolidation of similar purchases also resulted in uneconomical purchases and extra expenditure of Rs.93.95 lakh. [Para 2.7.2.1, 2.7.2.2 & 2.7.2.3]
  

Competitiveness in the tendering process

• Procurement practices adopted by DOS did not ensure adequate transparency and competition as 67 per cent of procurements amounting to Rs.996 crore were made on proprietary/ single tender basis. There were instances of proprietary purchases being made for routine items and also in cases where more than one source of supply was available.[Para 2.7.3.1 ]

Fairness and objectivity in the selection process and award of contract

• In violation of codal provisions and CVC guidelines, negotiations were held with other than lowest bidders resulting in placement of irregular purchase orders in eight cases, amounting to Rs.44.58 crore.Non-award of contract to the lowest bidders resulted in extra expenditure of Rs.3.42 crore in two cases.[Para 2.7.4.1]
  
• ISAC awarded contract to a supplier who was not found technically suitable and thus, extended undue favour by awarding contract worth Rs.4.27 crore. In other two procurements, ISAC extended undue favour to the suppliers in award of contract worth Rs.9.99 crore by changing the selection criteria after invitation of bids. Changes in terms of purchase order/contracts in other three cases benefited suppliers to the tune of Rs.1.87 crore. [Para 2.7.4.2, 2.7.4.3 & 2.7.4.4]
  
• Delay and inefficiencies in processing and finalisation of tenders resulted in avoidable additional expenditure of Rs.2.70 crore in two cases due to procurement of stores at higher rates, after expiry of initial validity of offer.[Para 2.7.4.4]
  

Efficiency in Post Contract Management

• There were significant delays in inspection of the stores received.Non-replacement of rejected items at ISAC resulted in unfruitful expenditure of Rs.8.73 crore in five cases. Moreover, non-installation/ delayed installation of equipment in six cases for period ranging from 5 to 60 months at LPSC and ISAC resulted in blocking of funds and idling of equipment worth Rs.12.43 crore.[Para 2.7.5.1 & 2.7.5.2]
  
• Advances in 1177 cases, worth Rs.437.73 crore, paid to foreign and indigenous suppliers were pending for 1 to 15 years and more. No interest was charged on these long pending advances by DOS.[Para 2.7.5.3]
  
• There was lack of monitoring of adjustment of advances and renewal of Bank Guarantees. Non renewal of 147 cases of Bank Guarantees amounting to Rs.83.65 crore may expose the organisation to financial risks in cases where suppliers default in making supplies/executing work orders. [Para 2.7.5.4]
  

Inventory Control

• ISAC did not revise its procurement policy for Bonded Stores since the last decade which resulted in blocking of funds worth Rs.600 crore.[ Para 2.8.1]
  
• There was overstocking in 9055 categories of electronic, electrical, electro-mechanical components (Bonded Stores) worth Rs.75.02 crore, resulting in infructuous expenditure due to obsolescence of items. No physical verification of Bonded Stores was conducted in ISAC after 1995-96.[Para 2.8.2, 2.8.4]

Summary of Recommendations

• To reduce delays, DOS should prescribe appropriate time frame for each stage of procurement viz., indenting, sanction, issue of purchase order, and supply. Such a time frame should be prescribed after taking into account the type of material to be procured and the sources of supply.
• DOS should streamline the system of assessment of requirement by the indentors by maintaining a centralised database of various items, their specifications, status of technology and availability in market, prevailing costs, sources of supplies etc, to ensure accurate projection of requirements and realistic estimation of cost.
  
• DOS should prepare annual procurement plans by consolidating requirements of all the end users in advance to avoid delays, repetitive procurements, maximise value for money by availing quantity discount and enhancing competition. DOS should strictly follow codal provisions in selection and award of contracts by placing orders on the lowest qualified bidder.
  
• To ensure transparency in the procurement process, DOS may consider going in for limited tendering for generic products where more than one supplier is available in the market.
  
• DOS may build up a database of vendors to bring in more competition in the procurement process and reduce proprietary/single tender procurements.
  
• DOS should ensure compliance to the CVC guidelines during evaluation of tenders.
  
• DOS should strictly follow codal provisions in selection and award of contracts by placing orders on the lowest qualified bidder.
  
• DOS should avoid inordinate delays in processing and finalisation of tenders to ensure timely procurement and avoid extra expenditure due to subsequent escalation in price.
  
• DOS should avoid inordinate delays in the placement of purchase orders and ensure strict compliance to the codal provisions for relaxation of terms and conditions of contracts.
  
• DOS should streamline its system of inspection of materials as delayed/non inspection deprived DOS of the opportunity of preferring damage/warranty claims and seeking replacement of rejected items.
  
• DOS should avoid delays in installation/commissioning of equipment by ensuring timely availability of site, infrastructure, etc.
  
• DOS should ensure that advance payments to suppliers are made only in exceptional circumstances subject to payment of interest at appropriate rates.
  
• DOS should make efforts to recover long outstanding advances from the defaulting suppliers.
  
• DOS should closely monitor adjustment of advances and renewal of Bank Guarantees to minimise its financial risk in cases of default on part of the suppliers in meeting their obligations under the contract.
  
• DOS may consider revision of its purchase procedures so as to make it consistent with the provisions of General Financial Rules, 2005.
  
• DOS may review its policy to stock Bonded Stores items on actual need basis and past consumption pattern. The procurement policy drafted in 1995-96 needs be reviewed in the present scenario.
  
• DOS should ensure that physical verification of all types of stores is conducted periodically to reduce inventory cost and make inventory management more efficient.
  
• The items declared as obsolete/ surplus/ un-serviceable should be immediately disposed off to avoid their intrinsic value from diminishing and thus incurring avoidable carrying costs.

Other comments

• Rule 161 of GFR, 2005 emphasises the importance of fixing time frame at different stages of procurement. Such a time frame will also make the concerned purchase officials more alert.
• Planning for procurement involves realistic and timely assessment of requirements, making proper cost estimates, conducting market surveys to identify the possible sources of supply, clubbing similar requirements to avoid repetitive tendering and obtain quantity discounts, selecting appropriate mode of procurement and formulating most suitable strategy to ensure timely availability of goods and services, as per the requirements of end users.
• As the estimated rate is a vital element in establishing the reasonableness of prices, it is important that the same is worked out in a realistic and objective manner on the basis of prevailing market rates, last purchase prices, economic indices for the raw material/ labour, other input costs etc., wherever applicable and assessment done based on intrinsic value.
• Competition is the key element of the procurement policy framework and promotes value for money. Effective competition requires non-discrimination amongst suppliers in procurement and the use of competitive procurement process.
• As per Rule 154 GFR “procurement from a single source may be resorted to only in emergency cases and in cases of availability of the sole supplier for the required goods, with the approval of the competent authority”.
• Good procurement practices offer all interested suppliers a level playing field to compete and thereby, directly expand the purchaser’s options and opportunities. A good procurement process should not only be fair but should be seen to be fair.
• Efficient post contract management includes immediate inspection of stores, their installation and commissioning, taking proactive action for replacement of rejected stores, monitoring of financial transactions to safeguard the interest of the organisation, by ensuring that the securities furnished by the suppliers are kept safely and updated periodically.
• The formulation of appropriate policy and procedures relating to inventory control and management assumes greater significance, especially in the context of the organisations where the level of procurement is very high. An efficient inventory management not only facilitates smooth operations of an organisation, but also optimises the level of inventory, thus, impacting expenditure on stores. This also involves physical verification of inventory on regular intervals which facilitates identification of surplus/obsolete/ unserviceable items and thus, efficient disposal.

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