Friday, 10 September, 2010

Will Didi slay the railway demon?

The Union railway minister has warned senior officials that she will not tolerate corruption but the difficulty lies in seeing through the demon’s disguises right down to the systemic fault-lines that keep it rooted, says
Shiv Karan Singh

Late last year, during vigilance week, Railway Minister Mamata Banerjee termed corruption as a “demon’’ and stated that there is no place in the Railways for corrupt officers. More recently, the annual general managers’ meeting found the minister directly warning senior officials that she will not tolerate corruption and that, given evidence, heads will roll. Bureaucrats have got the message, but corruption is a fertile demon. Cut one head off, another will grow back. The difficulty lies in seeing through the demon’s disguises right down to the systemic fault-lines that keep it rooted.

There is incentive and opportunity for Miss Banerjee to assess and amend features of railway procurement that give rise to the demon, especially now that her ambitions in Bengal appear to be on course. What is really at stake is the setting of a precedent. Certain systemic changes will save enormous amounts of public revenue in coming years, check future corruption, help better fulfil Vision 2020, and gift the minister an enviable legacy. On the flip side, without these corrections, the railways will drift away from being a “:lifeline to the nation’’ that brings growth to new sections of society; it will remain a gravy train for the same suppliers, only increase inequalities, and allow the demon a royal feast.

In questioning the transparency of RDSO’s supplier approval system and instituting a senior committee to study the functioning of this railway R&D body, the minister has made a promising beginning. But history shows that a little tinkering will achieve nothing. In 2005, the Central Vigilance Commission made detailed recommendations to the Railway Board, addressing high prices and lack of competition caused by RDSO’s nonsensical Part 1-Part 2 supplier division and “:large-scale corruption’’ in both product inspections and the process of approving suppliers. Only token changes resulted.

A 2006 CAG report showed how decentralization of procurement was done in an ad-hoc manner; that it failed to reduce time because suppliers were given undue favour; and that it created uncontrollable cartels and scandalous upward fluctuation of prices. What steps has the board taken since to eliminate cartels, introduce competition, and normalize prices? At one annual controller of stores meeting after another, complaints have been parried by board members with religious chanting of the board’s weak orders that have failed to control cartels or have been reduced to discussions about whether to centralize or decentralize the purchase of an item. Both centralized and decentralized procurement still suffer from three unaddressed problems: restricted competition, no independent techno-economic cost analysis, and, lack of professional independence for procurement officers. These three fault-lines keep the railway demon well fed.

Consider the independence of procurement. Members of the minister’s senior committee have noticed that the sole railways R&D body, Research Design & Standards Organization (RDSO), was formed in 1957 to do just as its name suggests: conduct research, develop and absorb new technology and design, and maintain quality, standards, and specifications. Nowhere in its mandate does it say that RDSO should be involved in vendor selection. Why has RDSO given research short shrift and become far more interested in creating approved supplier lists for all kinds of railway items?

The change occurred in the mid-1990’s. A 2004 CAG report shows how the research body had begun spending only 10-13 per cent of its entire budget on research and that its technical staff had shrunk in size. A closer look will show why, under the watchful eye of the Railway Board, RDSO has become a den of corruption in procurement, unleashing high-priced fruits of closed competition that the entire railways has been forced to swallow.

In RDSO, and in each of the six railway production units that create approved supplier lists, it is the numerous consuming directorates, like the mechanical and electrical directorates, rather than the one procurement directorate of stores that decide on and approve suppliers for items. This is an anomaly. It is one reason for the continued support of non-competitive bidding and attached corruption. It has removed a safety valve in the form of stores and increased direct contact between those that need and specify parts and private suppliers.

Standard practice calls for the procurement directorate to be involved in approving and developing vendors under the lead of a member stores on the Railway Board. This is not a novel idea. When the Railway Board was first reconstituted in 1924, with four members, one handled projects and stores. Some time after Independence, the entire stores directorate, peopled with officers trained in procuring materials for all kinds of railway items, began to function under the diktat of Member, Mechanical Railway Board.

Recently, given the importance and volume of railway procurement, there has again been a push for a member stores. But, despite this post having been recommended by parliamentary standing committees, a railways reform committee, a cadre review committee, the 5th Pay Commission, and sanctioned by the government of India and previous railway ministers, its creation has been repeatedly stalled by the board.

The reason new posts on the board are being resisted is that railway departments function as empires, fighting internecine turf wars. Fights are for control of infrastructure, personnel, and funds, in both substantial projects, like which directorate will control which freight corridor, and petty cases, which result in the irrational division of responsibilities even within trains. For example, what sense does it make that the mechanical directorate should oversee on-board cleaning contracts? Only when one notes that until recently the Rs 250 crore cleaning racket had Rs 150 crore annual profit margins, does this begin to make sense; rationality plays truant in the game of power and revenue.

In terms of stores, the member mechanical refuses to cede control because with it the mechanical directorate can dictate terms on annual procurement worth Rs 30,000 crore as well as the independence of stores personnel, especially given that the second largest employer in the world having 14 lakh employees has no proper transfer policy. When few honest stores managers find suppliers fixing prices, they can do little because their posts are in the hands of the very consumer department heads on the Board that approve suppliers. Stores managers are thereby reduced to mere observers of the tender process, called in only when it is time to sign away the high-priced loot.

A member stores on the Railway Board would spoil the party, which is exactly why the minister should push to re-create this post, and involve stores in vendor selection. However, recent events show the nature of counsel given to the Minister. The arbitrary transfer and virtual sacking of Mr M.P. Juneja, the seniormost stores officer, and a man reputed for his honesty, has further weakened railway procurement in the face of the demon. The highest stores post of additional member that Mr Juneja held has been downgraded to accommodate a junior officer. Did the demon make the Minister score a self-goal? Unless the minister realizes her error, the loot is set to continue.

The second and rather unbelievable lacuna is that railways does not conduct its own independent techno-economic cost analysis, that is, an estimation of material and processing costs of items, before mass-purchase. Given that there is no open competition to automatically control prices, this is astonishing. Numerous cases of overpricing, enumerated in a decade worth of CAG reports, some of which were open scams that no one cared to question, have benefited from this fact. At present, the only basis for assessing tender quotations is the last purchase rate, which suppliers fix and raise with every purchase. Three decades ago, a railways reform committee recommended the creation of zonal “:cost estimation cells’’ to bring order to prices quoted by restricted suppliers. Independent cost estimation cells at both the zonal and board levels need to be instituted to stop the large-scale revenue loss.

Lastly and most painfully obvious is the need for open competition. The minister would be wise to do away with the arbitrary distinction between Part 1 and Part 2 suppliers for all non-safety items. Part 2 suppliers, who bid for a small piece of the pie in each tender, undergo the same quality checks and tend to quote lower prices. It makes no sense to keep this irrationality alive. The CVC and the Comptroller Auditor General have repeatedly stated that this division causes railways immense revenue losses and promotes corruption. The railways could also benefit from the advice of the Competition Commission of India (CCI) if it were to consider a procurement overhaul. In 2006, the Railway Board circulated a routine letter that evidence of cartels should be reported to CCI. The CCI was, however, not functional during UPA 1, and cases reported were returned untended.

The CCI is up and running now and it would be telling if the Railway Board has not already taken recourse to guidance and officer education from the one agency that can help make its procurement process competitive. With the TERI report on competition in the transport sector commissioned and released in March 2009, the CCI already sits briefed about the corruption in the railways courtesy anti-competitive practices. However, at present, it appears that the railways only stands before the CCI as an accused, with Jindal Steel and Power Ltd taking the railways to task for its exclusive agreement with Steel Authority of India for the supply of rail tracks. The nation would benefit if harmful competition between railway departments is controlled and open competition between private suppliers, with demon-free quality inspections, is allowed to flourish.

The writer is The Statesman’s Bhopal-based Principal Correspondent

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