Good Practices in Public Sector Procurement The purchases made in different set-ups, whether in the Government or in the Public

sector both Central/State, Municipal Corporations etc. are deemed as Government purchases. The total procurement by these entities gross up to Rs. 4, 50,000 crores per annum i.e. 30 % of Indias Gross Domestic Product (GDP). The Public Sector both Central and State Units form a sizeable chunk of share in Government purchases. Of late a number of Govt. Organizations have been converted into PSUs/Corporations/Autonomous Organizations, which has further added their share of Purchases. The law recognizes Government as a model purchaser, and therefore places a higher responsibility on all those who are associated with it, and does expect that due care shall be exercised by all, in safeguarding the Government interests, while discharging their duties, and at the same time laying emphasis on the transparency aspect as well. While dealing with the suppliers, particularly the large number of Small Scale Industries, who often find themselves highly vulnerable, because of lack of infrastructure, and understanding of the laws, rules and the procedures relating to the Tendering and Contracting? The purchasing therefore lays more emphasis, on the Government officers, not only to equip themselves, and their staff with the provision of applicable laws of the land, they may have to guide the suppliers as well, so that it results in proper understanding of the various laws as applicable to the Contract, their implications, leading to timely execution of the contract, leading to acceptable supply of stores, off course at competitive prices. The accountability of the Government Purchasers is many fold, besides being accountable to the administrative ministries, the board of directors - in case of public sector, but also to different outside agencies like the public accounts committee, the CAG, the CVC etc. This does not leave enough scope for individual initiatives. The system has in built disincentives for taking decisions. At times the Executive becomes a prisoner of procedures, rather than an achiever of purpose. Not withstanding the above, the salient features as indicated below, need to be properly noted and if strictly followed, shall lead to cost effective purchases The concepts below even though may appear to be elementary, but are essential, and deemed as Good Practices: The terms and conditions that are to govern the purchases, should be readily assessable, be simple so that they are easily and uniformly understood by one and all. A brief knowledge of the applicable laws of the land - like the sale of goods act, the contract act, the various tax laws, the interest on delayed payments act, the limitation act and the Arbitration and Conciliation Act etc. The detailed acts should be readily available for reference as and when required. The tender specifications have to be clear, supported by the relevant drawings and the specification. In case of items of general nature, the relevant BIS specification should be found and incorporated. If for some reasons the same is not possible, then the available reputed brands have to be short-listed. All of these have to be processed as far as possibly directly from the manufacturers, or their authorized outlets, so as to avoid duplication/fraudulent purchases. The basis or the manner in which the tender (s) would be settled should be laid down in the tender itself. The settlement has to be done within the original validity and within the reasonable time. The sanctity of the tendering system has to be maintained. Avoid re-invitation of Tenders. Post tender correspondence should be generally avoided, as it generally leads to delays, and at times results in changing of the inter-see position due to tax structures or discounts. There should be no unusual conditions, like approval of sample before bulk supply, or modification to the specification midway, which has implications on the price structure & are do not lead to legally enforceable contracts

Transparency in public dealing through e-ERA Introduction The days have gone when only a few office staff used to monopolize in the access of information and, in fact, executives were to depend on them for getting relevant information and thereby it was question mark on transparency

in such dealings. Information and knowledge revolution in the coming decade are going to change the life of every individual and working of every business enterprise, small or big. Internet is driving this revolution at an exhilarating pace. Internet has the power to deliver information in any form be it words, figures, pictures, voice, etc. anywhere anytime instantaneously at a cost which is ultimately getting reduced. The Internet has brought about a lot of changes in business, economics, information and entertainment. Also transfer of information has no geographical and time barrier. Virtually all the manufacturers, suppliers, distributors, customers all across the world are now connected to each other through World Wide Web (WWW). Activities and transactions related to buying, selling, etc. can now be brought under the realm of internet. The pressure on each business enterprise now is to plan transformation to e-com paradigm, to what extent, in how many stages and at what speed. In the Internet based system, not only transparency can be ensured but everything is also on record. As Central Government Departments and Public Sector Enterprises are basically spending public money in the area of purchase, contracting, etc. it is, therefore, the right of the public to have access to the information desired by them. Therefore transparency is desirable at a place of public use. In this e-information era, public has now realized their right to access for information and like to have correct and complete information as per their need. Public is also aware of the latest information through publications, newspaper, news channels, Internet and now can easily approach rightfully for access of any such information. The main areas where computerization has taken place and transparency is being ensured are discussed as under: 1.0 Mass contact area: In the area of train reservation, where computerization was done in a bigger way, getting berths availability became so easy that public started planning their journey in advance. Such transparent style of functioning of Reservation Offices has brought the name and fame to the Railway. Computerization not only results in efficient error free functioning of organizational set up but also neatness and repetitive nature of information can be taken easily in a transparent manner. Computerization of Current Booking Offices has also resulted in the transparency in public dealing. On Railways efforts are already started to computerize the other offices, which ultimately will result in the increase of efficiency multifold and transparency in dealing with public can be ensured. Installation of Coupon Validating Machine (CVM), Platform Ticket Machines and Ticket Vending Machines on major suburban stations in Mumbai are becoming popular in public use due to their efficient functioning and thereby adding to transparency in the system. 2.0 Purchasing: Expenditure on purchase of materials on Indian Railways needed for operation, maintenance and product, etc. is of the magnitude as Rs.11,000 crores. Accordingly it is important to ensure transparency in all facets of procurement activities while dealing with the public. The zonal Railways and production units now have their website on materials management for easy access by their users including suppliers, purchasers and the indenters. Pilot project on computerization of Materials Management functions on Central Railway is already implemented covering all the modules. 2.1 Materials Management Information System (MMIS) - With the Introduction of MMIS, procurement functions have been fully computerized and it has resulted into value addition with regards to the transparency and efficiency at various level of its dealing. The MMIS is consisted of five function modules viz. Purchase module, Depot module, Finance, Uniform module and Sales & Auction module. With all these modules in place, the Materials Management activities are now being done effectively and in transparent manner. Monitoring of purchase cases where the procurement action getting delayed are very effectively done by way of review at various levels. 2.2 Negotiation only with L1 - In some of the central govt. depts. it was a system if there are several manufacturers participating in open tender, counter offer would be given and the quantity would be rationalized over several vendors in proportion to the competitiveness of their bid. This rationalizing method adopted by govt. dept. was defective, as L1 would not get everything, which is due to him. CVC issued the order to negotiation only with L1 in Nov. 1998.Effective implementation of the policy to negotiate only with L1 ensured no hanky panky and brought transparency in procurement process. 2.3 Advertised tender notice on website - CVC in their circular No.98/ORD/1 dt. 18.12.03 for the use of website has advised that the Central Government departments/organizations would ensure effective implementation of instructions on use of website for putting all the advertisement tender notices on website. On various issues pointed out by various

Govt./PSU Organisations, CVC has communicated clarifications for effective implementation of the instructions are as under: (i) On size of tender documents it was advised for putting tender document on website in addition to whatever methods are being presently used. (ii) On issues connected with data security, legality and authenticity of bid documents it was advised to use provisions of digital signatures through certifying authority. There are sufficient legal provisions under IT act to ensure use of website for e-business. (iii) Some organizations have sought clarification whether website is also to be used for proprietary items or items which are sourced from OEMs it was clarified that these instructions are applicable for open tender system only and not for such cases of PAC, etc. (iv) Do the instructions regarding short term tenders given in the CVC Order No.98/ORD/1 dated 11.2.2004 apply to Limited Tenders also? This was confirmed in affirmative as it does not involve any additional time or cost. (v) Implication of CVCs instructions on Procurement/execution of work through a system of approved/registered vendors. It was advised that wide publicity through website be given for registration, pre-qualification, criteria, etc. Any denial to suppliers would lead to presumption of malafide intentions on the part of tendering authority as covered vide CVCs letter No.98/ORD/1 dt. 2.7.04. 2.4 Pre-qualification, performance, evaluation criterion - CVC in their office order No.44/9/03 dt. 4.9.03 have advised that it should be ensured that pre-qualification criteria, performance criteria and evaluation criteria are incorporated in the bid documents in clear and unambiguous terms as these criterion are very important to evaluate bids in a transparent manner. Whenever required, the departments/organizations should follow two-bid system, i.e. technical bid and price bid. The price bids should be opened only of those vendors who were technically qualified by the department/organization. It was also advised that the department/organization may issue necessary guidelines in this regard for future tenders. 2.5 Payment to suppliers through ECS As Railways is placing purchase orders/works contract for supply of materials/execution of work therefore the payment to the suppliers/contractors after they submit their bills is required to be done in a efficient and transparent manner. In terms of CVCs directives, initiatives have already been taken for making payments through ECS to all such firms who will like to avail this facility. 2.6 Single window system The system has been introduced on Central Railway to facilitate quick registration of non-stock demand as well as further status of procurement action of such demand to the indenter. It also takes care of the redressal of complaints from firms regarding extension of delivery period and other post-contract activities so that the firms representative can have desired information from single window. 3.0 Scrap disposal: In the area of scrap disposal lot of initiatives have been taken for computerizing the scrap disposal function as scrap sales and auction module is integral part of Materials Management Information System. As about 90% of the revenue earning on account of scrap disposal is through disposal of P.Way scrap materials, efforts are therefore on to computerize accountal of P.Way materials so that efficiency and transparency in disposal of such P.Way scrap can be ensured as per directives of Railway Board. Electronic weigh bridges have been installed in the depots/scrap yards for correct weighment so as to avoid complaints on this account from the purchasers. 4.0 Acceptance of gifts by Government Servants : In the CVCs directives received it has been communicated that the Conduct Rules provide that no government servant shall accept or permit any member of the family or any other person acting on his behalf to accept any gift except on occasions like weddings, anniversaries or religious functions. The gifts are to be provided only to promote commercial/business interests and need not therefore be sent to government officials who are only doing their duty. Strict compliance of these directives will definitely bring transparency in the system. 5.0 Transparency within the departments: Transparency within the department means making information available as per the desire of employee whatever he

needs. In post-computer days, getting to know PF balances by the staff, particularly group D staff was difficult and they cannot properly plan for PF withdrawals whenever needed and they were to depend on information from HQ office only. After computerization of this activity staff can have access to such information from their respective divisional Accounts office. Adding to further transparency in dealing with PF matters, Accounts dept. has issued PF passbooks to all the employees and it is getting updated regularly. Similarly implementation of 5th Pay Commission, payment of arrears and pay fixation, etc. could be possible in an efficient manner due to computerization of such activities. Computerization of salary function has resulted into the salary getting transferred through ECS on the last working day of the month to all such employees who are availing this facility. 5.1 Vacancy status- Many Public Sector Organisations are advertising the vacancy position against which Govt. officials can apply for their selection on deputation. These vacancy positions are available on website through which the performa of application is in downloadable form. Due to this aspiring officials have assess to such information and can submit their applications well in time as against in older system such circulars were reaching to offices after expiry of due date. This has really brought transparency in the system CVC is the body that formulates the policies for the purchase and Materials Management of PSUs. It is also responsible for the control of graft and corruption in the public buying function. Conclusion: Transparency in handling any commercial function of the Govt. dept. is basically providing fairer systems and efficient and practical structures. The guiding principles of ethics should be behaving with integrity all the times, it would mean honesty with fair dealing, striving for objectivity with regard to all considerations relevant for the task and showing proper regards for technical and professional standards. From time to time CVC issues guidelines to Central Govt. depts. to adopt them which not only help them in maintaining internal standards but projecting right image. The common unethical practice can be showing undue favour, personal preferences, arbitrary selection of suppliers, etc. Basic principle of all government departments therefore should be that it must be publicly seen beyond reproach. To this end officers and managers need to do their duties in a manner, which ensures that they maintain a reputation for fair unbiased dealing with all suppliers. Vigilance Directorate of Railway Board, zonal Vigilance dept. of zonal Railways are issuing Vigilance Bulletin periodically bringing out DOs & DONTs, case studies of various departments and other related information for guidance of Railwaymen specially supervisors to eradicate corruption and bring out transparency in the public dealing.

Central Vigilance Commission (CVC's) observations Estimated Rates It was observed that the estimated rates are being worked out in an unprofessional and perfunctory manner, at times by extrapolating the price of the lowest capacity equipment or by applying a uniform yearly compounded escalation over the prices of similar equipment purchased few years ago. Consequently, the inflated estimated rates prepared by the Organizations resulted in acceptance and payment of higher prices to the firms. 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, IEEMA formula, wherever apphcable and assessment based on intrinsic value etc. 6.0 Notice Inviting Tender 6.1 Against the most preferred and transparent mode of Global tender enquiry/Advertised tender enquiry, some of the Organizations are generally issuing limited tender inquiry to select venders, irrespective of the value of purchase. Further, the credentials of the firms and the criteria adopted for selection of such venders, in most of the cases, are not put on record. This not only results in lack of competition but also favouritism to the select vendors. It has been noticed that even in cases where Advertised/Global tender inquiries were issued, the same were published in the local dailies and not in any National Newspaper and particularly in Indian Trade Journal, Calcutta, which is a Government publication and is regarded as the standard medium for advertising tender notices in India. The main purpose of issuing Advertised/Global tender inquiry is to give wide publicity. It has been noticed that the Organizations do not

forward the copies of the tender notices to the registered/past/likely suppliers and while in case of imported stores, the copies of the tender notices are not being forwarded to Indian Missions/Embassies of major trading countries. In order to give wide publicity, generate enough competition and to avoid favouritism, as far as possible, issue of Advertised/Global tender inquiries should be resorted to and published in ITJ and select National Newspapers. The copies of the tender notices should be sent to all the registered/past/likely suppliers by UPC and also to the Indian Missions /Embassies of major trading countries in case of imported stores. 6.2 It has also been noticed that for Advertised/Global tenders, against a normal time of four - six weeks, there are instances wherein time for tender opening of only 12-15 days was given. Similarly, in case of limited tenders, against a normal time of 21 - 30 days, there are cases where tenders were opened in a short period of only 7 days. The tender opening in such a short duration is normally resorted to in case of recorded emergencies, where in the purchaser sends the tender inquiries by faster means like fax/speed post. However, in most of such cases, neither urgency nor the proof of having sent the inquiries by fax/speed post could be established. In few cases, it was also noticed that though short term tenders were invited, expressing urgency of the requirement, however, the cases were processed in a very routine and casual manner without any consideration for urgency. On the other hand, in some cases, it was noticed that with the short time available, only 2-3 vendors who probably knew about the system, submitted their bids and, thereby forming a cartel and circumventing the system. In some of the cases of Global tenders, it was observed that though the Organizations had given a time of 6 - 8 weeks for tender opening but the tender sale was closed 2 - 4 weeks in advance of tender opening, thereby effectively giving only one month time to bidders for purchase of tender documents. The very purpose of floating Global tender which is to give wide publicity and sufficient time to bidders to get the bidding documents and submit their offers, in such cases seems to have been defeated. With a view to have wider, fair and adequate competition, it is important that sufficient time of say 4-6 weeks in case of Advertised/Global tenders and 3-4 weeks in case of limited tenders is allowed, except, in cases of recorded emergencies, wherein also, a reasonable time should be permitted and tenders should be sent by faster means like speed post /fax. The tenders should preferably be kept open for sale till the date of tender opening or just one day prior to the date of tender opening. With the widespread use of Information Technology, the tender notices should also be put on the website and e-mail address of the organization should be indicated in the tender notice. 6.3 In case of proprietary purchases, the detailed justification for purchase from a single vendor is not being placed on record. As by issuing single tender, the competition is totally eliminated and the possibility of paying higher prices cannot be ruled out. It is imperative that the purchase on Single tender basis be made with the detailed justification in its support and with the approval of Competent Authority, including associated finance.

General Principles of Entering into Contracts General Guidelines for Entering into Contracts by the DGS&D : While the various aspects of contract management in the DGS&D are discussed in the respective subject chapters, the following general guidelines for enforcing into contracts have been laid down by the Government of India. (a) Save in exceptional circumstances, no work of any kind should be commenced without prior, execution of contract documents. Even in cases where a formal written contract is not made, no. order for supplies etc. should be placed without at least written agreement as to the price. (b) The terms of a contract must be precise and definite and there must be no room for ambiguity or mis-construction thereon. (c) No contract involving an uncertain or , indefinite liability or any conditions of an unusual character should be entered into without the previous consent of the Ministry of Finance. (d) Subject to adequate prior scrutiny of terms, general or special, if any, standard forms of contracts should be adopted, wherever possible. The alternatives used in the standard forms, which are not applicable, should be invariably scored out in consultation with the Ministry of Finance and Ministry of Law. (e) In cases where standard forms of contracts are not used, legal and financial advice should be taken in drafting the contracts and before they are finally entered into.

(f) The terms of a contract once entered into should not be materially varied without the previous consent of the authority competent to enter into the contract as so varied. No payments to contractor by way of compensation or otherwise, outside the strict terms of the contract or in excess of the contract rates may be authorised without the previous approval of the competent authority. (g) No relaxation of specifications agreed upon in a contract or relaxation of the terms of an agreement entered into by Government should be made without proper examination of the financial effect involved in such relaxation. The interest of the public exchequer should be taken due care of before agreeing to any relaxation of agreement or contract. (h) In selecting the tender to be accepted, the financial status of the individuals and firms tendering must be taken into consideration in addition to all other relevant factors. (i) Before entering into a contract or an agreement, all pros and cons should be considered and validity of contractual documents should be ensured. Effective administrative machinery should also be set up to keep a vigil on the performance of parties concerned. (j) Provision must be made in contracts for safeguarding Government property entrusted to a contractor and the recovery of hire charges, if any, therefor. (k) When a contract is likely to endure, for a long period or where the contract provides for a clear schedule for the fulfillment of the various stages of the contract, it should include a provision for unconditional power of revocation or cancellation at the discretion of the government at any time on the expiry of reasonable notice to that effect. The period of notice should not normally be longer than 6 months. (l) All contracts should have a provision for recovery of liquidated damages for defaults on the part of the contractor, unless there are any special instructions issued by the competent authority. The terms of contract for the purchase of perishable stores should invariably include a (separate) Warranty Clause a model of which is given in Form G.F.R.I. This form may, however, be modified to suit local conditions. (m) It should be ensured that in all contracts where a warranty clause is included, the position regarding delivery of goods in replacement of rejected ones is made clear beyond doubt by adding the words Free of cost at the ultimate destination after the words by the purchaser in the penultimate sentence of the said clause, where the incorporation of such a clause is not in consistent with the other conditions of the contract. (n) A schedule of quantities with their issue rates of such materials which are supplied departmentally, and are used in the contract work, should form an essential part of the contract. It should also contain an escalation clause pertaining to rates of such materials the prices of which are controlled by Government and which the contractor arranges himself, so that Government may get the benefit of any saving in the quantities of the material actually used in execution. (o) The question whether any sales tax, purchase tax, octroi and terminal taxes and other local taxes and duties are to be paid and if so, by which party, should be settled and cleared up before entering into any contract, involving transfer of movable property, whatever its nature. (p) All contracts for purchase involving import of materials from abroad should as a rule provide for purchases on P.O.B. basis and similarly all sales contracts involving transport of materials from India to other countries should be entered into on C.I.F. basis. (q) Provided that a departure from the procedure prescribed above may be with the prior concurrence of the Ministry of Surface Transport. (r) No work should be done under an agreement/contract beyond the date of expiry of its tenure. Wherever it is considered that the work has to be continued beyond the date of expiry of the tender timely action should be taken for renewing the contract/agreement for the further period required, after a suitable review of the provisions of the old agreement/contract to see whether any modifications therein are required. (s) Where escalation in respect of labour, overheads, customs duties, freight etc. is provided for in a contract, the basis for the calculation of the same should be clearly indicated.

(t) Cost Plus contracts should be avoided except where they are inevitable. (u) Lump sum contract should not be entered into except in cases of absolute necessity. Whenever such contracts are entered into, all possible safeguards to protect the interest of Government should invariably be provided for in the conditions of the contract. (v) The Comptroller and Auditor General and under his direction other audit authorities have power to examine contracts and to bring before the Public Accounts Committee any cases where competitive tenders have not been accepted, or where other irregularities in procedure have come to light. Common Irregularities/Lapses observed in Stores/purchase Contracts and Guidelines for Improvement in the Procurement System-CVC Purchase Manual he cardinal principle of any public buying is to procure the materials/services of the specified quality, at the most competitive prices and, in a fair, just and transparent manner. To achieve this end, it is essential to have uniform -and well documented policy guidelines in the organisation so that this vital activity is executed in a well-coordinated manner with least time and cost overruns. In some of the organisations, the purchase manual is either not at all there or has not been updated for years together. Thus, the system of procurement is quite ad hoc and arbitrary. A codified purchase manual containing the detailed purchase procedures, guidelines and also proper delegation of powers, wherever required needs to be made by all the organisations so that there is systematic and uniform approach in the decision-making. Such an integrated approach is likely to put a cap on the corruption and would also ensure smoother and faster decision-making. Filing System The filing system adopted in most of the organisations is not satisfactory. Even the files are not being paginated. The part files are opened as and when new action is initiated and these part files are not merged with the main file, which inter alia results in break in continuity and arbitrariness in decision-making. The decisions/deliberations of the individuals or the tender committees are not properly documented or recorded which dilutes the accountability of the officers and may result in the interested officers going scot-free, even if serious lapses are established against them. The procurement files are very important and sensitive documents and thus there is a need to have a single file system with proper page numbering. In case of urgency, if opening of the part files is unavoidable, the same should thereafter be merged with the main file. The decisions and deliberations of the individuals or the tender committees also need to be properly recorded and well documented. Provisioning It has been noticed that in certain cases excessive, fraudulent and infructuous purchases were made without taking into consideration the important aspects like available stocks, outstanding dues/supplies, past consumption pattern and average life of the equipments/items etc. These excessive infructuous purchases were at times made in collusion with the firms. This resulted in not only the material lying unutilised for years together with no residual life but also a lot of extra expenditure was incurred on the inventory carrying cost. One of the organisations took double procurement action for purchase of tyres against the same liability. Even the factors like shelf life of 5 years and the past consumption pattern were ignored while placing the orders. As no action was taken to dispose off the surplus tyres, the department is incurring inventory carrying cost of about 20-25% per year for the last 10 years and the salvage value of the quantity held in stocks is likely to be Nil due to expiry of the shelf life. In few cases, it was noticed that though the demand for the stores was simultaneously received from different wings/field units but/ they were not clubbed together and were rather processed individually against the established principle of bulk buying. The provisioning of the stores needs to be done with utmost care taking into account the available stock, outstanding dues supplies, the past consumption pattern, average life of the equipment/spares. The requirements also need to be properly clubbed so as to get the most competitive and best prices. The requirements should not be intentionally bifurcated / split so as to avoid approval from higher authorities. In a case for purchase of 1,000 KVA D.G. sets, the tender enquiry was originally issued by the Organisation for supply of D.G sets with four stroke engine. However, on the request of one of the bidders, the type of the engine was later changed from four strokes to two strokes and contract was awarded. During investigation, it was found that the

engine manufacturer had given a release that the two stroke engine shall be phased out in two years. Surprisingly the existing DG sets were with four-stroke engine. In yet another case instead of buying DG sets for their energy needs, a shipyard hired DG sets from a firm in an ad hoc manner, without following competitive bidding. On investigation, it was revealed that the energy cost/unit worked, in excess of Rs.40/-. One time purchase for projects or capital equipments / spares should be properly justified depending on the actual requirement usage, rate of return etc. further, the obsolescence factor should also be taken into account i.e. the equipment to be purchased should conform to the latest specifications and technology available in the market. Appointment of Consultants Some of the organisations appoint consultants due to lack of in-house expertise in technical matters. It has invariably been noticed that the appointment of consultants is not being done in a transparent manner and their working is also not properly supervised. i. The appointment of consultants is often made in an arbitrary manner without inviting tenders and without collecting adequate data about their performance, capability and experience. In some of the cases, the consultants were appointed after holding direct discussions with only one firm without establishing the reasonableness of consultation fee payable to them. In some cases the terms were modified to the financial advantage of the consultant, even after award of the contract. In one of the cases, the organisation continued with a consultant for about 30 years and for all types of contracts. In yet another case, the Organisation invited offers from 8 enlisted consultants but, awarded the contract to the highest bidder on the plea that they are Padam Shree awardees. Extra amount on account of travel expenses was also sanctioned after award of the contract. ii. The payment terms to the consultants are allowed quite liberally. In one of the cases, the consultant fee was paid on quarterly basis without linking the same with the progress of the project. Even full payments had been authorised before the completion of the project. iii. Quite a few organisations especially in the Banking Sector seem to abdicate their responsibility completely and do not oversee the working of the consultants resulting in the latter exploiting the circumstances and at times in collusion with the suppliers, give biased recommendations in favour of a particular supplier. It has also been noticed that the consultants recommend acceptance of inferior items / equipments and also give undue benefit to the suppliers like nonrecovery of penalties, for the delayed supplies and corresponding reduction in the excise duty / custom duty, if announced after award of the contract. The consultants need to be appointed only when it is felt absolutely essential. The appointment of consultants needs to be done in a transparent manner and after following the competitive tendering system. The consultants role should be well-defined. The consultant is meant to assist the departmental officers because of lack of expertise and it should not mean that they takeover all the functions. The responsibilities relating to award of contract and execution of contract after appointment of consultant should not be abdicated completely by the organisations. Rather appropriate checks should be exercised at all stages of the execution of the contract. Penal clauses for deficiency in service should invariably be stipulated in the contracts/MOUs with the consultants. Estimated Rates It was observed that the estimated rates are being worked out in an unprofessional and perfunctory manner, at times by extrapolating the price of the lowest capacity equipment or by applying a uniform yearly compounded escalation over the prices of similar equipment purchased few years ago. Consequently, the inflated estimated rates prepared by the Organisations resulted in acceptance and payment of higher prices to the firms. 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, IEEMA formula, wherever applicable and assessment based on intrinsic value etc. Notice Inviting Tender Against the most preferred and transparent mode of Global tender enquiry/advertised tender enquiry, some of the

Organisations are generally issuing limited tender inquiry to select vendors, irrespective of the value of purchase. Further, the credentials of the firms and the criteria adopted for selection of such venders, in most of the cases, are not put on record. This not only results in lack of competition but also favouritism to the select vendors. It has been noticed that even in cases where advertised/global tender inquiries were issued, the same were published in the local dailies and not in any National Newspaper and particularly in Indian Trade Journal, Calcutta, which is a Government publication and is regarded as the standard medium for advertising tender notices in India. The main purpose of issuing advertised/global tender inquiry is to give wide publicity. It has been noticed that the Organisations do not forward the copies of the tender notices to the registered/past/likely suppliers and while in case of imported stores, the copies of the tender notices are not being forwarded to Indian Missions/Embassies of major trading countries. In order to give wide publicity, generate enough competition and to avoid favouritism, as far as possible, issue of advertised/global tender inquiries should be resorted to and published in ITJ and select National Newspapers. The copies of the tender notices should be sent to all the registered/past/likely suppliers by UPC and also to the Indian Missions / Embassies of major trading countries in case of imported stores. It has also been noticed that for advertised/global tenders, against a normal time of four to six weeks, there are instances wherein time for tender opening of only 12 to 15 days was given. Similarly, in case of limited tenders, against a normal time of 21 to 30 days, there are cases where tenders were opened in a short period of only 7 days. The tender opening in such a short duration is normally resorted to in case of recorded emergencies, where in the purchaser sends the tender inquiries by faster means like fax speed post. However, in most of such cases, neither urgency nor the proof of having sent the inquiries by fax/speed post could be established. In few cases, it was also noticed that though short term tenders were invited, expressing urgency of the requirement, however, the cases were processed in a very routine and casual manner without any consideration for urgency. On the other hand, in some cases, it was noticed that with the short time available, only 2-3 vendors who probably knew about the system, submitted their bids and, thereby forming a cartel and circumventing the system. In some of the cases of Global tenders, it was observed that though the Organisations had given a time of 6 to 8 weeks for tender opening but the tender sale was closed 2 to 4 weeks in advance of tender opening, thereby effectively giving only one month time to bidders for purchase of tender documents. The very purpose of floating Global tender which is to give wide publicity and sufficient time to bidders to get the bidding documents and submit their offers, in such cases seems to have been defeated. With a view to have wider, fair and adequate competition, it is important that sufficient time of say 4 to 6 weeks in case of advertised/global tenders and 3 to 4 weeks in case of limited tenders is allowed, except, in cases of recorded emergencies, wherein also, a reasonable time should be permitted and tenders should be sent by faster means like speed post /fax. The tenders should preferably be kept open for sale till the date of tender opening or just one day prior to the date of tender opening. With the widespread use of information technology, the tender notices should also be put on the website and e-mail address of the organisation should be indicated in the tender notice. In case of proprietary purchases, the detailed justification for purchase from a single vendor is not being placed on record. As by issuing single tender, the competition is totally eliminated and the possibility of paying higher prices cannot be ruled out. It is imperative that the purchase on single tender basis be made with the detailed justification in its support and with the approval of competent authority, including associated finance. Tender/ Bid Document The terms and conditions being stipulated in the bid documents by some of the Organisations are quite insufficient and sketchy. Sometimes, the bid document contain obsolete, unwanted matter and conflicting and vague provisions, resulting in wrong interpretation, disputes and time & cost over runs. Even the time/date for receipt and opening of tenders is not being incorporated in the documents. The important clauses relating to earnest money. Delivery schedule. Payment terms, Performance/Warrantee Bank Guarantee, Predespatch inspection. Arbitration, Liquidated Damages/Penalty for the delayed supplies and Risk-purchase etc., are not being incorporated in the bid documents. All these clauses are important for safeguarding the interest of the purchaser and also have indirect financial implications in the evaluation of offers and execution of the contracts. All the important clauses as brought out above need to be incorporated in the bidding documents so as to fully safeguard the interest of the Government, and, for evaluation of bids on equitable and fair basis and in a transparent manner.

In some cases, it was noticed that the amount of earnest money deposit stipulated in the tender document was grossly insufficient to protect the Government, interest in case of breach committed by the bidder. Some of the organisations instead of ignoring the bids not accompanied with earnest money deposit along with the tenders as per bids requirements, asked the bidders to submit EMD, after tender opening. The primary objective of submission of earnest money deposit is to establish the eamestness of the bidder so that he does not withdraw, impair or modify the offer within the validity of the bid. It also helps in restricting if not eliminating speculative, frivolous or wait and see bids. Since any relaxation regarding submission of earnest money deposit has financial implications besides giving encouragement to the bidders to submit frivolous bids as indicated above; the terms & conditions should clearly stipulate that the offers without earnest money deposit would be considered as unresponsive and rejected. In case of tenders invited in Two-bid system, some of the Organizations stipulate Earnest Money Deposit as percentage of the tender cost instead of fixed amount. In the Two-bid system, if EMD is taken on the basis of some stated percentage of tender value and with the announcement of the amount of EMD submitted by the bidders at the time of tender opening, the same will give every bidder a good indication of the prices quoted by the competitors by making back calculations. A bidder can use this information to the disadvantage of his competitor, if prices are subsequently modified. The earnest money deposit in case of two-bid system needs to be incorporated as a fixed and reasonable amount on the basis of estimated value of the purchase. Some of the organisations incorporate a specific delivery schedule inter-alia mentioning that bids offering delivery beyond stipulated date will be treated as non -responsive and will be summarily rejected. However, after opening of the tenders, the bid by one of the organisations with slightly longer delivery period was not rejected as per the bid guidelines, rather that offer was also considered and evaluation was made after loading the offer by applying some unilateral loading criteria. The same resulted in inter se change of ranking position. In order to meet the project requirement, it would be prudent to incorporate an acceptable range of delivery period with the stipulation that no credit will be given for earlier deliveries and offers with delivery beyond the acceptable range will be treated as unresponsive. Within this acceptable range, for the purpose of evaluation, an adjustment per month say @ 2% could be added to the quoted prices of bidders offering deliveries later than the earliest delivery period specified in the bid documents. The evaluation/loading criteria on account of acceptable range of deviations in the commercial terms and conditions viz. Payment terms. Delivery period. Performance Bank Guarantee etc., is not being incorporated in the bidding documents. The evaluation of the offers is being made simply on the price quoted which is not in order. The comparative assessment of offers in true sense would be complete only if it is made on equal footing taking into account the financial implications for the deviations in terms and conditions, in line with unequivocal evaluation criteria specified in the bidding documents. In one of the cases, it was noticed that due to non-stipulation of payment terms in the tender documents, the bidders quoted prices based on varying advance payment. The offers were evaluated by the Organisation simply on the quoted prices, even though L-1 bidder had asked for much higher advance payment in comparison to the L-2 bidder. As such, the evaluation done by the Organisation was not on equitable basis as the payment of higher advance, evidently had, financial implications. The Evaluation / Loading criteria with respect to the important terms, like payment terms. Delivery period. Performance Bank Guarantee etc., having financial implications need to be specified in unambiguous terms in the bid documents so that the evaluation of bids after tender opening could be made in a transparent manner without any subjectivity. Some of the Organisations incorporate only broad technical details instead of generic specifications with complete details of performance parameters and the technical evaluation criteria. At times the technical evaluation matrix is decided after opening of tenders and is kept confidential. In absence of the detailed specifications/technical evaluation criteria, the evaluation of offers on equitable basis and in a transparent manner would not be possible and would rather be prone to subjectivity in the decision-making. In one of the cases of hiring of coolers, the requirement was bifurcated into two categories viz new cooler and as good as new coolers. Neither the quantitative requirement of each category of coolers nor the specifications had been indicated for the category of as good as new coolers. Thus

the description given was quite vague and susceptible to manipulation as it gave full leverage to the bidders to supply coolers of any vintage. The detailed generic technical specifications including performance parameters and the technical evaluation criteria, if any need to be specified in the bidding documents in unequivocal terms. The exemptions/reservation of a particular item which normally apply to SSI units are not being specified in the tender notice / bid documents. The applicable purchase preference to public sector enterprises as per the guidelines circulated by Department of Public Enterprises is also not being incorporated in the bid documents leading to lot of complaints from SSI/PSU. The Government instructions on reservation of items and price preference to SSI Units and purchase preference to PSUs need to be incorporated in bid documents. It has been noticed that some tenderers offer conditional discounts for coverage within a shorter period, for early inspection/ payment etc. and, such discounts are being considered, at the time of evaluation of tenders by the organisations. It needs to be ensured that the evaluation of tenders should not be based on such conditional discounts and suitable clause should be included in the bidding documents. E-Procurement for Government: Opportunities and Challenges Introduction The advent of the Internet, digital connectivity, the explosion and use of e-commerce and e-business models in the private sector are pressuring the public sector to rethink hierarchical, bureaucratic organizational models. Customers, citizens and businesses are faced every day with new innovative e-business and e-commerce models implemented by the private sector and made possible by ICT ( Information and Communication Technologies) tools and applications, are requiring the same from governmental organizations. Citizens are referred as customers for governments, since governments need to empower rather than serve, to shift from hierarchy to teamwork and participation, to be mission oriented and customer focused, and to focus on prevention rather than cure. Governments worldwide are faced with the challenge of transformation and the need to modernize administrative practices and management systems. Recently, the public sector has began to recognize the potential opportunities offered by ICT and e-business models to fit with citizens demands, to offer better services to citizens and to increase efficiency by streamlining internal processes. ICT causes a paradigm shift introducing the age of network intelligence, reinventing businesses, governments and individuals. Paradigm shifts prevail in the public sector too. The traditional bureaucratic paradigm, characterized by internal productive efficiency, functional rationality, departmentalization, hierarchical control and rule-based management is being replaced by competitive, knowledge based economy requirements, such as: flexibility, network organization, vertical/horizontal integration, innovative entrepreneurship, organization learning, speed up in service delivery, and a customer driven strategy towards procurement functions. These new paradigms thrust the shift toward e-Procurement paradigm, which emphasizes coordinated network building, external collaboration and customer services. E-Procurement in Government The e-Procurement process is unique to government. While corporate purchasing has become supplier management and driven by business partnerships, government procurement remains dedicated to leveling the playing field between competitors by use of the sealed competitive bidding and awarding bids to the lowest bidder meeting specification. Government records are open and the prices revealed in the public arena. Thus, under public scrutiny, public purchasers must attempt to conserve the taxpayers money in an open arena. Fortune 500 companies boast of maintaining a key supplier base of 10-15 first and secondary suppliers which is miniscule to what a Government has as registered vendors and many more that bid, but never make it to the vendor list. Given this divergence, a Government has to adopt e-procurement solutions that take into account the above factors. Government must forge its own model of e-procurement and, by doing so, encourage the competition so heartily sought. The deluge of requests via the Internet from companies seeking to compete will have to be managed. Government must create a model that pays for itself, thus maximizing the taxpayer contribution without damaging small and emerging businesses. Government must implement a solution that weaks the procurement cycle without paralyzing other functions. This eprocurement process recommendation should improve the procurement cycle without upsetting the government policies and procedures necessary to the successful governance of the populace and businesses.

Government to Business consists of the electronic interactions between Government agencies and private businesses. It allows e-transaction initiatives such as e-Procurement and the development of an electronic marketplace for government. Companies everywhere are conducting business-to-business e-commerce in order to lower their costs and improve inventory control. The opportunity to conduct online transactions with government reduces red tape and simplifies regulatory processes, therefore helping businesses to become more competitive. The delivery of integrated, single-source public services creates opportunities for businesses and government to partner together for establishing a web presence faster and cheaper. Challenges One of the main challenges for an e-Procurement project is the establishment of an appropriate and context tailored strategy. Every project or initiative needs to be rooted in a very careful, analytical and dynamic strategy. This seems to be a very difficult task, requiring a focus on many aspects and processes, a holistic vision, long-term focus and objectives. Many public institutions limit their activities to a simple transfer of their information and services online without taking into consideration the re-engineering process needed to grasp the full benefits. The government must have a clear strategy to overcome the barriers to change. Part of the strategy is to engage in a rigorous assessment of the current situation, the reality on the ground and the inventory of projects, articulate costs, impacts and benefits of programme as well as continuously monitor and evaluate the project upgrading. Borrowing a lesson from the private sector, e-Procurement must be customer-driven and service oriented. This means that a vision of e-Procurement implies providing greater access to information as well as better, more equal services and procedures for public and businesses. In a typical large PSU and Government, procurement runs into hundreds of crores and complexity is inherent in the procurement process. What is required to be procured is wholly dependent on the nature of its business, and therefore varies from enterprise to enterprise. In todays scenario, adopting an effective cost saving mechanism is integral to any companys continued existence. Companies across different sectors of industry have been trying to simplify this extremely crucial aspect of their business, in extracting optimal quality, and timely, speedy transactions at the minimum possible cost. Another important aspect that the Government and PSUs need to look into is driving organizational compliance with negotiated contracts. This would enable Governments to keep and sustain their savings. Opportunity E-procurement, a new avenue for buying direct and indirect goods and services, is an effective procurement system, making waves in purchasing circles. The service provider plays a crucial role in offering sourcing and procuring solutions that satisfy customer needs and provide ample value addition to the service provided. In the past, traditional methods of procurement offered little transparency and lesser satisfaction of negotiation with suppliers. E-procurement offers the benefits of greater transparency, wider geographical reach and lesser time of transaction and better pricing. Also sustained savings can be achieved through automated, easy-to-use purchasing, invoice management, and supplier enablement capabilities. E Procurement Solution would help Government capture and settle all spend and readily obtain global user and supplier adoption. This improves process efficiency, increases compliance, and garners sustainable savings across the enterprise. All said and done, is this a trend that is catching up in the Indian scenario or would it also face the same fate as the dotcom with not much of response after a couple of years? Unlike the dotcom boom, e-Procurement has a compelling business proposition, which is cost savings and this affects the bottom line directly. Hence it is a sustainable business model and the trend is expected to be on the rise in the future. Trend is catching up within the industry as requirements for transparency, be it in the Government or the PSU sector, are catching up. But the flip side to it is that if it has to sustain itself, it not only has to have enough to pamper the existing clientele, but newer additions of products and an expansion of supplier base would need to be carried out. There is no point in expecting higher revenues every year from the same existing lines of business or the panel. They have to diversify and bring in newer products as also larger number of clients. Also contract compliances have to be ensured. Conclusions What the Government needs to do

For a successful implementation of an e-Procurement initiative the government must ensure that the following parameters are taken care of, in the solution which they intend to implement: 1. Analyze Accurate, thorough analysis provides: Spend visibility: Businesses know which suppliers are used for the most spend and what departments generate demand across all spend categories. Opportunity identification: Companies can readily determine key areas for spend improvement and supplier management to fully understand total cost of ownership. Spend and supplier management strategy: Comprehensive data on supply-side market microeconomics, supplier performance, and contract compliance enables companies to develop a cohesive, effective strategy. 2.Source Efficient, in-depth sourcing provides: Supplier management: Knowledge about existing supplier performance and complianceand access to qualified new suppliersallows companies to drive spend towards the best suppliers. Spend leverage: Businesses can actively source most or all of their spend to improve spend practices and negotiate better deals Win-win contract collaboration: Detailed information exchange enhances relationships between buyers and suppliers; buyers can assess supplier bids on multiple attributes in addition to price. 3. Contract Effective contracting delivers: Centralized contract management: Creating a central repository for all enterprise contracts gives even large, fragmented companies better spend visibility and the chance to aggregate spend across divisions. Improved compliance: A centralized, accessible location for all contracts and catalogs along with rapid workflow and approval capabilities enhance both end user and supplier compliance. Higher accuracy and control: Electronic support of contractual terms reduces errors and ensures that negotiated pricing, discounts, and terms are delivered. 4. Procure Efficient procurement provides: Streamlined purchasing: Automating procurement enables companies to eliminate paper driven processes and expedite workflow and approvals for all purchases. Better supplier access and communication: Online access to a large pool of global suppliers allows businesses to locate and effectively interact with the suppliers best qualified to meet their needs. High end-user and supplier compliance: Automated requisition and purchase order management capabilities for all participants and commodities increase enterprise-wide compliance and boost savings. 5. Settle Effective settlement offers companies: Shorter cycle times and fewer errors: Automating invoice creation, submission, and reconciliation improves speed and accuracy and minimizes problems. Early payment discounts: Faster bill settlement through accurate invoicing procedures allows businesses to qualify for extra savings from early payment discounts.

 Improved buyer-supplier relationships: Fewer invoicing disputes and rapid, correct payments improve cash flows and enhance relationships between buyers and suppliers. How Ariba can help the Government Ariba is the worlds leading Spend Management organization providing technology and consulting services to reduce, control and manage enterprise wide spend and improve profitability. Ariba is a NASDAQ listed, global organization working with more than 500 large corporate and Governments (including more than 50 of the fortune 100 organizations ) in 22 countries. Ariba works with different state governments in USA, like California, North Carolina, Virginia, Florida, Washington DC to name a few. North Carolina, which received the best e-governance state award runs on Ariba solutions. Integrated Ariba Spend Management solutions provide world-class tools and technology for businesses to engage, manage, and leverage Enterprise Spend Management (ESM) throughout the spend lifecycle. Ariba Solutions Delivery can give the Government a single point of connection to the expertise required to leverage and extend their ESM successes. Rapid time to value and quantifiable results that enable dramatic spend reductions are key success that a partnership with Ariba can achieve. Only through Ariba Spend Management can companies fully integrate their analysis, sourcing, and procurement processes with any legacy system into a cohesive solution that works backwards and forwards across the enterprise. Buyers and suppliers are empowered to transact globally in a participative way that delivers true value. To truly manage spend, sourcing, procurement, and financial, Government needs solutions that give them Government-wide spend visibility and closed-loop processescapabilities that Ariba Spend Management delivers. E-Procurement Reality Check Introduction Towards the end of 1999, many were predicting a massive swell in demand for B2B solutions in 2000, but all predictions were somewhat humbled as the world waited to see if all the computer systems would survive the Y2K bug and therefore, retain their faith in the promise of the digital age. The Year 2000 arrived without a hitch and this left many business managers wondering whether the money they had spent had been necessary at all. This scepticism was shared by none other than Tito Mboweni, who turned on the old banking system just to satisfy his curiosity and discovered that it was still working fine. This fingering uncertainty should have heralded a new era of business, as opposed to IT, led business systems projects. Supposedly the business cases would be harder scrutinised, the ROIs measured and heads rolled should the ROIs not be met. Sadly, it appears that in the mad rush to find work for the Y2K inflated IT departments, eCommercc has become the thing all businesses should be doing, just as they all did ERP. The question that does not appear to be being answered in the mad rush to do eCommerce though is whether the eCommerce intervention is in support of the businesses strategic objectives, or whether the organisation intends to change its strategic objectives in order to do eCommerce? As this forum provides only a limited opportunity to address the impact across the organisation as a whole (Buy-side, Sell-side and In-side) this paper will look only a the Buy-side implications of eCommerce, what is often referred to as eProcurement. Unlike the eProcurement systems however, this paper will address the entire Procure to Pay cycle within the paper itself and will not require any partnering or outsourcing!

It is a fundamental belief that technology decisions should be taken in line with the business processes they are intended to support and that business processes should only exist to take the oranisation closer to its strategic objectives. Any process that is not in support of the organisations srategy should be removed or re-engineered. This being said it is therefore important to understand at the outset what the business issues are behind the opportunity that is eProcurement. What are the business drivers behin procurement? Organisational procurement differs widely from consumer procurement. Keynes Supply and Demand Curves illustrates one of the core differences in Figure I. Figure 1: Keynes Supply And Demand Curves

To summarise briefly, the graph assumes there are two distinct drivers in supply and demand: Price and Quantity. The theory states that the higher the price is for an item, the lower the Demand will be for that item, yet the greater the incentive to suppliers to Supply the item. Conversely, the lower the pace for an item the greater the demand will be for the item, yet there will be less supply of the item, due to its low price. Generally, and this is where capitalists depart from socialists, the market will determine what the equilibrium (e) price (p1) and quantity (q1) is for an item. Due to this dynamic, the suppliers in the consumer market place tend to focus more on Supply than Demand, carrying out market research to determine what the wants are in the market place and delivering products to satisfy those wants and using marketing strategies to increase the amount of want there is for their products. In the Business to Consumer (B2C) market therefore. Supply leads Demand. In the B2B market, the buying organisation determines what its needs are on the basis of the type of goods or services it manufactures or delivers and demands these items from the supplier base. Because it is very difficult for suppliers to predict what the buyers requirements are going to be, unless they are in a strategic partnership, most B2B suppliers produce on the basis of what has been demanded by the buyers. It therefore follows that in B2B, Demand leads Supply. This is a critical differentiator as it means that in B2B the buyer has more power than in B2C, as, in B2B, the buyer buys only what he needs, while in B2C the buyer buys what he wants. The desire shifts the balance of power. When considering eB2B this is a crucial dynamic to understand. It is the reason why so many eB2C players failed to make the transition to eB2B and is behind the reasons why eProcurement is so far failing to meet the customers expectations.

Many of todays eB2B solutions are based on the eB2C model of displaying a large number of catalogue items detailing the product range of a group of suppliers and having the buyers surf the site. The key problem this creates is that this model is useful when the buyer has determined the need, but is not sure how to fulfil it: (I need a shirt, but I dont know which one I want). Browsing, both in the physical and virtual sense, helps the buyer arrive at a buying decision. In the organisation though the buyer has a limited degree of choice around how best to meet a need and very seldom is this based on the wants of the buyer, but more often the needs of the organisation. As the want is therefore predefined, there is no need to browse. The buyer will just select against a predetermined list of what he is allowed to buy. Few of todays eB2B solutions operate in relation to these drivers. What is the business issue that e-procurement seeks to address? Organisational procurement has three distinct phases as shown in Figure 2. Figure 2: The Components of Procurement

Sourcing is about establishing the best possible arrangements for the supply of bought in goods and services. The primary objective of sourcing is to find items of the best quality, at the best price, from suppliers who consistently supply correctly (right time right place). Once that has been accomplished the people in the organisation that need these items can then buy off the supply contracts (on-contract) that have been negotiated. Finally, the organisation must pay for the items.

Number of Transactions / Number of Suppliers Organisational spend will typically match the profile in Figure 3. Figure 3: Organisational Spend Profile Trade Wins Supply Chain Solutions (Pty) Ltd. Figure 4: Typical Organisational Buying Process Trade Wins Supply Chain Solutions (Pty) Ltd.

Many organisations today have realised that approximately 80% of the procurement effort is committed to only 20% of the procurement value and that this procurement represents goods and services that are not strategic to the organisations core business. Additionally, as this spend is consumption and not production driven, it needs to be managed very lightly in order to ensure that the organisations expense objectives are met. This usually results in a process somewhat like the one in Figure 4. KPMG did a study on behalf of VISA and the typical activity based cost for this process is about R350. See hltp://www.visa.com/pd/comm/intl/purchasing.html. Considering that one may be placing orders for lower than this amount, many organisations have seen this as a means to reduce costs to the organisation. Inherent in this process however is the fact that it is cumbersome. As a result of this many buyers in the organisation will by-pass the process in order to have their needs met quicker. This off-contract buying is referred to as maverick buying. The implications of this are two-fold: 1. Research has shown that when bought off-contract, items on average cost 30% more than the contracted price arranged by the procurement department; and 2. The contracted price would have been negotiated on the basis of a commitment of procurement volume. By buying off-contract the organisation will not meet its volume commitments and will be prejudiced when negotiating the next time. More recently suppliers have opted to go for volume rebates to ensure maverick buying does not expose them, but this is cumbersome both for the supplier and buyer. One of the other issues that arise is that due to the complicated nature of the process, many organisations seed the buying responsibility to the sourcing staff. This leads to the trained sourcing staff spending more time on the nonvalue adding activity of buying and less time on the value adding activity of sourcing. This increase in workload often results in the suppliers taking advantage of the distraction and sneaking up their prices. The final business issue relates to the organisations buying power. Many larger corporations do not have a complete picture of how much they buy from a particular supplier. In many cases the different business units in the organisation are buying from the same supplier at different prices. Organisations therefore need to be able to have a complete picture of everything they buy from which suppliers, across the organisation. In summary therefore it can be said that eProcurement seeks to target an organisations Low Value / High Volume spend, to reduce process costs, eliminate maverick spend, to allow the main buyers to focus on sourcing and to increase the organisations buying power. What do today's e-procurement systems offer?

The current eProcuremcnt systems target two key areas. The first of these is the buying process and the other is sourcing. Buying Process The diagram in Figure 5 details which areas of the buying process are accommodated in eB2B systems.

Figure 5: Scope Of Present Day eProcurement Systems Trade Wins Supply Chain Solutions (Pty) Lid The main target in the buying element of eProcurement is process inefficiency. Often the organisation has complicated authorisation routines, based on order value, budget and the commodity that is being bought. As these checks and balances tend to be binary, that is, they can only be Yes or No, they lend themselves to computer intervention, as this is how computers think. Theoretically, the computer will always be there loo, not in a meeting or on leave and therefore if the requisition meets with agreed criteria then the order should be created immediately. More than that though, it can route the requisition through the process, eliminating the need for the requisitioner to chase around a building to get a requisition signed off. Coupled with emerging technologies like WAP and SMS, the lapsed time on authorising a requisition can be decreased dramatically. Typically though, the role players in the process remain the same as does the cycle tune of the process. The reason for this is that the controls that are in place cannot he abandoned. Yes. the computer system can route the requisition for approval, but the approver needs to apply just as much time to the approval as he did before. This makes process cost reduction very difficult, as 80% of the costs relate to the role players and their responsibilities and only 20% to the interaction costs, the area where costs are saved. Reducing the process cost is complicated further by the ENID Factor. The ENID FActor postulates that every organisation has a little old lady called Enid who does many of the repetitive tasks associated with this type of process. Ultimately, while one can reduce the activity-based cost of a particular process by removing Enid this cost saving is only passed to the bottom line if Enid is fired. This is not so easy in present day South Africa. More to the point though practically. It is very difficult to reduce this process to such an extent as to free up an entire resource. This is because, as stated the role players stay the same. While certain efficiencies can be created, saving 10% from ten peoples work load does not add up to 100%. just as getting nine women pregnant at the same time will not result in a baby a month for nine months. The other challenge is that the eProcurement systems target a limited area of the Purchase to Pay cycle. The R350 referred to ny KPMG relates to the entire defined process in Figure 4. This decreases therefore the overall capacity of the e Procurement systems to deliver effective savings.

Sourcing Exchanges address the sourcing issue. An exchange is an electronic repository of supplier information including supplier master details such as name, address, nature, etc. and supplier product details. The idea is that, when linked to the buying process computer system, the exchange will deliver up to the buyer the range of products that the buyer is allowed to purchase. This begs the question as to why then the buyer needs authorisation for the transaction? The way in which an exchange achieves this is detailed in Figure 6.

Suppliers will load an electronic version of their catalogue onto the exchange. This usually requires the intervention of a specialised organisation, such as Logtech or Starnode, that will charge the supplier for the service. This is currently between R8 and R15 a line item. This may sound like a lot, but to produce a printed catalogue of high quality currently costs about the same and is outdated very quickly. The exchange operator will generally come to some arrangement with the supplier over maintenance. The exchange operator will then set up individual catalogues for each buying organisation, with its range of suppliers and contract arrangements. In most cases a duplicate copy of this information is stored at the buying organisation to improve system response times. It is important to note that the structure of the exchange makes it highly unlikely that one particular buying organisation could become privy to the buying information of another organisation. The exchanges, while they seem impressive, only exist because the buying process computer systems require them 10 exist. It is somewhat of a self-fulfilling prophecy. Theoretically, if an alternative system were proposed, such as the suppliers providing the catalogue information to the buyer directly, the exchange would have little reason to exist. While there is a justifiable set-up charge for the creation of the catalogues, the exchanges provide little additional, or sustainable value. As they all currently charge some form of ongoing transaction fee the question that must be asked is what are they doing for their transaction fee? The exchange operators claim to offer two sustainable value-adders: vendor searching and auctions. Vendor searching is compelling for a buyer as it enables them t0 quickly find a list of suppliers for a particular product. The problem lies in the fact that this functionality does not come as standard with the buying system. Remember, the buyer can only access his own catalogue directly. Additionally, while useful, it is difficult to attach a great deal of value to this service, as most good buyers know the best suppliers through those suppliers marketing efforts or have access to industry supplier lists, most of which they receive free. Reverse auctioning is an area receiving a great deal of attention and an entire presentation could be done on this issue alone. The short answer is that most industry experts, apart from the ones working for the vendors, are somewhat sceptical about the benefits of this functionality. It is important to remember that price is only one element of concern to the buyer. Total cost of ownership (TCO) goes further and it is TCO what concerns the buyer. Reverse auctioning can also create resentment in the supplier community and is not conducive to strong supplier relationships. While this is not so important for non-strategic procurement, one must remember that an auction will only provide the buyer with the best possible price available on that particular day. The vagaries of supply and demand will result in differing prices based on time of day, week, month and year and a variety of other factors. Other issues include the fact that large supplier may continually under-price in order to drive out smaller competitors, ultimately creating a reduced supplier base and higher prices in the long term. It is interesting to note that recent research carried out by the Chartered Institute of Purchasing and Supply in the UK found that in 60% of the cases the incumbent supplier won the auction. Does this mean that the buyer was paying too much for the item in the first place, or does it mean that the bigger suppliers are shaking out the smaller suppliers? This is unknown. Finally, it is sobering to also remember that in a reverse auction the price can also go up!

Figure 7: Expected Benefits of eMarketplace Participation Forrester In June 2000 Forrester published research on what companies were expecting to achieve from eMarketplace participation. That research is detailed in Figure 7. What is interesting to note is that 65% of these benefits can be ahieved through the implementation of a Strategic Procurement Policy the adherence to procurement best practices. This does not necessarily imply the implementation of any new Technology.

THE VISION OF THE eB2B VENDORS Figure 8: The Vision Of The eB2B Vendors

All the eB2B vendors are aiming for a situation in which their systems can address all the areas in Figure 8 for the Procure to Pay process, but the reality is that they are all a long way from that. Many issues still need to be addressed, some legislative and some from restrictions placed on them by other industries. On the legislative front, government still has a way to go on creating the necessary legal frameworks for eB2B. An emailed purchase order is still not a legal document, exposing the supplier to fraud. The VAT regulations to do not accommodate electronic invoices or self-billing. The eB2B vendors are also hampered by the controls on the banking system limiting their ability to close out the process and so are heavily reliant on the banks. The question that naturally follows is whether there is a system available today which goes further to addressing this issue? THE PURCHASING CARD (PCARD) The PCard has the following pre-requisites: 1. The buying organisation needs to first go through a supplier rationalisation process to reduce the number of suppliers it has. 2. Each of the suppliers must then be enabled 10 accept the PCard. This involves the implementation of specific software at the supplier and the agreement on the suppliers part to pay a merchant fee to the bank. This is usually

between 3.5% and 8%. 3. The buying organisation needs to inform the bank about which employees will be using the PCard what they can buy and what value. 4. The bank needs to issue the PCards to the buyers. The bank does not necessarily supply a physical card. Just the card number will suffice. 5. The buying organisation needs to buy a particular piece of software proprietary to the PCard system. Figure 9: PCard Process Trade Wins Supply Chain Solutions (Pty) Ltd. Once the above has been done the PCard works in the following way: 1. The buyer will phone, fax or email a Purchase Order to the supplier, along with the PCard number. 2. The supplier uses the Point of Sale (POS) software to connect to the bank to obtain authorisation for the transaction.

3. The bank will check that the user of the card is allowed to purchase from that merchant and whether the amounts are within the tolerances set by the buying organisation. 4. If approved, the supplier will then deliver the goods. 5. Once the supplier has delivered and as long as he has a signed delivery note, he then captures the line item detail of the transaction into the POS software and sends it through to the bank. 6. Four days later, the bank will settle the supplier directly into his bank account. 7. At month end, the bank consolidates all the transactions and sends an electronic statement to the buying organisation. 8. The buying organisation uses the proprietary software to break the information down for analysis and distribution to the PCard holders. The buying organisation has seven days in which to repudiate any transactions. 9. On the seventh day the amount is direct debited from the buying organisations bank account. There are the following benefits to the supplier: 1. While the supplier is effectively exchanging his settlement terms with the buyer with a merchant fee to the bank effectively a 3.5% / 4 day settlement term, what he does get is assured payment. Most suppliers are more concerned with being paid within the terms agreed than with the terms themselves. 2. He does not need to send an invoice. The statement from the bank is currently before the Receiver to attain

certification as VAT evidence. 3. A locked in relationship with the buyer. 4. Reduced collections costs. Collections costs can be as high as R80 per invoice - R40 per invoice on average. There are the following benefits to the buyer: 1. consolidated billing. This reduces the payables cost of the organisation. 2. Empowerment of staff. Instead of checking every purchase the buyer is free to transact within predefined limits and only the exceptions are managed. 3. All the benefits of strategic purchasing... reduced maverick spend, greater negotiating power, improved supplier relations, etc. 4. Actual reduced process cost as whole role players are removed. 5. Better management information. There are however limitations to the PCards use. The two charts in Figures 10 and 11 illustrate this. Assuming the buyer currently enjoys a settlement term of 60 days from statement, the supplier will have been financing the buyer for this period. The supplier is now paid within four days of delivery, although he pays for this in the form of a merchant fee. Figure 10: PCard Impact On Buyer NWC (1) Trade Wins Supply Chain Solutions (Pty) Ltd. The buyer sees his settlement term reduce from 60 days to seven days. This should theoretically be accommodated by the process cost savings he enjoys, but to what level?

At some point the impact on his net working capital is going to exceed his process cost savings. The chart in Figure 11 illustratrates this.

Figure 11: PCard Impact On Buyer NWC (2) Trade Wins Supply Chain Solutions (Pty) Ltd. Note: The gradient of the Impact line is a function of the Average Accounts Payable (AAP). The higher the AAP the steeper the line and therefore the lower the transaction value at which the benefit is lost. While this does not negate the use of the PCard it illustrates the importance of understanding what the process cost savings are likely to be and at what point the PCard ceases to provide benefit. Sadly, if the banks had enough vision they might realise that by re-pricing the product and adding certain key functionality, not major changes, then the PCard would be a powerful procurement tool for an organisations entire

spend and it would compete even more effectively with the eProcurerncnt vendors. In Conclusion It is essential that any organisation that is interested in eCommerce gains a deep and extensive understanding of what the impact is likely to be on the organisation. The only way to do this is for the organisation to be in touch with its strategy and thereby have clear goals and objectives of what it intends to achieve. When looking at eProcurement the organisation must begin by firstly ensuring it understands what its strategic objectives are in relation to procurement, how procurement aligns with and supports its wider corporate strategy and that its procurement processes are already world class and in line with international best practices. Once it has achieved this then it is in a position to seek out technology solutions to enable those business processes. It could literally save the organisation millions of Rands. Transparency in public dealing through e-ERA Introduction The days have gone when only a few office staff used to monopolize in the access of information and, in fact, executives were to depend on them for getting relevant information and thereby it was question mark on transparency in such dealings. Information and knowledge revolution in the coming decade are going to change the life of every individual and working of every business enterprise, small or big. Internet is driving this revolution at an exhilarating pace. Internet has the power to deliver information in any form be it words, figures, pictures, voice, etc. anywhere anytime instantaneously at a cost which is ultimately getting reduced. The Internet has brought about a lot of changes in business, economics, information and entertainment. Also transfer of information has no geographical and time barrier. Virtually all the manufacturers, suppliers, distributors, customers all across the world are now connected to each other through World Wide Web (WWW). Activities and transactions related to buying, selling, etc. can now be brought under the realm of internet. The pressure on each business enterprise now is to plan transformation to e-com paradigm, to what extent, in how many stages and at what speed. In the Internet based system, not only transparency can be ensured but everything is also on record. As Central Government Departments and Public Sector Enterprises are basically spending public money in the area of purchase, contracting, etc. it is, therefore, the right of the public to have access to the information desired by them. Therefore transparency is desirable at a place of public use. In this e-information era, public has now realized their right to access for information and like to have correct and complete information as per their need. Public is also aware of the latest information through publications, newspaper, news channels, Internet and now can easily approach rightfully for access of any such information. The main areas where computerization has taken place and transparency is being ensured are discussed as under: 1.0 Mass contact area: In the area of train reservation, where computerization was done in a bigger way, getting berths availability became so easy that public started planning their journey in advance. Such transparent style of functioning of Reservation Offices has brought the name and fame to the Railway. Computerization not only results in efficient error free functioning of organizational set up but also neatness and repetitive nature of information can be taken easily in a transparent manner. Computerization of Current Booking Offices has also resulted in the transparency in public dealing. On Railways efforts are already started to computerize the other offices, which ultimately will result in the increase of efficiency multifold and transparency in dealing with public can be ensured. Installation of Coupon Validating Machine (CVM), Platform Ticket Machines and Ticket Vending Machines on major suburban stations in Mumbai are becoming popular in public use due to their efficient functioning and thereby adding to transparency in the system. 2.0 Purchasing: Expenditure on purchase of materials on Indian Railways needed for operation, maintenance and product, etc. is of the magnitude as Rs.11,000 crores. Accordingly it is important to ensure transparency in all facets of procurement activities while dealing with the public. The zonal Railways and production units now have their website on materials management for easy access by their users including suppliers, purchasers and the indenters. Pilot project on computerization of Materials Management functions on Central Railway is already implemented covering all the

modules. 2.1 Materials Management Information System (MMIS) - With the Introduction of MMIS, procurement functions have been fully computerized and it has resulted into value addition with regards to the transparency and efficiency at various level of its dealing. The MMIS is consisted of five function modules viz. Purchase module, Depot module, Finance, Uniform module and Sales & Auction module. With all these modules in place, the Materials Management activities are now being done effectively and in transparent manner. Monitoring of purchase cases where the procurement action getting delayed are very effectively done by way of review at various levels. 2.2 Negotiation only with L1 - In some of the central govt. depts. it was a system if there are several manufacturers participating in open tender, counter offer would be given and the quantity would be rationalized over several vendors in proportion to the competitiveness of their bid. This rationalizing method adopted by govt. dept. was defective, as L1 would not get everything, which is due to him. CVC issued the order to negotiation only with L1 in Nov. 1998.Effective implementation of the policy to negotiate only with L1 ensured no hanky panky and brought transparency in procurement process. 2.3 Advertised tender notice on website - CVC in their circular No.98/ORD/1 dt. 18.12.03 for the use of website has advised that the Central Government departments/organizations would ensure effective implementation of instructions on use of website for putting all the advertisement tender notices on website. On various issues pointed out by various Govt./PSU Organisations, CVC has communicated clarifications for effective implementation of the instructions are as under: (i) On size of tender documents it was advised for putting tender document on website in addition to whatever methods are being presently used. (ii) On issues connected with data security, legality and authenticity of bid documents it was advised to use provisions of digital signatures through certifying authority. There are sufficient legal provisions under IT act to ensure use of website for e-business. (iii) Some organizations have sought clarification whether website is also to be used for proprietary items or items which are sourced from OEMs it was clarified that these instructions are applicable for open tender system only and not for such cases of PAC, etc. (iv) Do the instructions regarding short term tenders given in the CVC Order No.98/ORD/1 dated 11.2.2004 apply to Limited Tenders also? This was confirmed in affirmative as it does not involve any additional time or cost. (v) Implication of CVCs instructions on Procurement/execution of work through a system of approved/registered vendors. It was advised that wide publicity through website be given for registration, pre-qualification, criteria, etc. Any denial to suppliers would lead to presumption of malafide intentions on the part of tendering authority as covered vide CVCs letter No.98/ORD/1 dt. 2.7.04. 2.4 Pre-qualification, performance, evaluation criterion - CVC in their office order No.44/9/03 dt. 4.9.03 have advised that it should be ensured that pre-qualification criteria, performance criteria and evaluation criteria are incorporated in the bid documents in clear and unambiguous terms as these criterion are very important to evaluate bids in a transparent manner. Whenever required, the departments/organizations should follow two-bid system, i.e. technical bid and price bid. The price bids should be opened only of those vendors who were technically qualified by the department/organization. It was also advised that the department/organization may issue necessary guidelines in this regard for future tenders. 2.5 Payment to suppliers through ECS As Railways is placing purchase orders/works contract for supply of materials/execution of work therefore the payment to the suppliers/contractors after they submit their bills is required to be done in a efficient and transparent manner. In terms of CVCs directives, initiatives have already been taken for making payments through ECS to all such firms who will like to avail this facility. 2.6 Single window system The system has been introduced on Central Railway to facilitate quick registration of non-stock demand as well as further status of procurement action of such demand to the indenter. It also takes care of the redressal of complaints from firms regarding extension of delivery period and other post-contract activities so that the firms representative can have desired information from single window. 3.0 Scrap disposal:

In the area of scrap disposal lot of initiatives have been taken for computerizing the scrap disposal function as scrap sales and auction module is integral part of Materials Management Information System. As about 90% of the revenue earning on account of scrap disposal is through disposal of P.Way scrap materials, efforts are therefore on to computerize accountal of P.Way materials so that efficiency and transparency in disposal of such P.Way scrap can be ensured as per directives of Railway Board. Electronic weigh bridges have been installed in the depots/scrap yards for correct weighment so as to avoid complaints on this account from the purchasers. 4.0 Acceptance of gifts by Government Servants : In the CVCs directives received it has been communicated that the Conduct Rules provide that no government servant shall accept or permit any member of the family or any other person acting on his behalf to accept any gift except on occasions like weddings, anniversaries or religious functions. The gifts are to be provided only to promote commercial/business interests and need not therefore be sent to government officials who are only doing their duty. Strict compliance of these directives will definitely bring transparency in the system. 5.0 Transparency within the departments: Transparency within the department means making information available as per the desire of employee whatever he needs. In post-computer days, getting to know PF balances by the staff, particularly group D staff was difficult and they cannot properly plan for PF withdrawals whenever needed and they were to depend on information from HQ office only. After computerization of this activity staff can have access to such information from their respective divisional Accounts office. Adding to further transparency in dealing with PF matters, Accounts dept. has issued PF passbooks to all the employees and it is getting updated regularly. Similarly implementation of 5th Pay Commission, payment of arrears and pay fixation, etc. could be possible in an efficient manner due to computerization of such activities. Computerization of salary function has resulted into the salary getting transferred through ECS on the last working day of the month to all such employees who are availing this facility. 5.1 Vacancy status- Many Public Sector Organisations are advertising the vacancy position against which Govt. officials can apply for their selection on deputation. These vacancy positions are available on website through which the performa of application is in downloadable form. Due to this aspiring officials have assess to such information and can submit their applications well in time as against in older system such circulars were reaching to offices after expiry of due date. This has really brought transparency in the system CVC is the body that formulates the policies for the purchase and Materials Management of PSUs. It is also responsible for the control of graft and corruption in the public buying function. Conclusion: Transparency in handling any commercial function of the Govt. dept. is basically providing fairer systems and efficient and practical structures. The guiding principles of ethics should be behaving with integrity all the times, it would mean honesty with fair dealing, striving for objectivity with regard to all considerations relevant for the task and showing proper regards for technical and professional standards. From time to time CVC issues guidelines to Central Govt. depts. to adopt them which not only help them in maintaining internal standards but projecting right image. The common unethical practice can be showing undue favour, personal preferences, arbitrary selection of suppliers, etc. Basic principle of all government departments therefore should be that it must be publicly seen beyond reproach. To this end officers and managers need to do their duties in a manner, which ensures that they maintain a reputation for fair unbiased dealing with all suppliers. Vigilance Directorate of Railway Board, zonal Vigilance dept. of zonal Railways are issuing Vigilance Bulletin periodically bringing out DOs & DONTs, case studies of various departments and other related information for guidance of Railwaymen specially supervisors to eradicate corruption and bring out transparency in the public dealing.

Online Purchaseing-Reverse Auction Reverse Auction is a tool available for the procurement in improving its function as well as its effectiveness. It can be defined as specialized auction that allows the organization to procure goods from the sources by featuring decreasing incremental bidding.

In other words it is exactly opposite to the common auction that we see against which the goods are sold. It is a process, reverse to the common auction (forward auction) and as such it is called as reverse auction. In the reverse auction, the buyer lists down the items that he wishes to buy. He also decides the exact specifications for these items along with his requirements & terms & conditions, & the same is called as RFQs. These details Arun S Banavali, are given to the sellers who understand the buyers requirement, agrees tor his terms and conditions including the Dy. Gen. Manager Ltd. specifications. Once this process is over, the bidding for these items on the agreed terms and conditions, start and the lowest bidder here wins the order. In the process of reverse auction the common terminology used are RFQ i.e. Request For Quotation, the Reserve price i.e. price per unit that a buyer would like to buy or is ready to buy and Decremented value which is nothing but minimum price differential between one bid to the other, are the common factors or definitions used. There are Open and Closed reverse auctions. Means if the auction is limited to restricted approved supplier, means closed reverse auction and if it is open to any of the seller it will be an, open reverse auction. In this reverse auction ,for the Purchase Manager ,the common questions that come in the mind are: 1. How is this reverse auction different from common auction? 2. Can this be used a cost reduction tool. 3. Is it time saving process? 4. What are the security concerns? 5. What are their weaknesses? 6. Is it a complete solution? 7. Is it effective? 8. What are its other benefits? 9. What are the precautions that we need to take? 10. Can this be applied for all purchases? Various stages like preliminary preparation, conducting auction, past auction activities and monitoring the purchase orders are common main features of this reverse auction. When we conduct reverse auction suppliers/bidders need to be given a code name. As this reverse auction is new, the bidders need to be explained how the complete process and their role to be played. The bidders also need to be encouraged. We need to be in constant touch with these bidders to get the feedback as what is in their mind (what is cooking behind the seen) during this reverse auction process. The reverse auction can be done by buyer with his own IT arrangement or he needs to take the readymade services available from the market for such operations. During the bidding process, there is live display of the bids with suppliers with identified code. It is made possible for participating supplier, having their own passwords for giving his bids only. The bidding time is fixed. However, as per the terms laid down in the reverse auction, bidding time can be extended, based on the last bid received, is just 30 seconds before the time of closing. This would enable the other participating bidders chance to think & compete. However clause need to be addressed accordingly in the terms & conditions of bidding documents. At the end of this process the person who has given the lowest bid gets the order. On closing of the bid process, the lowest bid price is registered. The successful bidder signs the price which he has bid, last as winning bid & gives to the buyer and buyer need to place the order on the same supplier. As it is live process, it is very transparent and can be very competitive. So the reverse auction is a cost cutting tool. It cuts down the order process time i.e. Internal Lead time. In addition to the cost cutting, there are other advantages which are seen in the reverse auction. Few of these are : 1. It is transparent process 2. It saves time as it is very fast as the auction is live 3. It gives additional vendor base as in the case of open reverse auction. 4. It is best suited for the standard off shelf items. 5. With its continuous compettiive bidding process, the possibility of getting beter price is always there. However reverse auction also has certain weakness or disadvantages. These need to be studied completely before

going for reverse auction. Reverse auction can not work where there is cartel ling of suppliers.Reverse auction can not work where there is single source as such there is no competition.In the reverse auction process we may loose a good relation that is earned with the suppliers over the years of working with them. Reverse auction is not suitable for tailor made special items. This means reverse auction is not fit for all the items. However, we can effectively select the type of items for reverse auction wherein there is a potential for cost reduction, time reduction in the process and take necessary precautions in making the correct & complete RFQ. In the whole process .correct documentation is must to achieve the advantages of the reverse auction. In India there are many leading companies like Reliance Industries, Marico, Maruti Udyog Ltd, and Telco who have conducted many reverse auctions and obtained lot of success in terms of various factors like cost, time, additional source etc. Purchasing Cards - E-procurement 1. Introduction Organisations view purchasing cards as the payment vehicle of choice for low value transactions. Over the past two years purchasing card spending has grown strongly and the US Government in particular derived significant benefits by mandating the use of purchasing cards. The General Services Administration Program for US Government Departments is the largest in the world (over $15 billion per annum) and provides important pointers to help companies use their cards more effectively. This purchasing card program saved the US Government over $1 billion in its last fiscal year. Going forward, purchasing card spending is expected to double over the next two years, which would equate to a market size of approximately $80billion by the year 2002. The most frequently cited factors driving spending to the purchasing card are the speed and convenience for the end user, reductions in the cost and time associated with purchasing related activities, and the ease of use to acquire goods over the Internet. According to a purchasing card benchmark survey conducted earlier this year by a team of academic researchers, the average saving per purchase transaction with the use of a purchasing card is noted to be $68. This saving can be even greater if Purchasing Card Transaction data is effectively integrated with business accounting and financial systems. This paper highlights the experience of BoE Bank and focuses on the importance of data management to the success of purchasing cards. 2. What is the Purchasing Card? The purchasing card was developed to streamline the traditional purchase order and payment process and cut the cost and time of acquiring routine goods and services. These purchases are typically described as MRO, (maintenance, repairs and operational expenses) and include: Office supplies, e.g. furniture, computer equipment, fax and photocopying supplies Stationery Services, e.g. Couriers, Storage, Printing, Security, Hygiene and Cleaning Catering and canteen. Purchasing Cards can also be used for business travel and accommodation expenses, if a business requires consolidated expense management and data. The area where Purchasing Cards are likely to deliver most benefit is when they are effectively integrated with B2B e-commerce systems. The underlying infrastructure of a global payment association like MasterCard ensures that the Purchasing Card operates according to standards and well established regulations govern the acceptance and processing of Purchasing Cards all around the world. 3. Key Features

3.1. Spending controls include: Limits per card and transaction (value and volume) Restricted use for selected supplier categories and even specific suppliers. Zero floor limit, therefore every purchase transaction must be authorised before the purchase can be processed. These controls are flexible and can be applied as strictly or loosely as the buyer requires. 3.2. Purchase details with financial transactions. The card system allows for line item detail such as product description, quantities, price, tax amount and shipping charges to be linked to the financial transaction. This information is normally only available once the buyer receives the invoice. With the Purchasing Card, all purchase details can be linked to the financial transaction and viewed on a daily basis. 3.3. The Bank makes electronic payment directly to the supplier within a 2 to 3 days of the shipment, compared to 45 or more days with debtors accounts. 4. How is the card used? Buyers are assigned a limit and spending profile Orders are placed in the usual way The purchase is charged to the card Purchase details are submitted by the supplier to the bank with the financial transaction The bank pays the supplier within 2 to 3 days The cardholder receives a monthly statement and pays the bank Electronic reports are available for reconciliation While the process is simple, successful implementation is dependent on the extent of procurement and payment re-engineering. Existing purchasing and payment processes for MRO goods and services are often inefficient and costly so the Purchasing Card presents an opportunity to streamline procedures and add convenience, without losing control. As the supplier can now provide purchase details with the card transaction, the card effectively eliminates the need for invoices. The added benefit is that these purchase details (line-item-detail) allow buyers to directly integrate purchase transaction information into their business systems. 5. BENEFITS FOR BUYERS What the Government needs to do 5.1 Reduce cost of purchasing and payment by up to 60%. This is made possible by: Cutting out unnecessary administration and reducing accounts payable to one monthly statement and one payment. Replacing manual processes with electronic ordering, payment, reconciliation and cost allocation - e.g. receiving statements and reports by e-mail and online enables instant information sharing and processing. 5.2 Improve control and accountability: All purchases are authorised electronically With flexible transaction spending limits as well as supplier restrictions, cards can be configured to match the needs and usage profile of each employee and help reinforce purchasing best practices. By not issuing the card plastic the risk of card misuse is far lower (only an account number and related detail is needed for most B2B purchases) Management reports are provided to reconcile transactions, raise queries and resolve discrepancies 5.3 Gain up-to-date purchase data and tax information daily: For expense reconciliation, cost accounting and to integrate with general ledger and accounts payable systems.

5.4 Improve productivity as a result of: A shorter cycle from the purchase to payment and more efficient use of resources Consolidated statements, a single monthly payment and easy refund (credit) procedures which streamline financial administration and accounts payable. 5.5 Strengthen relationships with suppliers The prompt, electronic payment guarantee by the bank, is an incentive for quick and accurate delivery. Both purchases and returns are easily processed and audited using the card data. therefore queries or disputes can be efficiently handled with the banks assistance. 6. Benefits for Suppliers 6.1 Cash flow improves: This is because the bank guarantees payment to the supplier within 2-3 days of the transaction, compared with an average payment period of 45 days or longer and the payment happens electronically. Better cash flow and lower financing costs is of major benefit to small businesses that are often dangerously exposed to cash flow fluctuations and slow payment. 6.2 Much lower administration costs: As the bank guarantees payment in full to the supplier, the cost and effort of collecting on accounts receivable and outstanding debt is virtually eliminated. 6.3 Enhanced customer relationships: Processing purchase orders quickly and efficiently on the card Eliminates disputes, as each transaction will be authorised electronically before fulfilling the order. Providing purchase details (line-item-detail) with the financial transaction, which improves customers payment and reconciliation processes. Opening up the business to any customer who chooses to pay by card and to do business electronically. 6.4 Create new business opportunities Using software provided by the bank or certified vendors, suppliers are able to accept Purchasing Cards as well as other credit and charge cards that are already widely in use. In return for these benefits, the supplier pays the bank a commission, which is a percentage of the transaction value. A simple financial model can quickly demonstrate the cost and benefit of converting debtors (accounts receivables) into Purchasing Card clients. 7.What about E-Commerce and E-Procurement? The purchasing card is the ideal electronic payment method for online business purchases. No purchase is truly an online transaction unless payment takes place online as well. Using the Purchasing Card to pay for e-commerce purchases is probably the most effective way to start doing business electronically. It doesnt require a big investment, or the use of complicated procedures. B2B e-commerce and specifically e-Procurement is an extension of existing business processes using the Internet as a channel. E-Procurement allows for efficient interfaces between trading partners and more effective use of data, it is incomplete without integrated payment processes. By using the Purchasing Card and online payment software, traditional business purchases can be made just as easily online. Regardless of how a purchase is made - on the internet, by phone, fax, e-mail or in person, the Purchasing Card will consolidate all purchasing activity across multiple channels. After all the publicity about B2B e-commerce and. e-marketplaces. we suggest its time to get back to basics and implement best business practices. The use of a purchasing card can play a major role in this by improving efficiencies, controls and management, streamlining processes and improving the bottom-line. 8. Integrating the Purchasing Card

The key to success is integration of data and processes, between the supplier, the Bank and the buyer. To integrate a purchasing card into existing business processes, end-to-end data management is required, from requisition/order/purchase to payment and reconciliation. The purchasing card can be used in the real world (physical in-store), for remote purchases (email/catalogue/telephone orders), and the virtual world (Internet). To integrate the card effectively, systems are required for each scenario. Our goal at BoE Bank is to offer complete and seamless integration from the suppliers back-end system to the final reconciliation by the buyer and success depends on two key issues: a. The payment solution must be generic and open-ended. It would be simply too expensive to develop customised interfaces for specific systems used by suppliers and buyers. b. We cannot do this on our own and must necessarily form partnerships with ERP and e-procurement vendors, and integration specialists. 9. Managing data from Supplier to Buyer By consolidating financial and purchase information, the Purchasing Card allows both suppliers and buyers to provide and manage data in a standard format using commercially available software. Our locally developed solutions are: CPS (card payment software) and i-PayOnline to import data from suppliers SmartLink and browser-based electronic statements for buyers. 10. Supplier Card Acceptance Systems In the B2B market, where telephone, e-mail or taxed orders are likely to be used, merchants are supplied with customised card payment software. This software is a PC based Windows application where payment details with full line-item-detail can be captured and submitted to the Bank. The software can be integrated with suppliers invoicing systems to automate the transfer of data. i-Pay Online is a web-based card processing system, specifically developed by BoE Bank to support the Purchasing card and is typically integrated with an e-procurement system. It is a client/server application hosted by the bank, with two key functions: real-time authorisation of card payments a remote browser-based transaction management system for settlement requests, refunds and capturing of final line-item-detail i-PayOnline meets the business need for online card payments in B2B transactions as an affordable, efficient, secure and trusted solution - based on proven standards and protocols. If purchasing cards are presented for payment of online purchases, invoice detail is captured and submitted to the card-issuing bank. A unique trace number is generated at the time of authorisation that can be used as a key element in the transaction management interface. The transaction administration interface allows the supplier to request payment for authorised transactions, edit line-item-detail, do refunds and enquire about the status of transactions. 11. Technical Details: i-PayOnline is a client/server application with a small plug-in on client side (ASP and COM objects). Digital certificates are used for authentication of the client application and the suppliers. Messages are 128 bit encrypted between the client application and the server at the acquiring bank. i-PayOnline will issue a warning if cards from foreign or unfamiliar banks are used for payment.

12. Providing data to Buyers: The data sent to cardholders includes a number of account management reports, e.g. Declined and Disputed Transactions, which can be used to verify the control parameters for individual cardholders, and to detect possible abuse of the card. Cardholder statements are sent in electronic and paper form to individual cardholders and transaction details are summarised by merchant category e.g. stationary and cleaning services. Statement details can be provided on a weekly basis to reduce month-end administration. Cardholders also have the option to access transaction data sent to the MasterCard reporting system - Smart Data. Reports can be viewed online and downloaded for analysis and cost accounting. In our experience, most corporate clients require the purchase and financial data to be downloaded directly into their ERP or proprietary systems and then use their own reporting tools. MasterCard SmartLink is a customised solution to integrate the rich data available to card holders into SAP R/3. SmartLink streamlines the expense management process and eliminates unnecessary data capturing. Other features and benefits for SAP users are: Invoices from suppliers need not be captured in SAP as the invoice detail is retrieved from the Mastercard Smart Data system and automatically merged into SAP. No goods received note is required. Cost and account allocation can be automated by means of a buyers profile that is set up in Smartlink. An invoice is generated within SAP with full details of the supplier and line items, made payable to the bank, but with blocked for payment status. The cardholders statement is sent electronically by the bank. This data is imported into SmartLink and used to match the transactions on the statement with those on the invoices. Once reconciled, invoices will be released automatically for payment to the bank. 13. Conclusion: The implementation of a Purchasing Card programme, is a low cost way to cut processing costs, simplify procedures and improve controls and management information. These benefits should be enough of a compelling case to use Purchasing Cards, regardless of whether your business uses advanced ERP and/or e-procurement systems. University of Cape Town has implemented the totally integrated Mastercard SmartLink into SAP. Linda Harrower, the University Purchase Administrator is delighted with the product. We are discovering new applications daily, all making procedures and processing so much more hassle free and smoother, and saving vast amounts of time, administration, paperwork and cost.