Is Negotiation a Good Bargain: A Study in Public Procurement in India

Abstract

One of the issues in public procurement is whether the supplier selection process should be based only on competitive bidding (auction) alone or it should use negotiations. Relative efficiency of auction vs negotiation has been studied in economics literature. First price sealed bid auctions (conventional open competitive tenders) have been used successfully in public procurement. The present regulatory frame-work in India identifies negotiation as exception rather than the rule. This paper analyses circumstances in which competitive procedures or auctions work or do not work. The paper further argues that procurement policy of “No Negotiation" does not always produce optimal outcomes. If the procurement is complex and high value, auctions are likely to achieve sub-optimal outcomes. Negotiation with L1 does not help in addressing auction failures and therefore it might be better to ‘Not Negotiate’ at all rather than Negotiating with L1. Multi-stage auctions may provide opportunity to address some of the challenges that regular auctions face. It concludes that Negotiation is an effective tool to achieve allocative efficiencies and there is a strong case of permitting negotiations in high value complex public procurements.