Types of Government Pricing Mechanisms & TendersAbhijeet PrabhuAbhishek NaikAman Mahadeshwar

Anant SharmaAneev KothariApoorva Patil

Kakoli LahaKshitij SarodeSujit Ranmale

Table of Contents Price Control

Control & Support Price Dual & Token Price Need for Price Control Advantages & Disadvantages

Dual Pricing What is dual pricing The Fixed Price The Free Market Price Objective 1: Social Welfare Dual Pricing in India Objective 2: Entering a market

Table of Contents Tendering

Types of Tenders Tendering Process Case Study – Indian Railways (Brake Block Tender)

International Context Government Pricing in the USA Dual Pricing in Spain Fair Price in Canada Tendering Process in UK

Price ControlRestrictions on pricing Goods and Services in the Market

Price Control

Introduction Government can fix the price of the commodity either below the

equilibrium price or above the equilibrium price The equilibrium price of a commodity is determined by the free play of the

forces of demand and supply of the commodity without any intervention of the government

Examples Pharma industry Agriculture

Government Price Control In Agriculture An agricultural subsidy is paid to farmers and agribusinesses to

manage the agricultural industry Governments intervene to support farm prices as they often are

volatile primarily because of weather conditions When a country grows more of a product than it consumes,

supporting the price is more complex and requires a substantial bureaucracy

Legislating a minimum legal price below which a good cannot be sold works. So instead of legislating minimum prices, governments sometimes try to raise prices artificially by limiting production

U.S. approach to price control in agriculture Commodity Credit Corporation (CCC), a government agency in the

U.S., buys any quantity of a product offered by the country's farmers at the guaranteed "support price." That keeps market prices at or near the support price

The CCC disposes of the commodities it buys in ways that will not displace market demand and depress the domestic market price

For example, dairy products are often given away to low-income people, in the school lunch program, and as foreign aid

At harvest the CCC gives grain farmers nine-month loans equal to their production times the support price. The support price is called the "loan rate." The CCC accepts the grain as collateral for the loan

The Oil Embargo

A classic example of how price controls cause shortages was during the Arab oil crisis between October 19, 1973 and March 17, 1974.

Long lines of cars and trucks quickly appeared at retail gas stations in the U.S. and some stations closed because of a shortage of fuel at the low price set by the U.S. Cost of Living Council.

The fixed price was below what the market would otherwise bear and, as a result, the inventory disappeared.

Control & Support Price

Control Price In order to protect the interest of consumers government fixes the

maximum price of the commodity. For examples some goods such as wheat, rice, sugar, kerosene oil etc. have a control price.

Support Price Sometimes, in order to protect the interests of producers especially

farmers government fixes the minimum price of the commodity which has to be paid to the producers. In India low price of food grains such as wheat, rice etc. adversely affects the farmers. They may loose their interest in producing food grains.

Dual & Token Price

Dual Price Government adopts dual price policy under this policy a part of the

production of the good is sold at control price through fair price shops and the remaining part is sold at prevailing market price which is determined by the forces of demand and supply.

Token Price There are some goods and services which are considered necessary for the

existence of life e.g. medical services, health services and education services. Poor people

are unable to make use of these services at prevailing market prices. Therefore, government and some private ‘Charitable Institutions’ provide these services at a price which is much below even their per unit cost of production

Need for Price Control

To protect the interests of the vulnerable sections of the consumer given the income distribution

To facilitate the investments in priority industries which are essential for laying up the foundation for economic progress of nation

To prevent monopolistic exploitation by few firms belonging to single industry

To ensure reasonable degree of price stability

Advantages & Disadvantages

Advantages Of price control: Price ceilings help prevent suppliers from engaging in price gouging, or

charging outrageously high prices for limited goods Price ceilings are also beneficial for keeping the cost of living affordable

during periods of high inflation Disadvantages of price control:

Suppliers are discouraged from producing more of an item when they can’t set their own prices, therefore, supply of key resources will decline, reducing availability to the market

Price ceilings also reduce the quality of products, as suppliers have less financial resources to reinvest in their business.

Dual PricingVarying price levels based on a differential parameter

What is Dual Pricing

Is a price control device with a two-price system Fixed price Market price

The dual pricing system creates a free market w.r.t. the supply & demand This applies only to the excess supply & excess

demand Volume of demand & supply under dual market system

will not be same as under free market system

The Fixed Price

Determined so as to cover the cost of production and a reasonable margin

Generally lower than the price that would have prevailed in the absence of control

Fixed price could also be set at a level higher than that in a free market system

This could happen in a tariff protection system

The Free Market Price

Allows producers to reap competitive profits for volumes in excess of those held under fixed price

Need for the existence of open market for part production Allows producers and the government to readily and openly

see the difference in the two price levels Acts as a barometer to indicate shortfall in production and

demand This for both priority & non-priority users

Objective 1: Social Welfare

Protect vulnerable sections of society for minimum needs

Guarantee of minimum supplies for these sections

Those with means can pay a higher rate for additional quantities Capacity-to-pay principle

Dual Pricing in India

Cement Paper Sugar

Electric Power Textiles

SUGAR

65% of production sold at fixed price as - ‘levy sugar’

Reminder 35% sold on the open market Used to keep a lid on local prices & ensure supplies

for poor More recently levy sugar – 10% of production APR, 2013 : DECONTROL implemented

CEMENT

Resorting to dual pricing to escape govt. action on cartelization

Cement prices been artificially raised by cement producers

Post govt. talks the government pays Rs 200 per bag

Other consumers forced to pay Rs 350 per bag

Objective 2: Entering a market Enter a new market by offering a lower price for

the foreign currency Not an illegal competitive tactic helps price

rationalization across geographic regions If done with the objective of dumping can be

considered illegal UBER in India

Rates rise drastically in the absence of regularized alternatives

Example : Airline Industry Companies offer low prices for a booking made

well in advance With passage of time prices rise exponentially Companies thus charge different rates for the

same flight Differentiating factor here is time of booking

Example : Tourism oriented markets Higher prices for foreigners

Taj Mahal NGMA Prince of Wales Museum

TenderingInvitation to bids for projects with a definite Timeline

Types of Tenders

Open Tender Any firm or organisation can participate in it

Single Tender Normally done for a small amount, only one firm with whom the

tender giving firm is satisfied with in previous tender applies in it Limited Tender

Only firms which have either executed a tender before or are registered with the firm who is giving the tender apply for it

Global Tender Firms worldwide can apply for it

Tendering Process1) To prepare office note and take approval from administrative officer/firm

head.2) To ask for budgetary quotation from any firm through understanding or

research.3) Get administrative approval on the research.4) Prepare approximate estimation.5) Get financial approval on estimation from financial department.6) Get approval from administrative officer/firm head on approximate

estimation.7) To prepare tender notice based on terms & conditions.8) Calculate EMD (Earnest Money Deposit) (2% upto 1 crore & for more than 1

crore it is - 1 crore x 2% + (total amount – 1 crore) x 0.5%).9) Decide mode for tender notice (internet, newspapers etc.).10) To prepare tender notice.11) To publish the tender notice on internet (35 days before tender open date).12) To prepare tender booklet (30 days before tender open date).13) To open tender after accepting tender quotations.

Tendering Process14) To submit process of all forms from internet and manual forms to finance

department.15) To verify total EMD collected from tender forms.16) To prepare brief note based on terms & conditions.17) Finance department will do finance vetting of brief note.18) Formation of tender committee by administrative officer/firm head

(normally 3 people atleast but can be 2 people for a small tender).

19) Tender committee will submit tender committee minutes depending on their research and understanding.

20) The firm will be investigated on eligibility criteria submitted by the firm.21) To finalize tender committee inputs/suggestions.22) Approval of tender committee suggestions by administrative officer/firm

head.23) To issue LOA (Letter Of Acceptance) to the firm.24) Security Deposit (SD) or Bank Guarantee (BG) which is 5% is collected

within 15 days from issuing LOA.

Tendering Process25) Verification from bank on deposited money and it is done in 2 steps,

Firm has to deposit 5% of Performance Guarantee (PG) within 30 days from the date of issue of LOA

The bank issues confirmed verification on the PG deposited.26) Jointly the administrative officer/firm head and the contractor will sign

on contract agreement & update on internet if the tender amount is more than 1 crore.

27) After preparing tender completion office note, submit it along with 1st bill to finance department for compensation (if needed deduct SD and penalty if any).

Apart from this, the eligibility criteria should be properly mentioned in the tender notice so as to avoid unwanted firms applying for it. Also if needed, L2 (2nd least quoted firm) or L3 (3rd least quoted firm) can be given a chance to match L1 (least quoted firm) and retendering can be done depending on the criteria and matching.

Case Study – Indian Railways (Brake Block Case) Need – Rubber Brake pad of thickness 35 mm and length of 40

cm (Supply Contract) was needed (Limited Tender for 1 year) Total Amount – 1.25 crores (approx.) (all amounts in INR) E.M.D. amount = (1 crore*2%)+(0.25 crores*0.5%) = (2,00,000) + (12,500) = 2,12,500 Total Firms applied = 10 Total EMD collected = 20,00,000 (Form fees are ignored) After tender committee meeting, following were the

repercussions, L1 – 1.10 cr, L2 – 1.15 cr and L3 – 1.22 cr L1 was found ineffective in material review and hence rejected L2 was found appropriate L3 was the best and was asked to meet L2 quote but they denied

Case Study – Indian Railways (Brake Block Case) L2 was offered the contract and EMDs of other firms were

returned back L2 had to deposit,

BG = 5% of 1.15 crores = 5,75,000 (to Railways)

SD = 5% of 1.15 crores – EMD = 5,75,000 – 2,12,500 = 3,62,500 (to Railways)

PG = 5% of 1.15 crores = 5,75,000 (to Bank i.e. SBI)

Total Amount deposited by L2 = BG+SD+PG = 15,12,500

1st bill payment received by L2 = 1.15 crore/12 = 9,83,333

International Context

Government Pricing, Dual Pricing, Fair Price, Tendering Process

Price Control in the US

Food and Fuel Control Act (Lever Food Act) Enacted August 10, 1917 during WWI had set the minimum price of wheat

$2.20 per bushel Intent to provide cheap foodgrains to the Allies Rationing on scarce commodities War Production Board (WPB) and the Office of Price Administration (OPA)

created in 1942

Price of rice reduced in 1945 Harvest difficulties and inflationary conditions again increased prices in 1946

Rent control caused housing shortages In New York, some Federal properties continue with protection of rent

regulation If removed, there will be an exorbitant increase in rent of these placesBy 1946, most federal price controls were lifted

In 1962 John F. Kennedy set price control on steel industry This was done to control the wage-price spiral Steel companies cut back their investments in new technology & equipment Foreign steel suppliers like Japan got an opening

Price controls imposed by Richard Nixon on oil and natural gas in 1973 Increased lines at gas stations and an artificial shortage of gas Resulted in a fuel-rationing system Gas stations could not raise prices, and hence closed down after selling out their gas to

hold down their labor and operating costs Unavailability of gas at all times Creation of black markets for gas with exorbitant prices Abolished in in 1981

Cause & Effect

Dual Pricing of Pharma Products in Spain

Spain is the 4th largest pharmaceutical market in Europe with a market size of $22.7 billion

Drugs financed by the Spanish National Health System and sold in Spain are priced at the compulsory level fixed by the Spanish Administration

In all other cases, the Company is allowed to sell at a “free price”, “intervention price” determined by the Administration

Distributors buy drugs in Spain, where they are cheap, and sell them for a profit in other EU countries where prices are higher

This system obstructs parallel trade between EU countries This has resulted in drug shortages in the Spanish healthcare system A petition by Drug Manufacturers is currently filed in The Court of Justice of

the European Union  The European Association of Euro-Pharmaceutical Companies (EAEPC) has actively

called on Spanish and European competition authorities to remove these competition barriers

Fair Price in Canada FairTrade Canada ensures fair prices are given to both producers and end

consumers Ensures that farmers cover the costs of production and acts as a safety

net for farmers when world markets fall below a sustainable level Producers, generally small scale farmers, have to meet labour and

sustainable farming standards Producers will then get Fairtrade certification and are regularly checked Individual buyers and companies must also adhere to strict standards of

minimum price, regular reporting, and submiting to on-site audits Producers and traders can negotiate higher prices on the basis of quality

and other attributes For hired labor situations, Fair Trade ensures that wages for workers are at

least equal to the national minimum wage Fair Trade premium to help workers and farmers to improve their social,

economic, and environmental conditions

Tendering Process in the UKTendering process in UK can be carried out in following ways – Open: Anybody can submit a tender in response to the notice and only

those who meet the criteria will be assessed Restricted: Anybody can express an interest in delivering the service, only

those meeting the commissioners criteria will actually be invited to tender Competitive dialogue: This works in the same way as the restricted

process, but allows for a dialogue phase during which the potential service provider can discuss aspects of the contract with the commissioner

Assessment criteria – There are two main ways that tenders can be awarded: Cost, where the supplier will win the contract by being the cheapest Most Economically Advantageous Tender (MEAT), where the commissioner

considers value for money and compares it with what they are currently getting from their provider. Social benefits may also be measured

Tender advertisements – All tender opportunities have to be advertised publicly through the Official Journal of the European Communities (OJEC)

Expression of interest – Here, you need to inform the commissioner of your interest in delivering the service being procured

Pre-Qualification Questionnaire – Information by which the commissioner might assess the suitability of different suppliers to deliver the service. Questions on financial stability, history, similar orders delivered, capacity to deliver service, staff, regulatory compliance, health and safety policy etc.

Invitation to tender – This will lay out the proposed methodology for service delivery and how much it should cost

Interview and presentation – Need to present your proposal in a professional manner

Negotiation – Negotiating your terms and conditions, if any Signing the contract – The contract will set out the delivery of the service and how

much it costs in a legally binding document. It will set the price, targets for the service, and in most cases will include clauses on poor performance

Websites for Tendering in the UK - Private Tenders: http://www.tendersdirect.co.uk/ Government Tenders: https://

www.gov.uk/tendering-for-public-sector-contracts/overview