Types of Government Pricing Mechanisms & Tenders

1. Types of Government Pricing
Mechanisms & Tenders
Abhijeet Prabhu
Abhishek Naik
Aman Mahadeshwar
Anant Sharma
Aneev Kothari
Apoorva Patil
Kakoli Laha
Kshitij Sarode
Sujit Ranmale

2. 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

3. 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

4. Price Control
Restrictions on pricing Goods and Services in the Market

5. 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

6. 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

7. 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

8. 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.

9. 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.

10. 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

11. 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

12. 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.

13. Dual Pricing
Varying price levels based on a differential parameter

14. 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

15. 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

16. 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

17. 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

18. Dual Pricing in India
Cement Paper Sugar
Electric
Power
Textiles

19. 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

20. 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

21. 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

22. 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

23. Example : Tourism oriented markets
 Higher prices for foreigners
 Taj Mahal
 NGMA
 Prince of Wales Museum

24. Tendering
Invitation to bids for projects with a definite Timeline

25. 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

26. Tendering Process
1) 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.

27. Tendering Process
14) 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 at
least 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.

28. Tendering Process
25) 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.

29. 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

30. 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

31. International Context
Government Pricing, Dual Pricing, Fair Price, Tendering Process

32. 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 places
By 1946, most federal price controls were lifted

33. 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

34. 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

35. 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

36. Tendering Process in the UK
Tendering 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

37.  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