Discretion is a Tool of Corruption: Critical Analysis of an EPC Contract in the Oil and Gas Sector

Authored by - Ravidasan NS
Issue - RLR Volume VI Issue II

Abstract:

The EPC business is intricately complex and competitive which makes it quite vulnerable to succumb to the fangs of corruption. Corruption being an extremely detrimental concern in the public procurement and project execution process of the oil and gas sector attracts substantial losses to be incurred by the concerned project and in turn, by the sector. While monetary losses of such nature are frowned upon in general, it is of great concern and has lasting repercussions in the oil and gas EPC business since this sector underpins the nation’s growth and economic development. In this paper, the author has analyzed the breeding grounds of corruption in the oil and gas EPC contracts and has narrowed it down to one such ground, being the unrestricted exercise of discretion by the Project Owner. The author has observed that unchecked discretion provides scope for the parties to collude with each other in a manner that is against the spirit of public interest and has thereby, offered suggestions that may prove instrumental in maintaining checks and balances over any abusive exercise of discretion. This paper also analyzes the beneficial application of the principles enshrined in the UN Global Compact, World Bank Group integrity compliance program, and the concept of an ‘integrity pact’ and opines for the adoption of tenets such as transparency, integrity, accountability, reasonableness, and moderation, to curb the dangers brought about by an abuse of the discretionary powers by the concerned public authorities.

Introduction

An Engineering, Procurement and Construction Contract (EPC Contract) is used in connection with the development of complex Infrastructural Projects wherein the private sector undertakes the construction work on a large scale.[1] An EPC Contract is suitable for infrastructure projects since it provides for a single point responsibility wherein the contractor who has been awarded the project, undertakes the entire responsibility.[2] Detailed scope of work and technical and functional specifications of any machinery or facility to be constructed will be provided by the EPC contractor to the project owner, and from its commencement to the stage of final completion, the EPC contractor is in charge of developing the Project. The EPC contractor is also responsible for the designing, engineering, procurement, construction, and commissioning activities. This work structure is advantageous to the project owner as it provides for a fixed contract price unless the owner issues a change order to the work. The EPC Contract by contractual intent is free from any market price variation and the payment terms are fixed based on the achievement of milestones prescribed under the contract. The contract completion date is also fixed at the beginning of the work. In case of any delay in the completion of the project that is attributable to the contractor or for which the contractor absorbs the risk, the owner may levy liquidated damages to compensate himself for the losses arising on account of the late completion.[3]

In an EPC contract, the contractor is assigned the responsibility of investigation, design, and construction for the agreed lump sum price.[4] The contractor undertakes the risks relating to construction, with respect to time and costs fixed, at the time of execution of the contract. The EPC Contract period, instances, and manner of price adjustments and technical parameters are stated upfront, based on which the EPC contractor quotes the lump sum price for the respective project which is subject to the agreement of both Parties.[5] The procuring entity or the Owner specifies the core requirements of the project, such as quality, reliability, maintainability, durability, and safety of the assets in the tender documents. The contractor has the freedom to plan the construction schedule using the best industry practices, in order to achieve efficiency and economization of the project. Project risks such as soil conditions, weather, and technical and commercial risks relating to design and construction are assigned to and absorbed by the contractor.[6]

The contractor is liable to pay liquidated damages (LD) for each day of delay where such delay is beyond the time stipulated in the contract, subject to a cap of the maximum leviable LD specified in the EPC Contract. The EPC contract also provides for the extension of time in respect of the delays occurring on account of changes in the scope of work by the Owner or Procurement Entity and/or force majeure events.[7]

A Project Management Consultant (PMC) with good experience in design, project supervision, and works management is appointed as an Engineer in Charge (EIC) for the project. The PMC monitors and supervises the activities of the contractor and acts as a single-window coordinator with the contractor.[8] However, in complex projects, the Owner/Procuring Entity may also appoint a third-party consultant to cross-check the diligence of the PMC.[9]

In an EPC contract, the payments to the contractor are linked to the achievement of certain milestones or clearly specified outputs.[10] In order to save costs, the contractor may reduce the quality or scope of work. Disputes relating to quality, the scope of work, and time-over-run are unavoidable and an EPC Contract should contain a provision for evaluation of the quality, scope of work, and monitoring of the work to ensure the progress on a monthly basis and in respect of issuance of the certificate of acceptance.[11] The payment to the contractor should be commensurate with the actual work done for the project and the detrimental practice of plowing money at the beginning of the execution of the contract should be strictly prohibited.[12] The departmental estimate of the work, prevailing schedule of rates, quantities of work done, etc shall not be referred to in the contract and the leakage of such information should be strictly prevented.[13]

Corruption in EPC Contracts

The growth of the nation is inversely proportional to and directly related to the extent of corruption prevalent in the country. The development of infrastructure is essential for the economic growth and alleviation of poverty in any country. However, corruption increases the price of infrastructural development as well as reduces the quality and economic returns to infrastructure investment, which ultimately has an adverse effect on the nation’s growth rate.

The complicated administration of the bidding process, high project cost, and the prolonged period of execution, coupled with strong competition, encourage the bidders to indulge in corrupt activities.[14] Moreover, public procurement is a lengthy process and corruption can occur at any time and in many forms. The corruption risks involved in the various stages of infrastructure projects are[15]:

Project Appraisal: Rent seekers favor large projects and new construction over maintenance. Hence, in order to get approval for the project, rent-seekers underestimate the costs and overestimate the benefits without adequate economic justification.
Project selection, design, and budgeting: Costly designs may be planned and adopted to increase the consultants’ fees and contractors’ profits. Designs may also be tailor-made to favor a specific contractor. High-cost estimates are provided in the project for the diversion of funds at a later stage.
Bidding process: Rent seekers may interfere in the procurement process to favor specific firms or individuals. The organizations may extend bribes to the rent-seekers to obtain contracts while recovering the said costs at later stages of the project. There is a possibility of collusion among bidders to increase the prices or allocate contracts with the help of procurement officers. Tenders may be invited for projects that are not within the budget and contracts may be thereby, awarded.
Implementation: The contractor and the Engineer in Charge (EIC) may collude, with or without the Owners’ knowledge. This results in the use of poor-quality of materials and the culmination of substandard work. In order to increase its profit margins, cover potential losses, or recover the money spent on bribes, the contractor and EIC may collude to increase the contract price or adjust the required scope of work.
Operation and maintenance: The acceptance of substandard works or works below the specifications leads to the rapid deterioration of assets. Sufficient efforts or resources may not be allocated for the maintenance of the assets which favors new construction in the project identification stage for future projects.

It is thus, clear that corruption is the antithesis of development and good governance. Prevention is better than cure and the same principle applies to corruption as well. If the causes and circumstances which enhance the possibility of corruption are identified, then it is easier to plug the loopholes in the EPC Contract as well as ensure good governance.

Exercise of Discretionary Power

Public officials are called upon to intervene in several areas of social life and are expected to solve the day-to-day crises. A flexible approach is required to handle such complex situations along with bestowing the public official with appropriate discretionary powers.[16] Discretion is the authority of the public official to make decisions using reason and judgment in particular facts or situations.[17] In the words of Lord Halsbury in Susannah Sharp v. Wakefield 1891 AC 173 [18]

“Discretion means when it is said that something is to be within the discretion of authorities that something is to be done according to the rules of justice, not according to private opinion and according to law and not humor. It is to be, not arbitrary, vague and beneficial, but legal and regular and it must be exercised within the limit to which an honest man competent to the discharge of his office ought to confine himself.”

Public officials are allowed to take decisions in a public procurement contract, based on a certain level of reasoning, judgment, and acumen. The exercise of discretionary power by a public official is necessitated on a case-to-case basis considering the vague or indefinite statutory provisions.[19] The reasons for conferring discretionary power to a public official is:

Where the public official is called upon to handle a complex and varying nature of problems and the comprehension of the same within the existing rules is very difficult or ambiguous.
Where the absence of precedence and emergence of new problems makes adoption of general rules difficult.
Where it is impossible to foresee each and every problem and the public official is expected to solve the issues in spite of the absence of specific rules applicable to the situation.
The mechanical application of rules would result in injustice as the circumstances differ from case to case.[20]

For effective governance, discretionary powers are essential; however, such power should be exercised promptly, reasonably, appropriately, in good faith, impartially, without prejudice and in accordance with the provisions of law.[21]

Exercise of Discretionary Power under EPC Contract

At the outset, it must be clarified that there are inbuilt provisions in the tender documents to ensure transparency and fairness in the tendering process. However, there is every possibility of misuse or abuse of the discretionary power by the public officials to favor a bidder to the detriment of the public interest.

There are several stakeholders involved in an EPC Contract, but the primary beneficiary of an EPC Contract is the general public. Hence, the exercise of discretion in the execution of such EPC Contracts should be fair and reasonable. Furthermore, these EPC Contracts involve large amounts of public money and finance, and to ensure that the finance is utilized for legitimate reasons, close oversight of such contracts is also crucial. In most cases, these EPC Contracts are executed between the state parties and private parties, and the state parties are bound by law to follow the principles of fairness and reasonableness. At different stages, the state parties exercise discretion in the tender, award, and execution of EPC Contracts by the private parties. However, despite being bound by law, in several cases, such discretion is misused, and the parties resort to corrupt means for influencing the discretion of the state parties to the detriment of public interest. The Owner should consider the efficiency of the bidder and its ability to complete the work satisfactorily while awarding the contract[22] and the conduct of the party should generate confidence in the mind of the Owner.[23] Hence, both the Owner and the PMC are expected to exercise their discretion fairly and avoid taking advantage of their discretion to unfairly give one bidder an edge over other bidders.

The author has reviewed Bidding Document No. IBCE-6373-C00-PJM-TEN-EPCC-01A floated by Project Management Consultant (PMC) M/s Toyo Engineering Private Ltd. (Toyo) for New Atmospheric & Vaccum Distillation Unit (AVU) and Allied Facilities of M/s Indian Oil Corporation Limited (IOCL), for Barauni Refinery Capacity Expansion, to understand about the discretionary power granted to Owner as well as PMC or Engineer-in-Charge (EIC).

During the pre-bid stage, the Owner or PMC may exercise their discretionary in the following circumstances:

PMC may at its discretion extend the date for submission of bids.[24]
PMC or Owner may at its discretion seek additional documents or information from the bidder to satisfy the substantially responsive bid.[25]
PMC or Owner may have the right to accept or reject all the bids at its discretion and may annul the bidding process without incurring any liability to bidders.[26]
The owner may at its discretion revoke the disqualification or holiday listing punishment imposed on the bidder or contractor for its incorrect statement w.r.t previous transgression for anti-corruption activity.[27]

During the execution stage, the Owner or PMC may exercise their discretionary in the following circumstances:

The Owner may at any time at its discretion cancel the contract for any cause whatsoever.[28]
The EIC or Owner may at any time at its discretion suspend the work or supplies and the contractor shall at its own cost protect and secure the work and materials.[29]
Only the EIC or Owner has the right to suspend the work for the reasons such as the occurrence of a force majeure event and the contactor is not given any right to expressly claim suspension even in case of a prolonged force majeure event. Moreover, the Contractor shall not be entitled to any compensation for the suspension of work arising out of or on account of any such force majeure events.[30]
The Owner may at its discretion and convenience provide additional land near the worksite for the execution of the work.[31]
The EIC shall be entitled from time to time to or shall at any time, direct the contractor to perform any work, in relation to the execution of work by the contractor or relative to any matter affecting the contract or arising therefrom. The contractor shall perform the work without any compensation from the owner.[32]
The EIC may at its discretion, ask the contractor to employ additional manpower and machinery for the acceleration of the work and the decision of the EIC shall be final and binding upon the contractor.[33]
The EIC may, at the risk and cost of the contractor, appoint any subcontractor to achieve the necessary progress of the work.[34]
The EIC may, at its discretion, accept any work or supply made by the contractor at variance with the contractual specifications, on account of any unforeseen circumstances like force majeure, suspension of work, sabotage, and other cause, whatsoever.[35]
The Owner may, at its discretion, continue with the contract in case of re-constitution of the firm or company (contractor).[36]
The Owner may, at its discretion, increase or decrease the scope of work.[37]
Surplus project materials shall be disposed of by the Owner at its sole discretion, without any recourse to the contractor.[38]
The Owner or PMC may at its discretion, accept the performance test.[39]
The materials, design, and workmanship shall satisfy the EIC, and the direction given by the EIC w.r.t standard/specification/code of practice shall be binding on the contractor.[40]
The decision of the EIC shall be final and binding in the resolution of any doubt, ambiguity, or contradiction in the documents or correction of any error, or making good the omission.[41]

The above list mentions some of the discretionary powers bestowed and exercised by the Owner or the PMC during the execution of the EPC Contract. There are multiple situations that would arise in the day-to-day activities during the performance of the EPC Contract which would require the approval of the Owner or the PMC. However, the world over, the exercise of such discretionary powers is being abused and exploited to gain an unfair advantage.[42] It is a well-known adage that absolute power corrupts absolutely. Therefore, the broader the discretion, the greater the opportunities for abuse.

In order to remedy this, adequate checks and balances are required to mitigate or reduce the risks of malpractice during the exercise of discretionary power by the public officials, in fulfillment of their public duties. Public officials, while exercising discretionary power, shall act in good faith and perform their duties impartially.[43] There should be also a post-decisional review mechanism to ensure that the public authority exercises its discretionary power in accordance with the law and within the legal limits, either express or implied.[44]

The public official interalia need to pay attention to the following, at the time of exercise of discretionary powers:

Transparency: Policies, guidelines, and criteria adopted for taking the decision shall be made available to the affected person or entity.
Decision-making process: Decisions are to be guided by the principles of transparency, fairness, and accountability.
Justification for taking a decision and for variance: Accountability and procedural fairness requires written justification for the decision taken.
Record Keeping: Maintenance of records helps in the enhancement of accountability and transparent decision-making.
Ethical Responsibility: Code of ethics helps to reduce potential abuse of authority.[45]

Opportunities for Extortion of Money by Public Official

The instances given below indicate that there is a possibility and/or opportunity for misuse or abuse of discretionary power or authority by public officials to their advantage and seek uncalled demands

Approval of documents and certification

Delays/rejections in approval of critical documents, citing illogical reasons, which in turn delays the deliveries of equipment to the site and hence, delays the project completion schedule.
Delays/rejections in approval of survey reports, drawings, etc would in turn delay the project completion schedule.
Delays in engaging the inspectors for certifying the work ultimately delay the completion of work. Such issues do not have contractual support/provisions.
For certification of the required performance guarantees at the time of commissioning.
To certify completion of a milestone that is linked to liquidated damages / major payment.
Delay in certification of works and thereby delay in invoicing and creating bad cash flows for the Contractor.
Approving of changes to work processes, execution methodologies, or sourcing of materials necessitated out of changed situations during the execution (e.g., raw material shortages, embargos, site hindrances, force majeure, etc), without deterioration of the project performance parameters as required under the contract (e.g., achieving performance schedule, safety & operability, and operating costs of the plant).
Creating administrative hurdles and delaying the processes in respect of issuance of workers’ Gate passes/ Police verification/ Security checks/ Medical checks, etc.
The Owner appoints a Certifying Agency (CA) for the quality checks of the works as well as the services performed by the Contractor. The CA makes visits to the sites, yards, and vendor premises for assessing the quality of the materials and equipment prior to the despatch of the same. There is a possibility that the CA might point out minor punch points or other issues solely to deny approval of the material or equipment unless his favorable demands are met.

Change Order

The Owner’s delay in providing the approval of reasonable deviations (procurement from reputed manufacturers/suppliers), in turn, delays the delivery of such equipment to the site and hence, the project schedule.
Approval of the standby time due to the interface issues with the other contractors’ or clients’ works.
The Project Owner may delay the settlement of a tenable change order and force the Contractor to negotiate which may lead to the Contractor budging on the Project Owner’s uncalled-for demands.
Ask the Contractor to take up ‘out of scope’ works without settling the Variation order, which was a scope gap during the tendering stage.
Delay in approving the cost associated with the Owner initiated change order or making Adhoc payment for the claim of disputed costs in respect of the Owner initiated change orders.

Approval of Vendor

As per the contract, the contractor is permitted to source materials from the vendors approved by the project Owner or the EIC. There is a possibility of nominating a sole sourcing vendor for the procurement of materials. The sole vendor may be appointed without following a just and transparent procedure.
Negotiating a procurement contract with a sole approved vendor for the supply of materials does not involve an open competitive process. The Project Owner or EIC may delay or deny the approval of the additional vendor proposed by the contractor by citing frivolous reasons.
In cases where vendors regret or do not quote, additional vendors are needed to enable the Contractor to have competitive offers. The Project Owner may not allow additional vendors which effectively leads to a single vendor situation, which is not a fair situation to the Contractor.
Some Owners push for / recommend the Vendors for critical equipment. Such Vendors are in touch with Owner representatives/decision-makers and extend favors.
Rejecting placement of the purchase order on an approved vendor for the critical equipment stating that the approved vendor does not satisfy performance track records, mandate the vendor to satisfy new performance criteria, or cite other frivolous reasons.
One of the initial milestones for payment to the contractor is the approval of the purchase specification. It is mandatory for placing purchase orders on vendors for the supply of materials including long-lead items and the delay in approval would prejudicially affect the project schedule. The EIC or Owner might delay the approval of purchase specification citing minor mistakes.
Giving preference to local vendors is part of the EPC Contract, e.g, In-Kingdom Total Value Add (IKTVA) in KSA and In-Country Value (ICV) in Oman. The contractor has to submit necessary documents to the PMC or Owner, to satisfy the bid equalization process and for the approval of vendors. The PMC or Owner may misuse or abuse its position and deny approval unless the contractor concedes to his demands.

Bank Guarantee

The EPC contract requires the Contractor to submit Performance Bank Guarantee (PBG) to the satisfaction of the Owner. The bank guarantee charges vary from bank to bank and the contractor might wish to arrange PBG from a bank that is commercially viable for the project and its relationship with the banker. However, the Owner may refuse to accept this PBG citing his discretion, and propose the procurement of the PBG from a bank of his choice which would prejudicially affect the commercial interests of the contractor.

Defect Liability Period

The starting date of the defect liability period (DLP) in the EPC Contract would be linked to project owner activity, such as the issuance of the Provisional Acceptance Certificate (PAC). The Project owner or EIC may delay the issuance of such certificate, citing frivolous reasons to extend the DLP. The extension of the DLP would prejudicially affect the contractor to incur additional costs for the extended period, delay in getting retention money, the extension of PBG, etc.

Procurement of Materials

The Project Owner may insist on the false rejection of material (quoting frivolous grounds / good engineering practices) after delivery at the project site which may force the Contractor to settle the case with the Project Owner to avoid project delay liquidated damages.
Timely delivery of the materials and equipment is required to adhere to the work schedule and any delay in the supply would attract liquidated damages (LD). In order to issue an import permit required by a contractor to bring the materials or equipment into the country, a public official may demand the payment of a bribe.

Punch Points

Unless the contractor pays the bribe, the representative of the project Owner may refuse or delay or put additional conditions or punch points, not being specifically a part of the contract, to issue a certificate of acceptance or certify the payment which is due to a contractor.

Owner or PMC Fault

In a situation where due to errors or changes or delays by the EIC, the EIC may know that the contractor is entitled to a variation order yet refuse to issue the same, fearing that issuance of such variation order could expose the EIC to breach of contract or negligence, resulting in a claim by the project Owner.
The Project Owner may pressurize the EIC to refuse the extension of time or the EIC may choose not to grant it, in the expectation of gaining future work from the Project Owner.
Delay in providing the work fronts and creating interface issues with other Contractors.

Miscellaneous

A Project Owner may threaten that the contractor’s works are defective and deduct false or exaggerated amounts from the invoices of the contractor, alleging delay in the completion of the project.
The Project Owner may draw down on the performance bond, levy liquidated damages, or withhold the retention amount, citing false or exaggerated claims. Payments due to a contractor may be dishonestly delayed by the Project Owner.
A project owner may persuade the Engineer-in-Charge (EIC) to refrain from issuing an extension of time to which the contractor is entitled or to issue a certificate allowing the deduction of liquidated damages that are not due from the contractor.
While finalizing the project schedule, the Project Owner may not agree to list all the obligations to be fulfilled by the Project Owner within realistic timelines (including the delivery of the Free Issue Materials). This in turn puts the contractor in a disadvantageous situation contractually.
Through subjective interpretations of the contractual provisions, the Project Owner may try to harass the contractor, indirectly hinting at other expectations.
The Project Owner may take advantage of onerous clauses to force the contractor to pay the bribe requested or implied. (Eg: “the decision of the EIC shall be final and binding on the contractor” and “EIC, at its sole discretion, may reject the vendor without giving any reasons thereof”)
The Project Owner may threaten to suspend the contractor’s works or threaten to terminate the contract quoting (untrue) safety grounds.
Relying on generic clauses to deny genuine claims (e.g. (i) contractor is aware of all the conditions while entering into the Contract, (ii) in case of discrepancy, it should have been pointed at the bidding stage, (iii) this is a fixed price contract and all risks are with the contractor).
Ignoring concurrent delays by the Project Owner thereby placing the entire responsibility of the delays on the Contractor.
The EPC Contract may run for a longer period and in this globalized economy, there is a possibility of change in the constitution of the contractor (merger & acquisition, demerger, etc) in a legally permissible manner. However, the Project Owner may refuse to accept such a change in the constitution or management and threaten to terminate the contract. Also, the Project Owner may seek favors to carry out changes to the records like TDS, PAN, GST, etc in the records.
There is no mandatory obligation on the part of the Project Owner to award the contract to a techno-commercial L1 bidder. The Project Owner may wish to negotiate with the bidders even after the opening of the tender. This gives an opportunity to the Owner to seek favors for the award of the EPC contract. However, Indian PSUs award contracts based on L1 price and not otherwise.

Other Forms of Fraud

As a negotiation margin, the contractor may add a significant amount of false extra cost to a contract claim. A contractor may submit a variation claim to the Project Owner, whereby the contractor knows that the sum claimed, is larger than the contractor’s actual entitlement. A contractor may submit a false or exaggerated loss and expense claim to the Project Owner for which the contractor is not entitled. A contractor may submit a cost claim alleging that the Project Owner is responsible for a particular event and conceal records that would prejudice the contractor’s claim, including delays attributable to the subcontractor. False records such as false programs, invoices, timesheets, etc may be submitted, with or without the collusion of the public officials, by the contractor to support its claim.

There is a possibility of fraud by collusion between the contractor, EIC, and the Owner. The following situations depict the collusive fraud:

Evaluation and classification of the imported items are to be done for the calculation of the import duty. Import duty varies from one classification to another. As similarities exist in the classifications, a public official/ EIC may take a bribe and classify an imported material as one which has less import duty and causes loss to the exchequer.
In case of theft of costly goods from the project sites, the concerned public official may take a bribe in exchange for hiking the value and quantity of stolen goods for claiming insurance.
The EIC or representative of the Owner may take a bribe for incorporating lesser quality goods in the project, with an arrangement to place repeat order on the delinquent vendor/contractor.
The EIC may take a bribe from the contractor for giving an interpretation of the contractual provisions in favor of the contractor, thereby advising the Project Owner to provide extra time, cost advantage, and other allowances to the otherwise defaulting contractor.
During test runs, the EIC may take a bribe to approve false reports either finding fault with the work of the contractor or hiding the fault in the contractor’s work.
The EIC/ Project Owner may take a bribe from the contractor to extend various timelines in the contract for the convenience of the contractor, e.g., notified claims, force majeure event claim period.
The EIC / Project Owner may take a bribe from a bidder to qualify a non-eligible bidder, declare the entire tendering process as null, extend timelines for submission of a bid or change the specified criteria.

The above-cited examples depict the methods of corruption prevailing in public procurement. Regulation of public procurement procedures must be of necessary importance, considering the great potential for many types of corrupt practices.

Prevention and Detection of Corruption

Human, by nature, is greedy and hence, it is not possible to have a cent-percent corruption-free society. Corruption cannot be eradicated; we can only contain the problem and control it. In a vibrant economy, there are higher chances of being corrupt or being required to offer a bribe. Coordination and cooperation are the two factors to combat corruption. Greater coordination among the public officials especially law enforcement officers is required, and measures shall be taken to train the officials and maintain a strong network for rooting out corruption. Cooperation among the law enforcement officers of different countries is required to prevent people from taking benefit of the loopholes in the system. There should be a global adaptation of effective anti-corruption measures and the effectiveness of the law enforcement depends upon the cooperation and collaboration of the different jurisdictions. In the absence of the cooperation aspect, the corrupt would find ways and loopholes in the system to hide their activities.[46]

No one claims that corruption can be eliminated. But people believe that in order to minimize the bad effects of corruption, it should be checked and brought under control. The leadership must show its commitment to carry out the required reforms and demonstrate firmness and the political will to fight corruption, as it involves difficult decisions.[47]

As a part of the corporate sustainability initiative, the Global Compact leaders’ summit adopted the 10^th principle against corruption in 2004: “Businesses should work against corruption in all its forms, including extortion and bribery.” The objective of the 10^th principle is to proactively develop internal control measures to address corruption.[48] Huguette Labelle Chair, Transparency International and Member, UN Global Compact Board in his forward to Reporting Guidance on the 10th Principle against Corruption[49] detailed transparency in the following lines:

“Transparency is a first-line defense against corruption. Through transparency, organizations can communicate to stakeholders and the public their values and policies and how they are being translated into action. Transparency sets a tone of openness, accessibility, and accountability, building confidence among stakeholders that they are treated in an equitable and responsible manner. Transparency of commitment to values and openness about policies and processes will not only enhance a company’s reputation but act as a substantial deterrent to those wishing to act corruptly.”

The heart of a company’s commitment to the UN Global Compact is the submission of an annual Communication on Progress (COP) which provides information to its stakeholders. Awareness among the employees increases on reporting of anti-corruption and it helps to discipline and control the management. Proactive reporting of anti-corruption increases the reputation of the organization in the society and marketplace. The COP is based on concepts of transparency, accountability, and the continuous improvement of performance. The organizations shall adhere to the guidelines in the following categories:

Commitment and Policy: Organisations shall publicly state their commitment to work against corruption and comply with all applicable laws including anti-corruption. Risk assessment of corruption should be done to minimize the risk and develop policies to address the potential areas of corruption.
Implementation: All employees shall be communicated and trained on the anti-corruption commitment. The tone at the top-level shall be clear to the employees to counter corruption. Internal checks and balances are to be deployed to ensure consistency with the anti-corruption measures adopted. The responsibilities for handling multiple functions like contracts, placing orders, receiving goods, invoicing and payment shall be given to different individuals or departments. Before engaging a business partner, proper due diligence should be carried out and efforts must be undertaken to review their integrity. The whistleblowing mechanism should be implemented to enable the employees to report their concerns regarding corruption, without the fear of being victimized.
Monitoring: Leadership shall review the monitoring and improvement process. Continuous improvement of the anti-corruption program is required to address the changing risks.[50]

In order to end the debarment or early termination of debarment, the World Bank Group (WBG) requires the establishment and implementation of an integrity compliance program.[51] The WBG integrity compliance program interlia provides for the:

Prohibition of misconduct in the code of conduct of the company
Strong ethical leadership committed to compliance with the law.
Internal Policies: Internal policies shall provide for (a) the due diligence of the employees, (b) prohibition of facilitation payment, (c) maintenance of the appropriate records, (d) the establishment of controls over gifts, hospitality and entertainment, and (e) the restriction of the employment of former public officials, etc.
Business Partners: Conduct due diligence of business partners, make proper documentation of the relationship, pay justifiable remuneration through bona fide channels for the legitimate services, monitor and oversee the services, and seek the reciprocal commitment of compliance from the business partner.
Internal Control Measures: Establish and maintain checks and balances over the financial, accounting and record-keeping practices.
Employees shall be made aware of the internal policies and given effective training to ensure compliance with the same.
Establish whistleblowing channels to report breaches and periodically review the code of conduct.
Investigate the misconduct when encountered or reported or discovered.

The EPC Contracts themselves are drafted in a fair and judicious manner and the contractual terms distribute the risk and liability evenly among the parties. However, in the process of tendering and awarding EPC Contracts, the Employer exercises extensive discretion, and more often than not, such discretion is abused. Such abuse is evident through the above instances and examples. The courts have also observed the need for fairness and equity by governments or their agencies in the tendering process. In Tata Cellular v. Union of India,[52] the Supreme Court held that the Government should exercise fair play in the freedom of contract and there shall not be any bias or malafides in the decision to accept the tender or award the contract. The Wednesbury principle of reasonableness is applicable to the tender process and it must be free from arbitrariness. Rule of law and the doctrine of a ‘level playing field’ demands legal certainty should be incorporated into the terms and conditions of the tender documents to prevent unequal or discriminatory treatment.[53]

The opportunities for corruption are greater in an EPC Contract since it gives excessive powers of discretion to the Owner. Such opportunities can be reduced by minimizing the discretion granted and maximizing transparency and accountability in the public procurement process and project execution. The use of integrity pacts helps in promoting the spirit of transparency and inculcates confidence in the community in the aspect of public service contracts. An integrity pact makes sure that the parties to the contract do not pay, offer, demand, accept bribes or collude with the competitor to get the contract. It also provides for the independent and impartial monitoring process to ensure accountability in the course of the transaction. Bidders shall disclose the engagement of agents and payment of commissions or similar expenses in connection with the contract. The failure to disclose or false disclosure by the bidders will attract sanctions, which interalia includes the forfeiture of the bid bond, performance bond, blacklisting for future contracts, termination of the contract, etc. Bidders are encouraged to make disclosure on the basis of the assurance that competitors in the project would also do. Hence, both the Owner and the Project Management Consultant (PMC) are expected to exercise their discretion fairly and avoid taking advantage of their discretion to unfairly give one bidder an edge over the other bidder.

The Government of India has taken several steps to combat corruption and improve the integrity and accountability of Government institutions and uphold its commitment to ‘Zero Tolerance against Corruption.’ The steps taken by the government ineralia include:

Implementation of E-tendering in public procurements.
Introduction of Government e-Marketplace (GeM) for public procurement.
Introduction of e-Governance.
CVC has issued instructions to CPSUs to adopt Integrity Pact in public procurement.
The Prevention of Corruption Act, 1988 has been amended and vicarious liability is cast on the senior management of commercial organizations for the act of giving bribes with their consent or connivance.
RTI requests and first appeals can be filed through a web portal namely RTI online with the URL rtionline.gov.in.[54]

Conclusion

In view of the above, there must be an effort made to eliminate as many discretionary powers as possible, that are given to the EIC or other representatives of the Owner since it acts as breeding grounds for acts of corruption. The discretionary power should be exercised in a transparent manner and a person shall be accountable for his acts. It should become a norm to always document the exercise of discretionary power, with reasons mentioned for the decision taken, as it improves accountability and fosters transparent decision-making. Any discretionary power or substantial authority shall not be given to any individual who, the organization knows or should know, has engaged in illegal activities. An individual shall be prohibited from exercising discretionary powers if there is a conflict of interest and it affects the impartiality while performing the duties. The discretionary power shall not be exercised on unjustifiable grounds or in an unreasonable manner. The making of a decision shall not be arbitrary, biased, or convey the reasonable perception of bias and procedural fairness shall be observed. Discretionary powers shall be used for the proper purpose, exercised in good faith, and there shall not be any discrimination on any grounds whatsoever.

The procurement authority shall develop an appropriate policy and guidelines to assist the decision-makers in exercising their discretionary powers. The policies and procedures shall be fair, reasonable, and comply with the legal requirements. The decision-maker shall consider the relevant factors including the context and adopt openness in the decision-making process. The policy shall be consistently applied and communicated to the relevant stakeholders along with justifications for the decision taken.

Instead of concentrating power in the hands of one individual, the exercise of discretionary power can be dispersed and vested with a committee of three including the Chief Vigilance Officer and Compliance Officer of the Owner. As a check and balance mechanism, the exercise of discretionary power can be reviewed by the Independent External Monitors (IEM). These suggestions should be made applicable for the entire life cycle of a project from the RFQ or ITB stage till the completion of the defect liability period under the contract. The policy guidelines and the authorities tasked with the responsibility of making resolutions, should be communicated and made available to the EPC contractor at the very initial stage. In order to keep the progress of the contract on schedule, a dedicated team of such authorities should be made available at the contract site. This practice is popular in FIDIC contracts which provide for the institution of Dispute Avoidance/Adjudication Boards (DAAB), who are independent domain experts tasked with the responsibilities of resolving disputes at their very initial stages, in a reasoned fashion. This practice will also allow the generation of records after much due diligence and will deter the EIC or the Owner from indulging in malpractices.

The governments of different countries have passed laws for the oversight, and regulation of the bidding process and enabled the investigative agencies to prosecute in case of misuse of the discretion and violation of any laws. Despite, the presence of laws, there have been several transgressions by companies wherein they have indulged in corrupt practices to obtain government contracts. Therefore, there is a need to put stricter rules in place.

This article has been written by Ravidasan NS, Ph.D. Scholar, School of Law, University of Petroleum and Energy Studies and Deputy General Manager (Legal) at L&T Hydrocarbon Engineering Ltd., Mumbai.

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[39] Clause 5 of Annexure A-X(ii)

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[52] (1994) 6 SCC 651 (SC) (India)

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