Procurement of Goods

1. Procurement of Goods Er. Satya Narayan ShahB.Sc. In Mechanical Engineering (India)MS in Manufacturing Engineering & Management (UK) Email: er.snshah@gmail.com May, 2018 Cell: 9851004366

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3. “Goods” (public procurement context) Goods mean: • Objects of every kind. • Commodities, raw materials, manufactured products and equipment, industrial plants. • Objects in solid, liquid or gaseous form and electricity. • Services incidental to the supply of goods (less than the value of goods).

4. HOW DOES GOODS PROCUREMENT DIFFER FROM OTHERS ? • Goods are produced elsewhere; Dependent on the manufacturers • Quality assurance, Manufacturer’s assurance plan, specifications • Pricing is dependent on the place of delivery • Transfer of ownership • Warrantee/ Guarantee • Mostly, payment is done indirect; through bank or third party • More dependent on the documentary evidences • Rely on third party • Installation, Inspection, Testing and commissioning. • Trainings • Goods can be stored for use in future or multiple use.

5. Procurement Methods and Practices • Types of Procurement Method {PPA; Procurement Method to be Selected: 8- (a)} • International Competitive Bidding (ICB) • National Competitive Bidding (NCB) • Sealed Quotation • Direct Purchase/Negotiation • Through Consumers Society/Stake holder’s participation • Force account • Lump sum rate • Catalogue Shopping • Limited Bidding • Buy Back method

6. International Competitive Bidding(ICB)International Level Bidding: PPA 15 • Wider competition when domestic suppliers are not available in more than 1 nos. • Size and scope of contract usually costing large amount for which domestic contractors, manufacturers and suppliers don’t possesses adequate capability and resources • The goods are not produced locally • The goods are of complicated nature • The job is highly technical • Notice period (45 days minimum)- PPA 14 (4)(1)

7. National Competitive Bidding(NCB) • Medium size contract • Local production, reasonable cost, prompt delivery • Availability of local resources • 2 Crores to 1 Arab estimated amount (single stage) except provision of PPA 15 • Notice period (30 days minimum)- PPA 14 (4)(1) Er. Satya Narayan Shah

8. Sealed QuotationProvisions Concerning Sealed Quotation:PPR 84 • Small contracts • Amount up to 20 Lakh (for goods or services and works) • Amount up to 50 Lakh (for medical items) • Procedure of NCB to follow • Notice period is small (15 days) • Used for urgently required goods/ small jobs • Minimum 3 Quotations required on the first notification, no minimum number required for re-notice. Er. Satya Narayan Shah

9. Direct Purchase (PPR, 85) • IT IS JUSTIFIED WHEN: • Work involved cannot be defined in advance • Works are small and scattered or in remote places for which qualified contractors are not interested or likely to ask unreasonable price • Crisis situation needing prompt attention • Proprietary Goods procurement • Procuring from any other Public entity • International Government Organisation as per the published rate of goods or services. • Direct Purchase from local shops • Up to 5 Lakh • Up to 20 Lakh Medical items • Up to 15 Lakhs from Domestic Manufacturer. • Up to 25 Lakhs from Domestic Manufacturer (rate published by GON.

10. Lump Sum Rate • The Bidder proposes the percentage increase or decrease in the published estimated amount. • Limitation up to 2,00,00,000.00 Er. Satya Narayan Shah

11. Catalogue Shopping • Rate of the goods published publically by the manufacturer based on manufacturing specialty, quality of the goods and other facilities. • The publication may be Manufacturer’s websites or the standard publications (brochures, catalogues etc. ) • Limitation; 25,00,000.00 to 60,00,000.00 • Not for multi year contract • Directives published by PPMO Er. Satya Narayan Shah

12. Limited Bidding • The bidding process is performed among the limited bidders to procure Goods, Works or Services if it is known that there are 3 or less Manufacturers, Suppliers or Service Providers available. • Multiyear contract not allowed • Approval by one level higher officer. • Notice period 15 days

13. Buy Back Method • Buy new goods while sell the used goods to the supplier. • This method is used when the goods become obsolete after a defined period, or not suitable to use further or are not suitable for auction due to adverse effect on public health and environment. • List of goods to be approved by the Dept. Chief. • Not allowed for multi year contract Er. Satya Narayan Shah

14. Other Methods of Procurement • Two-Stage Bidding: Where the preparation of complete technical specifications in advance is undesirable or impractical. First stage • unpriced technical proposal on the basis of a conceptual design or performance specifications are invited • subject to technical as well as commercial clarifications and adjustments to be followed by amended bidding documents Second Stage submission of final technical proposal and priced bids Er. Satya Narayan Shah

15. Contract types PPRSchedule-3, (Relating to Sub-rule (1) of Rule 21)(For Goods and Other Services Procurement) • Contract for supply of specific goods. • Framework Contract or unit rate contract. • Multi year contract. • Contract for design, supply and erect. • Turn key contracts. -(design, procurement of all inputs, erection at site, commissioning, testing and even operation for an initial period) Er. Satya Narayan Shah

16. DOCUMENTS

17. PROCUREMENT The most important tool to achieve goal of Purchasing is the SPECIFICATION.

18. Specification • Specifications help to avoid lengthy description in the Bill of Quantities. • They guide Bidders about the clients intended quality requirements and to arrive them at fair price. • It is clear and concise description of materials and workmanship. • If required the specification is attached with proper drawings and other related documents

19. Specification • Specification is a part of contract documents limiting and describing the risks and responsibilities. • Formation of contractual obligations as to what exactly the clients want. • Helps the supervisors and commissioning and testing team. • It provides basis for dialogue between the Contractor and the Engineer to agree or disagree for quality of materials and works. • Clear specifications will result in less Claims, Disputes and Litigation problems • They should be non-discriminatory.

20. A GOOD SPECIFICATION SHOULD BE • Simple, consistent and exact, but not so specific that a loophole will allow a bidder to evade any of the provisions and thereby take advantage of his competitors or the buyer. • Identified, when possible, with some brand specification already on the market. (Custom goods are expensive). • Capable of being checked. It should describe the method of checking which will govern acceptance or rejection. A specification which cannot be checked is of little value and only confusion will result. • Reasonable in its tolerance. Unnecessary precision is expensive. • As fair to the seller as possible. • Capable of being met by several bidders for the sake of competition. • Clear and Up-to-Date. Misunderstanding can be expensive. • Flexible, inflexible specifications defeat progress. Invite vendors to suggest cost saving alternatives or substitutes.

21. HOW SPECIFICATIONS AFFECT PROCUREMENT PROCESS EFFECT ON:POORLY WRITTEN: WELL WRITTEN: NUMBER OF BIDDERS Overly broad or restrictive Complete, clear concise specifications. specifications. Deter potential bidders. Attract MANY AND Increase costs. QUALIFIED bidders. Decrease chance of desired results. EVALUATION Easily misinterpreted. SHARP SPECIFIC PROCESS/PROTESTSOpen to challenge and CRITERIA protest by unsuccessful Easier to evaluate. bidders. Minimizes possibility of protests. BIDDER RISK Unreasonable requirements Reasonable requirements higher risk and higher costs. lower assumption of risk by bidders. TYPE OF CONTRACT Uncertain amount of effort Well defined effort leads leads to cost reimbursement to a firm fixed price contract. contract. ADMINISTRATION OF Unclear inaccurate specifications Well defined specifications CONTRACT lead to management problems. lead to more control and easier administration.

22. Examples of Specification • Example – Vehicle • Type – Sedan, Hatchback, • General - Seating capacity, Engine Power, C.C etc. • Transmission – 4 speed, 5 speed • Steering – Manual, power • Options – AC, Non AC, • Warranty - Period to be covered

23. Other Standard Documentation • Commercial Documents- Invoice, Packing list • Official Documents- License, Embassy legalization, Origin Certificate, Inspection Certificate, Phytosanitary certificate, Other Legal Documents • Transport Documents- Bill of Lading (ocean or multi-modal or Charter party), Airway bill, Lorry/truck receipt, railway receipt, Forwarder Cargo Receipt, Deliver Challan...etc • Insurance documents- Insurance policy

24. Price schedule :offered from abroad. • Item description. • Country of origin. • Quantity. • Unit price FOB. • Unit price CIF, CIP ( Port of destination, Place of destination) • Total price. • Unit price of Inland delivery to final destination and unit price for other incidental services (if any).

25. Price schedule:Goods offered from within Nepal. • Item, Description. • Country of origin. • Quantity. • Unit price EXW per item. • Cost of local labor, raw materials and component indicated as percentage of EXW price. • Unit price per item final destination and unit price of other incidental services. • VAT and other taxes payable

26. Schedule of requirements. • This schedule should cover description of goods and services to be supplied and delivery dates. • Destination of delivery should be carefully specified as per used INCOTERMS (CIF, CIP etc.) • The date prescribed herein from which the seller’s delivery obligation starts (i.e. from notice of awards or contract signature or opening or confirmation of L/C) should be stated clearly. • There may be range of acceptable delivery periods.

27. INCOTERMS international terms of trade.

28. Goods Delivery

29. Responsibilities Affected The terms allocate responsibilities and costs between the parties for: • Licenses and government imposed formalities for import & export • Packing and marking for international transport • Documentation required for the transport, transfer and Customs clearance of goods • Proof of delivery • Taxes, duties, consular fees, terminal charges, arrival & destination charges • Insurance, when elected • Loading and unloading • International and inland transport • Risk of loss or damage

30. Background - Introduction • INCOTERMS are the terms of trade in business • Published and developed by the International Chamber of Commerce (ICC) • First established in 1936, updated periodically with the latest version being “INCOTERMS 2010”

32. Purpose of INCOTERMS • To facilitate the international trade so that goods are sold in more countries, in larger quantities, & in greater variety • To clearly define the respective obligations of seller & buyer • To reduce the risk of legal complication in a sales contract • To respond to the global business needs everywhere • Reduces or removes uncertainties arising from differing interpretations of shipping terms in different countries. • Reference to a proper INCOTERMS in a contract clearly defines each party’s obligations, costs and risks in the international transaction and reduces the risk of legal complications. • They can assist in defining what costs the purchase price includes (e.g. prepaid international freight, prepaid duties, insurance, etc.), and clarify the risks & liabilities.

33. INCOTERMS • When we buy, it tells us: •If we have to make logistics arrangements to move the goods •If we have to make arrangements to clear goods for export and or import •What is included in our price (freight, duties, import/export fees, etc). •If there is a problem in transit, who holds the responsibility • When we sell, it tells us: •How to price our sales transaction (do we include freight, duties and taxes in our price) •Do we have to export clear the shipments, do we have to import clear the shipment? •Do we have to make the logistics arrangements •Our responsibility if there is a problem in transit • We need to evaluate our capabilities before we enter into international contracts!

34. E EXW Ex Works F FAS Free Alongside Ship FCA Free Carrier FOB Free On Board C CFR Cost and Freight (was C&F) CIF Cost, Insurance and Freight CIP Carriage and Insurance Paid To CPT Carriage Paid To D DAF Delivered At Frontier DDP Delivered Duty Paid DDU Delivered Duty Unpaid DEQ Delivered Ex Quay DES Delivered Ex Ship INCOTERMS

35. Incoterms are divided into four (4) categories: “E” term – Seller makes the goods available to the buyer at the seller’s premises or other place named by the seller “F” terms – Seller is responsible to deliver the goods to the export shipment point and carrier designated by the buyer “C” terms – Seller is responsible for contracting carriage of goods to the place of destination, but does not assume risk of loss or damage to goods, or additional costs due to events occurring after shipment “D” terms – Seller is responsible for all costs and risks associated with delivering goods to the named place in the country of destination Organization of INCOTERMS 2000

36. Responsibilities of the Seller (Exporter) and Buyer (Importer) O Seller is responsible O Buyer is responsible

37. Responsibilities of the Seller (Exporter) and Buyer (Importer) O Seller is responsible O Buyer is responsible

38. Responsibilities of the Seller (Exporter) and Buyer (Importer) O Seller is responsible O Buyer is responsible

39. INCOTERMS 2010 • INCOTERMS 2000 has been modified on 27th September 2010 and has been enforced from 1st January 2011. • DAF (Delivered at Frontier), DES (Delivered Ex Ship), DEQ (Delivered Ex Quay) / DDU(Delivered Duty Unpaid) have been removed. • DAT( Delivered at Terminal),and DAP (Delivered at Place) have been introduced.

40. INCOTERMS 2010 Group E Departure. EXW Ex Works (…named place) Group F Main carriage unpaid. FCA Free Carrier (…named place) FAS Free Alongside ship (…named port of shipment) FOB Free on Board (…named port of shipment) Group C Main carriage Paid CFR Cost and Freight (…named port of destination) CIF Cost Insurance and Freight (…named port of destination) CPT Carriage Paid To (…named place of destination) CIP Carriage and Insurance Paid (…named place of destination) Group D Arrival DAT Delivered At terminal (…named place) DAP Delivered At Place(…named place) DDP Delivered Duty Paid (…named place of destination)

41. INCOTERMS 2010

42. INCOTERMS 2010

43. Documents Required for Payment. Goods supplied from out side : • Copies of supplier’s invoice. • Non negotiable bill of lading marked “ freight prepaid.” • Packing list identifying contents of each packages. • Insurance Documents • Inspection certificate • Certificate of origin Goods from within Nepal: • Supplier’s invoice. • Delivery note, Carrier receipt. • Insurance, Warranty, and Inspection certificate.

44. Country of Origin • For purposes of this Clause, “origin” means the place where the Goods were mined, grown, or produced, or from which the Services are supplied. Goods are produced when, through manufacturing, processing, or substantial and major assembly of components, a commercially recognized new product results that is substantially different in basic characteristics or in purpose or utility from its components. • The origin of Goods and Services is distinct from the nationality of the Supplier.

45. Shipping Documents • A legal document between the shipper of a particular goods and the carrier detailing the type, quantity and destination of the goods being carried. The Transport Document also serves as a receipt of shipment when the goods are delivered to the predetermined destination. This document must accompany the shipped goods, no matter the form of transportation, and must be signed by an authorized representative from the carrier, shipper and receiver. • They are - Bill of Lading (ocean or multi-modal or Charter party), Airway bill, Lorry/truck receipt, railway receipt, Forwarder Cargo Receipt, Deliver Challan...etc

46. WARRANTY/GUARANTY • Official authorization, sanction, or warrant. • An assurance by the seller of property that the goods or property are as represented or will be as promised. • The insured guarantee that the facts are as stated in reference to an insurance risk or that specified conditions will be fulfilled to keep the contract effective. • A guarantee given to the purchaser by a company stating that a product is reliable and free from known defects and that the seller will, without charge, repair or replace defective parts within a given time limit and under certain conditions. A guarantor • To assume responsibility for the debt, default, or miscarriage. • To undertake to do, accomplish, or ensure (something) for another. • To express with conviction: I guarantee that you'll like this book.

47. “Place of Destination” & “Final destination (Project Site)”… Sometimes both may be a single place. For large value goods or sophisticated goods, “Place of Destination” is chosen any easily accessible place instead of the project site where goods are to actually used. Transportation of goods from “Place of Destination” to the “Final destination (Project Site)” may be done in two ways: (i) Not included in the supply contract and purchaser itself does it, or (ii) included in the contract, but with separate pay item.

48. MODES OF PAYMENT Meansby which a payment is made, such as Advance payment (most secure for seller) Direct/Cash payment(most secure for buyer) Documentary Credit(more secure for seller as well as buyer)-L/C Documentary collection(more secure for buyer and to a certain extent to seller) Also called "Cash Against Documents".

49. 1. Contract BUYER SELLER 12. Goods Delivered CIF 5. Goods On Board 10. D o c u m e n t s 2 C r e d i t 11. M o n e y 6. Doc.s 7 4. Advice L/C Issued 3. Letter of Credit 8. Documents 9. Money ADVISING /CONFIRMING BANK ISSUING BANK Letter of Credit.

50. RISK SITUATIONS IN LETTER-OF-CREDIT TRANSACTIONS Risks to the Applicant • Non-delivery of Goods • Short Shipment • Inferior Quality • Early /Late Shipment • Damaged in transit • Foreign exchange • Failure of Bank viz. Issuing bank / Collecting Bank