Many times on the basis of recommendations of RDSO or other bodies, tenders for implementation/Up gradation of new /existing technology (e.g. SCADA) are floated in the divisions. Since these technologies are sophisticated and generally Railways do not have the necessary expertise to maintain such technology. Therefore the tenders are floated on TURNKEY basis i.e. Installation of the new / upgraded technology and its maintenance for a sufficiently longer period. Also many times the tenders for AMC for a period of relatively longer duration say 5 years are more are invited. The problem in such tenders is how to decide L-1.
As known in the Financial Management, value of money goes on diminishing as the time elapses. (Time value of money). In simple terms, value of a rupee 2 years
hence will not be same as of today because of inflationary and various other factors. Therefore from finance point of view, the offers received in tenders with
longer period must be adjusted with the discounting factor so as ascertain the exact cost to railways. Let me explain with the following case:
In a tender for installation and maintenance of a technology related to IT project two tenderers have participated. The scope of the work was to provide the hardware and to maintain the same for a period of 5 years. The rate offered by both the firms are as under:-
|
Sr.no. |
Particulars |
Rate offered by M/s. ABC Ltd. |
Rate offered by M/s. XYZ |
|
1 |
Supply of hardware |
15,00,000/- |
12,00,000/- |
|
2 |
Supply of software |
05,00,000/- |
04,00,000/- |
|
|
TOTAL |
20,00,000/- |
16,00,000/- |
|
3 |
AMC |
|
|
|
|
I st year |
02,00,000/- |
2,00,000/- |
|
|
2 nd year |
02,00,000/- |
2,50,000/- |
|
|
3 rd year |
02,00,000/- |
3,00,000/- |
|
|
4 th year |
02,00,000/- |
3,50,000/- |
|
|
5 th year |
02,00,000/- |
4,00,000/- |
|
|
GRAND TOTAL |
30,00,000/- |
31,00,000/- |
From the above table, one would easily draw the conclusion that M/s. ABC Ltd. has quoted lower overall value and hence he is L-1. But if we analyze the yearly CASH OUTFLOW adjusted to discount rate, the position becomes much different:-
|
|
|
M/s. ABC Ltd. |
M/s. XYZ |
||||
|
|
|
Cash outflow |
PV factor |
Present value |
Cash outflow |
PV factor |
Present value |
|
|
INITIAL YEAR |
20,00,000 |
1.000 |
20,00,000 |
16,00,000 |
1 |
16,00,000 |
|
|
END OF I st year |
2,00,000 |
0.935 |
1,87,000 |
2,00000 |
0.935 |
1,87,000 |
|
|
2 nd year |
2,00,000 |
0.873 |
1,74,600 |
2,50,000 |
0.873 |
2,18,250 |
|
|
3 rd year |
2,00,000 |
0.816 |
1,63,200 |
3,00,000 |
0.816 |
2,44,800 |
|
|
4 th year |
2,00,000 |
0.763 |
1,52,600 |
3,50,000 |
0.763 |
2,67,050 |
|
|
5 th year |
2,00,000 |
0.713 |
1,42,600 |
4,00,000 |
0.713 |
2,85,200 |
|
|
|
30,00,000 |
|
28,20,000 |
31,00,000 |
|
28,02,300 |
Thus the position of L-1 changes if we discount the cost quoted by the tenderers with a discount rate of 7% (notional rate).
So shall we adopt the Discounted Cash Flow technique while evaluating the inter-say position? What are the practices followed in different railways in this regard?
Manoj Asawa
DFM /BSL
