Review of Draft Procurement Policy
December 15, 2011
Last month, the Indian Cabinet of Ministers approved a draft Public Procurement Policy asking the government departments and public sector undertakings (PSUs) to give preference to micro and small entrepreneurs (MSEs), including those belonging to Scheduled Caste/Scheduled Tribe (SC/ST) entrepreneurs, while making purchases. It is to be notified under the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006.
There are 26 million MSMEs in India that employ about 60 million people, which contribute about 8 percent to its GDP, 45 percent to its industrial output and 40 percent to its exports, according to the Confederation of Indian Industry (CII). The new policy is aimed at helping to bring transparency in public procurements through open and competitive bidding, apart for a quota for SC/ST.
The General Financial Rules, 2005 govern procurements made by the central government. Some ministries/departments have specific procedures to supplement these rules. Currently, there is no overarching legislation governing public procurement by the central government and central PSUs. Government guidelines technically provide for support in marketing of MSE products through a variety of measures such as price preference, reservation of products for exclusive purchase from MSEs, issue of tender sets free of cost, exemption from payment of earnest money, etc. In practice, however, it has been noted that most of these facilities are not being provided.
As a result, many believe MSMEs are highly susceptible to volatile market conditions within the overall production chain. Additionally, various countries such as the United States, Brazil, Australia, China and UK already have special measures in place to support and ensure a fair share of the market to small businesses. There is also a belief that this policy would help transform authorities’ mindset that goods manufactured by MSMEs are ‘good enough’ for PSUs and the Government.
The new rules come after facing much opposition from ministries that are the big spenders, like railways and defence, over the months during which it has been under discussion. The government has now released the draft of the policy and sought comments from stakeholders and public by December 24.
Some of its major features are:
- All Central ministries and public sector undertakings (PSUs) will have to ensure that a minimum 20 percent of all their total annual purchases of products or services are from MSEs. Also, within this limit, 4 percent of the orders should be placed to the SC/ST entrepreneurs. But if an MSE fails to participate or fulfill the tender process, the 4 percent can be obtained from other MSEs.
- Defence armament imports will not be included in computing the 20 percent goal for the Ministry of Defence. Defence equipment, such as weapon systems, also will be out of the purview of any reservation.
- The procurement policy would be voluntary in nature for three years and made mandatory after that. At that time, non-conforming departments will be required to provide reasons for not meeting the targets to a review committee.
- Every ministry and PSUs would be required to set an annual target for procurement from the MSME sector at the beginning of the year. The PSUs will have to report their procurement in their annual reports.
- The Central ministries/PSU will continue to procure 358 items from MSEs, which have been reserved for exclusive purchase from them. A committee has been set up, however, to review this list.
- For enhancing the participating of SCs/STs in government procurement, the Central Ministries/PSUs will take necessary steps to facilitate this, including organising special vendor development programmes, buyer-seller meetings etc.
- In departmental and state-run enterprises’ tenders, participating MSMEs will be allowed to supply a portion of their tender even if their bids are higher than the lowest bid but are not more than 15 percent costlier than the lowest bid.