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Local Suppliers to Gain from the New Procurement Policy

By Amit Cowshish July 2017
 

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New Delhi. The Public Procurement (Preference to Make in India) Order, 2017 issued by the Department of Industrial Policy and Promotion (DIPP) on 15 June gives the ‘local suppliers’ much to cheer about.

They alone will be eligible to participate in tenders for procurement of goods by the procuring entities of the central government, including the public sector undertakings, if the estimated value of procurement is between Rs 5 lakh (approximately USD 7,800) and Rs 50 lakh (USD 78,000).

But this is contingent upon a sufficiently large supply base being available to generate competition. It remains to be seen how the procuring entities will assess whether this condition is met in individual cases.

More Good news

While procurements below Rs 5 lakh are exempted from operation of the 15 June order, there is more good news in relation to the procurements exceeding Rs 50 lakh (USD 78,000).

If in any such procurement, the lowest bidder turns out to be a non-local supplier, the local supplier participating in the same tender whose bid is lowest among all local suppliers and who happens to be within a margin of 20 per cent of the overall lowest bid, will get an opportunity to match the lowest bid to win the contract for 50 per cent of the total order quantity.

This will, of course, be possible only if the quantity is divisible. If it is not, the lowest among the local bidders could walk away with the entire contract subject to his bid being within the aforesaid margin of purchase preference and his original offer being within 20 per cent of the overall lowest bid of the non-local supplier.

Subject to these two conditions being met, the opportunity will pass on to the next higher bidders, one by one, if the lowest local bidder does not agree to match the overall lowest bid or supplying the entire 50 per cent of the total order quantity.

The Flip Side

On the flip side, it will not be enough to be a company registered in India to qualify as a local supplier.

To qualify as a local supplier, it will be necessary to ensure that the product offered for procurement has a local content of a minimum of 50 per cent, calculated as a percentage of the value added in India to the total value of the product or service.

The 15 June order lays down a simple formula for working out the extent of value addition: the total value of the product (excluding the net domestic indirect taxes paid) minus the value of the imported content (including all custom duties).

The percentages related to local content as well as the margin of price preferences can be reduced by the procuring entities. Conversely, the requirement of the minimum local content can also be increased by them.

They could also exempt any product or supplying entity or a class of items from the operation of the order or any part thereof.

The local suppliers can expect other eligibility conditions, such as the turnover, production capacity and financial strength, to be made more realistic by the procuring entities to avoid unreasonable exclusion from the tendering process.

Supplies abroad no more a precondition

Proof of supply to other countries will no more be a precondition for eligibility as a prospective local supplier. Talking of the other countries, at the discretion of the procuring entities, suppliers from the countries where the Indian suppliers are not permitted to compete could be declared as ineligible to bid.

Whatever parameters are adopted by a procuring entity in respect of a particular procurement will need to be disclosed upfront in the notice inviting tenders and thereafter will not be tinkered with during the entire process till award of the contract.

To the extent feasible, the Government e-marketplace (GeM) portal will mark the products which meet the minimum local content while registering them for display and provide for automated comparison with purchase preference and without purchase preference.

It will also be possible to obtain willingness of the supplier to exercise the option for price preference through the GeM portal.

The suppliers will be able to self-certify the extent of local content in the product, though for higher value procurements, exceeding Rs 10 crore (USD 15 million), such claims will need to be supported by a certificate from the statutory auditor or the cost accountant.

These claims will be subjected to random verifications by the internal and external experts appointed by the procuring entities and, of course, any declaration found to be false could result in debarment.

Speed and Flexibility

All these measures should drastically cut down the processing time.

Implementation of the order will be overseen by a committee headed by the Secretary DIPP with a host of other secretaries being its members. The committee will have Joint Secretary, DIPP as its Member Secretary.

The 15 June order provides a very flexible policy framework for encouraging procurement from local sources but it is still work in progress.

One, the way the order is worded leaves some doubt whether the purchase preference and margin of price preference are applicable to procurement of services also. This confusion needs to be put at rest immediately.

Two, the standing committee will need to identify ‘nodal ministry’ for a category of similar items and formally notify this decision so that the nodal ministry could then proceed with the task of deciding the requisite level of local content and the margin of price preference for that particular category of items.

MoD to look after acquisitions for paramilitary bodies also

There is a case, for example, for making the Ministry of Defence the nodal ministry for procuring goods for the paramilitary forces also. This will rid the Ministry of Home Affairs of the mundane task of procurement, bring in economy of scales and, most importantly, allow it to focus on internal security.

Other ministries and departments could also be similarly clubbed.

Three, reservation of procurements between Rs 5 lakh (USD 7,800) and Rs 50 lakh (USD 78,000) for the local suppliers is contingent upon the supply base being sufficiently large to ensure fair competition. Carrying out an assessment of the supplier base is an arduous task by any stretch of imagination. This could delay the roll out of the scheme.

Four, all ministries and departments which have formulated their own procurement manuals in consonance with the provisions of the General Financial Rules (GFR), under which the 15 June order has been issued, will need to amend those manuals.

The Ministry of Defence alone has at least four such manuals: one each for revenue and capital procurement for the armed forces and one each for the ordnance factories and the R&D establishment.

It will take some doing to modify all these manuals and also to identify and implement other steps required to operationalise the 15 June order.

The local suppliers have an equal, if not a greater, stake in implementation of the order. It is important that they provide specific inputs not only concerning the issues that arise directly from the text of the order but also on larger issues that are critical for creating an industry-friendly eco-system to the standing committee as well as the individual procuring entities like defence and railways.

With large budgets to spend on procurement, success implementation of the preference policy will depend on how it is managed by these ministries in the coming weeks.

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