Preferences in procurement

Written by Sandeep Verma | Updated: Mar 31 2011, 07:28am hrs
The Bologna Charter on SME Policies, adopted a decade back, contained recommendations for encouraging small business participation in government contracts and for integrating electronic commerce in their business strategies, including e-procurement initiatives that provide equal access to SMEs. India was an important signatory to the charter, and the Union government promulgated comprehensive legislation in the form of Micro, Small & Medium Enterprises Development Act, 2006 for facilitating development of MSMEs and for enhancing their competitiveness. Section 11 of this Act allows for notification of purchase preference policies in ministries and departments, including PSUs, for goods and services produced and provided by small businesses.

The initial version of the Draft Procurement Preference Policy (the only one in the public domain) provided for mandatory 20% procurement from MSMEs, including reservation for enterprises owned and managed by members of SC/ST communities and by women; and preferences were proposed for firms with ISI/ISO-9000 certifications. SMEs quoting prices up to 15% higher than the lowest bidder could get preference for procuring at least 50% quantity from them in case the SMEs were willing to match the lowest price. In section 11, being limited in scope to preferences, mandatory e-procurement from MSMEs was not a part of these initial proposals.

Government procurement policies in many developed countries, including the United States, Germany and Canada, have contained strong small business preferences for decades; and their implementation has become even more emphatic in the wake of the global economic crisis.

As the draft policy awaits clearances, it may be worthwhile to examine some of these proposals in the light of international experiences, together with associated policy imperatives and implications.

Federal regulations in the US, for instance, provide for mandatory set-asides for small businesses in procurement contracts below specified thresholds. For higher-value procurements, bids offered by small businesses are price-adjusted up to 10% instead of price-matching requirements, thus avoiding perverse post-bidding negotiations between qualifying SME bidders and the lowest, non-SME bidder. Abuse of the set-asides system in favour of women or disadvantaged groups is restricted by combining ownership with control of management and daily operations.

The Indian policy could similarly provide for small-value contracts to be exclusively reserved for SMEs, while establishing clear priorities within these exclusively-reserved contracts for SMEs owned by women and by members of SC/ST communities. Also, it may be more practical to use ISI/ISO certifications to qualify products and bidders, rather than providing for preferences within preferences, the latter being more prone to disputes and litigation.

International experience also clearly demonstrates advantages of agency-specialisation. For instance, the Government Accountability Office in the US hears challenges from protesters in respect of contract-award decisions without entangling itself with complaints about the small business or ownership/management aspect of bidder qualifications. These latter disputes are exclusively determined by the small business administration, thus allowing each institution to develop and sharpen expertise in its respective area of responsibility. In the absence of similar jurisdictional clarity in India, it is possible that the contracting process may get entangled among multiple government departments upon complaints regarding the small/non-small nature of qualifying bidders.

One aspect that may need examination in this context is the bundling of core supplies and services with collateral ones, and its impact on the ability of small businesses to effectively participate in public contracts. It may be worthwhile for the government to consider embedding provisions to obligate contracting officers to examine, before the issuance of tenders, the extent of bundling, and its potential effect(s) on small business participation. It is advisable to reduce such bundling to the extent possible without compromising their ability to effectively manage the contract and deliver associated public services.

Finally, there have been some demands for introducing mandatory e-procurement in the case of SMEs, even though such mechanisms may not be strictly allowable under the preferences provisions of the Act. E-procurement has the benefit of removing some barriers of information and physical participation in government contracts, while mandatory e-procurement raises certain other barriers like the cost of participation. These costs could be even more pronounced in the case of electronic reverse auctions (ERAs) that require bidders to continuously monitor bid prices over prolonged periods of time as shown by research in the case of the US defence ERAs. In fact, potential adverse effect on SME-capacity to participate is an important reason behind the Multilateral Development Bank guidelines on e-tendering and e-reverse auctions that require use of both paper-based and electronic bid submissions, instead of a solely electronic process.

ICT-adoption rate amongst Indian SMEs continues to hover around at 30%, while the costs of broadband access (as a ratio of the per capita national income) and broadband usage levels remain substantially adverse in India compared to countries like Brazil, Singapore and South Korea which have mandatory/near-mandatory electronic public procurement. Thus, while making e-bidding optional for public contracts would certainly lead to greater competition, a mandatory e-procurement policy may result in reduced participation by MSMEs, particularly by micro & small businesses.

A more careful and balanced approach for India may, therefore, include scaling-up of existing government projects for ICT-adoption amongst MSMEs while simultaneously creating an the enabling regulatory environment for private e-commerce transactions. We have begun to witness growth of many private B2B networks; and e-procurement could be made preferential once ICT-adoption rates become more significant and widespread, and when costs of obtaining contract information and of tender participation reach comparatively comfortable levels.

Enhancing MSME competitiveness and capacities are critical for Indias continued economic growth. A careful design of purchase preference regulations will certainly go a long way in achieving some of these important public policy objectives.

The writer is an IAS officer and holds an L.L.M. with specialisation in government procurement law.

Views are personal.