A key feature of the MSME Development Act of 2006 has been the preferential treatment given to small units in public procurement. The Act stipulated that government and public sector undertakings will give preference to goods and services from the small sector. Though provisions regarding this are still to be formulated, the government has recently said the Cabinet will clear, by mid-June, the policy, which will make it binding on government departments and PSUs to source at least 20% of their purchases from SSIs.

Public procurement can lend vital demand support to specific industry segments, whether they are public or small sector units. This is because of the large share of public procurement in GDP. In developed countries, public procurement makes up about 20% of GDP, and in India the share is a visibly much higher 30%.

In India the use of public procurement as a policy tool to support specific segments of industry has been largely restricted to a 10% price preference for public sector units. However, advanced economies like the US and the European Union, and some developing countries like Mexico, have used public procurement as a tool to support small business units.

Though there are no common definitions of the small industry in the United States and the European Union, the available information suggests that small businesses supplied 23% of the federal prime contracts in US in 2005 while they accounted for half of the private sector employment and the value-add in the economy. In contrast, the share of the small business in European public procurement is estimated to be a much higher 42%.

But these figures relate only to public contracts above the thresholds set by the public procurement directives and do not count subcontracts of all sizes awarded to SMEs. However the SMEs? shares of public procurement above the EU thresholds varied sharply, ranging from a high 78% and 77 % in Slovenia and Slovakia to a low of 35% and 31% in France and the UK.

In the developing world, the most recent example of government backing to small units through procurement polices comes from Mexico, where the stimulus package to combat the recession required that at least 20% of government purchases be made from SMEs.

Public procurement in India is highly decentralised with purchases being made by the Centre, the states and public sector units. However, there are no national-level legal provisions on public procurement and the quantum is generally decided by public policy. However, the ministry of finance prepares a manual on purchase of goods, services and works, and this acts as a guideline to the central government. Other arms of the government, like the Central Vigilance Commissioner and the Directorate General of Supplies and Disposals, have also issued guidelines, which are followed by other departments.

Some states like Tamil Nadu and Karnataka have enacted legislation to ensure transparency in procurement. The Tamil Nadu government has taken a step forward and extended marketing support to micro and small enterprises by giving domestic enterprises a 15% price preference in purchase of goods, as provided in the Tamil Nadu Transparency in Tenders Act, 1998.

However, legal provisions alone cannot ensure that the small-scale industry benefits from government procurement. Globally public procurement has been associated with corruption and the World Bank estimates that bribes paid on this count will add up to $1 trillion each year.

India’s government procurement practices and procedures are not very conducive for the small industry as they lack transparency. India is still not a signatory to the WTO Agreement on Government Procurement (GPA) but the country has obtained an ?observer? status in the WTO Committee on Government Procurement in February 2010. One way to curb the malpractices in public sector procurement is use of IT. The government has followed up on this front and asked all procurers to switch to the e-procurement regime. But a small or medium unit has to overcome various other generic constraints if it is to actively gain from the new procurement policies.

A recurring complaint from small units involved with government procurement is that their small size itself is a handicap as the large size of the government orders de facto excludes them from participation since they are unable to tender for the whole contract. This handicap can be overcome only if the government directives allow contracts to be awarded in separate lots. France has adopted this method to overcome the size constraints of small units.

Yet another major handicap of small units is their limited access to information on government procurement. This can be overcome to a large extent through e-procurement. However, with a vast number of Web portals catering to the government, only some units will be able to tap the full potential of the policy even after the introduction of e-procurement on a large scale.

A suggestion made in this context is the use of centralised Websites for e-procurement in federal or large countries.

At the more general level, the introduction of a 20% reservation for small units has to be accompanied by guidance on tender procedures. Until that happens, MSME units will find it hard to fully tap the public procurement opportunities.