Rising barriers in public procurement systems

Written by Sandeep Verma | Updated: Aug 27 2009, 04:08am hrs
A seemingly innocuous amendment was recently approved in the $ 33-billion Fiscal 2010 Energy and Water Appropriations Bill in the US Congress, stipulating that the Acts funds may be used to purchase vehicles manufactured only by Ford, Chrysler or GM. The impact of such regulatory changes is not expected to be insignificant for Indian suppliers in times of the global crisis, as India has a sunrise industry supplying high-value components to a number of European, Asian and US automobile manufacturers.

This Kissel amendment essentially builds upon the Buy American provisions in the American Recovery and Reinvestment Act of 2009 (ARRA), when the Congress mandated that all iron, steel and manufactured goods be produced in the US for ARRA-funded public works and public buildingsa move certain to affect the sharp growth rates that the Indian steel industry has enjoyed in the US markets for the last few years. The implementing guidance issued by the White House went one step further, when it directed executive agencies to target stimulus funds to support small businesses and promote local hiring in the US. The newly-promulgated contractor compliance norms on ethics that mandatorily flow down to sub-contractors performing portions of work, even outside of American borders, are also expected to impose additional costs on Indian companies that participate as sub-contractors to primes in the US.

The overall trend of the US government procurement policies appears to be a mix of de jure and de facto domestic preferences, especially when negotiated procurement has already been the norm since late 1990s instead of sealed bidding, and a large part of federal government contracting now centres on procurement of services rather than goods. When coupled with the difficulties in getting work-permits for immigrant workers, this translates into raising barriers for foreign suppliers.

European countries have also amended their national public procurement laws with a view to promote domestic contractors. France, for instance, recently raised thresholds for competitive procurement, restricting open bidding to fewer government contracts. The EU has allowed increased use of accelerated procedures, giving lesser time within which potential bidders can submit meaningful bids.

The biggest obstacles for Indian companies may be yet to come, as the EU comes up with a small business plan akin to the US set-asides for small and disadvantaged businesses, despite evidence of lack of competition in the way such contracts are awarded in the US. Increased domestic preferences in government procurement markets within developed economies gives strong credence to many of Indias concerns with international trade negotiations, and it may be a good posturing for India in the forthcoming bilateral negotiations with the US, and also during the informal New Delhi Ministerial this year, towards bringing these concerns to the fore.

Admittedly, the government procurement agreement (GPA) negotiations are not a part of the Doha Round, but the ICRIER in a 2004 study had echoed the relative openness of Indias regulatory regimes, and had suggested that India use the GPA tactically to make better trade-offs in the classical areas of agriculture and NAMA negotiations. It may also be worthwhile for India to examine the desirability of initiating formal negotiations for entry into the GPA. At minimum, initiating such procedures could be a tactical signal that India can leverage to obtain a favourable negotiation outcomes in the mainstream WTO negotiations. The advantages will also lie for high-value contracts in GPA member states, since Indian bidders would then have to be treated at par with domestic bidders of the procuring entity.

China, with a far less transparent public procurement system, has already initiated negotiations for entry into the GPA, and India may only need to restructure its bid-protest system for challenging contract-award decisions for making a similar claim. Viewed against weakened commitment to international competition in developed country procurement systems, India may well be able to negotiate satisfactory outcomes in its GPA negotiations.

It may also be a good opportunity for policy makers to insert tools for economic recovery in Indias government contract regulations. The micro, small & medium enterprises ministry wants to introduce a Small Business Act, and it may be useful to craft a policy that maximises the employment generation and technology absorption aspects of small-business contracting, while avoiding the pitfalls of set-asides in government contracts. Increased use of offset contractsmandatory performance obligations imposed on foreign suppliers that benefit domestic industry through technology exchanges and exportsmay be yet another useful policy tool to be employed.

Such contracts have been used in India with a fair degree of success in defence and aviation sectors, even when the level of obligations in India remains considerably low vis--vis developed countries. Indias draft National Offset Policy aims to impose such requirements on all government contracts above a threshold value, and the current situation may be a good time to evaluate the benefits of introducing offsets to target technological and capacity upgradation in select areas, both in private and public sectors.

The developed world is already showing highly protectionist tendencies in the wake of the current economic crisis, and it is time that India takes the leadership role so that national interests can be best served through appropriate strategic and tactical moves, even as we engage with the rest of the world on a significantly deeper level of economic activity. Solutions to survival and growth in times of crisis usually lie somewhere between increased international trade and stronger economic policies for domestic industrial revival; and bad news coming up from the international arena may just have to be made the best of in these times.

The writer is a civil servant and can be reached at sverma.ias@gmail.com. These are his personal views