DIPP Accords Preference to Local Suppliers in Public Procurement

The Public Procurement (Preference to Make in India) Order, 2017 was issued by the Department of Industrial Policy and Promotion (DIPP) on 15 June. DIPP issued the order under the newly introduced Rule 153 (iii) of the General Financial Rules, 2017 (GFR 2017). The order empowers the government to provide for mandatory procurement of any goods or services or for price preference for the purpose of promoting locally manufactured goods or locally provided services. And the order applies to all procuring entities, which includes all ministries, departments, attached and subordinate offices, autonomous bodies and government companies as defined in the Companies Act, 2013.

Purchase and Price Preference

Under the new policy, only local suppliers will be eligible to bid if the value of procurement is between Rs 5 lakh and Rs 50 lakh, provided sufficient local capacity exists to generate competition. To qualify as a local supplier, the company will have to have ensure that the product or service it is offering has a minimum of 50 per cent local content. Local content implies the value added in India. This will be calculated by subtracting the value of imported content (including customs duty) from the total value of the good/service (excluding net domestic indirect taxes).

While local suppliers can self-certify the extent of the local content in their product or service, a certificate of the statutory auditor/cost accountant will have to be submitted to support the claim of local content where the value of procurement exceeds Rs 10 crore. The Order also provides for random independent verification of self-certification by committees of internal or external experts. False declaration could, of course, result in debarment.

The field will be open to both local and non-local suppliers in respect of procurement programmes exceeding Rs 50 lakh. If, however, a non-local bidder turns out to be the lowest (L1) in any such case, the lowest among the local bidders whose price bid is within 20 per cent margin of the lowest non-local bidder, will get an opportunity to match the L1 price and, subject to this condition being met, will get the contract for 50 per cent of the total order quantity, if the quantity is divisible. If the local L1 does not agree to match the overall L1 price quoted by the non-local supplier, the next higher bidders will get the opportunity to match the overall L1 price, one after the other.

If the quantity is not divisible and the lowest offer happens to be that of a non-local bidder, the lowest among the local bidders, whose bid is within 20 per cent of the overall L1 price, will get an opportunity to get the contract for the entire quantity subject to his matching the overall L1 price. In the event of the lowest local bidder not agreeing to it, the opportunity will pass on to the next higher bidders one by one, provided the price quoted by them is within 20 percent of the overall L1 bid.

Exemptions

While all procurements up to Rs 5 lakh are, in any case, exempted from the ambit of the Order, procuring agencies have been given the power to grant exemption in particular cases exceeding the exempted limit also. Procuring entities will also have the power to reduce the requirement of the minimum local content below 50 per cent or the margin of purchase preference below 20 per cent. Conversely, procuring entities may also increase the percentage of minimum local content after annual review, subject to availability of sufficient local competition and adequate quality. Special provisions can also be made for exempting local suppliers from meeting

‘the stipulated local content if the product is being manufactured in India under a license from a foreign manufacturer who holds the intellectual property rights and where there is a technology agreement/ transfer of technology agreement for indigenous manufacture of a product developed abroad with (a) clear phasing of increase in local content’.

Standing Committee

A Standing Committee has been constituted with Secretary, Department of Industrial Policy and Promotion (DIPP) as the chairman. Secretaries of Commerce and Electronics & Information Technology and the Joint Secretary (Public Procurement) in the Department of Expenditure will be its members. Secretaries of the departments concerned with specific items will participate when any issue related to any item allocated to that department is taken up by the committee. Joint Secretary (DIPP) will serve as member secretary of this committee which is basically designed to oversee the implementation of the Order by co-opting technical experts, if considered necessary.

Follow-up

This is a promising step taken by the government. But its implementation will depend on a number of follow-up steps to be taken by the Standing Committee and individual procuring entities. At least three steps seem critical for smooth implementation of the policy.

One, some ministries and departments, such as defence and railways, have formulated separate procurement procedures. They have done so in pursuance of the authority delegated to them by Rule 142 of GFR 2017 (corresponding to Rule 135 of GFR 2005) for issuing detailed instructions relating to procurement of goods and services broadly in conformity with the general rules contained in the GFR. The Ministry of Defence (MoD) alone has different manuals for revenue and capital procurement. Ordnance Factories, the Defence Research & Development Organisation (DRDO) and Defence Public Sector Undertakings (DPSUs) have their own manuals. All these manuals will have to be suitably amended to ensure implementation of the DIPP order.

Two, the Standing Committee will need to identify the nodal ministries in respect of particular goods and services and formally allocate these items to them for notification of the minimum local content as envisaged in the DIPP order. It may be worth the while to make MoD the nodal ministry for all procurements for the paramilitary forces also. But this is easier said than done and, in any case, it would take some doing to fix the minimum local content threshold.

Three, assessing the extent of the local supply base will also take some doing. This will require carrying out a survey of the domestic manufacturing/supply base, capacity of local suppliers and the potential for local competition before fixing the minimum local content percentage and the manner of its calculation. The DIPP order requires the nodal ministries to carry out this exercise with ‘a view to avoiding cost increase from the operation of (the) Order’. Ministries and departments may presently be ill-equipped to handle this task.

Inputs from local suppliers

Indian industry, which is the intended beneficiary of this preference policy, needs to play a proactive role in facilitating the smooth implementation of the order. Their primary focus should be to provide inputs to the government not only on the issues arising directly from the various provisions of the DIPP Order but also on issues not covered by it. There are several such issues. For example:

• Will the policy work well if there is proactive disclosure of industry-friendly information about short- and long-term shopping list of items, both recurring and one time, by every procurement entity?
• Is there a case for reserving all recurring revenue procurement items for local suppliers?
• What general and sector-specific measures need to be taken by the Standing Committee and individual procuring entities to improve ease-of-doing business in various sectors? The focus on macro policy issues clouds seemingly mundane issues like delay in payment, unresponsiveness of procuring entities, as well as the absence of a mechanism to showcase products and an institutional mechanism for interaction between the procuring entities and suppliers. These, and several other such issues, have a bearing on ease-of-doing business and consequently on local manufacturing.

Some entities like defence and railways are into public procurement in a big way. They need to go the extra mile to ensure smooth implementation of the new policy. There are several issues related to defence procurement, the Strategic Partnership Model, Make procedure, Offsets and Defence Technology Fund, which, if resolved, could give a huge boost to the objectives underlying the DIPP order.

It is important for the industry to channel specific inputs and feedback to the Ministry of Finance, DIPP, nodal ministries, individual procurement entities and Public Sector Undertakings on issues concerning policy and procedure for procurement from local sources as well for promoting manufacturing under the Make in India initiative.

Views expressed are of the author and do not necessarily reflect the views of the IDSA or of the Government of India.