Suppliers may be fined 10% if they fail to meet local content needs

Suppliers for government contracts may have to cough up a penalty equivalent to 10 per cent of the contract value and lose the performance bank guarantee if they don't meet prescribed local value-addition requirements in any government procurement tender.

The Department for Promotion of Industry and Internal Trade (DPIIT) is considering changes in the current procurement norms to further increase the minimum local content requirement in public procurement tenders, as a part of its Make-in-India initiative. The definition as well as the way to compute ‘local content', which is the amount of value-addition done in India, is also being explored, a person aware of the matter said.

According to the current rules, ‘local content’ is the total value of the item procured, and excludes imported content in the item. It is then calculated as a proportion of the total value, in terms of percentage.

The changes will be a part of the government's attempt to give a renewed impetus to promote manufacturing and production of goods and services in the country.

“There is a thinking that the current formula to compute local content or domestic value-addition needs to be revised. This is because the true value is not captured in the formula, as it includes several other costs and the final value is often inflated. The emphasis will now be on the cost of production, instead of sale price,” the person cited above said.

DPIIT has also sought views from key ministries such as railways, power, petroleum and natural gas, shipping, steel, telecom, finance, among others, and over a dozen public sector enterprises. They include Steel Authority of India (SAIL), NTPC, Delhi Metro Rail Corp (DMRC) and the Airports Authority of India (AAI).

The development comes in the backdrop of the government taking a series of steps over the last one year to push Aatmanirbhar Bharat. It has also been taking steps to provide purchase preference to local suppliers.

Last year, the DPIIT had made changes in the procurement norms to give preference to companies whose goods and services have more than 50 per cent local content. Thereafter, it also allowed nodal ministries to mark higher than minimum local content requirements for some categories as ‘Class I’ and ‘Class II'.

The minimum local content requirements of Class I and Class II suppliers are 50 per cent and 20 per cent, respectively. The former gets the highest preference in all government purchases due to higher local value-addition.

“There could be an increase in the minimum local content requirement for Class II suppliers to 30 per cent from 20 per cent. The idea is to strengthen public procurement norms to ensure that local suppliers get preference,” the person cited above said.