Public procurement policy target a bridge too far?

With Minister for Micro, Small and Medium Enterprises (MSME) Kalraj Mishra having told the Lok Sabha in a written reply last Monday that 20 per cent procurement from micro and small enterprises (MSEs) will be mandatory with effect from April 1, 2015 for all Central ministries, departments and Central public sector undertakings (PSUs), a little over three months are left for achieving a target that few of the parties concerned are prepared for.

The size of India's public procurement market was variously estimated in 2011 and 2012 at Rs 12-15 lakh crore by the Planning Commission, CUTS and the Central Vigilance Commission, but the Prime Minister's Task Force on MSMEs estimated in 2010 that MSEs' share of this market was a mere four-to-five per cent.

However, information on the procurement efforts of Central PSUs received by the MSME ministry up to November 2013 was not very encouraging. Out of 207 Central PSUs, 103 provided complete data, and only 32 had begun procuring more than 20 per cent from MSEs, while 49 had procured nothing from MSEs.

According to a CII background paper on the issue, "many [Central PSUs] are yet to start the process of measuring how much they are procuring from MSEs," although they are under a statutory obligation to provide the MSME ministry with the status of their procurement efforts.

The paper says the existing ecosystem is not yet prepared to face the challenges emanating out of the implementation of the procurement policy, and that a "paradigm shift is required in the ecosystem covering all stakeholders."

The paper says that the procurement policy opens a "huge window of opportunity" for the MSE sector and at the same time enables Central PSUs to develop an alternative, sustainable supply chain. "However, if continuous and systematic plan[s] are not put in place by all the stakeholders, then the desired and intended benefits of the policy may not come", it says.

Central PSUs feel that most MSEs do not meet the eligibility criteria when open tenders are floated, nor are the production capabilities of the MSEs very evident, because there is no comprehensive database available on MSEs. MSEs are unwilling to get themselves registered as such owing to procedural complexities.

The most crucial challenge that MSEs face when dealing with PSUs is delays in receiving payments. The procurement guidelines stipulate that payment must be made 90 days after the date of acceptance of goods or services by PSUs. However, PSUs tend to take too long for inspection of material that they are supplied with, and this leads to delays in payments. PSUs also do not make advance payments, especially at the time of procuring high-tech products.

To deal with bottlenecks and ensure the success of the policy, according to the background paper, there is a need for a coordination mechanism between the ministry of MSME and other stakeholders such as PSUs, MSE associations, the Development Commissioner - MSME, state industry directorates and MSME Development Institutes.

MSEs, which find tender processes and tender documents too complex to comply with, will need handholding not only from PSUs, but also from other stakeholders such as large vendors, "in order to augment capacities and ensure preparedness for availing the benefits of the procurement policy", the paper concludes.