Last updated: December 17th, 2019 4:57 PM

MSME Public Procurement Policy

The MSME sector is essential for economic growth and to create work opportunities in India. Low labour to capital ratio in this sector when compared to large industries along with an extensive and diverse geographical distribution of such enterprises make them crucial for the inclusive and equitable growth across the nation. They stimulate entrepreneurial spirit and diffuse skills into rural and urban areas through the promotion of economic innovation and dynamism. However, these enterprises are burdened down by significant constraints that restrict their growth potential. To tackle these issues, the Ministry of MSMEs notified the implementation of the MSME Public Procurement Policy. This article talks about this policy and the various aspects of the same.

Overview

With the objective to promote the growth and the development of Indian MSMEs by upgrading their market access and linkages, the Indian Ministry of MSMEs notified the implementation of the MSME Public Procurement Policy from 1 April 2012. The Policy is deemed mandatory as stated under the MSMED Act of 2006. The policy aims to achieve an overall procurement of minimum 20% of the total annual purchases of products produced or services procured from MSMEs by the Central Ministry, Government Departments and PSUs. Deemed mandatory from the 1st of April 2015, the policy has also saved a sub-target of 4% procurement of goods and services, out of the 20% from the MSEs owned by SC or ST Entrepreneurs.

Principle

The MSME Public Procurement Policy rests on the core principles of competitiveness, adhering to sound procurement practices and the execution of orders for supply of goods and services under a system that is fair, equitable, competitive, transparent and cost-effective.

Procurement Goal

Every Central Ministry/ Department/ PSE is required to set an annual objective for procurement from MSEs at the start of every fiscal year, with a view to procuring at least 20% of the overall total annual purchases of products produced or services rendered by MSEs for three years. Post-2015, the overall procurement goal of a minimum of 20% has been deemed mandatory. Of the 20% target of annual procurement from MSEs, a sub-target of 4% is allocated for procurement from MSEs owned by Scheduled Caste (SC) or Scheduled Tribe (ST) entrepreneurs. It is essential to note that this is 4% of total procurement and not 4% out of the 20% target. However, in case of failure of such MSEs to participate in the tender process or to meet tender requirements and L1 price, 4% sub-target for procurement allocated for MSEs owned by SC or ST entrepreneurs can be achieved from other MSEs. All the expenses incurred on the purchase, whether capital from fixed assets or recurring revenue in nature, should be kept in mind while estimating the minimum amount of demand at 20% of the total procurement of goods and services that is to be raised from MSEs. The total procurement would also include all items purchased, be it indigenous or imported.

Eligibility

Only Micro & Small Enterprises registered with any public agency are eligible under the Public Procurement Policy. A public agency could be any of the following.

1. District Industries Centres (DICs)
2. Khadi & Village Industries Commission (KVIC)
3. Khadi & Village Industries Board (KVIB)
4. Coir Board
5. National Small Industries Corporation
6. Directorate of Handicrafts and Handloom
7. Any other body specified by the Ministry of MSMEs.

As per the following definition, MSEs would be considered as owned by SC or ST Entrepreneurs.

Enterprise Type	Criteria
Proprietorship	Proprietor is of SC or ST background.
Partnership	SC or ST Partners should hold a minimum of 51% of shares of the unit.
Private Limited Company	A minimum of 51% of the unit’s share is held by an SC or ST Promoter(s).

Procurement Coverage

The MSME Public Procurement Policy is valid to all the Ministries, Departments and Central PSUs, regardless of their nature or volume of procurement. The Ministry of Defence is the only exception to this notification. Defence armament imports are excluded in the estimation of the 20% procurement goal for the Ministry of Defence. Furthermore, defence pieces of equipment such as weapon systems and missiles are also beyond the scope of this policy. The Ministry of Defence itself would do the monitoring of goals set under this policy in line with proper procedures that they have established. This policy is restricted to the procurement of the goods produced and the services rendered by MSEs alone without including trading activities. The 358 items currently reserved for the purchase from the MSE sector would continue to be reserved for the MSEs.

Requests for Exemption

The Central Ministries, Departments and PSUs may request the Review Committee for an exemption in the purchase of hoods that may not be considered relevant for the supply by MSEs. The Review Committee would consider such requests for the waiver from the 20% objective on a case-to-case basis and would monitor the achievements under the Policy.

Ernest Money Exemptions

It is essential for MSEs to provide their tender sets free of cost and are exempted from the payment of earnest money.

Sub-Contracting

Public Procurement Policy clearly states that the annual goal of the procurement would also include subcontracts to the MSE units by large enterprises and the consortia of MSEs formed by the NSIC. The payments made on account of the sub-contract to the MSEs by the contractor for the execution of PSEs’ contract would be considered a part of the PSEs’ annual procurement expenditure on MSEs in the case of any such sub-contractual arrangement is made with the MSE. Subcontracting is a vital tool made available under this policy. This provision can be effectively and efficiently used by the procurement authorities to meet its MSE procurement goal in a situation where the nature of the procurement such as turnkey projects and special requirements, can be fulfilled by large companies only. To offer flexibility to the procuring agency, this policy has not prescribed any particular roadmaps or tools for the implementation and measurement of MSE procurement through the sub-contracting mode. Therefore, each agency has the freedom to devise their mechanism. However, the adoption of the following processes would ensure a more systematic approach.

• The identification of the procurement area where sub-contracting is practical, as well as feasible.
• The preparation of a Tender or a Request for the proposal documents: While drafting the bid documents, clauses concerning to MSE subcontracting should be included with the complete details on who could be considered as an MSE, the requirement of documentation from leading suppliers and so on. In the technical evaluation criteria, additional points or weight could be allotted for the inclusion of MSE as a subcontractor.
• Monitoring and Reporting: The responsibility of ensuring that the subcontractor is an MSE must be allocated to the main contractor with explicit contractual provisions.

Rate Contracts

Rate contract is an effective and efficient mechanism taken up by many procuring organisations in order to manage speedier procurement processes and to bring in cost reduction and efficiency as well. The MSME Public Procurement Policy encourages the usage of rate contracts wherever it may be applicable.

Vendor Development Programmes

The primary access barriers to the public procurement market by MSE is the limited access to information, low skill sets, tedious registration/ contracting/ bidding procedures and payment delays. This policy also advises the procuring organisations to take actions such as vendor development programmes, buyer-seller meets, and outreach activities which could enhance the MSE’s ability to participate in public procurement in addition to the procurement goal. Most organisations are undertaking this in various formats and with varying degrees of impact. The policy talks about the need for a more systematic approach such as the following.

• Enhancement of the coordination amongst the procurement and the vendor division.
• Well-prepared and detailed content with an experienced resource.
• The content must comprise of the following:
  • Procurement Potential and an Annual Procurement Plan
  • Understanding of the Vendor Registration Processes
  • E-procurement and Digital Signature
  • Preparation of Bids and Common mistakes made by MSEs
  • Grievance Redressal Mechanism