Indian MSMEs discouraged in public procurement: Study

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Saurabh Gupta | 24 Dec, 2009
The Micro, Small & Medium Enterprises (MSMEs) are discouraged in public procurement mainly due to unavailability of financial guarantees, lack of knowledge about tender procedures, new opportunities and large size of contracts, according to a recent research study conducted by Milagrow - IMT Center of Excellence.

The study focused on the Government Procurement Policies for MSMEs in several nations across the globe. It also analyzes the implementation effectiveness at the grassroots level and identifies the best practices such as e-procurement, favorable tender process, reservation for SMEs in subcontracts etc. Based on these best practices and considering the MSME ecosystem in India, recommendations have been made to the Ministry of MSME in India for the procurement policies for the MSMEs.

The importance of SME sector is well-recognized world over owing to its significant contribution in achieving various socio-economic objectives, such as employment generation, contribution to national output and exports, fostering new entrepreneurship and to provide depth to the industrial base of the economy.

MSMEs in India contribute 39% of the industrial output, 33% of exports, 31 million in employment with exposure to greater opportunities for expansion and diversification across the sectors. The academic and policy literature recognizes this economic and social importance of the MSME sector.

Despite its high importance, the MSME sector in India has always been neglected by the Government and the large enterprises. Public procurement is another area where the MSMEs have been neglected.

Recommendations for the Indian Government
* 20 percent Reservation for MSMEs in all Public Procurement Contracts
* e-Procurement mechanisms to enhance the effectiveness of public procurement policies
* Simplification of the tendering process and educate the MSMEs about these processes
* Unbiased evaluation of the proposals should be done using ICT tools
* Performance Management system to evaluate the Govt. departments in MSME procurement
* Payment cycle time should be reduced for the MSMEs and the bidding fees should be removed

The process of the public procurement is not at all user-friendly and discourages MSMEs from even responding to the Government tenders. The size of public procurement in India is huge and can provide a high potential for growth to the MSME sector. It covers a wide range of supplies, services and works required by governments, local authorities and public organizations.

Financial guarantees required
* High qualification levels and required certification
* Lack of knowledge about tender procedures
* Large size of contracts
* Low access to information about new opportunities
* Cost of preparing the proposal
* Huge administrative burdens

The best practices were evaluated by studying the public procurement policies of 22 nations, including Australia, Austria, Belgium, Canada, Denmark, Germany, Italy, Korea, Mexico, Netherlands, Spain, Thailand, UK and USA. Comparative ranking was also done for assessment of the policies on the basis of each, structure-conduct, performance and the overall effectiveness of the policies. Based on these best practices, the following recommendations have been drafted for the Indian policy makers.

It was found that the countries where the share of SMEs in public procurement is low or not as per the government targets, the main reasons for under achievement was lack of proper encouragement by the government agencies in ensuring that the SMEs get government contracts, poor follow up mechanism to ensure the extent of SME participation in government contracts, lack of good e-procurement system and non allowance of subcontracting. Australia, Austria and Korea top the ranking whereas Mexico and Thailand stand at the bottom.

The countries under the study have also been ranked on procurement policies and effectiveness of implementation. Based on the Structure-Conduct-Performance framework, 15 countries were ranked on the basis of the effectiveness of their public procurement policies. Indiaâs performance remains below average as it occupies thirteenth position in the final ranking table due to the lack of inclusive programs for SMEs in public procurement. European Countries form the middle part of the ranking due to EUâs internal market policies and highly developed e-procurement systems.