Help For Small Businesses From The Government – Governments around the world encourage small businesses to participate in government tenders. They do this directly through or through procurement mandates, indirectly through policies that encourage small businesses to participate in tenders, or by supporting measures that equate small businesses in competitive tenders. Greater small business participation in the public procurement process will benefit not only small businesses, but government and the economy at large. In India, the policy to promote small business participation in public procurement focuses on micro and small enterprises (MSEs). At the central government level, there are MSE procurement policies for central ministries, departments and units in the public sector. At the state level, policies that increase the government’s MSE supplier base vary from country to country. This white paper provides leading international examples of promoting small business involvement in government procurement and outlines best practices for increasing the MSE supplier base from Indian states. Finally, a list of 21 recommendations is provided to Indian states in formulating and implementing their procurement policies. This white paper is the first in a series of four white papers on state-level business reform in India.
Small businesses account for 90 percent of all businesses and 50 percent of all employment worldwide. In emerging markets, small businesses account for seven out of ten formal jobs. Thus, small businesses not only contribute to the economy; They are the economy. Small businesses in India are divided into micro, small and medium-sized enterprises (MSMEs), collectively known as the MSME sector. This differs from international standards for small businesses, which usually (but not always) focus on small and medium-sized enterprises (SMEs). In this document, MSME refers to the broader classification of small businesses. The term MSE is used in the Indian context to refer only to micro and small businesses. SME is used to refer to small and medium-sized enterprises. All three terms are different and refer to different groupings of the small business classification.
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As elsewhere, MSMEs are the growth engines of the Indian economy. They employ the largest number of people after the agricultural sector and account for 95 percent of the country’s industrial units and 45 percent of its industrial output. The MSME sector also generates about a third of India’s GDP and produces total value output and services; MSMEs also account for nearly half of all exports from India.
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Given the important role MSMEs play in driving the economy, governments around the world are implementing policies to support them in the hope that they will grow into large, successful companies. One of the ways governments directly support small and medium-sized businesses is by acquiring preferential sourcing, creating demand for their products, and (in some cases) providing them with preferential terms to win government orders.
One of the main drivers for governments to adopt such a policy is the benefits it brings not only to small businesses, but to the economy as a whole. Small business purchases by the government:
Economic multiplier effect, strengthening local supply chains and local economies. For example, a 2009 study found that between 2006 and 2007, the state of California earned about $4.2 billion and created 26,000 new jobs by outsourcing to businesses owned by disabled veterans and local small businesses rather than large corporations. Studies have consistently shown the wider socio-economic benefits of SME participation.
A literature review of recent efforts in Brazil suggests that public procurement can provide significant protection for SMEs and that it may have implications beyond the lifecycle of government contracts.
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MSMEs also gain soft skills and other benefits from participating in public procurement, such as improved information systems and greater professionalism. Winning a government contract can increase the volume and stability of demand for small businesses, providing them with a stable and favorable environment for investment and growth.
However, it is important to point out the potential drawbacks when public procurement policies are not properly implemented. Corruption in preferential tenders can lead to market capture, rent seeking and other problems. Improper implementation can lead to long-term inefficiency and increase costs by making SMEs more dependent on government preferences. Evidence that the economic benefits of medium-sized firm growth outweigh any inefficiency losses from preferential procurement is also inconclusive, and while some studies suggest that small firm participation in public procurement fosters innovation, there are competing studies suggesting the opposite. Finally, alignment – the most common approach to facilitating SME participation – depends on erecting barriers that can lead to market distortions. That is why it is important to ensure transparency and monitoring of tenders and a targeted approach to ensure that the benefits offered help businesses grow. One thing governments could consider is limiting SME procurement benefits for a few years so that inefficient MSMEs that don’t grow don’t continue to take advantage of the benefits and bear the government’s costs.
Governments around the world support small businesses through public procurement, both directly and indirectly, and implement support measures to encourage their participation in the procurement process.
Indirect events and support are just as important as commitment; It is important that governments adopt an integrated approach to promote small business procurement.
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The text box below outlines a number of practices adopted by countries to promote the participation of SMEs, SMEs or SMEs in public procurement.
India’s procurement landscape is governed by policies and measures put in place by the central and state governments to promote small business procurement. The procurement policy targets MSEs, which make up more than 99 percent of MSME companies in India.
The public procurement policy for micro and small enterprises promotes central government MSE procurement. Central mandates and policies apply to all central government corporations (CPSEs), ministries and departments of the central government.
At various stages, financial and non-financial barriers prevent MSE from participating in the public procurement process. Pre-qualification requirements, such as revenue, prior experience with government suppliers, years of service, and more, may limit participation in MSE. Meanwhile, financial requirements, such as enrollment fees and follow-up guarantees, can constrain MSEs’ free cash flow, discourage them from applying and erode their ability to bid.
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MSEs registered for central purchasing are exempt from bidding fees. While Earnest Money Deposit (EMD), or offer security, has been removed for MSEs under the General Financial Rules, 2017 amendments and other orders, EMD may still be required if necessary. In many cases, EMD is being demanded of MSEs even though it has been withdrawn – a fact acknowledged by the government when it again suspended EMD and reduced performance guarantees as part of the forbearance of the Covid-19 regulation. Even after ordering and delivering goods, services or works, MSEs face stranded assets and limited cash flows due to payment delays. Despite the payment term of 45 days, fines for late payment and other government measures, payment arrears persist.
At the state level, state acts direct MSE procurement policies. States with purchasing mandates can include them in their store purchasing rules; procurement rules; industrial policy; MSME policy or MSE promotion policy; purchasing policies and rules; or any other law, rule or policy of the state, as the case may be.
In addition, Meghalaya gives a 20 percent purchase advantage to startups. Uttar Pradesh has announced a policy of 25 percent procurement preference for MSMEs after cabinet approval, but has not been formally notified of the policy. Maharashtra advises government agencies to procure 20 percent of SMEs wherever possible. Andhra Pradesh’s MSME Policy 2020 has been dropped but notes the use of the central government’s procurement mandate.
Incentives and policies to promote the participation of MSEs in public procurement vary from country to country. According to the Ministry of Micro, Small and Medium Enterprises, the primary responsibility for the development and promotion of MSMEs lies with the state governments. The central government, at best, supplements the efforts of the state government with various initiatives. It is therefore important that states take a leading role in developing effective procurement policies that support SMEs. Many states have taken measures such as exemptions or concessions on procurement channels, EMD and performance guarantees. Others have waived or waived pre-qualification requirements such as turnover, previous experience, and more. Below are some additional leading best practices from Indian states.
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Based on the above, Haryana and Rajasthan are at the forefront of policies favorable to small business purchases. While Rajasthan does not have a clear procurement mandate for MSEs, Haryana offers the highest procurement advantage while also making concessions in terms of procurement costs, collateral and pre-qualification requirements.
Given the important role MSEs play in the economy, it is important that state governments develop their own MSE promotion policies, including MSE purchase promotion policies. Some of the elements and reform measures that state governments can adopt as part of policies to promote MSE procurement are listed below. These recommendations are based on international best practices and leading examples from Indian state governments.
1. MSE procurement mandate as a ratio of total procurement by government agencies. Such a mandate should equal or exceed the 25 percent mandate of the national government.
6. Remove EMD, procurement costs, performance assurance and additional performance assurance for ALBs
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