India: Purchase Preference To Local Suppliers In Defence Procurement

Last Updated: 10 October 2018
Article by Amit Cowshish

A year after the Department of Industrial Policy and Promotion (DIPP) notified the policy (Government Policy) on purchase preference for the local suppliers, the Ministry of Defence (MoD) has issued 4 (four) notifications between June and September 2018 giving effect to that policy in relation to defence procurements.

It may be recalled that the Government Policy notified in 2017 provides that only the local suppliers will be eligible to participate in public procurement up to INR 50 Lakhs (approximately USD 71,500) provided enough local capacity exists to generate competition. (The policy exempts procurements up to INR 5 Lakhs (approximately USD 7,150). The term 'local supplier' denotes a supplier or service provider whose products or services meet the prescribed minimum local content. It is evident from the context that the local supplier must be an Indian entity.

The Government Policy further provides that where the local capacity is not considered by the procuring department to be good enough to generate competition or where the value of procurement exceeds INR 50 Lakhs (approximately USD 71,500), the following procedure will be followed:

  1. If the lowest bidder is not a local supplier, only fifty per cent of the order quantity will be awarded to him in the first instance. Thereafter, the lowest bidder among local suppliers will be invited to match the lowest price quoted by the non-local supplier (referred to as overall lowest price hereafter) if the price quoted by such lowest local supplier is within the prescribed margin of price preference and the order for the remaining fifty per cent of the order quantity will be placed on him subject to his agreeing to match the overall lowest price.
  2. If such local lowest bidder fails to match the overall lowest price or accepts less than the offered quantity, the next higher local supplier who happens to be within the prescribed margin of purchase preference shall be invited to match the overall lowest price for the remaining quantity (after accounting for the fifty per cent awarded to the overall lowest bidder and the quantity accepted by the lowest local bidder) and the order will be placed for the quantity accepted by the second lowest local bidder. This process will continue till the entire quantity is exhausted but if some quantity is left uncovered even after exhausting all the local suppliers, the left-over quantity may be awarded to the overall lowest bidder.
  3. If the order quantity is not divisible, and in respect of procurement of services where the bid is evaluated on price alone, if the lowest bid is not from a local supplier, the lowest bidder from among the local suppliers will be invited to match the overall lowest price bid if the price quoted by him is within the prescribed margin of price preference and the order for the entire quantity will be placed on him subject to his agreeing to match the overall lowest price.
  4. If such local lowest bidder fails to match the overall lowest price, the local supplier with the next higher bid who is within the prescribed margin of purchase preference shall be invited to match the overall lowest price and the order will be placed on him if he agrees to match the overall lowest price. If the second lowest local bidder does not agree to match the overall lowest price, the third lowest local supplier will be invited. This process will continue till some eligible local supplier agrees to match the overall lowest price but if no local supplier agrees to do so, or if there is no local supplier within the margin of price preference, the order will be awarded to the overall lowest bidder.

It will be evident from the foregoing summary that the margin of price preference and the extent of local content are two important variables in the purchase preference policy. The Government Policy leaves it to the individual ministries and departments to assign value to these variables. The notifications issued by the MoD do precisely that and, in fact, much more. Three of the four notifications contain lists of a total of 109 items in respect of which purchase preference will be given by the procuring agencies under the MoD and the percentage of local content required in each one of them. The list of items ranges from Helo Safety net which requires 70 per cent local content to some items related to missiles in respect of which the local content requirement is as low as 10 per cent. Though not mentioned specifically in any of the aforesaid notifications, it is evident from a plain reading of these notifications that the margin of price preference will be 20 per cent to make the manufacturer eligible for preference being given when pitted against a non-local supplier.

The local content (domestic value addition) in the items mentioned in the notifications will be calculated by excluding the following elements at every stage of manufacturing/production/ assembly from the total cost of the item:

  1. Direct costs (including freight, transportation and insurance) of all materials, components, sub-assemblies, assemblies and products imported into India.
  2. Direct and indirect costs of all services obtained from the non-Indian entities/citizens.
  3. All license fee, royalties, technical fees and other fees/payments of this nature paid out of India, by whatever term/phrase it is referred to in the contracts/agreements made by the vendors and sub-vendors.
  4. Taxes duties, cesses, octoroi and any other statutory levies in India of this nature.

The Department of Defence Production (DDP) in the MoD, which will be the nodal department to oversee the implementation of the policy, may constitute a Technical Committee of internal and external domain experts for carrying out a random independent verification of self-declarations and auditor's/ accountant's certificates submitted by the bidders in respect of the local content in the item, if it receives a complaint about it. The DDP and the other procuring agencies under the MoD may also prescribe a fee to cover the administrative cost of handling such complaints.

As MoD has decided to lay store by self-certification of local content by the suppliers, false declaration will be treated as breach of the Integrity Code entailing, among other actions MoD may be entitled to take under the law, debarment of the offending supplier for a period up to two years.

The notifications issued by the MoD have come into effect prospectively from the dates on which these were issued, and the lists will remain valid till these are reviewed after March 31, 2020. Meanwhile, if a question arises regarding applicability of the Government Policy to any other defence product, the matter will have to be referred by the procuring agency to the DDP for clarification.

Though it took MoD a long time to issue these notifications which, by the way, are subject to the provisions of the DIPP notification in respect of aspects not covered in the former, it is the first small step towards extending the purchase preference policy to procurement of major platforms, equipment, weapon systems and other capabilities at some later stage, which is what the larger defence industrial units would probably be more interested in.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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