Local value addition for Public procurement : Issue and recommendations

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Local value addition for Public procurement : Issue and recommendations

Jayakumar Selvaraj

@Jayakumar

August 2, 2021

Public Policy

697

Public Procurement (Preference to Make in India), Order 2017— Revision, issued by DPIIT, dated 16.09.2020 mandates that global tenders shall not be floated for any public procurement with an estimated value less than 200 crores. For such non-global tenders, only Class-I local suppliers (local value addition >50%) and Class-II local suppliers (local value addition – 20% to 50%) are eligible.

The order defines ‘local content’ as the amount of value added in India which shall, unless otherwise prescribed by the Nodal Ministry, be the total value of the item procured (excluding net domestic indirect taxes) minus the value of imported content in the item (including all customs duties) as a proportion of the total value, in percent.

Software products

Typically, the supply chain of software products spans multiple countries, involving resources from the product company, its subsidiaries specializing in R&D and third-party service providers to whom certain services are outsourced. India, by being the pre-eminent global outsourcing hub and home to many MNC R&D centers is an important part of this global supply chain and contributes significantly to the development of software products. However, given the fact that software products are developed over multiple years and get updated subsequently many times over, there are challenges in quantifying the value addition from a particular location. The methodology for calculation of local content adopted in the reference order does not deal with this complexity and therefore has led to some amount of ambiguity around the calculation.

Recommendation

We have suggested that Software companies which have their development centre (s) in India shall be treated as local suppliers and classified based on their headcount in India, as below.

Companies that employ 1250 people, engaged in software development be considered Class -I suppliers
Companies that employ 500 people, engaged in software development be considered Class -II suppliers

Cloud services

In the case of Cloud services also it is not possible to apply the definition of ‘local content’, as stated in Order 1. For Cloud services, MEITY already has stringent norms in place which require ‘local content’. MEITY’s empanelment process as delineated in referenced document (iii), requires the following.

The data center facilities and the physical and virtual hardware should be located within India.
Compliance to the government regulations wherein it is required that Cloud services offered shall be hosted within India and data residency shall also be limited to the boundaries of India.
All data functions and processing shall be performed within the boundaries of India.

As a consequence, many tenders that are open could not be served by companies with potential solutions. Some of these tenders have not received even a single bid. Given its impact, there is an urgent need to address this issue to prevent any serious delay in the roll out of ongoing ICT projects.

Recommendation

We have requested MeitY to issue a clarification that empaneled cloud service providers are Class-I local suppliers and that no additional declarations will be required other than the empanelment certificate, for participating in Government procurement.

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Jayakumar Selvaraj

Jayakumar