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Supporting Cottage, Small and Medium Enterprises through preferential procurement

Contributed by Ms Pem Lama

Understanding Preferential Programmes

Public procurement allows benefiting from the direct utility of procured products. In addition, procurement policy can be approached strategically to work in coherence with existing development strategies and help achieve environmental and socio-economic objectives. By strengthening demand for certain domestic products, the public sector can stimulate industry, create jobs, help disadvantaged producers and protect the environment. This is frequently called green or sustainable public procurement.

Preferential programmes are an important tool in the sustainable public procurement toolbox. Preferential procurement can take many forms, but can be defined as procurement policies stipulating that certain supplier groups are favored in tender evaluations, which are thereby not only based on price and inherent quality of the product.

There are many methods of implementing preferential procurement policies, such as[1]:

  • Set asides – Which allow certain enterprises/individuals to compete for the contracts which have been reserved for them.
  • Qualification criteria – Which excludes firms that cannot meet a specified criteria for participating in a bid.
  • Contractual conditions – Where a contractual condition can be made to fulfill a policy objective such as mandating certain portion of the contract to be carried out by enterprise that fulfill certain prescribed characteristics (such as being disadvantaged).
  • Offering back – Which offers the bidder the opportunity to get the contract if they are prepared to match the price and quality of the best tender received.
  • Preference at the short-listing stage – Which establishes preference for certain suppliers or service providers on basis of their qualifications vis-à-vis the policy objective(s).
  • Award criteria – Which can introduce weighting that meets policy objective(s), in addition to the usual weighting of price and quality.
  • Product/Service specification – Which specifies certain requirements from the product/service (such as local content/ value-added locally, etc).
  • Design specifications, contract conditions and procurement processes – Which can target participation from preferred group of bidders to fulfill policy objective(s).
  • General assistance – that provides support for targeted enterprises to compete for business, but does not give any favourable treatment in the actual procurement process.

Bhutan’s Cottage, Small and Medium Industries Development Strategy

Bhutan’s Cottage, Small & Medium Industry (CSMI) represents an important part in contributing towards the national development philosophy of Gross National Happiness (GNH). In particular, CSMIs help promote pro-poor growth, inclusive and equitable development and can be more environmentally-friendly due to its smaller scale. In 2012, the Micro, Small and Medium Enterprises (MSMEs)[2] contributed a total of Nu. 890.9 million to Bhutan’s total national revenue, , equivalent to 5.1%. The Labour Force Survey (LFS) of 2010 indicates that 56.2% of total workforce in Bhutan is employed in agriculture/farming, followed by private business which employed 20.6% of the total national workforce.

Recognizing the importance of CSMIs, RGoB has developed a Policy, Strategy and Action Plan has been developed for CSMI sector[3]. Leaving medium industries aside, the Cottage and Small Industries (CSIs) service companies form the largest sector with over 9,000 firms out of the 14,249 CSIs in Bhutan. Based on 2013 figures, over 97% of the CSIs were sole proprietorships – thereby micro-scale firms. Besides service companies such as the common catering and consulting services, industry is categorized into production & manufacturing like the agro-based and forestry-based firms.

The role of the government is seen as providing an enabling policy, legal and regulatory environment for CSMIs, investing in public goods and correcting or compensating for market failures. The CSMI Development Strategy states six strategic objectives:

  1. Strengthening the policy environment and institutional framework
  2. Strengthening the legislative framework and enterprise environment
  3. Facilitating access to finance and incentives
  4. Enhancing competitiveness and innovation
  5. Improving market access
  6. Enhancing employment and developing a culture of entrepreneurship

Preferential Procurement and CSMI in Bhutan

Bhutan’s implementation of preferential procurement is laid down in the Procurement Rules and Regulations (PRR) of 2009, amended in 2014, which provides for a five percent margin of preference for national bidders, meaning preference must be given to goods of Bhutanese origin (or to Bhutanese bidders in case of works) if the price difference does not exceed five percent compared to foreign goods (or international bidders in case of works). The Standard Bidding Documents (SBDs) include particular clauses on preference for domestic bidders and the requirements to meet the criteria to be eligible for the margin of preference (SBD on Works, Section 1, Clause 30, SBD on Goods, Section 1, Clause 38).

The CSMI Action Plan 2012-2014 proposes changes in public procurement to boost the CSMI sector, specifically to contribute to one of the strategic objectives, which is “strengthening the legislative framework and enterprise environment” (Activity 2.8). It asks to “raise the 5% margin of preference for national bidders and reduce discretion”.  To further facilitate procurement from CSMIs, pursued activities include: establishing a central procurement website and requiring all agencies to use it; developing guidelines for CSMI bidders on drawing-up public procurement proposals; and maximizing the use of e-procurement for the benefit of all, especially CSMIs.

Conclusion

The inclusion of the above measures in Bhutanese public procurement policy shows the importance the RGoB gives to strengthening CSMIs as a core part of the economy. Moreover, procurement measures are not isolated but part of a broader set of CSMIs policies, plans and strategies. This is a commendable approach to maximize the multiplier benefits that these firms provide to Bhutanese society, and individuals’ sustainable livelihoods.

Nevertheless, there is room for expanding preferential procurement in an effective manner and introducing policies that can create demand for specific goods, services and works in a manner that will support socio-economic development in Bhutan. Specific economic industries which are strategically important can be promoted, creating coherence with existing development policies and strategies, such as Bhutan’s 11th Five-Year Plan that has the strategic objective of achieving “self-reliance and inclusive green socio-economic development”. Promotion of the identified strategic industries can be combined with helping national disadvantaged suppliers, women, disabled persons, ethnic/tribal minorities, rural and poor communities to undertake those business opportunities. Manifestations of preferential programs were outlined above, and include set asides; qualification criteria; contractual conditions; offering back; preference at the short-listing stage; award criteria – product/service specification; and design specifications, contract conditions and procurement processes.

Whichever instrument is pursued, policy design must include a clear set of methods and procedures for implementing preferential procurement. These are necessary to foster coherence and prevent corrupt practices, for which preferential programs can open a window if not carefully designed. It is also important to be mindful of concerns related to preferential procurement and try to mitigate potential negative impacts. The latter can include inefficiency due to intentionally-reduced competition, unfair treatment of bidders, compromised integrity, and lack of consistency or transparency in the procurement processes.

 

[1] Best Practice Guide B1: Formulating and implementing  preferential procurement policies. March, 2004: First edition of CIDB document 1007. Construction Industry Development Board. South Africa.

[2] MSME includes trading sector as well, whereas CSMI excludes trading sector

[3] CSMI Policy (2012), CSMI Development Strategy 2012-2020, CSMI Action Plan for 2012-2014, Ministry of Economic Affairs, Royal Government of Bhutan