"I realise that some of my criticisms may be mistaken; but to refuse to criticize judgements for fear of being mistaken is to abandon criticism altogether... If any of my criticisms are found to be correct, the cause is served; and if any are found to be incorrect the very process of finding out my mistakes must lead to the discovery of the right reasons, or better reasons than I have been able to give, and the cause is served just as well." -Mr. HM Seervai, Preface to the 1st ed., Constitutional Law of India.

Wednesday, January 1, 2014

Purchase Preference to Public Sector Enterprises: A Short History

This brief post summarises the evolution of the Law on Purchase Preference to Public Sector Enterprises. The purpose of this is to act as a first reference point to researchers interested in the subject.
 
Since 1992, the Government of India has been following the Purchase Preference Policy.[1] Under the said Policy, the Department of Public Enterprises, Government of India had sought to liberalise the industrial policy of India and stressed on the need for improvement of the performance of public enterprises based on commercial principles. The Government deemed protection of public enterprises through price or purchase preference was not in accordance with the liberalised industrial policy. Therefore, the Department of Public Enterprises recommended replacing the then prevailing price preference with purchase preference in public procurement. Under purchase preference, where the price quoted by a public enterprise in public procurement was within 10 per cent of the lowest bidder (L1) price, ceterus paribus, purchase preference may be granted to the said public enterprise concerned provided it was willing to match the L1 price, that is, supply at the price quoted by the lowest bidder.
 
This policy was transitory and was operable for three years. The Notification providing for Purchase Preference Policy also recommended that price/ purchase preference policy had to be done away with within three years from the date of its issue, that is, January 1995, by which time, the public enterprises were to adjust to the new environment of competition and efficiency. However, the policy was extended in 1995 up to March 1997[2] and in October 1997 up to March 2000.[3]
 
The 1997 notification restricted the purchase preference to manufactured items produced by public sector enterprises or joint ventures with public sector enterprises where the purchase was in excess of Rs. five crore. Further, the notification clarified in that in case of joint ventures with public enterprises, there had to be a value addition of at least 20 per cent by the public sector enterprises in the item manufactured. In February 1998, it was clarified that the above notification was applicable even in case of services provided by public sector enterprises.[4]
 
The purchase preference was again extended in 2000[5], 2002[6], 2004[7] and 2005[8], subject to certain conditions. The 2005 extension was to be effective till March 2008. However, the policy was reviewed pursuant to the decision of the Supreme Court in Caterpillar India Pvt. Ltd. v. Western Coalfields Ltd.[9] In the said decision, it was contended by the Appellant that the 2005 guidelines make purchase preference mandatory as compared to the previous guidelines which used permissive language in respect of purchase preference. Further complaint was raised regarding the efficacy of such a policy which granted monopoly to public sector enterprises. Consequently, the Supreme Court issued the following guidelines in the case:
  • The concerned ministries are directed to consider the issues raised by the Appellant and to consider We, therefore, direct that industry-wise assessment be done and to perform an industry-wise assessment of the need for preference. Where there is cost-effectiveness in a public sector enterprise, there is no need to give preference over others. 
  • The assessment should also decide whether and to what extent there should be preference so as to ensure a level playing field. If purchase preference is required, the margin of preference should be fixed.
  • Further, if the object of the tender is to invite foreign direct investment, the impact of purchase preference on such investment should be considered.
  • The extent of discretion is to be given as to whether the purchase preference should be followed or not should be re-introduced.
  • The above exercise is to be undertaken by the concerned ministries within four months from the date of the judgement. 
  • In the interim, the present policy shall continue to apply till the issue is reconsidered afresh by the concerned departments of the Government of India.
  •  While fixing the norms, the capacity of a party to deliver the subject matter of the contract and that of the competitors should be taken note of.
 Consequently, the DPE revisited its previous notifications and came up with the fresh notification in November 2007[10] and instructed the following:
  • The Purchase Preference Policy would terminate with effect from 31.03.2008.
  • This decision would not affect the Purchase Preference Policy framed for specific sectors by the relevant Ministry/ Department.
  • The Concerned Ministry/ Department would be entitled to evolve/ review preferential policies for the sectors of their concern, as per their requirement.
In view of the above notification, the Purchase Preference Policy ceased to be effective from 31.03.2008. Consequently, the CVC Instructions issued in March 2009 exempt the Purchase Preference Policies as made by the relevant Ministries/ Departments from the ban on post-tender negotiations.
 

[1] Office Memorandum No. DPE/13(19)/91-Fin.dated 13 January 1992, available at
[2] DPE OM NO.DPE/13(19)/91-Fin. dated 15 March 1995
[3] DPE OM NO.DPE/13(19)/91-Fin. dated 31 October 1997, available at
[4] DPE OM No.DPE/13(19)/91-Fin. dated 10 February 1998, available at
[5] DPE OM No. DPE/13(3)/2000-Fin.-GL-30 dated 14 September 2000, available at
and DPE O.M. No.DPE/13(3)/2000-Fin. dated 30 October 2000, available at
[6] DPE OM No. DPE/13(1)/2002-Fin. dated 14 June 2002, available at
[7] DPE O.M. No.DPE/13(12)/2003-Fin. dated 26th October 2004, available at
[8] DPE OM No. DPE.13(12)/2003-Fin. Vol. II dated the 18th July 2005, available at
[9] AIR 2007 SC 2971: (2007) 11 SCC 32: MANU/SC/7685/2007
[10] DPE OM No. DPE/13(15)/2007-Fin dated 21st November 2007, available at

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