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Draft DPP 2020- Changes in Procurement Provisions

The draft Defence Procurement Procedure (DPP)- 2020 has been released by the Defence Ministry that aims at further increasing indigenous manufacturing and reducing timelines for procurement of military hardware/equipment strengthening the defence preparedness of the country. The Article throws light on major changes proposed in the procurement provisions in the new DPP.

The draft of Defence Procurement Procedure (DPP) -2020 has been released by the Ministry of Defence (MoD) and has been put in public domain www.mod.in for seeking the inputs. The draft of Defence Procurement Procedure (DPP) seems to have simplified the procedure and reduced the timeline to ensure probity, transparency and accountability initiative, refine Life Cycle Support of procured equipment & platforms and hasten the defence acquisition process by further simplifying the procedures & reducing the overall procurement timelines. The major changes proposed in the procurement provisions in the new DPP are given below.

Procurement Categories

Draft DPP-2020 has added two more categories for Capital procurement and their Indigenous Content (IC) terms are tabulated as under:

The new procurement category, “Buy (Global-Manufacture in India)” for equipment bought from abroad, from foreign vendors as approved during AoN, in quantities as considered necessary with the intention to subsequently build it in India with technology transfer with a minimum indigenous content of 50 percent of the value of the contract. This will ensure only the minimum numbers would be bought in ready-built condition; and balance would be manufactured in India. This can be achieved in the manufacturing of the entire equipment or spares/assemblies/ subassemblies/ Maintenance, Repair and Overhaul (MRO) facility for the entire life cycle support of the equipment, through its subsidiary in India. Acquisition under this category can also be carried out without any initial procurement of equipment in Fully Formed (FF) state. This category would be given a higher preference than the current ‘Buy Global’ built abroad.

‘Make’ Category

‘Make’ was a single category in DPP 2002. The DPP 2006 had 3 categories in ‘Make’, i.e., Make (Strategic), Make (High-Tech) and Make (Low-Tech) and these categories were retained in DPP-2008 and DPP-2011; while DPP-2016, as amended till Jan 2019, had ‘Make’, ‘Make-II’ categories. Some of the headwinds which made ‘Make’ category as a non starter are:-

  • The Defence Sector Production Agencies (DPSUs/OFB) got into the category which was not in the initial plan.
  • Industry also projected the inflated development cost in some cases.
  • Within Private Sector industry there were anonymous complaints on criteria of short listing of the two Development Agencies (DA).
  • Some companies within Private Sector offered to do the development defence product without Government subsidiary and somehow the MoD fell for it without analyzing the impact.
  • The level of funding has been tweaked.

Some of the initial projects in ‘Make’ Category’ such as the Phase-I of the project Tactical Command Control Communications and Information System (Tac C3I) has been completed. However due to GIS Technical and intra compatibility problem and audit objections next phase is held up. Therefore, introducing another ‘Make’ category further adds on to the other categories that have been included in the past but have not had significant projects fructifying. It would have been more prudent to push ahead the prevailing categories rather than including another category to the list.

‘Make-II’ Category

Broadly the ‘Make-II’ focuses ondevelopment of equipment/ primarilyfor import substitution/innovative solutions by use of readily available commercial, military or dual use mature technologies.

Basically in ‘Make-II’, the Services indicate the project requirement to industry for seeking the feasibility of enhancing the capabilities of the existing system. Industry can also make suo motu proposal in case it can provide solutions on line with the projected requirement. For example the Army had projected the 120mm Extended Range (ER) Guided Mortar Ammunition under ‘Make-II’ and one of the Private Sector company made a suo moto proposal for similar equipment say 81 mm Extended Range (ER) Precision Guided Mortar Ammunition.

‘Make-II’ where innovative solutions have been offered even by a single individual or a firm, the cases would be progressed as a resultant Single Vendor.

Make-III Indigenously Manufactured (IM)

Which although not designed/developed indigenously, but are being manufactured in India as import substitution for product support of weapon systems/equipment held in the inventory of the Services. Indian firms may manufacture with ToT from OEMs but IC contents have to be over 60 percent.

Introduction of ‘Innovation’ is a good idea as it may facilitate greater participation of the Indian industry including MSMEs, start-ups, individual innovators, R&D institutes and academia and may further aid in creating an ecosystem which fosters innovation and encourages technology development in Defence.

iDEX/Innovation

Introduction of ‘Innovation’ is a good idea as it may facilitate greater participation of the Indian industry including MSMEs, start-ups, individual innovators, R&D institutes and academia and may further aid in creating an ecosystem which fosters innovation and encourages technology development in Defence. However the credentials of those who pilot the projects are not substantiated by their past performance. We need to have a look at our past performance in indigenization from DRDO and DPSU and progress on’ Make’ category. Some facts:- 

  • DPP is mainly to govern procedures for Capital procurement and money coming from Capital Expenditure.
  • Innovations for Defence Excellence (iDEX), ‘Open Competition’ Approach and Technology Development Fund (TDF) Schemes to foster innovation & technology development in Defence and Aerospace. These have been proposed managed and funded by DRDO and DPSU and earlier were not part of DPP. However these organizations managed to get DAC approval for inclusion in Draft DPP adding to already Complex procedures.
  • iDEX will function as the executive arm of DIO, carrying out all the required activities while DIO will provide high level policy guidance to iDEX. IDex has been functioning for last over 5 years, but what are the achievements?
  • To put it more bluntly these Govt. organizations wants industry to develop and share the IPR with marginal compensation.

The MoD need to learn from past performance of those piloting these projects (seems to be survival gimmick) and global best practices to channelize the policy to yield positive results in the field of innovation.

Promoting Use of Indigenous Materials Software and Components

  • Incentives for use of indigenous raw materials, special alloys, software and components encouraging the development and production to facilitate greater participation of Indian Industry.
  • Leverage highly developed indigenous software expertise for running applications and analysis - based applications for  Communications, Encryption sub systems on indigenous software in Buy (Indian – IDDM) & Buy (Indian) cases.
  • Enhanced Performance Parameters (EPP) for indigenous software defined with commensurate credit score in the SQRs.
  • Input relative to these will be sought at RFI Stage to examine platforms and other equipment/systems with substantial contribution.

Product Support and Maintenance

After the various experiences of equipment not being available for use; the Product Support has been considered as essential requirement of new acquisitions to optimize useful equipment exploitation. Some mandatory provisions such as product support for 3-5 years post warranty (as applicable) are being considered essential including:-

  • Engineering Support Plan (ESP)
  • Annual Maintenance Contract (AMC)
  • Comprehensive Maintenance Contract (CMC)
  • Life Cycle Support Contract (LCSC)
  • Performance Based Logistics (PBL)

The provision of product support level and applicability of above sub sets may differ from project to project for new capital procurement. For example an aero platform may need AMC CMC etc but may not be necessary for a Rifle or simple platform. Besides need to consider designs, development and manufacturing and servicing ecosystem in the country for life cycle support.

The Total Cost of Acquisition in a particular contract may include:-

  • Direct Acquisition Costs
  • Cost of ToT
  • Cost of TTL Based Reserves
  • Cost of TBO/ MTBF Based Reserves
  • Cost of Scheduled Intermediate Level Servicing
  • Cost of Depot Level Overhaul  etc

The vendors will have to provide quotes as per the requirement and format in the RFP. The Direct Cost of Acquisition and Cost of ToT (in case applicable) need to be quoted on firm and fixed basis as per the delivery schedule. The first one has more weightage basis for short listing the equipment. The ToT requirement is there in case additional numbers are required to be produced in the country. The others if asked in RFP as per detail requirement of RFP and the submission in the technical bid.

Leasing

The proposed  concept of leasing is to save on overall cost to offset huge initial capital outlays for procurement of non  combat platforms with periodical rental payments. The lease could be ‘Lease (Indian)’ or ‘Lease (Global), and likely to be preferred in cases:-

  • Procurement not feasible due to time
  • Asset needed for specific time or underutilized if procured
  • Smaller numbers needed – administrative & maintenance
  • Service life lease rental better than acquisition cost
  • Operational necessity

Leasing will be useful for military equipment not used in actual warfare like transport fleets, trainers, simulators, etc. Leasing could be already in service equipment /new equipment

Indigenous Content (IC)

Cost of equipment before taxes/duties less Direct Cost (including freight/transportation & insurance) of all physical materials imported into the country for the product, all imported services and all license fees, royalties, technical fee to be paid out of India for the product.

The draft DPP-2020 caters for  Indigenous Contents by the prime vendor and its Tier-I/II vendors and IC Performa to be used to capture import content by the prime vendor and Tier-I/II vendors.

DPP-2016 stipulated IC to be calculated at every stage of manufacturing/production/assembly (from smallest supplier of parts, components, etc to the system integrator). The draft DPP-2020 caters for maximum coverage of import content by the prime vendor and its Tier-I/II vendors and IC Performa to be used to capture import content by the prime vendor and Tier-I/II vendors. Indigenous Content (IC)Computation is based on:

  • Minimum 80% of the value of main contract must be accounted for import content by the prime vendor and its Tier-I/II vendors
  • Import content of Tier-II vendors must be accounted for if:
  • If the contract value of Tier-II supplier> INR 100 million
  • Value of supplies of Tier-II supplier is > 5% of contract value of the Tier-I supplier
  • Import content of the rest of the supplies
  • @15% of value of supplies from rest of Tier-I suppliers (Balance Tier-I Suppliers)
  • Any direct import by prime vendor/Tier-I/II vendors and import through traders/stockists and local agent of foreign supplier would be treated as having 90% import content, unless accompanies by import certification
  • Monitoring of IC
  • Foreign Exchange Rate Variation (FERV) adjustments from MoD
  • Filling for the GST

Price Variation Provisions

In the past mostly the defence contracts as per earlier version of DPP were entered into on a fixed price basis and they did not have Price Variation provisions. However, the shipbuilding contracts which are generally long term (as ship building is minimum 4-5 year activity) were on Cost Plus basis with defence shipyards. With the fluctuating market conditions in the case of long term contracts the variable price quotes were given by the Sellers and General Financial Rules (GFR) had provisions for the same. Only amendment to DPP-16 in the year 2018 brought in Denial clause and corresponding implication of PV.

In the Draft DPP to cater for the escalation of price from the last date of submission of bids till the finalization of the CNC, PVC may also be incorporated in the RFP for all cases more than INR 1000 Crores and where the time period of deliverables is more than 60 months. PVC caters to the price escalation that creeps due to fluctuations in the exchange rate, inflation etc. as a result of delays in the procurement process. The PVC, wherever applicable and is incorporated in the RFP even in ‘Buy (Global)’ cases also. Further, the PVC, other variations and foreign exchange clauses operate only during the original delivery period.

Exchange Rate Variation

Exchange Rate Variation (ERV) is applicable for Rupee contracts with Indian vendors, based on RFPs issued under all categories of Capital Acquisitions, where there is pre decided import content and delivery period is over one year and the rate of exchange variation is above 2.5%. The ERV clause will not be applicable for extended periods in case delivery periods unless the reasons for delivery period extension are attributable to the Buyer.

New Chapters in the Defence Procurement

 Two additional chapters added in revised draft on;-

  • Information and Communication Technology (ICT). Policy & procedures for procurement & management of integrated projects.
  • Post Contract Management in Capital procurement entails different contracting agency & contract operating agency to ensure smooth transition from pre to post contract.

The major policy changes proposed in the draft have attracted attention from OEMs and Private sector industry. It would be advisable to review the proposed changes in DPP 2020 keeping in view the feedback from the Industry, especially the foreign vendors who are main party for Technology Transfer, and stakeholders in partnership and supply chain with Indian industry. Also, the obvious need to rationalize the legacy issues and provide fair competitive level for the private sector.

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