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DPP Revision and Likely Impact

Ritika Behal

Ritika Behal

The Defence Ministry has released the new Defence Procurement Procedure (DPP) emphasizing on higher indigenization in line with the 'Make in India' programme of the Government.  The new DPP, basically, aims to enhance private sector participation, to promote indigenous design and development and domestic manufacturing and to speed up the procurement process.

The Ministry of Defence (MoD) has released the long awaited Defence Procurement Procedure (DPP) 2016. The new DPP comes into effect on all procurements effected from April 2, 2016. The document does not have key chapter on strategic partnership with key subsets such as Standard Contracts, Offset Policy and all the relevant annexures, appendices and schedules. These are expected to be released later as part of the comprehensive DPP-2016. Some of the changes as discussed below are tangible steps towards removal of red-tapism and bureaucratic hurdles.

Indian Vendor

An Indian vendor for defence products requiring industrial licence needs to be an Indian entity, which could include incorporation/ownership models as per Companies Act, partnership firms, proprietorship, and other types of ownership model as per relevant Indian laws, complying with, besides other regulations in force, the guidelines/licensing requirements stipulated by the Department of Industrial Policy and Promotion as applicable.

An Indian vendor for defence products not requiring industrial licence, need to be an Indian entity, which could include incorporation/ownership models as per Companies Act, partnership firms, proprietorship, and other types of ownership model as per relevant Indian laws and complying with all regulations in force applicable to that industry.

Imperative to note that if an entity sets-up a 100% subsidiary vide the state of the art route under the Foreign Direct Investment (FDI) policy, the same can also be an eligible Indian vendor for procurement purposes. However, in the context of the 'Make' procedure, the JVs in which foreign equity is more than 49 percent would not be eligible to participate in the 'Make' programme which is reserved for entities in which the majority stake is to be controlled by resident Indians.

Order of Preference for Procurement

The new order of preference for procurement shall be as follows:

Depending upon factors such as Indian industry's capability, access to technology, time frame required and availability for development, the 'Make' category of procurement would be pursued in isolation, in sequence or in tandem with any of the aforesaid five categories. Foreign companies may revisit the 'drawing board strategies' towards domestic partnerships (financial or technological) as the first three categories of procurement shall require an Indian vendor to front end the procurement process.

Buy Indian (IDDM)

A new category called the 'Buy (Indian IDDM)' or 'Indigenously Designed, Developed and Manufactured' platforms has been introduced. 'Buy (Indian-IDDM)' category basically deals with procurement of products from an Indian vendor meeting one of the two following conditions:

  • Products that have been indigenously designed, developed and manufactured with a minimum of 40% Indigenous Content (IC) on cost basis of the total contract value;
  • Products having 60% IC on cost basis of the total contract value, which may not have been designed and developed indigenously;

The same percentage of IC will also be required in (a) Basic Cost of Equipment; (b) Cost of Manufacturers Recommended List of Spares (MRLS); and (c) Cost of Special Maintenance Tools (SMT) and Special Test Equipment (STE), taken together at all stages, including FET stage.

The onus of proving that the equipment design is indigenous rests with the vendor, and such vendor claims will be verified by govt agencies. It would be desirable if Government introduces a fixed Standard Operating Procedure ('SOP') for verification of claim of indigenous design and development.

Make Procedure

The Make procedure is proposed to be sub-divided into the following two sub-categories with adequate measures for Micro, Small and Medium Enterprises (MSMEs):

  • Make I (Government Funded) category which involves 90 percent funding of the development cost and reimbursement of the remaining 10 percent if the RFP is not issued within 24 months from the successful development of prototype.
  • Make II (Industry Funded) category where 100 percent cost for development of successful prototype shall be refunded in case of delay in issue of RFP beyond 24 months.

While Make category programme has been revamped, some of the annexures are yet to be released by the government. Based a few media reports, one may expect incorporation of certain conditions to keep the category exclusively reserved for entities controlled by resident Indians.

The increase in government funding (from 80% to 90%) and the commitment of an issuance of an RFP are positive and motivating measures likely to catalyse domestic research, design and development.

Increase in Indigenous Content

There is introduction of IC on Buy & Make (for Foreign OEMs) or else a balance between SKD; CKD and IM kits in order to ensure meaningful value addition in India. Another change includes increase of indigenous content under Buy Indian category from 30% to 40%. Under Buy and Make (Indian) and Buy and Make categories the requirement of indigenous content has been raised from 30% to 50%.

The increase in indigenous content requirement is likely to have multiplier effect. While the foreign vendors shall try to scout with partners who can deliver higher indigenisation, the Indian vendors will try to reduce their dependence on imported components and technology.

It is, however, to be noted that the responsibility to prove an indigenous design rests with the industry, while the final say would be that of the government. To examine the industry's claim, DPP-2016 provides for a committee system comprising scientists from the Defence Research and Development Organisation (DRDO) and members of the concerned Service Headquarters (SHQs). The guidelines, on the basis of which the committee would verify the claims, would be promulgated later by the MoD. Pending the release of the guidelines, it would, however, not be unreasonable to argue that the newly provisioned committee has a challenging task ahead. This is in view of the fact that typical defence technologies are not patented, nor does the DRDO/SHQ have full knowledge of designs of military equipment developed by other countries. Given these constrains, it looks like that the committee would rely mostly on the undertakings and documentary proof submitted by the industry for the purpose of certification.

Higher yet Flexible Indigenous Content Requirement

The industry was particularly vocal with regard to critical aerospace items, in which local capability stands at a bare minimum and achieving even 20 percent IC is a difficult task at the present state of India's defence industrial development. It may be noted that the Hindustan Aeronautics Ltd (HAL), the state-owned monopoly in aircraft manufacturing, depends on foreign sources to the extent of 80 to 90 percent for input materials.

The RFI Process

DPP-2016 has institutionalised the Request for Information (RFI) process, which was followed in not so a disciplined manner under the earlier DPPs. Although the new measure has increased the number of procurement steps involved in 'Buy' and 'Buy and Make' schemes by one more to 12, it has nonetheless brought about much needed clarity in the vital step of procurement, which has a far reaching implication on the source of procurement, indigenisation, the degree of competition, and more importantly, the timeliness of procurement. Besides articulating the objectives and format of the RFI process, it also stipulates the specific inputs that the procurement authorities would seek through the institutionalised step. In addition, in a departure from the past, the RFI is now required to be formulated by the concerned SHQ in consultation with other relevant stakeholders, including DRDO, DDP and HQ IDS (earlier the SHQs were solely responsible for preparing the RFI). This would ensure that any alternative views that the other stakeholders might have on a particular proposal would be taken into consideration at the very beginning of the procurement stage, rather than leaving these to later stages and thus causing unnecessary delays.

Reduced Validity and Sanctity of AoN

In a move to cut down the procurement time frame under the 'Buy' and 'Buy and Make' schemes, the new DPP makes two subtle changes, one by reducing the validity of the AoN from the earlier one year to six months, and the other by making the validity period sacrosanct. The reduced validity of AoN would mean that the RFP has to be issued within six months (from the date sanction of AoN), failing which the SHQ would “re-validate the case and seek fresh AoN with due justification for not processing the case in time.” Making the AoN validity sacrosanct, the new provision makes it mandatory for the SHQs to re-issue any retracted RFP within the original validity of AoN. Earlier, the validity of AoN for the re-tracked RFP was increased by one year from the date of retraction, causing delay.

RFP parameters and revisiting “L1” process

The RFP parameters have been divided into three categories -

  • Essential Parameters - A: These are parameters that are generally a part of the contemporary equipment available in the market, form the core of Service Qualitative Requirement (SQR); Essential Parameters - A will be tested and validated at the Field Evaluation Trials (FET) stage itself.
  • Parameters - B: Though not available originally in the equipment fielded for the FET, these parameters can be developed and achieved by the vendors using available technologies. Essential Parameters B may also be incorporated in the Statement of Case ('SoC'), for provision of partial quantities of the items being procured, to meet different/higher specifications for specific operational requirements.
  • Enhanced Performance Parameters (EPP): EPP are those parameters that enhance the capability of the equipment, vis-à-vis the essential parameters; a SQR may not contain EPP in all cases. Inability to meet the EPP does not preclude vendors from being eligible for the bidding/bid evaluation. Equipment successfully meeting the EPP parameters will be awarded a credit score of up to 10%, for evaluation of L1, with each individual attribute not exceeding a credit score of up to 3%, as approved by the Acceptance of Necessity (AoN) issuing authority. In case procurement involves EPP, then the EPP and their credit scores need to be explicitly detailed in the RFP.

In such cases, if the equipment supplied by a vendor does not have the EPP, then the commercial quote of the vendor, for the purpose of L1 determination, remains as it is.

In cases where a vendor's equipment meets the EPP, the commercial quote will be multiplied by a credit factor less than 1 and greater than or equal to 0.9, based on the additional technical score assigned for the EPP, as detailed in the RFP.

For example, if a vendor quotes Rs. 10 crores for an equipment, and meets a certain EPP for which an additional credit score of 2% is being provided, then the commercial quote of this vendor will be considered for L1 determination purpose only, as Rs. 9.8 crores (10 crores multiplied by 0.98), and not Rs. 10 crores.

However, for all purposes other than L1 determination, the value of the commercial quote will be considered as Rs. 10 crores only.

This move is likely to ensure that technically superior products do not get sidelined solely due to price considerations which, at times, may not be that significant vis a vis the incremental sophistication of the products at offering.

'Single OEM, Multiple Bids' and 'Multiple Bids by Single Indian Vendor'

Accepting the uniqueness of defence procurement, DPP-2016 has incorporated two provisions  'single OEM, multiple bids' and 'multiple bids by single Indian vendor'  in which although the bids are single-vendor in nature they would not be retracted because of lack of competition. The first case is likely to arise in 'Buy and Make (Indian)' category in which a single foreign original equipment manufacturer (OEM) offers the same product through multiple bids in collaboration with a number of Indian companies. In such a situation, the new provision allows the authorities to continue with the procurement process, provided that the Defence Acquisition Council (DAC), the highest decision-making body of the defence ministry, decides that changes in the RFP condition will not invite participation of any more foreign vendors.

The second case is likely to arise under the 'Buy and Make' procurement category in which one Indian company submits multiple bids in collaboration with a number of foreign vendors. Such a case is now acceptable under the new DPP. The main argument for accepting such a case as not a single vendor situation is that the technical and commercial arrangement of one foreign vendor would vary from that of others.

Offsets

Contract threshold has been increased from Rs 300 Crores to Rs 2,000 Crores for offsets in defence. The offset clause would be applicable for 'Buy (Global)' or 'Buy and Make' categories of procurements where the indicative cost of acquisition is Rs. 2000 Crores or more, as on the date of accord of AoN.

Subsequent to the implementation of this provision, only large defence contracts shall be brought within the offset policy. This shall have a two-fold effect. The enhancement of the limit shall firstly, carve out contracts having smaller offset obligations, whose administration and verification was an onerous task for the department. Hopefully, the government shall be able to focus on key offset outcomes with respect to large contracts.

Secondly, for the remaining key players with substantial offset obligation, it shall become imperative to consider setting up of long term manufacturing and supply chains in the country, thus, augmenting the government's efforts of indigenization.

Other Provisions

In addition to the above mentioned provisions, DPP-2016 also includes the following new provisions:

  • Dispute settlement: The DPP sets up an empowered committee to solve disputes or unforeseen issues. Till now disputes were administered by the Defence Acquisition Council ('DAC').
  • In certain cases specifically stipulated in the RFP, the cost of low-value items is to be reimbursed to vendors qualified in the FET stage. This is intended to incentivise wider participation, especially by the smaller companies which may have reservations due to the high cost of participation in extensive filed trials.
  • Change in name of the vendor: Whenever a change in vendor name occurs during any stage of procurement process - from submission of RFI till execution of complete contract - due to any reason such as change in business strategy, merger and acquisitions, or any other reason, it will be permitted.
  • Provision for Equipment Policy Committee (SEPC) to hire experts including from academia and industry for the purpose of “review, rationalisation and finalisation of SQRs.” (The list of experts is to be maintained by HQ IDS and the SHQs). This is likely to help expedite the procurement process, particularly of the Army which often suffers from delays in acquisition due to deficiencies in SQR formulation, among other major reasons.
  • No IC requirement from Indian companies in a 'Buy (Global)' contract if offset is waived off. This is intended to provide a level-playing field between foreign OEMs and Indian companies.
  • The cost of Buyer Nominated Equipment (BNE) procured from the Ordnance Factory Board (the departmental production agency under the DDP) would not be taken into consideration for the purpose of selection of L1 vendor. This is intended to insulate the L1 vendors from an arbitrary hike in price by the OFB post submission of the commercial bid.
  • In certain 'Buy and Make' programmes, in which foreign OEMs are allowed to select their Indian Production Agency (PA), the RFP would stipulate the eligibility criteria for selection. This would bring transparency in the selection process.
  • The scope of Fast Track Procedures (FTP) is expanded to apply to items where undue/unforeseen delay, due to reasons beyond the control of acquisition set up, seem to be adversely impacting the capacity and preparedness of the forces.

Conclusion

With a view to streamline and expedite the existing procurement process, the Ministry intends to cut down the time lag between various phases of defence acquisition. Further there has been an attempt to identify the bottlenecks and fix the same, with predefined timelines.

India today stands at an inflection point of becoming a dominant defence manufacturing base in the world. With the right ingredients in hand- manpower, flourishing automotive and IT base and in country demand for captive consumption, what is required is a conducive policy environment which could sustain a sector requiring high gestation period and huge investment. Hopefully, the changes in the DPP shall aim and contribute towards catalysing the same.

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