An incomplete version of the much-awaited Defence Procurement Procedure (DPP) 2016 was released on 28 March 2016 to coincide with the inauguration of the three-day Defexpo 2016 at Goa.
The released version comprises a preamble and five chapters which have largely been carved out of the first four chapters of DPP 2013. The revised standard contract document and various annexures/appendices have not yet been notified but considering that DPP 2016 is applicable from 01 April 2016, it should be just a matter of time before these too are notified.
What is not likely to be notified shortly is the chapter on ‘Strategic Partners’. This was one of the most talked about recommendations made by the Committee of Experts(CoE) set up by the ministry last year to suggest a policy framework for promoting ‘Make in India’ in defence and concomitant procedural changes.
The procurement procedure, as it has evolved over the years, comprises several stages, starting with formulation of Services Qualitative Requirements (SQRs) till signing of the contract. These stages remain unchanged. Major changes have, however, been made in procurement categories and the basis for award of contracts.
The most significant of these changes is addition of a new category to the existing five, arranged in a decreasing order of priority: ‘Buy (Indian)’, ‘Buy and Make (Indian)’, ‘Make’, ‘Buy and Make’, and ‘Buy (Global)’.
The new category to be called ‘Buy (Indian Designed, Developed and Manufactured)’, or ‘Buy (IDDM)’ for short, replaces ‘Buy (Indian)’ as the most favoured category.
The products to be procured under this category will be required to have a minimum of 40 per cent indigenous content if these are designed, developed and manufactured indigenously. If the product is not designed, developed and manufactured indigenously, it will be required to have a minimum of 60 per cent indigenous content.
While it is ostensibly intended to encourage indigenous production, this category would clash with the ‘Buy (Indian)’ category, under which the requirement of indigenous content in the product has been increased from the existing 30 per cent to 40 per cent. Thus, a product not designed, developed and manufactured indigenously can be procured under either of these categories but the requirement of indigenous content would vary depending on the
category under which it is procured. This will complicate the process of categorisation of procurement proposals.
Since DPP 2013 did not bar Indian vendors offering indigenously designed, developed and manufactured products with 30 per cent indigenous content under the ‘Buy ((Indian)’ category, it is somewhat difficult to make out how introduction of ‘Buy (IDDM)’ category and increase in the requirement of indigenous content under ‘Buy (Indian)’ would provide a greater incentive to the Indian industry.
The second major change is in regard to splitting of the ‘Make’ category into ‘Make I’ and ‘Make II’ sub-categories. The ‘Make’ category was introduced in 2006 with the objective of promoting indigenous design and development of prototypes of high technology complex systems for meeting future requirements of the armed forces.
As was the case with ‘Make’ projects, ‘Make I’ projects will be funded by MoD but the extent of funding of the cost of development has been increased from the existing 80 per cent to 90 per cent and a provision has been made for payment of mobilisation advance to the selected developing agencies.
The remaining 10 percent of the cost of development will also be reimbursed to the developers if the Request for Proposal (RFP) is not issued by MoD within two years of successful development of the prototype. The ‘Make II’ projects will be self-funded by the industry but in this case also the cost of development will be reimbursed in full by MoD if the RFP is not issued within two years.
To bring the Micro, Small and Medium Enterprises (MSMEs) in the loop, ‘Make I’ and ‘Make II’ projects with estimated cost of development up to Rs 10 crore and INR 3 crore respectively will be reserved for them. The ‘Make II’ projects will, however, be opened to others if no MSME evinces any interest in them.
It may be recalled that not a single contract for a ‘Make’ project has been signed till date, largely because of the complexity of selecting the development agencies. Since the revised criteria for selection of the development agencies have not been notified as yet, it is difficult to say how splitting of the new scheme will play out, also keeping in view the fact that there is no significant change in the ‘Make’ procedure. Even so, this is a good idea and with some tenacity on the part of the Integrated Project Management Teams (IPMTs) whose role will be crucial in navigating the ‘Make’ projects, it could make a big difference in so far indigenisation of defence production is concerned.
The third important change is in regard to the basis for award of contracts. The SQRs will henceforth be detailed in the RFPs in terms of Essential Parameters A and Essential Parameters B. The former would comprise those features that are generally present in the equipment available in the market. These features will be tested and validated in the Field Evaluation Trials (FET) and contracts awarded based on these parameters.
Essential Parameters B do not necessarily have to be available in the equipment fielded for FET. The vendors will be permitted to develop these parameters after the award of contract. This should mitigate the financial risk for the vendors who had to incur substantial expenditure on customising the product before fielding it for FET.
There is another change which will have an impact on award of contracts. In future, RFPs may also contain Enhanced Performance Parameters (EPP), which add to the capability of the equipment, though these will not be a part of the SQRs. Inability to meet EPPs will, therefore, not disqualify a vendor at the time of bid evaluation but if the equipment meets these parameters the vendor offering such equipment will be assigned credit/weightage up to 10 percent while evaluating his financial bid at the time of determination of the L1 (lowest) bid.
This is intended to make sure that not just the price but the quality also plays a part in determination of the L1 offer. It is a noble idea but its implementation could be problematic, not least because the decision as regards the EPPs and fixing the extent of credit to be assigned to each one of the parameters could always be questioned.
Several other minor, albeit significant, procedural changes have also been made in DPP 2016 but the absence of the chapter on Strategic Partners and delay in notification of the new offsets policy robs it of what was expected to be its USP.
The entire ‘Make in India’ buzz notwithstanding, India will have to continue to depend on transfer of technology from FOEMs for meeting the requirement of the armed forces for quite some time. The ‘Buy and Make (Indian)’ and ‘Buy and Make’ categories were designed for this purpose. These categories cater for outright procurement of a limited quantity of equipment from FOEMs, followed by indigenous manufacture of the remaining quality in India. Under the former category, the contract is signed with the Indian companies who, in turn, can tie up with FOEMs, while under the latter category the contract is signed with the FOEMs who are then expected to transfer technology to the MoD-nominated Indian Production Agency (IPA) for licensed production of the equipment.
The difficulty in identifying private sector Indian companies with whom contracts could be signed or who could be nominated as IPAs made Defence Public Sector Undertakings (DPSUs) and Ordnance Factories as the default choice for MoD for licensed production of defence equipment. Ostensibly to overcome this difficulty, a committee was set up by MoD to recommend the criteria for short listing of Indian entities as ‘Strategic Partners’. Since notification of the chapter on ‘Strategic Partners’ has been deferred, it is not clear whether these partners are supposed to serve
as prime contractors under ‘Buy and Make (India)’ as well as IPAs under ‘Buy and Make’, or their role will be limited to being nominated as IPAs under the latter category, as recommended by the CoE.
One wonders why should MoD take on the responsibility of nominating private sector entities in ‘Buy and Make’ cases when it has the simpler option of leaving it to the FOEMs to chose the Indian production agencies on their own. This strategy was adopted in the ‘Avro-replacement’ programme of the Indian Air Force and an enabling provision has indeed been made in DPP 2016 to adopt it in future programmes also. This category could actually become the norm for licensed production of equipment in India.
The offset policy adopted in 2006 was intended to strengthen the defence industrial base in India. The policy was revamped in 2012 but the results have belied expectations. For more than a year now MoD has been mulling a paradigm shift in the policy. A revised offset policy/procedure, drafted last year, was expected to form the core of the new guidelines to be incorporated in DPP 2016 but the new policy has not been notified as yet.
Presently, FOEMs are free to make a proposal conforming to the laid down policy parameters for discharge of the offset obligation. It is expected that under the new norms MoD will mention the specific area(s) in which it would like FOEMs to discharge the offset obligation in a given acquisition programme. This will lend substance to the policy but reliance on a maze of committees to execute this idea, as envisaged in the draft policy, could prove counterproductive.
There has been little, if any, simplification of the Fast Track Procedure and the provisions relating to procurement under Inter-governmental Agreements or on strategic considerations. The potential of these provisions, which can lead to faster procurements, remains largely untapped, with the exception of the Foreign Military Sales programme (FMS) which has proved to be the fastest gateway for export of arms to India. But then, it is not the DPP route. The FMS procedure is laid down by the US government.
Lastly, the recent reports of commissions allegedly paid by the Italian firm Elettronica SpA in a defence deal, as revealed by the leaked files of Mossack Fonseca, again highlight the need for a pragmatic policy on debarment of dealings with, and blacklisting of firms facing allegations of transgression. Indiscriminate debarment/blacklisting have done a lot of harm in the past. Hopefully, the unreleased portion of DPP 2016 will fix all such problems that have beset defence acquisitions for a long time.