DPP 2016 was a path breaking documents in many ways, but was yet not quite adequate to either boost defence exports or bring in additional FDI in the sector. However, the government has thereafter continued to tweak policies in response to the Indian defence industry’s legitimate demands. With the thrust being clearly on indigenisation, policy shifts have addressed multiple areas, repeatedly. The author analyses some of the areas that have witnessed changes in order to spur the growth of local suppliers.
Local Suppliers to get Purchase Preference for 109 Defence Items
In a long overdue move, the Ministry of Defence (MoD) has issued a series of orders between June and September 2018, extending the purchase preference policy notified by the government in June last year to the local suppliers of 109 items. These items range from air pumps and ventilation fans to design, manufacturing, supply, erection and commissioning of capital equipment like rolling mills and furnaces.
The term local supplier refers to a supplier of goods or a service provider whose product or service meets the minimum local content requirement laid down by the procuring agency. In the case of the aforesaid 109 items the minimum local content requirement is specified in respect of each item separately in the MoD notifications. It ranges from 10% in respect of some components of missile systems like Akash, Invar and Konkurs to 70% in respect of Helo Safety nets.
The government policy, which has now been extended to the aforesaid 109 items, is not applicable to procurements up to Rs 5 lakh. For procurement between Rs 5 lakh and Rs 50 lakh, only local suppliers are eligible to participate in the tender if the procuring agency is of the view that adequate local capacity exists to generate competition. Where the procuring agency is not sure that adequate competition can be generated, and in all procurement cases exceeding Rs 50 lakh, local suppliers will be entitled to the purchase preference as illustrated below:-
• If the overall lowest bidder is a non-local bidder, he will be awarded only 50% of the order quantity in the first instance. Thereafter, the balance 50% quantity will be offered to the lowest local supplier (participating in the same bid), provided such local supplier’s bid is within 20% of the lowest bid of the non-local supplier and also if the lowest local bidder agrees to match the price bid of the overall lowest non-local bidder.
• If the lowest local bidder does not agree to match the lowest price quoted by a non-local bidder or the local bidder is unable to accept the entire offered quantity (50%), the next lowest local bidder whose bid is within 20% of the overall lowest bid will be invited to match the price of the lowest non-local bidder and the contract will be awarded to such local bidder if he agrees to match the overall lowest bid.
• If the second lowest bidder does not agree to match the price or is unable to accept the quantity offered to him, an opportunity will be given to the next lowest bidder, and so on, as long as their bid happens to be within 20% of the overall lowest bid submitted by the non-local bidder.
• If any quantity is left over after exhausting all eligible local bidders, the left-over quantity will also be offered to the lowest non-local bidder who had been awarded 50% of the order quantity in the first instance.
• Where the quantity is not divisible, and the bid of a local supplier is found to be within 20% of the lowest bid submitted by a non-local supplier, the local supplier will be invited first to match the price of the overall lowest non-local bidder and the contract will be awarded to him if he agrees to match the price. If he does not agree to do so, the opportunity will be given to the next lowest local supplier, and so on. In such cases, the non-local supplier whose bid is the lowest can expect to win the contract only if all the local suppliers whose bids are within 20% of the non-local supplier’s bid refuse to match the price of the non-local lowest bidder.
It is evident that the eligibility to participate in the competition depends on two factors: presence of the requisite percentage of local content in the product or service being offered by the local suppliers and the price bid being within 20% of the lowest price quoted by a non-local supplier. The MoD notifications not only indicate the requisite percentage of local content in respect of each item but also make it clear that the local content will be calculated by excluding from the total cost of the product, the following elements at all stages of its manufacturing, production or assembly:-
• Direct costs (including freight, transportation and insurance) of all materials, components, sub-assemblies, assemblies and products imported into India;
• Direct and indirect costs of all services obtained from non-Indian entities and citizens;
• All license fees, royalties, technical fees and other fees/payments of this nature paid out of India, by whatever term/phrase these are referred to in the contracts/agreements made by the vendors or sub-vendors.
• Taxes, duties, cesses, octroi and any other statutory levies in India of this nature.
The term ‘at all stages of manufacturing, production or assembly’ implies that the local content in all the bought-out items that go into manufacturing of the product being offered by the local supplier will be aggregated while calculating the total local content in that product. The local suppliers will, therefore, need to incorporate an appropriate clause in their contract with their sub-vendors which requires them to reveal the local content in the item being supplied by them to the local supplier.
It will be the responsibility of MoD’s Department of Defence Production (DDP) to constitute a Technical Committee with internal and external domain experts for carrying out independent verification of self-declarations made by the local suppliers or the auditor’s/accountant’s certificates submitted by them in support of the claim of local content in their products. These verifications will be carried out randomly in case there is a complaint. The DDP and other procuring agencies may even prescribe a fee to cover the administrative cost of handling such complaints.
False declarations will be treated as breach of the Code of Integrity entailing debarment of the offending bidder or his successors for a period up to two years, apart from any other action that may be permissible under the law.
The MoD orders take effect prospectively and will remain valid till these are reviewed after 31 March, 2020. While for the present the orders are applicable to only 109 items, all questions on whether an item being procured is a defence item covered by the government policy will be decided by DDP which is to be the nodal agency to monitor the implementation of the orders. It perhaps leaves a window open for more items to be included in the list of eligible items on a case-to-case basis.
Though belated, and largely limited to what appears to be revenue items, extension of the government’s purchase policy to defence products is a welcome step. Hopefully, the percentage of the local content requirement in respect of each item has been fixed with due consideration and will provide a fair opportunity to the local suppliers to compete with the non-local suppliers, match their price bids and win the contracts. It is a good beginning, but the effectiveness of the policy will depend on a dynamic monitoring of the extent of participation by the local suppliers.
One also hopes that in due course, the policy will be extended to capital acquisitions with any changes that may be required to be made in the conditions related to indigenous content and the margin of purchase preference in respect of the major defence platforms, equipment, weapon systems and other capabilities. That will be the real test of MoD’s willingness to promote the domestic defence suppliers.
(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of BharatShakti.in)