 "Procurement policy undergoes a change of focus")
The Defence Procurement Policy of 2013 (DPP-2013), released on June 1, 2013, aims at providing "a boost to the Indian Defence Industry, both in the Public and the Private sector," according to Defence Minister A K Antony in his Foreword to the document. This is sought to be achieved by according priority to acquisitions from Indian companies; simplifying the "Buy & Make (Indian)" procurement category; and revising the procedure for shipbuilding, amongst other measures.
DPP-2013 is the latest ministry of defence (MoD) procurement policy, which has evolved steadily, if slowly, since the turn of the millennium. Current procurement structures trace their roots to the Group of Ministers (GoM) report on "Reforming the National Security System", formulated after the Kargil Review Committee submitted its report in 1999. The GoM comprehensively reviewed the procurement structures that had been in vogue since 1992, and recommended the framing of new procurement structures.
In a watershed change in April 2001, private companies were permitted to engage in defence production, subject to licensing and to an FDI cap of 26 per cent. In October 2001, the Defence Acquisition Council (DAC) and the Defence Procurement Board (DPB) were put in place to "bring in better synergy between the MoD and the Service Headquarters (HQ) in planning, defence acquisition and operations so that all stakeholders may function in a coordinated manner," according to former MoD additional secretary, S N Misra, in his authoritative book, Impact of Defence Offsets on Military Industry Capability and Self-reliance.
While these initial DPPs did not trigger any major rise in military procurements, the MoD actively sought and obtained feedback from a range of stakeholders, including foreign original equipment manufacturers (OEMs), foreign and Indian industry bodies, private and public sector Indian companies and the military. Two years later, DPP-2005 was promulgated, incorporating several major changes.
DPP-2005 mandated that qualitative requirements (QRs) should be broad-based in order to avoid single-vendor situations; that there should be joint services QRs for equipment common to all three services; and it incorporated the ministry of finance (MoF) suggestion that there should be more objective techniques for comparing bids, catering for Discounted Cash Flow (DCF) and Exchange Rate Variation (ERV).
In what has evolved into a major policy pillar of Indian defence procurement, the DPP-2005 accepted the recommendations of the Kelkar Committee - which submitted its report that year - and mandated that offsets of at least 30 per cent would be imposed on all foreign procurements worth more than Rs 300 crore. Vendors could discharge offset liabilities by purchasing or exporting goods and services produced by the Indian defence industry, or by investing in India's defence industrial infrastructure.
The following year, DPP-2006 fleshed out that preliminary offset policy. Vendors were permitted to discharge offset liabilities by investing in Indian defence R&D, and were allowed to choose an Indian Offset Partner (IOP), who was required to have a defence production licence. A MoD agency was established to facilitate offset tie-ups between IOPs and vendors, but this agency, called Defence Offset Facilitation Agency (DOFA) would never be empowered, or provided with the infrastructure, to discharge this role effectively.
DPP-2006 also introduced the "Make" category of procurement, which provided a framework for the Indian private and public sectors to lead the development of defence products. DPP-2006 also reviewed and revised the Fast Track Procedure for procuring urgently needed defence items; and the Procedure for Indigenous Warship Building. An "Integrity Pace" was made compulsory for all contracts above Rs 100 crore.
By 2008, increased public and institutional scrutiny of defence procurement, and the internationally-watched procurement process for 126 medium multi-role combat aircraft (MMRCA), had created a momentum for fairer procurement. DPP-2008 introduced greater transparency in the trial evaluation of equipment, mandating the Request for Proposals (RfP, or tender) would describe what trials would be conducted so that vendors would be aware of the modalities and evaluation criteria. Vendors would receive directions during the course of trials as well as the result of the evaluation. If any vendor's product were disqualified, the MoD would communicate the reasons in writing and place that on record.
DPP-2008 also liberalised the offset policy, acceding to a chorus of demands from foreign OEMs and prospective IOPs. Offset credit banking was introduced, permitting vendors to bank offset credits for up to two years in anticipation of offset liabilities that arose in the future. And IOPs no longer needed a defence production licence; they only needed to meet guidelines set by the Department of Industrial Policy & Promotion (DIPP).
More changes to the offset policy were made in DPP-2011, which came into effect on January 1, 2011. Vendors were permitted to discharge offset obligations through partial indirect offsets, i.e. in the related spheres of civil aerospace, internal security and training. Two further amendments, notified later that year, permitted offsets to be discharged through a "grant" to government entities; and permitted Tier-1 sub-vendors to discharge offset obligations in proportion to their work share in the system that had incurred the offset liability.
DPP-2013, the current procurement procedure that was promulgated on June 1, for the first time explicitly backs indigenous procurement over foreign purchases. It stipulates that Indian defence companies will get access to the military's long-term equipment roadmap, providing them with the time needed for developing the military's future equipment requirements; levels the playing field between the defence public sector undertakings (DPSUs) and private defence companies; simplifies the "Buy & Make (Indian)" procedure to benefit Indian industry; and defines ambiguous terms in the DPP like "indigenous content."
The new policy, which only applies to tenders initiated after June 1, is structured to ensure that each piece of equipment that the military requires should be bought abroad only if developing and building it in India proves impossible. This is done by mandating priorities in the "categorisation" process. "Categorisation" is a key decision point in each acquisition project, in which the MoD decides whether the equipment should be developed and built in India ("Buy Indian" and "Make" categories); or built in India by an indigenous consortium ("Buy & Make Indian"); or built in India with transfer of technology ("Buy & Make with ToT"); or bought over-the-counter from a foreign vendor ("Buy Global").
DPP-2013 lays down an order of preference for categories, in which building and buying in India is at the top, and buying over-the-counter abroad is the last priority. The order of preference is: (1) "Buy (Indian)"; (2) "Buy & Make (Indian)"; (3) "Make"; (4) "Buy & Make with ToT"; and (5) "Buy (Global)". Any proposal to select a particular category must now state reasons for excluding the higher preferred category/categories."
The new policy also entitles private companies to access to important details from the military's 15-year Long Term Integrated Perspective Plan (LTIPP). This will allow industry the lead-time needed to meet future equipment needs.
But DPP-2013's most far-reaching change lies in its stringent definition of "indigenous equipment". The successive DPPs of 2002, 2005, 2006, 2008, 2009 and 2011 have regarded all equipment purchased from Indian suppliers as "indigenous", even when it contains 80-90 per cent foreign-sourced items, with just 10-20 per cent Indian components, that too in secondary fields like assembly and delivery. Now DPP-2013 rules that, "Import content in the products supplied by the sub-vendors will not qualify towards indigenous content."
The new definition of "indigenous content" requires the following to be deducted from the cost of indigenous equipment: the direct costs of all materials, components, sub-assemblies, assemblies and products imported into India; the costs of all services obtained from non-Indian entities; all royalties, licence fees, technical fees etc. that are paid abroad.
While vendors are allowed to self-certify the true value of indigenisation, certain safeguards have been put in place, such as the banning or suspending of a vendor for up to five years if any false certification is detected.
In addition to the steady evolution of the DPP over the years, there is recognition that the "Make" procedure needs to be simplified to attract more Indian private players into defence production. In addition to simplifying procedures in successive DPPs, a full-fledged exercise is underway to rewrite the 'Make' and the 'Fast Track' Procedure. This, MoD insiders hope, might be completed by the end of this year.
A key drawback remains the continuing applicability of the various editions of the DPP to procurements initiated during their validity. For example, the MMRCA contract continues to be governed by the provisions of DPP-2006, even if it has been concluded after DPP-2013 became valid. An RfP issued today will be governed by DPP-2013, even if a far more enlightened policy comes into force two years hence.
DPP-2013 is the latest ministry of defence (MoD) procurement policy, which has evolved steadily, if slowly, since the turn of the millennium. Current procurement structures trace their roots to the Group of Ministers (GoM) report on "Reforming the National Security System", formulated after the Kargil Review Committee submitted its report in 1999. The GoM comprehensively reviewed the procurement structures that had been in vogue since 1992, and recommended the framing of new procurement structures.
In a watershed change in April 2001, private companies were permitted to engage in defence production, subject to licensing and to an FDI cap of 26 per cent. In October 2001, the Defence Acquisition Council (DAC) and the Defence Procurement Board (DPB) were put in place to "bring in better synergy between the MoD and the Service Headquarters (HQ) in planning, defence acquisition and operations so that all stakeholders may function in a coordinated manner," according to former MoD additional secretary, S N Misra, in his authoritative book, Impact of Defence Offsets on Military Industry Capability and Self-reliance.
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The following year, the MoD promulgated DPP-2002, specifying a procedure for "Buy" cases that involved importing defence equipment. This was fleshed out in DPP-2003, which laid out a procedure for the "Buy & Make" category, in which the purchase of foreign equipment was followed by licensed production within defence public sector undertakings or ordnance factories (DPSUs/OFs).
While these initial DPPs did not trigger any major rise in military procurements, the MoD actively sought and obtained feedback from a range of stakeholders, including foreign original equipment manufacturers (OEMs), foreign and Indian industry bodies, private and public sector Indian companies and the military. Two years later, DPP-2005 was promulgated, incorporating several major changes.
DPP-2005 mandated that qualitative requirements (QRs) should be broad-based in order to avoid single-vendor situations; that there should be joint services QRs for equipment common to all three services; and it incorporated the ministry of finance (MoF) suggestion that there should be more objective techniques for comparing bids, catering for Discounted Cash Flow (DCF) and Exchange Rate Variation (ERV).
In what has evolved into a major policy pillar of Indian defence procurement, the DPP-2005 accepted the recommendations of the Kelkar Committee - which submitted its report that year - and mandated that offsets of at least 30 per cent would be imposed on all foreign procurements worth more than Rs 300 crore. Vendors could discharge offset liabilities by purchasing or exporting goods and services produced by the Indian defence industry, or by investing in India's defence industrial infrastructure.
The following year, DPP-2006 fleshed out that preliminary offset policy. Vendors were permitted to discharge offset liabilities by investing in Indian defence R&D, and were allowed to choose an Indian Offset Partner (IOP), who was required to have a defence production licence. A MoD agency was established to facilitate offset tie-ups between IOPs and vendors, but this agency, called Defence Offset Facilitation Agency (DOFA) would never be empowered, or provided with the infrastructure, to discharge this role effectively.
DPP-2006 also introduced the "Make" category of procurement, which provided a framework for the Indian private and public sectors to lead the development of defence products. DPP-2006 also reviewed and revised the Fast Track Procedure for procuring urgently needed defence items; and the Procedure for Indigenous Warship Building. An "Integrity Pace" was made compulsory for all contracts above Rs 100 crore.
By 2008, increased public and institutional scrutiny of defence procurement, and the internationally-watched procurement process for 126 medium multi-role combat aircraft (MMRCA), had created a momentum for fairer procurement. DPP-2008 introduced greater transparency in the trial evaluation of equipment, mandating the Request for Proposals (RfP, or tender) would describe what trials would be conducted so that vendors would be aware of the modalities and evaluation criteria. Vendors would receive directions during the course of trials as well as the result of the evaluation. If any vendor's product were disqualified, the MoD would communicate the reasons in writing and place that on record.
DPP-2008 also liberalised the offset policy, acceding to a chorus of demands from foreign OEMs and prospective IOPs. Offset credit banking was introduced, permitting vendors to bank offset credits for up to two years in anticipation of offset liabilities that arose in the future. And IOPs no longer needed a defence production licence; they only needed to meet guidelines set by the Department of Industrial Policy & Promotion (DIPP).
More changes to the offset policy were made in DPP-2011, which came into effect on January 1, 2011. Vendors were permitted to discharge offset obligations through partial indirect offsets, i.e. in the related spheres of civil aerospace, internal security and training. Two further amendments, notified later that year, permitted offsets to be discharged through a "grant" to government entities; and permitted Tier-1 sub-vendors to discharge offset obligations in proportion to their work share in the system that had incurred the offset liability.
DPP-2013, the current procurement procedure that was promulgated on June 1, for the first time explicitly backs indigenous procurement over foreign purchases. It stipulates that Indian defence companies will get access to the military's long-term equipment roadmap, providing them with the time needed for developing the military's future equipment requirements; levels the playing field between the defence public sector undertakings (DPSUs) and private defence companies; simplifies the "Buy & Make (Indian)" procedure to benefit Indian industry; and defines ambiguous terms in the DPP like "indigenous content."
The new policy, which only applies to tenders initiated after June 1, is structured to ensure that each piece of equipment that the military requires should be bought abroad only if developing and building it in India proves impossible. This is done by mandating priorities in the "categorisation" process. "Categorisation" is a key decision point in each acquisition project, in which the MoD decides whether the equipment should be developed and built in India ("Buy Indian" and "Make" categories); or built in India by an indigenous consortium ("Buy & Make Indian"); or built in India with transfer of technology ("Buy & Make with ToT"); or bought over-the-counter from a foreign vendor ("Buy Global").
DPP-2013 lays down an order of preference for categories, in which building and buying in India is at the top, and buying over-the-counter abroad is the last priority. The order of preference is: (1) "Buy (Indian)"; (2) "Buy & Make (Indian)"; (3) "Make"; (4) "Buy & Make with ToT"; and (5) "Buy (Global)". Any proposal to select a particular category must now state reasons for excluding the higher preferred category/categories."
The new policy also entitles private companies to access to important details from the military's 15-year Long Term Integrated Perspective Plan (LTIPP). This will allow industry the lead-time needed to meet future equipment needs.
But DPP-2013's most far-reaching change lies in its stringent definition of "indigenous equipment". The successive DPPs of 2002, 2005, 2006, 2008, 2009 and 2011 have regarded all equipment purchased from Indian suppliers as "indigenous", even when it contains 80-90 per cent foreign-sourced items, with just 10-20 per cent Indian components, that too in secondary fields like assembly and delivery. Now DPP-2013 rules that, "Import content in the products supplied by the sub-vendors will not qualify towards indigenous content."
The new definition of "indigenous content" requires the following to be deducted from the cost of indigenous equipment: the direct costs of all materials, components, sub-assemblies, assemblies and products imported into India; the costs of all services obtained from non-Indian entities; all royalties, licence fees, technical fees etc. that are paid abroad.
While vendors are allowed to self-certify the true value of indigenisation, certain safeguards have been put in place, such as the banning or suspending of a vendor for up to five years if any false certification is detected.
In addition to the steady evolution of the DPP over the years, there is recognition that the "Make" procedure needs to be simplified to attract more Indian private players into defence production. In addition to simplifying procedures in successive DPPs, a full-fledged exercise is underway to rewrite the 'Make' and the 'Fast Track' Procedure. This, MoD insiders hope, might be completed by the end of this year.
A key drawback remains the continuing applicability of the various editions of the DPP to procurements initiated during their validity. For example, the MMRCA contract continues to be governed by the provisions of DPP-2006, even if it has been concluded after DPP-2013 became valid. An RfP issued today will be governed by DPP-2013, even if a far more enlightened policy comes into force two years hence.