Defence Procurement Procedure 2016 : The Prospective Game Changer ??

 DPP 2016, anticipated to role out shortly, is part of an iterative process that started out in 1992 and has since been periodically revised seven times, with the last version being reviewed in 2013. However, what is interesting to note is that never before has there been such palpable anxiety and optimism for any earlier version of the DPP than that awaited in 2016. The promises that it allegedly holds, make it synonymous to a win-win situation for all the stake-holders, especially the private industry and seeks definitive action on the ground in both letter and spirit. 

As a part of a series of meetings, the Defence Acquisition Council (DAC), in a meeting chaired by Defence Minister Manohar Parrikar on11 Jan16, formalised certain issues that could ease the process of defence indigenisation and stimulate it towards potential deliverables. Analyses of certain changes that are likely to be incorporated, as per reports are enumerated below.

“A new category called the ‘IDDM’ or ‘Indigenously Designed, Developed and Manufactured’ platforms has been introduced which will get top priority and will be first to be chosen for tenders”. This signifies a major shift from the existing categories of ‘Make’, ‘Make and Buy (Indian)’, ‘Buy (Indian)’ wherein the aspect of 30% indigenous content had vague and generic implications. ‘IDDM’ will have two categories — one, in case the design is indigenous, it will be mandatory to have 40 per cent local content in the product; two, 60 per cent local content will be mandatory in case the design is not Indian. Also, under the new DPP, systemic changes have been proposed to the the ‘Make’ category so as to kick start this stalled process. “Only firms with majority stake and controlled by resident Indians will come under Make categories”.

The “Make” procedures will now be divided in three sub-categories.  Make I will involve 90 per cent funding of development cost by the government; in Make II the government will refund 100 per cent of development cost in case Request for Proposal (RFP) is not issued for two years from the time of development of prototype; and Make III will be reserved for small and medium scale enterprises will be reserved for projects worth less than Rs.3 crore. These are crucial changes as financial support provided by the government, coupled with accountability of the suppliers to deliver will undoubtedly lead to concrete progress on the ground. In addition, this covers the entire spectrum of indigenous production ranging from systems and components to spares.

“The offset threshold for defence deals to be increased to Rs 2,000 crore from existing Rs 300 crore” is another practical step being initiated by the government, taking into consideration we already have signed offsets worth USD 5 billion and another USD 8 billion are in the pipeline. Offsets increase the cost of the product by 14-18 per cent and therefore the crux of the whole thing is the absorption of these offsets in terms of services, production or technology which we have not been able to do in the past .

In order to ensure product quality, theL1 policy of selecting lowest bidder is being modified. ‘10 per cent extra weightage will be given if a system displays better qualities than required’. This along with another new proposed change that ‘Bids can be accepted even if there is only one supplier’ will  help the defence establishment focus on quality, collaborate with serious partners and deter suppliers indulging in retrograde practices to remain afloat.

Strategic Projects have major ramifications on defence preparedness and have a direct correlation to both time and money. With private players joining the defence bandwagon in a big way, it will be more feasible to select vendors on their intrinsic value than their face value. Business Enterprises have to understand that Defence Production results in profits only in the long run and substantial investment is required in the developmental stage. In order to ensure adequate safeguards, the new DPP will carry a clause wherein ‘Projects with development costs equal to or exceeding Rs 5,000 crore, to have a minimum 'net worth' of 5 per cent of the development cost, subject to maximum of Rs 1,000 cr’ and ‘Companies require to be registered for five years, three years in case of MSMEs and have a minimum credit rating of B++, from a recognised rating agencies’.

In a major boost to R&D by private players, DPP 2016 allows government to fund up to 90 per cent of development costs to private companies of which 20 per cent will be given in advance and in 24 months the entity will be given a tender. If the tender is not given, the private company will get a refund of its expenses. Another addition is the funding of Rs 10 crore for R&D to medium-scale industry which will boost component level and small scale innovations.

In continuation to the governments effort to reduce timelines, enhance accountability and have the users (defence services) co-opted in the scheme of things, the following clauses have been included

• Each of the three Services will have a Major General-rank officer for project management to be run on road map in line with the long-term perspective plan.
• Validity of Acceptance of Necessity (AoN) brought down to six months from earlier one year.
• Certain duplicate clauses which resulted in time overruns in defence procurements have been eliminated
• The DPP sets up an empowered committee to solve disputes or unforeseen issues. Till now disputes went to DAC

Does the Game Change ?

Anyone who has been closely associated with the nuances of self reliance in defence production will vouch that no country in the world has achieved this goal without the intimate involvement of the private industry. Even China which has moved to the third place in arms exports, had to privatise its state owned enterprises to the extent of listing them on the stock exchanges and also manufacture civil end goods, so as to ensure financial and technical sustenance. A holistic analysis of the prospective DPP 2016 clearly underlines the overwhelming urgency with which the concerns of the private sector have been addressed and a clear level playing field with the public sector established. With the private sector on board, huge investments from local giants such as Reliance, Tata, L&T and Mahindra have already been committed as there is a business opportunity worth 250 billion dollars in the coming 7-8 years .

In addition, once the guidelines to select strategic partners in critical areas of defence production are included in the DPP (presently being finalised based on the report of a committee led by former DRDO chief V.K. Aatre) , a tectonic shift will take place in defence indigenisation which in itself will be a game changer towards making India achieve self reliance in critical areas of defence production.

Views expressed by the Author are personal.