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Amendments to Defence ProcurementProcedure – 2008

With a view to integrate the private sector in defence production, the Ministry of Defence (MoD) issued a set of amendments to DPP-2008 on 01 November 2008. The professed objective of these amendments was – “to provide encouragement to the indigenous defence industry to play a major role in meeting the needs of the armed forces, ensuring transparency and accountability in all procurement cases and liberalising offset provisions to enable vendors to fulfill their obligations”.

In addition to introducing a new procurement category to encourage joint ventures, the new amendments also contained certain enabling and amplificatory provisions.

Illustration 1: Categories of Procurement Proposals

Earlier, the Defence Acquisition Council (DAC) categorised all acquisition proposals as ‘Buy’, ‘Buy and Make’ and ‘Make’ cases. ‘Buy’ implies outright purchase of the complete quantity required. ‘Buy and Make’ entails initial purchase of limited quantity in fully built up form, followed by licenced production in India of the balance requirement. Finally, ‘Make’ cases refer to indigenous development of the equipment. With new amendments, the government introduced another category called ‘Buy & Make (Indian)’. See Illustration 1.

With a view to share the future needs of the armed forces with the industry, it was decided to put up a public version of perspective document outlining the technology perspective and capability road map covering a period of 15 years on MoD website. In acquisition cases where participation by Indian industry was considered probable, representatives of industry associations were to be invited by the Categorisation Committee to seek their views and clarifications, if any. However, these representatives would not be present during the decision making meetings.

‘Buy & Make (Indian)’

Based on the Capability Definition Document (CDD) prepared by the concerned Service Headquarters (SHQ), DAC could select a project under the new ‘Buy & Make (Indian)’ category. CDD would outline the requirement in operational terms and briefly describe the present capabilities determined on the basis of the existing equipment and manpower. SHQ would indicate long term requirement in terms of numbers, time schedule, immediate fund availability and the critical technologies to be absorbed by the Indian vendor, as identified by the Defence Research and Development Organisation (DRDO).

Illustration 2: Stages of ‘Buy and Make (Indian)’ Procedure

Indigenously manufactured products were to have minimum 50 percent indigenous content on cost basis. The Indian partner was to absorb the identified critical technologies, 50 percent of which would be in respect of items for which engineering and manufacturing documentation were to be provided to the Indian vendor to enable him to carry out fabrication, assembly and testing. See Illustration 2.

For acquisitions under this category, the Request for Proposals (RFP) were to be issued only to Indian public and private sector companies that were assessed to possess requisite technical and financial capabilities to undertake such projects. It was left to them to negotiate transfer of technology and finalise co-production arrangements with the foreign manufacturers.

Short-listing of Indian companies for the issuance of RFP was to be carried out on the basis of the Detailed Project Proposal submitted by them in response to CDD. Companies were required to outline the roadmap for development and production of the item either by themselves or through any production arrangement with a foreign producer. The proposal had to spell out details of the proposed work-share and transfer of technology, both in range and depth. Once RFP was issued to the selected companies, the standard procedure described for ‘Buy and Make’ category would have applied.

‘ Make (High-tech)’

The process would start with respective SHQ forwarding Preliminary Services Qualitative Requirements (PSQR) in respect of all proposals included in the Long Term Integrated Perspective Plan (LTIPP) to Headquarters Integrated Defence Staff (HQ IDS). Each project would be put through detailed feasibility study by HQ IDS with respect to estimated capital expenditure, proposed sharing of developmental costs, likely development agencies and minimum order quantity envisaged. Projects considered fit to be undertaken as ‘Make (High-tech)’ would be identified and submitted to DAC for obtaining necessary approval.

All ‘Make (High-tech)’ cases would thereafter be processed by the Acquisition Wing, with Integrated Project Management Teams (IPMT) constituted for each project. IPMT would be headed by service officers with members from different disciplines and agencies. Based on PSQR for the project, IPMT would prepare a Project Definition Document (PDD) defining system requirements in detail and spelling out anticipated time and cost requirements. It would also suggest exit criteria in case of unsatisfactory progress. Firms (both from public and private sectors) empanelled by DDP would be given PDD and invited for Expression of Interest (EoI).

Responses to EoI would be scrutinised by IPMT to make a detailed assessment of design and manufacturing capabilities of all respondents. Plans and roadmap for the development of critical technologies would also be appraised. List of short listed competent firms would be forwarded to the Defence Production Board through the Acquisition Wing. Normally, two agencies would be selected as per the laid down criteria.

Both the selected firms would prepare Detailed Project Reports (DPR) including scope of work in terms of PSQR, development phases and time schedules. Once IPMT is satisfied, it would progress DPR to the Acquisition Wing for approval. Financial approval would be accorded by the Competent Financial Authority and necessary orders issued to both the firms. IPMT would carry out regular monitoring during development phase and submits periodic reports to the Acquisition Wing, which in turn would keep the Defence Production Board duly informed.

Illustration 3: Stages of ‘Make (High-tech)’ Procedure

Once prototypes got ready, their technical evaluation, including field trials, would be carried out by the concerned SHQ. After the acceptance of staff evaluation report by MoD, commercial negotiations would be carried out as per the normal ‘Buy’ procedure. Orders for limited series production would be placed on the lowest bidder.

As shown in Illustration 3, the role of IPMT was critical to the success of any project. Therefore, it was essential that all members of IPMT were selected with due diligence and given sufficiently long tenures for continuity.

Enabling Clauses

Integrity Pact (IP) for all procurement schemes over Rs 100 crores was introduced in 2006. The policy provided for the appointment of Independent Monitors by the government to oversee adherence to the Pact. As regards their role, the policy simply stated – “As soon as a Monitor notices, or believes to notice, a violation of this Pact, he will so inform the Head of the Acquisition Wing.”

In the subsequent amendments, MoD spelt out the functioning of the Monitors in detail. Their role was changed from one of pure oversight to receipt of complaints and conduct of follow-up enquiries. Names and addresses of the Monitors nominated for each case were required to be given upfront in RFP itself.

On receipt of a complaint with regard to violation of IP, the buyer had to refer it to the Monitors for their comments/enquiry. If required, the Monitors could peruse the relevant records. The enquiry report was required to be submitted to Director General Acquisition for his final decision.

Another enabling provision related to offset contracts. Although no subsequent changes were allowed in respect of offset components or value, change in offset partner could be allowed in exceptional cases, when considered necessary to enable the foreign vendor to fulfill his offset obligations.

Amplificatory Aspects

In order to remove ambiguities in some provisions of DPP-2008, MoD issued amplificatory amendments. They were as follows:-

Issuance of Request for Information (RFI) was made mandatory to seek required inputs to make broad based SQR. It could be done both by corresponding with maximum manufacturers and putting details on the MoD website. Earlier the words used were ‘may be’, which led to multiple interpretations. Besides, seeking of information regarding range and depth of transfer of key technologies was also allowed.

Formulation of SQR was further elucidated – they should be capability-centric and the functional characteristic should be verifiable.

In order to ensure that SQR would result in multiple vendor competition, all new proposals being put up to DAC had to contain details of essential verifiable functional characteristics visà-vis technical parameter of the equipment available in the world market.

The earlier procedure mandated that all procurement schemes exceeding Rs 100 crores would compulsorily have IP signed between the procurement agency and the vendor. However, it was not clear whether the value as indicated by the procurement agency was the sole criterion. Doubts were raised as to the applicability of this clause in case a vendor pegged his commercial proposal marginally lower than the threshold of Rs 100 crores. It was now clarified that IP would be required if the indicative value intimated by the procurement agency was more than Rs 100 crores.

In case of offsets, there was a doubt whether repeat orders placed under ‘option clause’ get subjected to offset obligations. It was now clarified that offsets would not be applicable in ‘option clause’ cases, if the same was not envisaged in the original contract.

An Appraisal

Addressing a seminar on defence acquisitions in New Delhi on 27 October 2009, the Defence Minister claimed that the new amendments aimed at – ‘promoting and facilitating wide participation of defence industry, while enabling transparency and integrity in all acquisitions’. However, an in-depth appraisal of the amendments revealed that except for increased transparency, very little could possibly be achieved.

Transparency

By making issuance of RFI mandatory, the government took a major step towards enhancing transparency. Similarly, broad-based and capability-centric SQR could help generate more competition and not prejudice selection of competing technologies.

However, sharing of the perspective equipment plan with the industry was likely to be of academic and peripheral value for three reasons. One, as pointed out by the Comptroller and Auditor General of India, 15-year Long Term Integrated Procurement Plan of the armed forces for the period 2002-2017 had been finalised only in 2006, whereas it ought to have been approved well before its commencement. It showed total apathy towards long term planning. Two, all perspective plans undergo frequent changes, both for operational and extraneous reasons. Finally, funds are allotted to MoD on annual basis. A procurement plan without assured financial support means little. Given the above limitations and constraints, the industry was unlikely to commit resources purely on the basis of a provisional perspective plan.

Probity

Clarification regarding the applicability of IP would certainly prevent smart vendors from keeping their quote marginally lower than Rs 100 crores to escape signing the Pact.

As regards the enlarged role of Independent Monitors to oversee enforcement of IP, it was unlikely to improve the credibility of the procedure. Although their appointments were to be made in consultation with the Central Vigilance Commissioner, their competence to spot irregularities in complex and intricate defence procurement mechanism would always remain suspect. Moreover, they could not be expected to be independent as their continued employment depended on their pro-government deportment. Worse, they were required to submit their report to the authority against whose organisation the complaint had been lodged. Understandably, most vendors considered the role of Independent Monitors to be totally perfunctory in nature.

Promotion of Indigenous Industry

Introduction of consultations with the industry prior to categorisation of acquisition proposals was an overdue measure. It would help the Categorisation Committee to take well considered decisions, fully aware of the indigenous competence.

Unfortunately, the most hyped new categorisation of ‘Buy & Make (Indian)’ was perhaps the most flawed policy change. The government’s muddled thinking was revealed by the fact that while the amendment equated the new category with the existing ‘Buy and Make’ procedure, the official press release called it akin to ‘Make’ procedure.

Moreover, there were major infirmities and ambiguities in the proposed procedure. For example, under normal ‘Buy and Make’ route, indigenous production followed purchase of certain quantity of selected equipment after competitive evaluation. In other words, facilities for licenced production were set up in India only after outright purchase was concluded. However, the new ‘Buy & Make (Indian)’ route entailed issuance of RFP to multiple Indian vendors, asking them to field their equipment for trials. It implied that all participating Indian vendors would have to form joint ventures with foreign OEM and finalise arrangements for indigenous manufacture well in advance of submitting their technical and commercial proposals, lest the successful OEM started playing truant later on. It was fated to be a highly uncertain route.

Inexplicably, the primary onus of initiating cases under ‘Buy & Make (Indian)’ category was put on SHQ. It was not clear as to why and on what basis could a SHQ prefer such a route. Moreover, SHQ was required to identify the critical technologies that should be absorbed by the Indian partner, albeit in consultation with DRDO. It was a very tall order and much beyond the competence of any SHQ.

Most importantly, it was going to be well nigh impossible to monitor and ensure transfer of technology as envisaged in the contract document. As indigenous value addition had been fixed at 50 percent by cost, foreign vendors could continue to supply critical components ex their own facilities. Thus, Indian value addition would remain limited to low-tech manufacture and associated services.

Conclusion

Whereas amplification of certain provisions to remove ambiguities was a welcome step, the euphoria created by the media was totally misplaced. One was reminded of the excitement generated in 2006 when ‘Make (Hi Tech)’ policy was introduced to promote indigenous development of projects based on proven or matured technologies. It had been a total non-starter. Not a single project had got initiated under that category during the previous three years. It was feared that ‘Buy & Make (Indian)’ category would also meet the same fate as the procedure spelt out appeared to be highly convoluted and imprecise.