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Defence Procurement Procedure – 2013

In April 2013, the Defence Acquisition Council (DAC) met under the chairmanship of the Defence Minister to approve the newest version of the procurement procedure, i.e. DPP-2013. It aimed at kick-starting India’s quest for self-reliance in defence production. Stressing the need for rapid indigenisation of defence products through the strengthening of the defence manufacturing base and infusion of greater efficiency in the procurement process, the Defence Minister exhorted both the public and the private sectors to play pivotal roles in this endeavour. He also promised to create genuine level playing field for Indian manufacturing industries vis-à-vis global players.

All cases in which the Request for Proposals (RFP) was issued after 01 June 2013 were to be guided by DPP-2013. Procurement cases under progress in accordance with the provisions of earlier versions of DPP were to continue as such. Salient aspects of the procedure have been discussed hereunder.

Preference to the Indigenous Defence Industry

Although earlier versions of DPP also considered indigenous procurement/ development to be the preferred option, DPP-2013 laid it down as a policy directive. This was by far the most significant change incorporated in DPP-2013 and was expected to give a strong impetus to indigenisation efforts. Every proposal for acquisition had to be examined for categorisation as per the following order of preference:-

(a) Priority 1: ‘Buy (Indian)’. Procurement of complete requirement from indigenous sources. It was specified that in addition to the equipment, even the product offered at the trial stage must also have minimum 30 percent indigenous content.

(b) Priority 2: ‘Buy & Make (Indian)’. Purchase of limited quantity from an Indian vendor followed by licensed production/ indigenous manufacture in the country with minimum 50 percent indigenous content on cost basis. Indian vendor could also be an Indian company forming joint venture or establishing production arrangement with foreign original equipment manufacturer. In such cases, RFP would be issued to only those Indian vendors, who are assessed to have requisite technical and financial capabilities to undertake such projects.

(c) Priority 3: ‘Make’. Indigenous development either by the Defence Research and Development Organisation (DRDO) or the industry (both public and private sectors) with a view to promote indigenous research, design, development and production of capabilities.

(d) Priority 4: ‘Buy & Make with Transfer of Technology (ToT)’. Purchase of part requirement from a foreign vendor and production of the balance quantity in India under licence with ToT.

(e) Priority 5: ‘Buy (Global)’. Entire quantity to be procured through global tendering in which Indian companies could also participate.

As per the laid down procedure, all acquisition proposals that emanate from a Service Headquarters (SHQ) were debated at length by two categorisation committees (lower and higher) at Headquarters Integrated Defence Staff (HQ IDS) to determine the route to be adopted. Representatives of companies and industry associations were invited for consultations as regards local production competence. Representatives of DRDO were also co-opted to get inputs regarding systems which could be developed and produced by them within the required timelines. Thereafter, recommendations of the higher categorisation committee were placed before DAC for final decision.

DPP-2013 mandated that while categorizing a proposal, reasons for not adopting a higher preference route would have to be spelt out with reasons. Notably, before any imports could be considered, DRDO had to confirm that the equipment could not be produced/developed in the country in the required time frame. In other words, procurement from foreign sources would always be the last resort.

Tangible Support to the Indian Industry

Officials of the Ministry of Defence (MoD) conceded the fact that lack of advance information with the domestic industry about likely defence requirements was a major impediment in the growth of the defence industry. Therefore, with a view to provide adequate time to the Indian industry to develop futuristic weaponry, DPP-2013 mandated issuance of a public version of the 15-year Long Term Integrated Perspective Plan, outlining the ‘Technology Perspective and Capability Roadmap’.

Additionally, DPP-2013 directed that SHQ should initiate consultations sufficiently in advance of actual procurements so that capital acquisition plans could be translated into national defence R&D and production plans.

‘Buy and Make (Indian)’ and ‘Make’ procedures had been evolved with high expectations to facilitate unleashing of the full potential of the indigenous industry. Unfortunately, both the categories failed to deliver. In fact, most observers had started questioning their rationale. MoD apparently took note of the issues involved. It simplified ‘Buy and Make (Indian)’ procedure by doing away with the requirement of short-listing of vendors by the Project Appraisal Committee, thereby increasing competition and expediting the process. As regards ‘Make’ category, a high-level Committee was constituted to review it. It was expected to streamline the process by removing all irksome provisions.

Encouragement to the Private Sector

Earlier, recipient for Maintenance ToT under ‘Buy (Global)’ category was nominated by the Department of Defence Production and the nominee was invariably a public sector undertaking or an ordnance factory. The private sector considered it to be a discriminatory practice and had been agitating against it. DPP-2013 modified the provision and allowed foreign vendors to choose their Indian partner for maintenance, repairs and overhaul work. It was certainly an overdue reform.

Security concerns are often cited by the entrenched interests to oppose the participation of the private industry in the defence sector. To overcome it, DPP-2013 initiated evolution of a security framework for Indian private industries. Draft Security Guidelines applicable to all licensed defence industries were circulated for consultation with various stakeholders. In addition to ensuring protection of security sensitive information that is shared with the private sector, security guidelines would silence the sceptics as well.

Commercial clauses and evaluation criteria were rationalised in the new procedure. MoD had also taken up a case with the Ministry of Finance with respect to the issues related to the grant of deemed exports status for certain defence projects and rationalisation of tax/duty structures impinging on the Indian defence industry.

Assistance to Medium, Small and Micro Enterprises

Medium, Small and Micro Enterprises (MSMEs) are universally accepted as engines that drive technological progress in all industrial sectors, especially in the defence industry which is highly technology-intensive. Major defence companies incorporate sub-systems developed by MSMEs to configure required defence equipment. However, MSMEs are small players with limited resources and cannot compete on their own. Lack of sufficient capital is the biggest dissuasive factor. They need governmental hand-holding to thrive and deliver.

MoD had been aware of the fact that the role of MSMSEs was central to the development of the indigenous industry. The Defence Production Policy of January 2011 promised to ‘set up a separate fund to provide necessary resources to public/private sector including SMEs as well as academic and scientific institutions to support R&D of defence equipment/systems enhancing cutting edge technology’. However, no follow up action had been taken.

According to DPP-2013, Small Industries Development Bank of India (SIDBI) had decided to set aside an amount of Rs 500 crore for providing loans. Further, a fund of Rs. 50 crore out of ‘India Opportunities Fund’ (managed by its subsidiary SIDBI Venture Capital Ltd) had been earmarked for equity support. Regular supply of funds to MSMEs involved in the manufacture of defence products would thus be facilitated. MSMEs were hopeful that the promised funds would help mitigate their financial woes.

Rationalisation of the Procedure

In addition to the above changes, a number of measures were initiated to simplify and streamline the procurement procedure. Efforts had also been made to remove ambiguities and provide clarifications in the interpretation of policy provisions. Some of the key aspects were as follows:-

(a) Indigenous content was now defined in an unambiguous manner, providing requisite clarity and a common understanding. It was clarified that in addition to the basic equipment, indigenous content percentage had also to be achieved in ‘Manufacturers Recommended Spares’, special tools and test equipment. Thus indigenous content requirement would now extend all the way to the lowest tier of the sub-vendor. Penalties were proposed to be imposed for not achieving the stipulated indigenous content levels at each given stage with a scope to make up for the deficiency at a later stage. Further, a method for assessment of indigenous content, based on self certification by vendors, was laid down.

(b) SHQ was required to finalise and freeze the Services Qualitative Requirements (SQR) prior to seeking ‘Acceptance of Necessity’. No deviation in SQR was permitted after the grant of approval by DAC. If it was considered inescapable to seek changes in SQR, fresh sanction would have to be obtained from DAC. Interestingly, approval for all deviations from DPP would hereafter be given by DAC and not by the Defence Minister, as hitherto fore.

(c) As the private sector companies were allowed participation in the defence subject to licensing, MoD had finalised the Defence Items List and sent it to the Ministry of Commerce for the issuance of necessary notification by the Department of Industrial Policy and Promotion. It was also clarified that dual-use items would not require licensing.

(d) With a view to expedite the process of approving acquisition proposal, financial powers were suitably enhanced. Now, the Defence Procurement Board could approve proposals up to Rs 300 crores. The financial powers of the Service Chiefs were increased to Rs 150 crores.

(e) Ship Building Procedure was rationalised with the inclusion of model RFP format and streamlining of the offset policy.

Whereas rationalisation of the procedure is a periodic exercise, the Indian industry was euphoric that the new amendments to DPP would generate huge opportunities for the indigenous companies.

The Way Forward

Promotion of the Indian defence industry is undoubtedly a critical requirement. Increase in the powers of the Service Chiefs was overdue and was a welcome move. Similarly, evolution of security guidelines would help ensure protection of security sensitive information shared with the private sector. More importantly, it would eliminate opposition to the entry of the private sector in defence production on grounds of lack of security consciousness.

All countries are struggling to streamline their procedures for defence procurements. In India’s case, complexities increase multi-fold due to three factors – bulk of major equipment is imported, field trials have to be carried out in varied terrain/climatic conditions and the procurement regime does not enjoy high credibility. Therefore, MoD ought to have mustered courage to introduce radical reforms, minor tinkering being inconsequential. Some of the major issues that remained neglected are flagged below:-

(a) Surfeit of categories had created utter confusion. Most categories defied logic. They were highly convoluted, complex and impractical. Both ‘Make’ and ‘Buy and Make (Indian)’ were bereft of any genuine developmental effort. Both had failed to produce results and not a single case had made any progress under these two categories.

(b) Mediocrity of acquisition staff had been the bane of the Indian procurement regime. Even CAG was forced to highlight the fact that defence acquisition was a cross-disciplinary activity requiring expertise and criticised the system of entrusting acquisitions to unspecialised personnel posted for three-year tenures.

(c) DRDO was like an albatross around the services’ neck. It promised a lot but delivered little. DPP accorded undeservedly overriding powers to DRDO, especially in categorisation of proposals. Worse, the much-trumpeted restructuring of DRDO had been a meaningless exercise.

(d) Indian offset policy needed simplification. With a view to favour the public sector, MoD has promulgated guidelines that had woven a complex web of conflicting and confusing provisions that were bound to lead to multiple interpretations and squabbling.

(e) FDI cap at 26 percent made it a highly unattractive proposition. Defence industry covers too vast a spectrum of technologies and sub-technologies to be considered a single entity for determining upper limit of foreign equity holding. India should have adopted a flexible and technology-specific approach. All joint venture proposals should be assessed on the basis of nature, level and depth of the know-how involved and categorised accordingly for the fixation of FDI cap.

It needs to be recalled here that prior to the promulgation of the current genre of the procurement procedure in 2002, every procurement proposal was first vetted by DRDO for local development and production. Unless DRDO expressed its inability, other options could not be explored. DRDO invariably made tall promises which were never fulfilled. Consequently, modernisation of the armed forces suffered.

It is certainly a commendable objective that the armed forces be equipped with indigenously produced defence systems. However, to achieve that, the Indian industry has to perform. It is easy to mandate that indigenous production will be the first option and imports the last resort. Such a directive presupposes availability of the necessary technological competence with the Indian industry to produce the required equipment in the given timeframe.

Commendable objectives of DPP-2013 notwithstanding, it must be ensured that Indian soldiers are not made to fight with outdated weaponry because of the indigenous industry’s inability to deliver.