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Defence Procurement Procedure – 2016

An expert committee under Dhirendra Singh was constituted on 01 May 2015. The Committee was tasked to evolve a policy framework to facilitate ‘Make in India’ in defence manufacturing and align the policy evolved with the Defence Procurement Procedure (DPP); and to suggest the requisite amendments in DPP-2013 to remove the bottlenecks in the procurement process and also simplify/rationalise various aspects of the defence procurement. DPP-2016 has been formulated with the experience gained by the government in the defence procurement process and the recommendations of the Dhirendra Singh Committee. DPP-2016 was promulgated in April 2016 and continues to be operative to date. Hence, it has been discussed at length.

Salient Aspects of DPP-2016

DPP-2016 claims to strive to strike a balance between competing requirements such as expeditious procurement, high quality standards and appropriate costs; while maintaining highest standards of transparency, probity and public accountability. With a view to achieve self-reliance in design, development and manufacturing, DPP-2016 focuses on institutionalising, streamlining and simplifying defence procurement procedure. The professed aim is to give a boost to ‘Make in India’ initiative, by promoting indigenous design, development and manufacturing of defence equipment, platforms, systems and sub-systems.

‘Make’ procedure has also been refined to ensure increased participation of the Indian industry. Enhancing the role of MSMEs in defence sector, cutting down permissible timeframes for various procurement activities and institutionalising probity norms have also been given due importance. Some salient aspects of DPP-2016 have been highlighted hereunder.

Categorisation of Acquisition Proposals

Capital acquisition schemes will be classified as ‘Buy’, ‘Buy and Make’ and ‘Make’. ‘Buy’ scheme refers to an outright purchase of equipment. It has three sub-categories – ‘Buy (Indian-IDDM)’, ‘Buy (Indian)’ and ‘Buy (Global)’. ‘Buy (Indian-IDDM)’ is a newly introduced category and relates to the procurement of products designed, developed and manufactured in India with a minimum of 40 percent Indigenous Content (IC) on cost basis of the total contract value. Products which may not have been designed and developed indigenously also fall in this category provided they have 60 percent IC.

‘Buy (Indian)’ category refers to procurement of products from an Indian vendor having a minimum of 40 percent IC on cost basis of the total contract value. ‘Buy (Global) category implies outright purchase of equipment from foreign or Indian vendors. In case of procurement through foreign vendors, government-to-government route may be adopted for equipment meeting strategic/long term requirements.

‘Buy and Make’ scheme means initial procurement of limited quantity in fully formed state, followed by indigenous production through Transfer of Technology (ToT). Under this scheme, the procurements are subcategorised as ‘Buy and Make (Indian)’ and ‘Buy and Make’.

‘Buy & Make (Indian)’ category refers to an initial procurement of limited quantity of equipment in fully formed state from an Indian vendor engaged in a tie-up with a foreign Original Equipment Manufacturers (OEM). The bulk quantity will be manufactured indigenously with ToT. Under this category, a minimum of 50 percent IC is required on cost basis of the Make portion of the contract. On the other hand, ‘Buy & Make’ category refers to an initial procurement of limited quantity of equipment in fully formed state from a foreign vendor, followed by indigenous production by an Indian production agency through ToT.

‘Make’ aims at developing long-term indigenous defence capabilities. It entails manufacture and upgrade of those systems that are designed, developed and manufactured by an Indian vendor. Depending upon factors such as Indian industry’s capability, access to technology, time frame required and available for development; ‘Make’ category of procurement would be pursued in isolation, in sequence or in tandem with any of the five categories under ‘Buy’ or ‘Buy & Make’ classifications.

Under DPP-2016, in decreasing order of priority, the procurement of defence equipment would be categorised as: ‘Buy (Indian–IDDM)’, ‘Buy (Indian)’, ‘Buy & Make (Indian)’, ‘Buy & Make’ and ‘Buy (Global)’. Reasons for not adopting a higher priority route for procurement have to be recorded in writing.

Services Qualitative Requirements

All capital acquisitions will be based on Services Qualitative Requirements (SQR), which lay down the fundamental user requirements in a comprehensive manner. SQR would be drafted by the user directorate at Service Headquarters (SHQ). SQR need to be detailed, realistic, achievable and verifiable. They must avoid ambiguity of any type. SQR must be broad based and must not be tailored from/for a particular product or service and must result in procurement of the items that best meet the requirements of the forces.

It may not be viable for all vendors to produce a complex and costly equipment precisely customised for unique requirements, within limited time and in limited numbers, for assessment and evaluation at Field Evaluation Trial (FET) stage. Hence, SQR parameters have been further sub-classified as Essential Parameters–A and Essential Parameters–B. This aspect has been discussed at length subsequently.

Short-listing of Vendors

Once SQR have been finalised, the sources of procurement of the weapon system/stores shall be ascertained and short-listing of the prospective manufacturers/suppliers carried out by SHQ. The short-listed vendors will be OEM or authorised vendors or export agencies authorised/sponsored by foreign governments. Technical Managers may increase the short-listed vendor base, based on vendor capability. Keeping the security and other relevant aspects in view, appropriate publicity may be given to the proposed procurement with a view to generate maximum competition.

Acceptance of Necessity

For obtaining Acceptance of Necessity (AoN), SHQ would prepare a Statement of Case (SoC) and draft Request for Proposals (RFP). SoC will include assessment of the acquisition category against the specified defining attributes. SoC will specify total quantities required, break-up based on five years plans and the quantity that is required to be procured in the next two years. SoC, with comments of all agencies, would be placed for consideration of the Categorisation Committees, who will submit its recommendations to the AoN according authority.

Cases in which ToT is being sought, the appropriate production agency would be approved by the AoN according authority based on the recommendations of the Categorisation Committee. The production agency could be selected from any of the public/private firms including a joint venture company.

Cases in which the total requirement of equipment/weapon system is spread over two or more plan periods, AoN will be processed for the entire quantity, clearly indicating the quantities sought during various periods/ stages. AoN once accorded will be deemed to be valid for the subsequent procurements also; however, quantity vetting would be done at each subsequent stage.

RFP

RFP will be a self-contained document that will enable vendors to make their offer after consideration of full requirements of the acquisition. In cases where ToT is involved, the RFP would include the requirement for indigenous manufacturing as well. RFP should spell out the requirements of ToT in scope, range and depth of the technology required.

Solicitation of offers will be as per ‘Single Stage – Two Bid System’. It will imply that a single RFP would be issued soliciting both the technical and commercial bids together, but in two separate and sealed envelopes. Bids/ responses shall be accepted only from those to whom RFP has been issued.

Technical Evaluation

A Technical Evaluation Committee (TEC) will be constituted by SHQ for paper evaluation of the technical bids received in response to RFP. It will include representatives of the user service, maintenance agency and representatives of quality assurance. TEC will examine the extent of variations/differences, if any, in the characteristics of the equipment offered by various vendors with reference to SQR and prepare a Compliance Statement. Non-compliance of vendors to any of the required provisions would lead to rejection of the bid at this stage. TEC may invite the vendors for technical presentations/clarifications on technical issues. The Acquisition Wing will formally accept the report of TEC.

Trials

After the acceptance of TEC Report by the Acquisition Wing, all selected vendors would be asked to provide their equipment for trials in India, except when trials are to be conducted at vendor premises. FET will be conducted by the user service on the basis of the trial methodology given in RFP. Methodology for evaluation of each parameter should be clearly detailed in the RFP, so that the vendors fully understand its implications. FET will normally be conducted on ‘No Cost No Commitment’ basis.

Staff Evaluation

Staff Evaluation will analyse FET results and shortlist equipment recommended for introduction into the services. Staff Evaluation Report will be approved by SHQ and forwarded to the Acquisition Wing for acceptance. In case no vendor meets SQR, the case would be foreclosed and a fresh RFP issued after reformulating SQR. Vendors will be informed about the results of trials and evaluation, along with reasons for disqualification.

In a case where bids had been submitted by more than one bidder in a competitive manner and the Staff Evaluation after trials shortlists only one equipment for introduction into service, it would not be considered as a single vendor situation. For, as the techno-commercial offers were received before the trials, the commercial bids were competitive in nature. In other words, bidders had submitted their offers in an open competition and were not aware of any single bidder getting approved after the trials.

Technical Oversight Committee

For expert oversight over the technical evaluation process, the Acquisition Wing will constitute a Technical Oversight Committee (TOC) for all acquisition proposals in excess of Rs 300 crores and for any other special case. TOC will comprise of three members drawn from a standing panel of specialists. It will be tasked to see whether the trials, trial evaluations, compliance to SQR and selection of vendors were done according to the prescribed procedures. It will have to give its observations and recommendations, based on a majority decision, within 30 days, which may be extended by a maximum period of 15 days, with the consent of the Defence Secretary.

Commercial Negotiation Committee

After the acceptance of Staff Evaluation Report and TOC Report (where applicable), a Commercial Negotiation Committee (CNC) will be constituted. Initial activities of CNC shall include establishing a benchmark for the reasonableness of price in an internal meeting before opening the commercial offer. The sealed commercial offers of the technically accepted vendors shall be opened by CNC at a predetermined date and time under intimation to vendors, permitting such vendors or their authorised representatives to be present.

A Compliance Statement incorporating the commercial terms offered in RFP and those sought by the vendor(s), analysis of the discordance and the impact of the same will be prepared. A similar statement would be prepared in regard to deviations noticed in the delivery schedules, performance-cum-warranty and guarantee provisions, acceptance criteria and Engineering Support Package.

CNC would prepare a Comparative Statement of Tenders with a view to evaluate the technically acceptable offers and determine the lowest acceptable offer (L1 vendor). Once the commercial offers are opened and the quote of L1 vendor is found to be within the benchmark fixed in the internal meeting, there should be no need to carry out any further price negotiations.

CNC Report, along with the summary of recommendations, would be processed by the Acquisition Manager for obtaining expenditure clearance and CFA approval. Consequent to the approval of CFA, the contract would be signed by the Acquisition Manager/Director (Procurement) concerned in the Acquisition Wing. While responsibility for contract administration and management would be that of SHQ concerned, post-contract monitoring would be conducted by the Acquisition Wing.

Major Changes

Whereas the basic format of making defence procurements remains unchanged, a number of major changes have been made with a view to promote indigenous industry, in line with the government’s mission ‘Make in India’. The important ones have been recapitulated here.

New Category of Buy (Indian-IDDM)

First priority in all future defence procurements will be accorded to the products that have been designed, developed and manufactured indigenously. The product must meet the laid down criteria of IC. However, the onus of proving that the equipment design is indigenous rests with the vendor and such vendor claims will be verified by a committee comprising scientists from DRDO and representatives from SHQ, based on documents issued by authorised agencies and presented by the vendors.

Apart from overall IC, the same percentage of IC will also be required in Basic Cost of Equipment; Cost of Manufacturers’ Recommended List of Spares; and Cost of Special Maintenance Tools and Special Test Equipment.

Indigenous Content Defined

For the purposes of the DPP, IC for an equipment or an item shall be arrived at by excluding from the total cost of that equipment/item the following elements at all stages (tiers) of manufacturing/production/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/citizens.

All license fees, royalties, technical fees and other fees/payments of this nature paid out of India, by whatever term/phrase referred to in contracts/agreements made by vendors/sub-vendors.

Taxes, duties, cesses, octroi and any other statutory levies in India of this nature.

Indian Vendor Defined

For the first time, the definition of an Indian vendor for the purposes of defence procurements has been spelt out in the new DPP to clear all confusion. Unless specifically provided for in a clause/section/chapter or elsewhere of the DPP, an Indian vendor means:-

For defence products requiring industrial licence: an Indian entity, which could include incorporation/ownership models as per Companies Act, partnership firm, proprietorship and other types of ownership models including societies as per relevant laws, complying with, besides other regulations in force, the guidelines/ licensing requirements stipulated by the Department of Industrial Policy and Promotion, as applicable

For defence products not requiring industrial licence: an Indian entity registered under the relevant Indian laws and complying with all regulations in force applicable to that industry.

Splitting of SQR

A major change relates to the splitting of SQR into two sub-categories as follows:-

Essential Parameters–A: These are parameters that generally form part of the contemporary equipment available in the market and form the core of SQR. These will be tested and validated at FET stage.

Essential Parameters–B: Though not available originally in the equipment fielded for FET, these parameters can be developed and achieved by the vendors using available technologies. These parameters need to be tested and validated within a specified time frame as stipulated in the contract. Failure to meet these parameters after signing of the contract and within the stipulated time frame, will lead to forfeiture of all bank guarantees (Performance Bank Guarantee, Additional Bank Guarantee and Advance Bank Guarantees, if any) and attract other penal provisions as may be prescribed by the government.

Introduction of Enhanced Performance Parameters

Enhanced Performance Parameters (EPP) are those parameters that enhance the capability of the equipment, vis-à-vis the essential parameters. SQR may not contain EPP in all cases. Inability to meet the EPP does not preclude vendors from being eligible for the bidding/bid evaluation. However, if a vendor claims to have equipment meeting the EPP as specified in SQR and RFP, then they must provide details of the same in their technical bids, which will be tested for compliance during FET itself.

Equipment successfully meeting EPP parameters will be awarded a credit score of up to 10 percent, for evaluation of L1, with each individual attribute not exceeding a credit score of up to 3 percent, as approved by AoN according authority.

Treatment of Single Bids Rationalised

In case a single bid is received at the bid submission stage, SHQ may proceed with the process and complete the Technical Evaluation without retracting RFP. Within 4 weeks from the acceptance of TEC report, the case must be referred to AoN according authority. In case it is concluded that there is no scope for change in SQR and other conditions of RFP; and that retraction and reissue of RFP is not likely to increase the vendor base, then the case may be progressed with the approval of the Defence Acquisition Council, provided the vendor agrees to hold the original commercial bid till completion of the procurement process.

Conclusion

In addition to the above mentioned procedural reforms, a number of other changes of significance have also been introduced. For example, having realised the failure of the old ‘Make’ procedure to deliver, it has been revamped.

The threshold for the Integrity Pact has been reduced from the earlier Rs 100 crore to Rs 20 crore. All cases involving upgrade of an in service weapon system/equipment will also be covered by DPP-2016. Categorisation of such cases may be carried out depending on scope of the proposal, availability of indigenous technology and the need for seeking critical technologies from foreign vendors.

Validity of AoN for categories under ‘Buy’ and ‘Buy and Make’ schemes has been reduced to six months. However, for ‘Buy and Make (Indian)’ schemes and turnkey projects, it will be one year. AoN would lapse for all cases where RFP for approved quantity is not issued within the original validity period of AoN. In such cases, SHQ would have to re-validate the case and seek fresh AoN with due justification for not processing the case in time.

Threshold for the application of the offset clause has been raised from the earlier Rs 300 crore to Rs 2,000 crores, thereby exempting a large number of defence contracts from the convolutions of offsets. This single step will help expedite procurements and save offset cost penalty.

Recent reforms in DPP are well intentioned. Quite rightly, a great deal of stress has been laid on harnessing the potential of the India industry, especially the private sector and MSMEs. It is not that the guidelines and directions contained in DPP-2016 are flawless in all respects. But then, reforms are a continuous process.

It is equally important that good policies get translated into discernible actions on ground. It is only then that an environment of free competition, fair play and transparency can be built which is so very essential for defence procurements.