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Defence Procurement Procedure – 2006

With a view to make the procedure more comprehensive, the government revised it yet again. Defence Procurement Procedure – 2006 (DPP-2006) was duly promulgated on 01 September 2006. DPP-2006 covered all capital acquisitions (except medical equipment) undertaken by the Ministry of Defence (MoD), defence services and the Indian Coast Guard, both from indigenous sources and ex-import. It was not made applicable to Defence Research and Development Organisation (DRDO), Ordnance Factory Board (OFB) and Defence Public Sector Undertakings (DPSU), who were to continue to follow their respective procedures for procurements.

The planning process was explained in detail, with proposals for acquisition of capital assets flowing from the long-term, medium-term and short term perspectives as under:-

(a) 15 Years Long Term Integrated Perspective Plan (LTIPP)

It is evolved by the Headquarters Integrated Defence Staff (HQ IDS) in consultation with the Service Headquarters (SHQ) and is based on the Defence Planning Guidelines. It is approved by the Defence Acquisition Council (DAC).

(b) 5 Years Services Capital Acquisition Plan (SCAP)

It is formulated by HQ IDS and indicates the list of equipment to be acquired, keeping in view operational exigencies and the overall requirement of funds. DAC considers and approves it.

(c) Annual Acquisition Plan (AAP)

It is a subset of SCAP. HQ IDS works out the annual requirement of funds for capital acquisitions taking into account the schemes listed in SCAP and those proposed for the year ahead, carryovers, operational exigencies and proposed changes in priorities recommended by the respective SHQ. Based on the budgetary projections and allocations, the draft AAP is formulated by the respective SHQ and forwarded to HQ IDS. AAP is based on a two years acquisition cycle and caters for adequate cushion to safeguard against surrender of funds. Proposals not listed in SCAP may only be processed after due approval of DAC. AAP is approved by the Defence Procurement Board (DPB).

Illustration: Stages of Acquisition Process

In addition to the provision of budgetary support, the planning process also includes scaling, acceptance of necessity and quantity vetting. Thereafter, the Acquisition Wing processes all acquisition proposals incorporated in the finalised AAP under the overall guidance of DPB. See Illustration.

Salient Features of DPP-2006

DPP-2006 was a very comprehensive and exhaustive document which covered the complete gamut of acquisition activities. Recommendations made by the Kelkar Committee were also incorporated. To make the procedure above board, many bold and innovative provisions were included to create an environment of trust in the fairness of the system. Major initiatives were taken to integrate the private sector in defence production. Some of the salient features of DPP-2006 have been discussed in the subsequent paragraphs.

Categorisation of Procurement Cases

‘Buy’ category was further subdivided into ‘Buy (Indian)’ and ‘Buy (Global)’. ‘Buy (Indian)’ must have minimum 30 per cent indigenous content if the system is being integrated by an Indian vendor. Indigenous development was further categorised as follows:-

All strategic, complex and security sensitive systems to be earmarked for development by DRDO under their own procedure.

Low technology mature systems to be categorised as ‘Buy (Indian)’ and must have a minimum indigenous content of 50 per cent.

Acquisitions involving high technology complex systems to be covered under the new ‘Make’ procedure. These projects were to be earmarked for public sector/private sector/consortia.

All cases involving upgradation of in-service weapon systems and equipment were also covered by the new procedure. Such cases were also to be categorised as ‘Buy (Indian)’, ‘Buy (Global)’, ‘Buy and Make’ and ‘Make’ cases.

Maximising Competition

In order to generate maximum competition, the following facilitating provisions were included:-

Though the initial list of short-listed vendors is prepared by the SHQ, it can be supplemented by the Technical Manager.

Wherever possible, keeping the security and other relevant aspects in view, appropriate publicity may be given to the proposed procurement. Generic case-specific advertisement should be posted on the internet. Expression of interest and advertisements through newspapers may also be resorted to.

Vendors’ registration may be done through Internet.

DPP-2006 discouraged single vendor procurements and aimed at maximising competition. However, at times, India may want to procure state-of-the-art equipment being manufactured by only one vendor to get qualitative edge. Such cases had to be debated by DAC after proper technology scan was carried out by HQ IDS in consultation with DRDO.

Additionally, if only one vendor claimed compliance with the parameters at the time of paper evaluation by the Technical Evaluation Committee, the procedure stipulated that the Request for Proposals (RFP) be retracted and a fresh RFP issued with revised parameters.

Bidding Process

‘Single-stage two-bid’ system was made mandatory as it guards against the possibility of a vendor increasing his commercial offer consequent to the development of a single vendor situation after evaluation. All vendors had to submit their technical and commercial proposals at the initial stage itself, albeit in two separate sealed envelopes. It was only after the technical evaluation that the commercial offers of the successful vendors were opened to determine the lowest bidder. No change in the commercial offer was permitted under any circumstances.

Evaluation

RFP had to contain details of criteria proposed to be applied for selection. In case a matrix was being used, vendors had to be made aware of it along with inter-se weightage assigned to various parameters. No alteration to the matrix was permitted after the issuance of RFP.

Security concerns permitting, representatives of the vendors were permitted to witness field trials. After each stage, a debriefing of all the vendors was required to be carried out in a common meeting (wherever possible) as regards the performance of their equipment. Compliance or otherwise vis-à-vis RFP parameters had to be specifically communicated to all the vendors at the trial location itself.

Transfer of Technology

Production agency nominated to receive transfer of technology could be a public or private sector firm, based on the inputs received from the Department of Defence Production. If a joint venture company had participated in the tender, then the company would qualify only if it had the ability to absorb the technology as per the RFP requirements. Provision was also made for the transfer of technology for maintenance infrastructure as well.

Commercial Negotiations

In a multi-vendor situation, contract could be concluded with L1 without any price negotiations. However, negotiations might be held in exceptional circumstances where valid logical reasons existed. In single vendor cases, the Commercial Negotiation Committee was required to establish a benchmark price before opening the commercial offer. If the quoted price was found to be within the benchmark fixed, no further price negotiations were required. RFP had to mention this aspect. It was a very ingenious provision and was expected to cut down delays caused by long and protracted price negotiations.

Offsets

Detailed guidelines for the fulfillment of offset obligations, issued earlier in July 2006, were incorporated in DPP-2006. The policy was made applicable to all purchases where indicative cost was over Rs 300 crores for ‘Buy’, ‘Buy and Make with Transfer of Technology’ and ship-building projects. DAC could prescribe offsets higher than 30 percent for specific cases. For joint ventures where Indian firm was bidding, the foreign partner had to discharge the offset obligations.

Offset obligation could be discharged through any of the following routes:-

Direct purchase of or executing export orders for, defence products and services provided by the Indian defence industry.

Foreign Direct Investment (FDI) in Indian defence industry.

FDI in Indian organisations engaged in research in defence research and development.

Fall Clause and Integrity Pact

Every bidder was required to give an undertaking that he had not supplied a similar item at a lower rate to any department of the Government of India. If it was found at any stage that the said item had been supplied at a lower price, then that very price with due allowance for quantities and intervening time period would be applicable to the case in hand. The vendor would be required to refund the extra amount, if already received.

For all procurements of over Rs 100 crores, a pre-contract integrity pact would be signed between the government and the vendors, wherein the government and the bidders promise not to accept and offer bribes respectively during the procurement process. The pact would be a binding agreement between the government department and the bidders for specific contracts.

The government would appoint independent monitors for the purposes of the pact, in consultation with the Central Vigilance Commission. As soon as the monitor noticed, or believed to notice, a violation of the integrity pact, he would so inform the Head of the Acquisition Wing for further action.

Private Sector

DPP-2006 did not make any distinction between foreign and Indian companies or between private and public sectors. Indian companies started expecting enormous business opportunities, especially with offsets having been made mandatory for all major defence contracts.

Subsequent to the acceptance of the Kelkar Committee Report, a scheme to accord recognition to private sector industry leaders was proposed. Those identified as “Raksha Udyog Ratnas” (RURs) were to be encouraged to assume the role of system integrators of large defence systems and producers of weapon platforms. RURs were to be treated at par with the public sector undertakings for all defence acquisition purposes, including undertaking licenced production with transfer of technology from overseas sources.

Emergent Procurements

For emergent acquisitions, the government reviewed and modified the existing fast track procedure. Fast Track Procedure – 2006 (FTP-2006) aimed at a time limit of 112 to 154 days from the date of initiation of the proposal to the date of signing the contract. Deliveries were to be completed between 3 to 12 months after the contract had been signed.

As in the previous procedure, FTP-2006 could be adopted only for those requirements that related to an imminent operational situation or a crisis without warning. The need had to emanate from the Service Chief. The proposal was required to be put up to the Defence Minister with the recommendations of the Defence Procurement Board. As time was of essence in such procurements, FTP-2006 was to be applied to items which were likely to be available within the laid down time frame.

Conclusion

DPP-2006 was a very exhaustive document which aimed at promoting transparency and competition. However, there were two issues that continued to be a cause for major concern. First, DPP-2006 had not tried to identify reasons for delays and take corrective action to affect reduction in the time taken to finalise procurement deals. Secondly, a number of features remained mired in impreciseness and uncertainty. For example, provisions relating to execution of ‘Make’ cases, implementation of integrity pact and fulfilment of offset obligations lacked clarity and left many questions unanswered. As reforms are a continuous process, future reviews of the procedure were expected to address these issues.