India's New Defence Procurement Procedure

In January, India’s Ministry of Defence issued the Defence Procurement Procedure 2011 (DPP-2011). The 262-page document, which came into force from the first day of 2011, would guide Defence Ministry’s multi billion dollar capital acquisitions till 2013 when the next DPP is due. The revised document, which is based on “experience of procurement agencies” and feedback from a cross section of industrial stakeholders, has made a number of changes. According to the Defence Minister, AK Antony, the changes in the new DPP are aimed at “ expediting decision making, simplification of connatural and financial provisions and also to establish a level playing field for the Indian defence industry, both public sector and private sector.”

24th Mar 2011


INDIA’S NEW DEFENCE PROCUREMENT PROCEDURE

LAXMAN KUMAR BEHERA 

In January, India’s Ministry of Defence issued the Defence Procurement Procedure 2011 (DPP-2011). The 262-page document, which came into force from the first day of 2011, would guide Defence Ministry’s multi billion dollar capital acquisitions till 2013 when the next DPP is due. The revised document, which is based on “experience of procurement agencies” and feedback from a cross section of industrial stakeholders, has made a number of changes. According to the Defence Minister, AK Antony, the changes in the new DPP are aimed at “ expediting decision making, simplification of connatural and financial provisions and also to establish a level playing field for the Indian defence industry, both public sector and private sector.”

NEW FEATURES OF DPP-2011
Among other changes in DPP-2011, the shipbuilding guidelines have undergone a comprehensive review. The Chapter-III of DPP-2011, which pertains to domestic shipbuilding procedures, has been divided into two sections of guidelines, in comparison to the one set of guidelines in previous DPP. Section ‘A’ of Chapter-III of new DPP incorporates provisions which would be applicable exclusively for the government-owned shipyards on nomination basis, while the provisions in Section ‘B’ are meant for private shipyards on competitive basis. According to the Defence Ministry, the revised guidelines, which are based on “inputs provided by all stakeholders” would provide a level playing field between the state-owned shipyards and the private shipbuilders and promote ‘health competition” between them, leading to greater efficiency in domestic shipbuilding capability.

In offset provisions, the new DPP has expanded the list of eligible products and services which could be resorted to by the foreign companies for discharging their offset obligations. The earlier “List of Defence Products” has been expanded under the new name “List of Products Eligible for Discharge of Offset Obligations” to include products of two more categories: “Products for Internal Security” and “Civil Aerospace Product”. In all, the DPP-2011 has 27 categories of products (in comparison to 13 categories in DPP-2008), which could be used for offsets purpose. According to the Defence Minister, the expansion of the list “will provide a wider range of offset opportunities to vendors participating in defence procurements and encourage building up of indigenous manufacturing capability in crucial areas.”

List of Products Eligible for Discharge of Offset Obligations
Defence Products
1. Small arms, mortars, cannons, guns, howitzers, anti-tank weapons and their ammunition including fuze.
2. Bombs, torpedoes, rockets, missiles, other explosive devices and charges, related equipment and accessories specially designed for military use, equipment specially designed for handling, control, operation, jamming and detection.
3. Energetic materials, explosives, propellants and pyrotechnics.
4. Tracked and wheeled armoured vehicles, vehicles with ballistic protection designed for military applications, armoured or protective equipment.
5. Vessels of war, special naval system, equipment and accessories
6. Aircraft, unmanned airborne vehicles, aero engines and air craft equipment, related equipment specially designed or modified for military use, parachutes and related equipment.
7. Electronics and communication equipment specially designed for military use such as electronic counter measure and counter counter measure equipment surveillance and monitoring, data processing and signalling, guidance and navigation equipment, imaging equipment and night vision devices, sensors.
8. Specialized equipment for military training or for simulating military scenarios, specially designed simulators for use of armaments and trainers.
9. Forgings, castings and other unfinished products which are specially designed for products for military applications and troop comfort equipment.
10. Miscellaneous equipment and materials designed for military applications, specially designed environmental test facilities and equipment for the certification, qualification, testing or production of the above products.
11. Software specially designed or modified for the development, production or use of above items. This includes software specially designed for modelling, simulation or evaluation of military weapon systems, modelling or simulating military operation scenarios and Command, Communications, Control, Computer and Intelligence (C4I) applications.
12. High velocity kinetic energy weapon systems and related equipment.
13. Direct energy weapon systems, related or countermeasure equipment, super conductive equipment and specially designed for components and accessories.

Products for Internal Security

1. Arms and their ammunition including all types of close quarter weapons.
2. Protective Equipment for Security personnel including body armour and helmets.
3. Vehicles for internal security purposes including armoured vehicles, bullet proof vehicles and mine protected vehicles.
4. Riot control equipment and protective as well as riot control vehicles.
5. Specialized equipment for surveillance including hand held devices and unmanned aerial vehicles.
6. Equipment and devices for night fighting capability including night vision devices.
7. Navigational and communications equipment including for secure communications.
8. Specialized counter terrorism equipment and gear, assault platforms, detection devices, breaching gear, etc.
9. Training aids including simulators and simulation equipment.

Civil Aerospace Products

1. All types of fixed wing as well as rotary aircraft including their air frames, aero engines, aircraft components and avionics.
2. Aircraft design and engineering services.
3. Technical publications
4. Raw material and semi-finished goods.
5. Flying training institutions and technical training institutions (excluding civil infrastructure).
Source: Ministry of Defence, Government of India, Defence Procurement Procedure 2011
It is noteworthy that the revised product list in DPP-2011 is exclusive of certain services which could also be resorted to by the foreign companies to discharge their mandatory offset obligations. As per the revised guidelines, “for the purpose of discharge of offsets, ‘services’ will mean maintenance, overhaul, upgradation, life extension, engineering, design, testing of eligible products as indicated in [the expanded eligible product list] and training. Training may include training services and training equipment (e.g. simulators) but exclude civil infrastructure.”
In addition to the above changes, the DPP-2011 has also brought about several other changes, pertaining to Acceptance of Necessity (AON), Transfer of Technology (ToT) for Maintenance Infrastructure, Technical Oversight Committee (TOC), Trial Evaluation, Exchange Rate Variation (ERV), Performance and Warranty Bond, and Fast Track Procedure. As regards AON, the DPP-2011 has extended its validity in which the RFP would be issued. In DPP-2008, the condition was that “AON would lapse for all cases where the RFP for approved quantity is not issued within two years from accord of AON.” As per the revised condition, “for cases where the original RFP has been issued within two years from accord of AON and later retracted for any reason, the AON would continue to remain valid … provided the subsequent RFP is issued within one year from the date of retraction of original RFP.” The extension of time period is meant to save crucial processing time, which is quite significant in Indian MoD’s case.
In case of ToT for Maintenance Infrastructure, the new document has tried to provide a level playing field among the Indian companies, both private and public. Previously, the provision for maintenance infrastructure was largely for the state-owned enterprises. The foreign supplies were bound to sign contract with them for creating “base repairs (third line) and the requisite spares for the entire life cycle of the equipment.” Now any Indian company which is registered under the Indian Companies Act 1956 is eligible to obtain the contract. This would provide the private sector companies, who are registered under the 1956 Act, an equal opportunity to compete with their public sector enterprises to get the maintenance contact. The eligible company is however to be nominated by the Department of Defence of MoD for obtaining the final maintenance contract.
In a further move to broad base the level playing field, the Exchange Rate Variation (ERV) clause which was earlier applicable to the government companies, has been modified to include the private companies in it ambit. However the application of the clause is restricted to the ‘Buy Global’ category, in which both Indian and foreign companies compete to win MoD contract. The application of the clause for Indian companies would provide them an equal opportunity in hedging against the fluctuation in exchange rate. The safeguard is meant to benefits those companies who intend to integrate certain foreign parts and components in their final product.
Transparency in defence contract has been a major issue for the Indian MoD. To enhance this aspect, the MoD has provided several in-built measures through DPP, including the provision of Technical Oversight Committee (TOC), whose responsibility is to provide “expert oversight over the technical evaluation process.” The three member Committee (comprising one each from Service, R&D and government owned production agency), which is set up on a case-by-case basis, is mandated to provide oversight to all contracts whose value exceed Rs 3.0 billion. The DPP-2011 has gone one step further in strengthening the Committee. In contrast to DPP-2008 which was silent about the rank of the members, the new document is relatively more categorical in saying that the members should have “adequate seniority and experience.” A senior and experienced committee is expected to provide better oversight.
As regards trial evaluation, the DPP-2011 has provided an additional grace period of up to 30 days. This extra time is over and above the 15-day grace period that is already provided to all qualified vendors who are required to produce their equipment for trials by a due date as notified. The extra period of up to 30-days, which can be equally availed by the participating vendors, is however to be approved by the concerned Service Headquarters. Nonetheless, provision of addition grace period may help retain the participation of some companies who have genuine difficultly in fielding their equipments for trial by the end of first grace period.

In DPP-2011, the stringent clause under the fast track procurement relating to blacklisting of vendors for delay in delivery of equipment has been removed. To some extent, the move shows the MoD’s tacit understating that such option does not bring higher accountability on the part of vendors. To make the vendors more accountable, the DPP-2011 has however increased the LD (Liquidated Damages) value from earlier rate of 1 per cent per week subject to maximum of 10 per cent of value of delayed store to 1.5 per cent subject to 15 per cent of the delayed store.

The DPP-2011 has lessened the administrative as well as financial burden on the vendors. This is evident from two fronts. First, under the Payment Terms, vendors are now required to furnish a single Performance-cum-Warranty Bond instead of two separate bonds as required under the earlier DPP. The value of the combined bond has been reduced by half to five per cent of the contract value. Second, under the Integrity Pact, which is applicable for contracts valued Rs. 1.0 billion and above, vendors are required to submit Integrity Pact Bank Guarantee (IPBG), at the rate of Rs. 10 million for contract valued up to Rs 3.0 billion and Rs. 30 million for contact valued above Rs. 3.0 billion. Moreover, the Bank Guarantees under the Integrity Pact is linked to the validity of the Commercial Offer submitted by vendors and are, therefore, no longer open ended (in earlier provision, the validity of Bank Guarantee was open ended).

WEAKNESS OF DPP-2011
The first and foremost weakness of DPP is its lack of focus on strengthening acquisition structure, which in the present form is scattered between the MoD and Service Headquarters, leading to diffusion of responsibility, accountability, and other attendant weaknesses. This has been highlighted by the Comptroller General of India (CAG) in a 2007 report submitted to the Parliament. Among others, the CAG pointed out delays in acquisition; lack of effective coordination among the Services in procurement of common items; major drawback in formulation of QR [qualitative requirement]; deficiency in the process of technical and trial evaluation. The CAG had suggested “an integrated defence acquisition organisation … incorporating all the functional elements and specialisation involved in defence acquisition under one head.” However, nearly four years after the CAG’s recommendations, the successive DPPs, including the 2011 version, have ignored to act upon.

From the offsets point of view, notwithstanding the expansion of product list, the overall policy is still marked with features of conservatism. In contrast to acceptable global practices, the offset guidelines in DPP do not allow the provisions of multipliers and technology transfer through offset route. The conservatism is partly driven by the fear of being dumped with redundant technologies and partly because of lack of a strong monitoring system. However these fears need to be overcome to get the maximum benefit out of offset route. For instance, multipliers could be given on select list of technologies, so as to infuse greater interest among the foreign companies to transfer such technologies which they are otherwise reluctant to pass on. Apart from the above, the period allowed for banking of offsets– which is two-and-a-half years – is too less to attract prior investment, which could be utilised for discharging future obligations. Considering that the banking provision is meant for engaging foreign companies in India for a long time, the banking period needs to be extended.

CONCLUSION
The DPP-2011 is no doubt a much improved version than its predecessors. The changes in document - especially those related to domestic shipbuilding, offsets, AON, ToT for Maintenance Infrastructure, Technical Oversight Committee, Performance and Warranty Bond, Fast Track Procedure, Exchange Rate Variation, Trial Evaluation - are the welcome changes and would together help expedite defence acquisition, and push for higher defence industrialisation in India.

The welcome changes notwithstanding, the DPP-2011 has however missed the opportunity to bring in reforms in some crucial areas, such as acquisition structure and offsets. The present acquisition structure, as pointed out by the CAG, is not an optimal structure to handle MoD’s massive and complex defence acquisition. Since a strong acquisition body could lead to higher efficiency, it needs a careful consideration in the next DPP, which is due in two years’ time. In offsets, the conservatism in respect to multipliers, technology transfer and banking period needs to be overcome to get maximum benefit. The ray of hope is that the MoD has constituted a high-powered Committee which is tasked to “conduct a comprehensive study of the existing offset policy as well as institutional arrangements and recommend changes, as appropriate.” The industry is hopeful that some of their demands would be addressed by the Committee.
 

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