India: Defence Procurement Procedure 2016 – Renewed Focus On Indigenous Production

Last Updated: 8 November 2017
Article by Amit Cowshish

The revised Defence Procurement Procedure 2016 (DPP), which will regulate all capital acquisition programmes initiated on or after 01 April 2016, seeks to leverage India's buying power with a renewed focus on indigenous production of defence equipment by the Indian industry. At least five changes made in the DPP clearly point in this direction.

'Buy (Indian Designed, Developed and Manufactured)' – a new procurement category

This new procurement category, introduced in DPP 2016, replaces 'Buy (Indian)' as the most preferred mode of procurement in the hierarchy of procurement categories which also includes 'Buy and Make (Indian)', 'Buy and Make' and 'Buy (Global)' in the decreasing order of preference, apart from a stand-alone 'Make' category that is not a part of this hierarchy.

This category is meant for outright purchase of equipment designed, developed and manufactured in India by the Indian vendors with a minimum of 40 per cent indigenous content. If, however, the equipment is not designed and developed in India, it can be purchased under this category only if it has indigenous content of 60 per cent.

This conflicts with the 'Buy (Indian)' category under which equipment, whether or not designed and developed in India, can be procured provided it has a minimum of 40 per cent indigenous content. Hopefully, this issue will get resolved in due course but what is important is the trust reposed by the Ministry of Defence (MoD) in the potential of the Indian industry to manufacture defence equipment in India, even if it is in collaboration with the foreign Original Equipment Manufacturers (OEMs), and to achieve indigenisation to the extent of 40/60 per cent.

The Indian industry and the OEMs will, therefore, do well to ensure while entering into technology transfer or other arrangements that the equipment made in India meets the requirement of indigenous content to qualify under both these categories irrespective of whether or not it is indigenously designed and developed, leaving MoD with no option but to buy it from an Indian vendor.

Making it easier for the private industry in the 'Buy and Make' cases

Under the 'Buy and Make' category, the OEM, selected by following the laid down procurement procedure, is required to tie up with the Indian Production Agency (PA) nominated by the MoD to manufacture the equipment in India under the 'make' portion of the contract.

In the absence of an internal procedure for selecting private sector entities to be nominated as PAs, contracts under this category have generally been awarded to the Defence Public Sector Undertakings DPSUs) in the past. This is now set to change as a new provision in the DPP empowers the MoD, if it so decides, to provide an option to the OEMs to select PAs on their own.

This model has been adopted by the MoD in the past in Avro-replacement programme of the Indian Air Force, though that procurement programme is yet to see the light of the day.

Strategic Partnership (SP) Scheme

The chapter on the SP scheme, which was not included in the DPP when it was promulgated in 2016, was finally notified more than a year later in May 2017. This scheme envisages two parallel actions by the MoD: selection of platforms made by OEMs meeting the MoD's requirements and short listing of potential Indian companies which could tie up with the selected OEMs to manufacture the platform in India through technology transfer.

Once this action is completed, the Indian companies, identified as potential SPs, will be called upon to participate in the tendering process and the contract will be awarded to the lowest bidder. The scheme is initially slated to be adopted in four segments: fighter aircraft, helicopters, submarines and armoured fighting vehicles/main battle tank. There are several imponderables in the scheme but it does open up new vistas for the Indian industry.

Refinement of the 'Make' procedure

The projects under the 'Make' procedure are intended for indigenous design, development and manufacture of prototypes of futuristic equipment, weapon systems and other platforms by the Indian companies, with or without collaboration with the foreign companies, with substantial funding of the cost of development of the prototype by the MoD. Although not a single contract has been awarded under this category since 2006 when it was first introduced, the changes made in DPP 2016 could give a boost to the 'Make' projects.

For one thing, the category has been split into two sub-categories. Under the first sub-category, the extent of funding has been increased from 80 to 90 per cent and a provision has been made for payment of a mobilisation advance. The second sub-category comprises projects which will have to be undertaken by the industry without any funding by the MoD.

The remaining 10 per cent of the cost of development in respect of the projects under the first sub-category and full cost of development of the prototype under the second category will also be reimbursed by the MoD to the developers if the Request for Proposal (RfP) is not issued within two years of successful development of the prototype.

Projects with cost of development up to Rs 10 crore under the first sub-category and Rs 3 crore under the second, will first be offered to the Micro, Small and Medium Enterprises (MSMEs). The ball has already been set rolling by the MoD with a long list of 30 potential 'Make' projects as on 30 March 2017.

Essential and Enhanced Parameters

To make life easier for the vendors, they will now not be required to customise the equipment before offering it for field evaluation trials which is an important stage in the procurement process. Instead, they will be permitted to offer the equipment for trials based on 'Essential Parameters A', which will be specified in the RfP based on a careful study of the features that are normally available in the equipment available in the market commercially off-the-shelf (COTS).

After selection of the vendor whose equipment qualifies the field trials and whose commercial offer is the lowest and award of the contract to such vendor, it is only this vendor who will be required to incorporate 'Essential Parameters B' – also indicated in the RfP – in the equipment offered by him for trials before commencing the delivery.

Another provision made in the DPP will now make it possible for the MoD, in those cases where it decides to invoke it, to give weightage if the equipment offered by a vendor has enhanced technical parameters. This weightage will be given only for the purpose of determination of the lowest offer (L1). The desired 'enhanced parameters' and the weightage formula will be indicated in the RfP. This will make it possible to award the contract on what is typically called L1-TI basis for procurement of equipment that is technologically superior to the equipment offered by the lowest bidder.

Likely impact

It is too early to assess the impact of these changes as much will depend on MoD's dynamism in taking pragmatic decisions.  One thing is sure, though: the future of long-term business relationships between the Indian industry and the OEMs lies in creating capacities in India for co-development/co-production and life-time sustenance/upgradation of equipment as India is firmly set on the course to making itself a manufacturing hub and achieving self-reliance in defence with defence procurements potentially ranging between one and one-and-half lakh crore in the course of the next ten years.

Amit Cowshish, Partner (amitcowshish@duaassociates.com )

*The views expressed are personal and may not necessarily reflect the views of the Firm.

Dua Associates, 704-705, Global Business Park, Tower 'B', Mehrauli - Gurgaon Road, Gurgaon - 122002 (Haryana), India

Tel:  +91 124 2803366-7

Fax: +91 124 2803370

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