The defense ministry’s Defense Acquisitions Council (DAC) approved significant changes to the 2013 Defense Procurement Procedure (DPP) on Monday.
Headlining these reforms is a measure of relief given to foreign Original Equipment Manufacturers (OEMs) in terms of their offset obligations. Foreign OEMs were required to plow back 30 percent of the value of any order worth INR 300 crore (INR 3 billion or USD 44 million) and above into Indian industry. Now they will be required to do so only for orders with a value of INR 2,000 crore (INR 20 billion or USD 300 million) and above.
Foreign OEMs have typically struggled to find qualified Indian Offset Partners (IOPs) that make suitable destinations for the absorption of offsets. This will mean fewer instances of required discharge of offset obligations.
Also importantly, the approved changes include a ‘new category of acquisition’, which is to be the most preferred category to process defense procurement, called Buy Indian Indigenously Designed Developed and Manufactured (IDDM), over and above all other categories. Under IDDM, any order will require at least 40 percent indigenous content if the design is indigenous in addition to development and manufacture. In the absence of an indigenous design but with indigenous development and manufacture, the required percentage of indigenous content will be 60 percent.
Under the new DPP, this category will have a higher preference than the others:
- Buy (Indian): An outright purchase of equipment from Indian vendors only.
- Buy & Make (Indian): A purchase from an Indian vendor (including an Indian company forming joint venture/establishing production arrangement with OEM), followed by licensed production/indigenous manufacture in the country.
- Buy & Make with Transfer of Technology (ToT)
- Buy (Global): An outright purchase of equipment from foreign as well as Indian vendors.
On the face of it, Buy Indian (IDDM) could also appear to overlap with the other categories.
The older ‘Make’ category under the 2013 DPP said:
Acquisitions covered under the ‘Make’ decisions would include high technology complex systems or critical components/equipment for any weapon system to be designed, developed and produced indigenously. A minimum 30% indigenous content on cost basis shall be required in such cases in the successful prototype.
It then appears that the requirement for indigenous content has been hiked under the ‘Make’ category, variously in the case of indigenous design or otherwise, which has been now given a higher preference than the other categories. And the category has been given a different name.
‘Make’ now appears to be a substantially more advanced concept.
DPP 2013 said:
The Defence Procurement Procedure ‘Make’ will cover all capital acquisitions of High Technology Complex Systems and upgrades undertaken by indigenous Research, Design and Development. These would be undertaken by Ordnance Factory Board (OFB), Defence Public Sector Undertakings (DPSUs) and Indian Industry / Consortia on a level playing field on shared development cost.
Now, firstly, all three services will have Project Management Unit headed by a two-star who will be responsible for all ‘Make’ projects. Companies involved in these projects will be required to be majority owned and controlled by resident Indians and will be required to have a net worth of at least five percent of the stipulated development cost (which could equal a maximum of INR 1,000 crore or USD 150 million) for projects with development costs of INR 5,000 crore (USD 750 Million) or above. Companies need prove only a positive net worth for projects with development costs of less than INR 5,000 crore (USD 750 Million).
There will also be three sub-categories under ‘Make’.
The first sub-category of ‘Make’ projects (Make I) will be funded by the government up to 90 percent of the development cost. Projects with costs less than INR 10 crore (USD 1.5 million) will be reserved for Medium and Small Scale Industries (MSMEs) and opened up to larger companies, if no MSME can ‘develop the required prototype’. The remaining 10 percent of the development cost will be refunded by the government to the development company if a Request For Proposal (RFP) for the equipment developed is not issued within two years of the successful development of the prototype.
Make II are projects that will be completely funded by industry on the understanding that 100 percent of the development cost would be refunded to the developers of a successful prototype in case the RFP is not issued for the developed equipment within two years of successful development.
Make III will be projects funded by MSMEs with a development cost of no more than INR 3 crore (USD 440,000).
But besides ‘Make’, the DAC has also marked up the required indigenous content under Buy (Indian) up to 40 percent from the 30 percent under DPP 2013.
And while Buy and Make (Indian) already required indigenous content of at least 50 percent, the DAC has apparently extended this to Buy and Make, as well, which required ‘purchase from a foreign vendor followed by licensed production/ indigenous manufacture in the country’, under DPP 2013.
The DAC has also approved the reduction of the validity of the Acceptance of Necessity (AoN) from one year to six months, to speed up the flotation of tenders. DPP 2013 had earlier reduced the validity of the AoN from two years to one year with ‘a stipulation to freeze the Services Qualitative Requirements (SQRs) before the accord of the AoN’.
Two other significant changes have been approved.
Firstly, while earlier to qualify for the technical shortlist and be considered for the opening of the commercial bids, a vendor only had to make sure their product exhibited for trials was compliant with the Staff Qualitative Requirements (SQRs) or met the requirements of the technical parameters.
Now, any technical bid that exceeds the requirements of the SQRs by meeting the ‘Enhanced Performance Parameters’ in the RFP will be awarded an additional weightage of 10 percent for which they will get credit while evaluating their commercial bid for the determination of L1.
Further, a lone single bid to a tender will no longer be grounds for virtually automatic scrapping or withdrawal of the RFP, as under DPP 2013, as long as the bid of the single vendor, itself, is deemed justifiable.
Many of these changes appear substantial, but the cumulative effect of these changes remains to be seen pending the publication of the new DPP in two months.