Indian Defence Review

After a prolonged delay, the Ministry of Defence (MoD) released the revised Defence Procurement Procedure (DPP) on March 28, 2016.1 The document, coming into effect from April 01, 2016, is applicable to all projects which would be given in-principle approval (or the Acceptance of Necessity (AoN)) thereafter.2 It is, however, to be noted that the released document is not a complete one, as a key chapter on strategic partnership and all the relevant annexures, appendices and schedules are still a work in progress and are expected to be released later as part of the comprehensive DPP-2016. Nonetheless, the revised document, the first under the Modi government, has set the tone for a new procurement regime with a clear intention to boost the ‘Make in India’ initiative in the defence sector, and to speed up the procurement process.

While articulating the new features, DPP-2016 draws heavily from the report of the Committee of Experts set up by the Modi government under the chairmanship of Dhirendra Singh, to suggest a policy framework for facilitating ‘Make in India’ in defence and further streamlining the procurement process. Among others, DPP-2016, running into 100 pages, envisages an array of features that include: a preamble to the document which articulates the peculiar nature of defence acquisition and the imperatives of self-reliance in defence production; a brand new procurement category, favouring purchase of locally designed, developed and manufactured products; higher yet flexible indigenisation content requirement in the existing ‘Buy (Indian)’ and ‘Buy and Make (Indian)’ procurement categories; a comprehensively revamped ‘Make’ procedure; an institutionalised set of steps for processing the request for information (RFI); and certain measures to deal with procurement in single-vendor situations. This Special Feature analyses some of the key provisions of the new procurement document.

Key Provisions
‘Buy (Indian-IDDM)’ Procurement Category 

To provide a greater thrust to the ‘Make in India’ initiative in defence production, DPP-2016 has introduced a new procurement category, Buy (Indian–Indigenously Designed, Developed and Manufactured), or ‘Buy (Indian – IDDM)’. In terms of prioritisation, the new category, which would also be used for procurement of all locally designed and developed items under the revamped ‘Make’ procedures, is placed above the existing ‘Buy (Indian)’ category which, in turn, is placed above the other categories, namely the ‘Buy and Make (Indian)’, ‘Buy and Make’ and ‘Buy (Global)’, in that order. Under the new category, indigenously designed equipment with 40 per cent indigenous content (IC), or equipment not necessarily designed in-house but having a 60 per cent IC, is intended for procurement from the local industry. The intent is clearly to promote in-house design capacity and higher localisation, two critical aspects, which, if implemented in the right spirit, could deepen the role of domestic industry, especially the private sector, in defence production.

It is, however, to be noted that the responsibility to prove an indigenous design rests with the industry, while the final say would be that of the government. To examine the industry’s claim, DPP-2016 provides for a committee system comprising scientists from the Defence Research and Development Organisation (DRDO) and members of the concerned Service Headquarters (SHQs). The guidelines, on the basis of which the committee would verify the claims, would be promulgated later by the MoD. Pending the release of the guidelines, it would, however, not be unreasonable to argue that the newly provisioned committee has a challenging task ahead. This is in view of the fact that typical defence technologies are not patented, nor does the DRDO/SHQ have full knowledge of designs of military equipment developed by other countries. Given these constrains, it looks like that the committee would rely mostly on the undertakings and documentary proof submitted by the industry for the purpose of certification.

Higher yet Flexible Indigenous Content Requirement

With a clear intention to boost the local content in procurement and drive the larger ‘Make in India’ initiative, the revised DPP has enhanced the indigenous content requirement under the existing ‘Buy (Indian)’ category from the earlier 30 per cent to 40 per cent. However, while setting the higher target, the DPP has not lost the sight of the unique procurement cases which require a different indigenisation requirement. For such cases, DPP-2016 provides flexibility to the procurement authorities to stipulate either a higher or lower indigenisation content, depending on the merits of the projects. The flexibility in the indigenisation requirement, which is also extended to ‘Buy and Make (Indian)’ procurements, would go a long way in meeting a key demand of the local industry, which has long complained that rigidity in IC is oblivious to the ground reality. The industry was particularly vocal with regard to critical aerospace items, in which local capability stands at a bare minimum and achieving even 20 per cent IC is a difficult task at the present state of India’s defence industrial development. It may be noted that the Hindustan Aeronautics Ltd (HAL), the state-owned monopoly in aircraft manufacturing, depends on foreign sources to the extent of 80 to 90 per cent for input materials.

Revamped ‘Make’ Procedures

If there has been one big disappointment in the DPP’s recent operational history, it has been the complexity, leading to ineffectiveness, of ‘Make’ procedures, which were first articulated in 2006 with a view to promoting in-house research, design, development and production of ‘high-technology complex systems’ by the domestic industry, especially the private sector. DPP-2016 has attempted to plug certain loopholes by way of making a number of changes, beginning with the planning process. The structure of the Annual Acquisition Plan (AAP), which is a subset of the five-year Services Capital Acquisition Plan (SCAP) and the guiding document for procurement, has undergone a change to include, for the first time, a number of ‘Make’ projects that have already been given in-principle approval or are to be considered for in-principle approval by the higher procurement authorities. Besides, the existing Technology and Perspective Plan (TPCR), which has been criticised for being too vague, is now given a new life by requiring it to reflect the “details of the acquisition plans for a period of 15 years, for use by the industry.” These two developments on the planning front are likely to lead to the greater visibility of ‘Make’ projects and, more importantly, accountability on the part of the procurement authorities. Apart from this, changes have also been made in respect of the responsibility of SHQs, classification of ‘Make’ sub-categories, funding pattern for prototypes development, and clarity as to who would be eligible for undertaking ‘Make’ projects.

Compared to the previous DPPs, DPP-2016 has attempted to make the SHQs own and, being responsible for, ‘Make’ projects. In this regard, the SHQs would be now entrusted with the task of identifying potential ‘Make’ projects and undertaking feasibility studies for each identified project in consultation with other stakeholders (earlier, the responsibility for both activities was entrusted with the Headquarters Integrated Defence Staff (HQ IDS)). Under the new ‘Make’ procedures, the SHQs, including the Coast Guard, are also required to establish a permanent Make-Project Management Unit (Make­-PMU) comprising a two star serving officer as the head and officers drawn from various ranks/branches/specialisation as other members. The newly provisioned body is intended to instil a sense of ownership among the armed forces whose direct involvement is critical in any successful development of a military item. In a move to ensure continuity in decision-making, the head of the Make-PMU is required to have a minimum tenure of three years, whereas other officials are required to have a longer tenure. The Head and the members are also required to serve as key members in the important multi-disciplinary Integrated Project Management Team (IPMT), which has the key responsibilities of preparing the Project Definition Document (PDD), issuing the Expression of Interest (EoI), shortlisting the developmental agencies, and monitoring the progress of prototype development. It is interesting to note that under the revamped ‘Make’ procedure, the power to constitute the IPMT is vested with the Department of Defence Production (DDP), whereas under the earlier procedures the responsibility was with the Director General (Acquisition). It seems that the DDP, which has long been criticised for its limited role in defence indigenisation efforts, is now trying to acquire a larger role under the new DPP.

Effecting a crucial change, the new DPP has divided the ‘Make’ projects into two categories – Make-I (Government Funded) and Make-II (Industry Funded) – besides giving a decisive say to the Micro, Small and Medium Enterprises (MSMEs), which had long craved government attention for their role in defence indigenisation efforts. As the names suggest, for the category of Make-I projects, it is the government that would take the lead in funding prototype development by the industry; whereas for the latter category, which is largely confined to import substitution, it is the industry that would bear the full cost of development. For Make-I (Government Funded) projects, the new procedure envisages a higher government funding commitment of up to 90 per cent (in comparison to up to 80 per cent under the earlier ‘Make’ procedures) for prototype development, with a further provision that 20 per cent of the total developmental cost would be paid in advance. In order to bring in a degree of accountability and to follow best commercial practices, the new procedure provides for the mandatory issuance of the request for proposal (RFP) within two years’ of successful development, failing which the balance 10 per cent funded by the industry would be reimbursed to it. For the MSMEs, the new procedure provides them the first right to undertake prototype development up to Rs. 10 crore under the government-funded ‘Make’ projects (up to Rs. 3.0 crore in case of Make (Industry Funded)). In other words, only when MSMEs are not interested in taking up small valued projects, it can be opened up for participation by the bigger industry players.

In a move to clarify as to who would be eligible for the ‘Make’ programme, DPP-2016 has restricted the participation in such a programme to “only Indian vendors including Association of Persons (AoP)” to be detailed in an appendix that would be notified separately as part of the complete DPP-2016. Pending the release of this crucial appendix, it is believed that entities with majority resident Indian holding would be eligible for ‘Make’ projects. In other words, Joint Ventures (JVs) having foreign equity of more than 49 per cent would not be eligible. This would ensure that decision-making and the crucial intellectual property rights (IPR) of the ‘Make’ designs would stay in the hands of the resident Indians. It is also believed that the eligibility criteria would include a minimum five years of operational experience (three years for MSMEs) besides a credit rating of B++ issued by reputed credit rating agencies.