Time is Now-Make in India in Defence : Defence Procurement Procedures – Rewritten

Issues Details: 
Vol 9 Issue 6 Jan - Feb 2016
Page No.: 
11
Sub Title: 
From a leading defence manufacturer globally in the early part of the twentieth century, India was reduced to becoming the largest importer of defence systems globally, a dubious distinction the
Author: 
Col KV Kuber (Retd)
Friday, February 19, 2016

From a leading defence manufacturer globally in the early part of the twentieth century, India was reduced to becoming the largest importer of defence systems globally, a dubious distinction the nation has pledged to reverse. When the Prime Minister addressed the delegates at Aero India 2015, he left no doubt in anyone’s mind of his firm resolve to reverse the trend and indigenise manufacturing in defence and make the country self-reliant.  The ball was set rolling soon after by the Defence Minister when he constituted the ‘Experts Committee’ led by Mr Dhirendra Singh to recommend amendments to the existing procedure of procurements. The basic aim has always been to indigenize and achieve self-reliance by developing a strong industrial base within the country.

The need for indigenous development and production is not a new discovery. It was felt more than two decades ago when our former President, Dr Abdul Kalam envisioned a dream for the reversal of the ratio of 70% import and 30% indigenous content. DPP 2006 introduced the ‘Make’ procedure and DPP 2013 sharpened focus on indigenous development. However, what was lacking then was implementation. There was a need for synergy amongst different departments, amongst ministries, especially of Commerce & Industry, External affairs and Defence.

In this era of “Make in India”, “Made in India”, “Start up India” and “Stand up India”, the present dispensation has demonstrated their resolve to take the nation forward on a path of rapid progress, not seen before.

A Holistic Approach

The government has adopted a holistic approach towards reforms. Within three months of assuming responsibility, the Ministry of Commerce attended to the long pending issue to notify a liberalised licensing regime. With a single notification, about 60% of the products were de-licensed, thus contributing towards ease of doing business. This came along with the notification of defence products which enabled a greater clarity on products that are to be classified as defence products. It was now time for the FDI policy to be synchronised with the policy adopted in the Defence Sector. Thus came the FDI circular of 2015 and the notification to amend the erstwhile Press Notes on the subject.

With the framework for increased defence industrialisation has laid out, the focus was now on exports and the MoD actively started working on a draft Exports Policy. While there was a push for easing the norms for obtaining the NOC/exports license, a committee was constituted for laying down the philosophy and suggest changes to the Defence Procurement Procedures. In a highly synchronised and coordinated manner, the Prime Minister provided the much desired push by announcing ‘Make in India’ in Defence at the Bangalore Airshow 2015. A number of other measures were in place to harmonise with the efforts of Make in India in Defence.

The Process

It was perhaps for the first time that the Defence Minister personally took charge of reforming the process and modernise the procedure to ensure ease of doing business in defence. He was visible at a number of defence events, interacted with the industry and think tanks, and took the initiative to personally brief the Dhirender Singh committee on the vision of the MoD, with the Vice Chiefs of the Armed Forces, Defence Secretary and other senior service officers and bureaucrats in attendance.

The committee came out with its report in a record time, thanks to the vision and efforts of the Chairman, Shri Dhirendra Singh. Some path breaking recommendations were made, such as according primacy in decision making to the Armed Forces, role of the political leadership, role of the executive and reforms to the establishment(such as re-organisation of the Acquisition Wing) and more.

A framework for Make in India was the highlight of the report, which hitherto captured the essentials of the DPP in vogue and incorporated the same in a tabular form. Suggestions for reducing the timelines at various levels of the process, delegation of authority at different levels and encouraging the MoD to interact with the industry as partners rather than as vendors, were some of the highlights. Concept of strategic and development partners, simplification of the MAKE procedure, encouragement to the MSMEs and demystifying the Offsets were other highlights of the report.

While the MoD constituted a ‘Task Force’ to lay down the criteria for selection of Strategic Partners from the private sector as also to lay down a long term covenant, the Defence Minister has been closely monitoring the progress made in formulating the DPP. The Task Force is understood to be deliberating on various aspects of Strategic Partnership and has submitted its report. It has been reported in the media extensively with a comprehensive financial, technical evaluation process with a composite entry gate. They have also accorded priority for five sectors such as Aircraft, Helicopters, Submarines, AFVs and Ammunition.

Highlights: DPP 2016

In a smart move the Defence Minister has addressed all aspects associated with the procurement process in a deliberate and holistic manner. Recent press reports of the DPP 2016 being approved by the DAC in its meeting on 11 January 2016 provide for a new direction to the acquisition executive. The Indian Armed Forces are awaiting the new DPP which is likely to restore the pride of place to the Armed Forces in decision making as envisaged by the Dhirendra Singh Committee. It is widely believed that many of the recommendations of the committee will find favour for inclusion in the new DPP.

The DPP this time has been rewritten with great emphasis on its alignment with the Prime Minister’s vision of Make in India and other initiatives. Since its first version in 2002, the DPP has been amended eight times, each time retaining its original form with cosmetic amendments. This time the Minister has followed a methodical approach by easing out norms in the DIPP for licensing and associated FDI inclusions. With two expert panels to analyze and provide for the required ammunition to the decision makers in the MoD to adopt, and a robust mechanism inside the MoD to review and suggest inclusions; the DPP formulation has been attempted keeping all the stake holders’ involved in decision making.. Some of the important issues reportedly covered by DPP 2016 are analysed below:-

• Buy Indian-Indigenous Design, Development and Manufacturing (IDDM) has been introduced as a new procurement category in addition to the existing ones. Under this category it would be mandatory to have 40% indigenous content (IC) for indigenously designed equipment, or 60% IC for other equipment. Moving a step ahead over DPP 2013, Buy Indian (IDDM) procurement category will be given the first preference. DPP 2013 had Buy Indian as the most preferred acquisition category.

• While Indigenous Content requirement for Buy (Indian) cases has been raised to 40 percent from the existing 30 percent, Buy and Make (Indian) and Buy and Make categories will require 50 per cent Indigenous Content. New DPP will also address the users’ requirement of having a wider vendor base. Selected companies dealing with specific projects can further work on the improvement of the product based on the mutually agreed parameters. Companies meeting the requirements of Enhanced Performance Parameters will get additional credit scores during evaluation of their product cost.

• New provisions for private sector’s involvement as Production Agencies (PAs) and ToT (Transfer of Technology) partners have been introduced.

• The rules for the retraction of Request for Proposals will be made more stringent. Single vendor cases are going to see light of the day, however, with due justification.

• The new DPP will have three sub-categories under Make procedure- Make I (Government funded), Make – II (Industry funded) and Make – III (MSME funded). MoD will fund 90 per cent of development costs of Make projects instead of the current 80. In case of delay in issuance of RFP after successful development of a prototype, MoD will be liable for covering the remaining 10 per cent. New DPP will also address the concerns of MSMEs as projects under Make I sub-category, with estimated development costs of less than INR 10 crores will be reserved for MSMEs. Procurements linked with MSME funded Make projects not exceeding INR 3 crores would be exclusively reserved from MSMEs. MSMEs will also get 100 per cent refund of the prototype development cost if the RFP is not issued within 24 months of successful development of the prototype. Government funded Make projects will be eligible for a mobilisation advance of 20 per cent of the estimated development cost.

• Make projects will be steered and monitored by a dedicated Project Management Unit, chaired by a Major General or equivalent officer from each service HQ. Companies having a majority stake by an Indian and controlled by resident Indians will be eligible for projects under Make category. Companies need to be registered for a period of five years; three years in case of MSMEs. Companies need to have a minimum credit rating of B++, issued by recognised credit rating agencies.

• The nagging issue of L1 (lowest bidder) is being addressed by introduction of extra performance weightage upto 10%. If a particular system performance exceeds the QR, it will be given extra weight age to compensate for price. This is logical, since no system is designed to meet the specific requirement of a specific force. In the near future when Indian industry leaders set out to sell Indian weapon systems abroad, they too will also expect a delta for the additional features incorporated. This will encourage vendors, domestic and foreign alike, to go that extra mile and do better, to the benefit our Armed Forces.

The only announcement with regard to offsets has been to raise the threshold from existing INR 300 crores to INR 2000 crores. This may have been done to ease the burden of monitoring by the MoD that is already understaffed for this purpose.

Reactions of the Indian Defence Industry

Interactions with a number of representatives from the defence industry have indicated very positive vibrations. For the first time the industry feels that their concerns have been met. MSMEs have got a fair deal as well. For long one has heard many a speaker from the government lauding the role of MSMEs and speak at length of the Defence Industrial Base. However, it is for the first time that the government has walked the talk. What hitherto was percieved as lip service by the MSMEs, some concrete action has been proposed this time. Even the Dhirendra Singh committee fell short in making bold recommendations in favour of MSMEs. The credit, thus, must go singularly to the Raksha Mantri, who has understood and appreciated the requirement of strengthening the Defence Industrial Base, with the MSMEs residing at the base.

Can the MoD do More?

Now or Never. We as a nation are in a Now or Never type of situation. Make in India is no more a slogan with adaptations across ministries, departments and disciplines. Two of the most important sectors that can actually contribute to Make in India, the Defence and Power sector, have taken aggressive steps to abide through conformance.

There is a lot more to be done in Offsets, despite the MoD allowing some incremental changes to the existing guidelines. The recommendations of Dhirendra Singh committee may be addressed in full with the aim of making offsets implementable and result oriented. Some of the reforms include (i) simplification of the offsets process, (ii)minimal interference, (iii)hand-holding and facilitation, (iv) enhancing banking of offsets,(v) address raw materials production, (vi) technology transfer to industry and (vii) creating express clearance channels for offsets.

One more idea reflected in the Dhirendra Singh committee report, is that of the Innovative Funding Mechanism, to allow investments by VC funds into the MSME sector. This will add up for twin benefits, (i) allow MSMEs access to low cost funds and (ii) encourage OEMs to use this avenue for effective and hassle free discharge of offsets in India. The VC Fund will take care of the modalities of downstream investment and consequent offsets benefits, besides providing the MSMEs with the much needed management, access to foreign OEMs for hand-holding support and make them globally competitive.

If MSMEs require any support it is fundamentally all about cash flow and money influx. They can upscale quickly, are resilient and make good business cases. Like reservations have been provided in MAKE category of procurement, the government may also consider extending the benefit to the Buy category as well, by according priority to procurement from MSMEs for all procurements less than INR 50 Crores

It is a globally accepted practice to mandate the big boys with goals towards small business, as it happens in the contracts awarded by the US DoD, to Lockheed Martin or Boeing, mandating them to source at least 30% from the MSMEs. Similarly, in keeping with the spirit of the MSMED Act of 2006, MoD may like to mandate a general out-sourcing norm of at least 50% with a special provision that 30% may be outsourced from the MSMEs. This will eventually lead to a tier-isation of the Indian defence industry, which is presently in a state of undefined logic.

Conclusion

A new era dawns, a new DPP is in the works, a new attitude sets in the government - an attitude of outreach, of developing capabilities and capacity, of enabling exports and of hand-holding; all of this set to change the landscape of the Indian defence industry. Private sector is gearing up and making investments like never before, foreign OEMs are aggressively looking at India as a destination for investment, and public sector is actively pursuing outsourcing norms- all for the good of the industry.

Indian industry has an energy like never before, all, defence conferences and seminars are overflowing, and many companies from across the country are evincing interest in this initiative. They want to diversify and make a foray into the defence sector, despite knowing the difficulties of quality consciousness, timelines and heavy investments. Promise is evident; Delivery is important.

Defence Industry is no more restricted to the known DRDO townships like Chennai, Bangalore and Hyderabad as many states are formulating and announcing Aerospace and Defence policy in a bid to attract investments. Utilization of diversified skill sets is a great take away from this exercise.

In the near future we are likely to witness a number of start ups in the Defence sector and we must be geared to meet this challenge thrown to the establishment by the industry. The Armed Forces must necessarily go forward and interact with the Indian industry. The industry looks forward to user-interaction as this is the ultimate test of the intellectual business acumen blending with the demand stringency, to evolve strong supply side dynamics.

There is more to come and we can, with an intelligent guess, expect the DPP to be announced in consonance with the DEFEXPO scheduled to be held in Goa in the last week of March 2016.

Procedures must not make prisoners of the acquisition executive, rather be seen as an enabling mechanism and a broad guidance, with delegated powers to the procurement executive to make informed decisions, for timely delivery of military systems to the Indian Armed Forces.

Category: 
Geopolitics