BackNew defence procurement procedure to be unveiled at Defexpo
Govt approves key changes to accord priority to locally made equipment and fund private-sector R&D
PremiumOn 11 March, defence minister Manohar Parrikar said DPP 2016 is being finalized. Photo: Abhijit Bhatlekar/Mint
Mumbai: The new Defence Procurement Procedure (DPP) that will introduce measures to promote indigenization and self-reliance in defence will be unveiled at the Defexpo India 2016, a biennial show of military and security systems.
On 11 March, defence minister Manohar Parrikar said DPP 2016 is being finalized.
Enabling provisions for utilization and consolidation of design, development and manufacturing infrastructure available in the country are included in the proposal, the minister said.
Parrikar said the defence acquisition council (DAC) has approved a set of amendments to simplify the offsets process.
Offsets, currently, are a provision in DPP that require any foreign arms maker securing an order worth more than ₹ 300 crore from India to source components worth 30% of the value of the order from India.
During 2014-15 and 2015-16, the DAC approved 66 capital procurement cases at an estimated cost of ₹ 1.98 trillion, according to the defence ministry.
During 2014-15 alone, 47 capital procurement contracts valued at ₹ 64,859.52 crore were signed. In the 11 months to February 2016, 44 such contracts valued at ₹ 39,955.36 crore were signed.
The objective of the new DPP is to ensure expeditious procurement of the approved requirements of the armed forces in terms of capabilities sought and time frame prescribed by optimally utilizing the allocated budgetary resources.
“However, pendency sometimes occurs in procurement cases due to several reasons, such as insufficient and limited vendor base, non-conformity of the offers to the Request for Proposal conditions, long field trials, complexities in contract negotiations and long lead time for indigenization etc," the ministry admitted in a statement on 11 March.
So will the new DPP be a game changer?
The defence ministry had approved key policy changes to accord priority to locally made equipment and fund private sector research and development (R&D) in defence.
The DAC had approved changes to DPP to introduce a new category called Indigenously Designed, Developed and Manufactured (IDDM) equipment.
Under the new category, it will be mandatory for 40% of the content to be sourced locally.
It has also revised the so-called defence offset clause, which will now be applied to contracts of more than ₹ 2,000 crore instead of the current ₹ 300 crore, thereby removing a hurdle to foreign companies eyeing the Indian market.
A clear picture will emerge during the Defexpo India 2016, experts say.
Some believe that the new DPP will be a game changer as it will bring several changes, which includes categories of products to be imported and the products to be procured from local companies.
Bharat Mandot, co-founder and chief executive officer of management consultancy StelCore Management Services Pvt. Ltd, said DPP would give priority to indigenous manufacturers under the ‘Make in India’ initiative but it wouldn’t be a mandatory condition to award contracts.
“Technology transformation will be the major part of it and government can allow higher limits for the foreign direct investment (FDI) and that the new policy would modernize the defence forces. With defence remaining within the government’s high priority focus area and in view of the government’s commitment towards fine-tuning of policy and regulations, the sector may see significant growth," Mandot said.
What India is lacking is the inflow of sophisticated technology and with further enhancement of the FDI limit, critical technology may flow in, Mandot pointed out.
“The government should provide a level-playing field for private players. Today, the Indian industry is more confident about making significant investments in the defence sector. This has to be encouraged to enhance competition and improve the procurement options for the government," Mandot said.
Mandot added that the new DPP will create a conducive policy environment, cut red tape and provide attractive incentives to promote local defence manufacturing.
“With a little more impetus from the government’s end, India could well become a major defence and aerospace manufacturing hub in the 15-20 years," Mandot said.
The defence minister also hinted at transparent defence procurement procedures under the new DPP regime.
He did not disclose details.
Kabir Bogra, associate partner at Khaitan and Co., said introduction of strategic partners (SPs) and a revised offset framework is expected in the new DPP.
In fact, the Dhirendra Singh Committee has recommended an “SP Model" for creating capacity in the private sector on a long-term basis over and above the capacity and infrastructure that exists in the public sector.
Pursuant to its recommendations, the VK Aatre Task Force was constituted to lay down criteria for selection of SPs for various platforms from the private sector industry.
It has presented its report to the government in January 2016.
“The SP concept would rejuvenate the domestic industry since the foreign original equipment manufacturers (OEMs) can tie with Indian partners for providing technology rather than undertake protracted negotiations with the ministry of defence. SP would develop domestic capability and make technology absorption a commercial matter between Indian and foreign manufacturers and not entirely a legal issue," Bogra said.
Referring to the offset framework, Bogra said it needs a serious relook, adding “we need to provide more commercially viable alternatives to original equipment manufacturers to fulfil offset obligations".
“The government is getting out of the industry’s way to control offsets but more needs to be done. For example: cross credits for projects need to be permitted and offsets should be used strategically and not for every project. We also need to have a greater push towards enabling services to move India up in the value chain," Bogra said.
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