While most of the world is locked down to contain the spread of COVID-19, the Ministry of Defence (MoD) continues to work and make another attempt to refine the existing Defence Procurement Procedure (DPP). The MoD has uploaded the latest draft of DPP 2020 on its website and comments are sought by May 8, 2020. By the year-end, after taking cognisance of all the suggestions, DPP 2020 is expected to be finalised and issued.
The DPP defines the process for capital expenditure from the annual defence allocation. For the current financial year, it is pegged at Rs. 1,18,555 Crores and is approximately one-third of capital expenditure of the Government of India. Therefore, the process of refining the DPP is significant. After the Bofors incident that rocked the nation, the DPP took a formal format in 1992. In the aftermath of Kargil Conflict, on the recommendations of the Group of Ministers, DPP took shape as a comprehensive document on capital procurements in 2002. With practical experience gained and observed inability to speed up the procurement process, it was continuously revised. Its new incarnations in 2003, 2005, 2006, 2008, 2011, 2013 and 2016 did not deviate from the fundamental structure and process of procurement, resulting in no significant enhancement in the efficiency of capital procurements.
In the last 50 years, India, with seven per cent of global arms imports, has emerged as the largest arms importer. Saudi Arabia is a distant second with a little over three per cent of global arms imports. For decades, both policymakers and policy implementers have struggled to reverse the trend. The formalisation of DPP in 1992, creation of offset models in 2006 and the Strategic Partnership Model in 2016 has not changed the narrative. India continues to be the only major economy with a relatively modest defence industry. Therefore, the main aim of DPP 2020 should be to efficiently and effectively utilise capital budget allocation for modernisation of the Indian Armed Forces and simultaneously give a boost to the indigenisation of defence industry as a long-term strategic objective.
There are five foundational changes needed. First is the inherent underlying principle that to ensure financial probity, multiple checks are mandatory. A clearly annunciated flow chart, well-defined responsibilities and distinct accountability of all participants in the process are necessary for any process to be efficient. DPP in all its incarnations has lacked that and relies on individual and collective checks at multiple levels. A simple observation in the procurement process may have to be commented upon by 15 individuals before a case can move forward. The approach of collective responsibility has invariably allowed diminished individual accountability, which was adversely commented upon by the Comptroller and Auditor General (CAG) of India in its report on Capital Acquisitions for Air Force tabled in the Parliament in February 2019. This needs to change.
The second issue is about the structure of DPP. DPP stands for Defence Procurement Procedure and this aspect needs to be the focal point. Besides covering the procurement procedure, the draft has so many other aspects related to partnerships, research and development (R&D), innovations, manufacture, offsets et al. Structurally, DPP needs segregation of R&D from the procurement procedure. All processes related to capabilities not currently available need de-hyphenation from DPP. For example, the chapter on ‘Make and Innovation’ must not be part of DPP. In any case, the preliminary procedure given in all these cases leads only to the first stage of procurement. This resets the time and process to zero and the procurement process starts ab initio. So, the elimination of these processes will de-clutter the DPP. These processes are significant for developing an indigenous ecosystem. But DPP is not the place for its germination. A separate policy and guidance document, to cover all aspects of R&D for the defence sector from innovation to design and development as articulated in draft DPP 2020, will be ideal.
The third issue is about the complexity of the process. It starts with the first stage of procurement that leads to acceptance of necessity and categorisation of the capital acquisition scheme. Based on estimated cost, every capital acquisition case is categorised at an appropriate level that defines the source and method of procurement, for example, Buy Global) or Buy and Manufacture. The types of categorisation in draft DPP 2020 is mind-boggling. In fact, with every new incarnation, DPP has added new ways for categorisation. Simply stated, the decision-maker needs to categorise the operationally required capability into two verticals – Buy or Lease. In either case, every required capability needs to be acquired or leased on a globally competitive basis to obtain the best value for money. At this juncture, it may seem contrary to ‘Make in India’ goal. But it is not so in case certain clauses are added to the entire procurement process that is discussed a little later.
The fourth change needed is about the offset policy. The intention of this clause was to plough back capital expenditure on imported military hardware to initiate the indigenous defence industry. But it has not happened. In fact, offset credits and verification or accurate measure of indigenous content in various platforms remain suboptimal owing to a very complex and cumbersome process. It is well known that the offset clause adds to the final contract value. Eliminating offsets will simplify the contracting process and possibly enhance financial efficiency. But support to ‘Make in India’ too is mandatory for long term defence goal. A simple method can be adopted to counterbalance the removal of offset clause and energise indigenous manufacture. As all capital acquisition schemes are proposed via a global tender, a clause of part payment in Non-Repatriable Rupees (NRR) will not only support ‘Make in India’ but also assist in offsetting the notional loss by current suboptimal offset procedure. The international vendors will like to factor this aspect in their bids akin to offset clause. A simple procedure like this is likely to be more efficient than the unwieldy offset clause. The payment in NRR will have to be utilised to source equipment/services from the Indian entities. This is a simple method to ensure the requisite level of sourcing of equipment/services from India and can objectively be monitored for compliance.
Additionally, the outbreak of COVID-19 and a looming recession combined with the changing character of conflict presents an ideal time frame for India to indigenise defence industry.3 DPP 2020 must make use of the current challenges to invigorate the indigenous defence industry by making procedures simple. Will foreign vendors find loopholes in money repatriation clauses and route the money to parent company through fictitious firms in India? Some companies will definitely attempt this. But overall, this simplified process will be very effective in supporting ‘Make in India’.
Now coming back to categorisation riddle of DPP once again. Along with categorisation as Buy or Lease, the decision-maker needs to qualify the share of contract value that needs to be paid to the vendor in NRR. And this could vary between 30 to 100 per cent based on the individual case at the sole discretion of the decision-maker. Earmarking 100 per cent payment in NRR will obviously eliminate global players and this aspect needs a clear understanding by the decision-maker.
The last point is about clarity in DPP. It needs to be drafted for the decision-makers. Although size-wise even the 700-page draft DPP 2020 pales in comparison to the United States Defence Federal Acquisition Regulation Supplement or Direction Générale de l’armement Instruction of France or similar procedure in the United Kingdom (UK), but in all these countries personnel operating these instructions are formally trained and stay in these departments for decades. Without any formal training and with relatively very short average tenure of two to three years in India, it is difficult for most personnel to comprehend a complex document like the draft DPP 2020. This assertion is valid for most of the personnel manning the acquisition wings of the MoD or Services Headquarters. Year after year, the CAG reports have been pointing out major and multiple procedural deviations in almost all capital procurements.
The DPP 2020 needs to cut out obfuscation, repetitions, and bring out core issues for the consideration of the decision-makers in a concise and clear manner. This can be done in case issues associated with R&D are cut off, categorisation is simplified, and clauses like offset eliminated.
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