The Ministry of Defence (MoD), on March 20, 2020, released the draft Defence Procurement Procedure 2020 (DPP-2020), soliciting public comments by April 17. The draft, over 700-page long, is the culmination of a review process which was set in motion by Defence Minister Rajnath Singh in August 2019 under the Chairmanship of Director General (Acquisition). The draft builds upon DPP-2016, which itself has undergone 47 amendments as part of the Business Process Reengineering.
The new draft intends to achieve two broad objectives: hastening the procurement process by removing procedural bottlenecks and promoting Make in India in defence. The draft has revised the existing procurement categories, increased the requirement of indigenous content (IC) under various categories, and incorporated some new concepts of defence procurement. Besides, it has also revised the existing offset guidelines and made changes in the contract template and other provisions of the document. This policy brief raises some issues for consideration by the MoD before the finalisation of the draft. It, however, begins with an analytical overview of the major changes incorporated in draft DPP-2020.
Draft DPP-2020: An Overview
Revised Procurement Categories and Indigenous Content
As Table 1 shows, the draft has added a new category, Buy (Global-Manufacture in India), to the existing five prioritised procurement categories in DPP-2016, besides increasing the IC requirement by 10 percentage points in almost all the categories. These changes are intended to promote the Make in India initiative in defence, with the new category providing an opportunity to the foreign vendors to manufacture in India through their subsidiaries.
Apart from the new prioritised category, several stand-alone categories/sub-categories have been created. One of these is ‘Leasing’, which is intended to enable the armed forces to possess and operate costly equipment like transport and trainer aircraft and simulators without having to own them. This will save the initial capital cost of acquisition of items required in smaller numbers and probably for specific periods. The procedure for leasing of equipment is designed to be faster than the normal acquisition process.
The ‘Make’ category, introduced for the first time in DPP-2006, was split into two sub-categories in DPP-2016: ‘Make I (Government Funded)’ and ‘Make II (Industry Funded)’. A third sub-category, ‘Make III (Indigenously Manufactured)’, has been added to these two. Besides this, the ambit of this category has been expanded by creating a similar category called ‘Innovation’, which is also split into three sub-categories (see Table 2). The ‘Innovation’ category brings the existing two schemes, Innovation for Defence Excellence (iDEX) and Technology Development Fund (TDF), under the ambit of capital acquisition.
The chapter on Strategic Partnership Model (SPM), which was introduced for the first time in DPP-2016 to promote private sector participation in big-ticket defence manufacturing, has not been included in draft DPP-2020 as no changes have been made therein.
|Prioritised Procurement Category||IC||Prioritised Procurement Category||IC|
|Buy (Indian-IDDM)||≥ 40% if Indigenous Design; Otherwise ≥ 60%||Buy (Indian-IDDM)||≥ 50% & Indigenous Design|
|Buy (Indian)||≥ 40%||Buy (Indian)||≥ 50% if Indigenous Design; Otherwise ≥60%|
|Buy & Make (Indian)||≥ 50% of the ‘Make’ Portion||Buy & Make (Indian)||≥ 50% of the ‘Make’ Portion|
|Buy & Make||N.A.||Buy & Make||≥ 50% of the ‘Make’ Portion|
|—||—||Buy (Global – Manufacture in India)||≥ 50%|
|Buy (Global)||Nil for Foreign Vendor; ≥ 30% for Indian Vendor||Buy (Global)||Nil for Foreign Vendor; ≥ 30% for Indian Vendor|
Source: Adapted from DPP-2016 and Draft DPP-2020, Ministry of Defence, Government of India.
|Category & Sub-Category||Feature|
|Make||Make-I (Government Funded)||MoD funding assistance upto 70%; Buy (Indian-IDDM) category for acquisition post successful development with ≥ 50% IC|
|Make-II (Industry Funded)||Provision to buy from single source; Buy (Indian-IDDM) category for acquisition post successful development with ≥ 50% IC; Provision for suo-moto proposal from industry|
|Make-III (Indigenously Manufactured)||Procurement through Buy (Indian) with ≥60% IC; Provision for suo-moto proposal from industry|
|Innovation||(Innovation for Defence Excellence (iDEX)||Grants from government; Provision for suo-moto proposal from industry; Procurement through Buy (Indian-IDDM) category|
|Open Competition||User-led projects in which the prototype development is possible within two years. Provision for suo-moto proposal from industry; post successful development, procurement through Buy (Indian-IDDM) category|
|Technology Development Fund (TDF)||Procurement through Buy (Indian-IDDM) category|
Source: Adapted from Draft DPP-2020, Ministry of Defence, Government of India.
The increase in IC percentage in various procurement categories is accompanied by a pragmatic methodology for verification of the IC content. As per the new methodology, the prime vendor is required to capture import content of its own items and items supplied by its vendors equivalent to a minimum of 80 per cent of the main contract value. The methodology should ease the industry’s burden of computation of IC in all supplies down to the smallest of the sub-suppliers in the value chain, whose numbers runs into several thousands in some of the big defence contracts.
To further improve IC in defence production, the draft includes provisions for greater use of indigenous military materials and software, the latter being a strong forte of Indian software industry. Provision has been made in the tendering process and elsewhere to identify these critical inputs and promote their greater use through various incentive mechanisms to achieve higher self-reliance. At present, a large proportion of the materials used for domestic arms production are imported.
The draft refers to aero-engines and FAB (fabrication facilities to manufacture silicon wafers) as projects of national importance and calls for their procurement, even if there is only a single source of supply. The purchase assurance is likely to incentivise potential players to invest in these areas which require huge upfront investment.
Streamlining Procurement Process
The draft DPP-2020 includes several features to overcome the procedural bottlenecks and speed up acquisition. In a major step, it envisages constitution of a multi-disciplinary Services Qualitative Requirement Formulation Committee (SQRFC) under the chairmanship of a Brigadier level officer for preparation of Qualitative Requirements (QRs). This should help in the formulation of realistic QRs which has been problematic in the past, resulting in delays, cost overrun and capability void.
To streamline the QR formulation process further, Essential Parameters-A, which are parameters or features generally present in the contemporary equipment available in the market and form the core of QRs, have been divided into three sub-categories – Operational Parameters, Technical Parameters and Maintainability and Ergonomic Parameters. This is likely to bring greater clarity and objectivity in the formulation of specifications. In a departure from the previous DPP, amendment of QR parameters before the tender is issued to the vendors will also be permissible. The power to approve such amendments is vested in different authorities, depending on the nature of the amendment. This provision is likely to obviate the need for seeking fresh approval of the Acceptance of Necessity (AoN) according authority for every change in the QR parameters post-AoN.
To speed up procurement, a timeline of six months (from the date of receiving responses to the request for information) has been mandated for the formulation of QRs, and up to one year for seeking AoN from the competent authority. For all cases up to Rs. 300 crore, the Services Procurement Board (SPB) will have the authority to accord the AoN, while the Defence Procurement Board (DPB) will be the AoN-according authority for cases above this limit and up to Rs. 500 crore. All cases exceeding Rs. 500 crore will be placed before the Defence Acquisition Council (DAC) for obtaining AoN.
Along with the QR formulation, changes have been made in the trial and quality assurance processes. The trial process has been strengthened by mandating all field trials to be conducted under the aegis of dedicated Trial Wings to be set up within the existing training establishments run by the services.
Physical trials can also be substituted by documentation and certification, to the extent possible, as it serves the purpose for which the field trials are carried out. This has been described as promotion of competition and not elimination of vendors for the slightest of defects noticed during the trials. Towards this end, the vendors will be given an opportunity to carry out in-situ repairs, if any such defect is noticed during the trials, so as to meet QR requirements specified in the tender.
In regard to quality assurance, four major provisions have been made to make the process of acceptance of equipment more objective and transparent. One, broad Quality Assurance Plan (QAP), including the sample size, will be included in the request for proposal (RFP). Two, the vendors themselves will be required to submit draft Acceptance Test Procedures (ATP). Three, third party inspection will be allowed in certain cases. And four, there will be no repetition of quality assurance tests at different stages of acceptance – Pre-Dispatch Inspection (PDI) and Joint Receipt Inspection (JRI).
The DPP-2016 provided for acquisition of equipment designed and developed by the Defence Research and Development Organisation (DRDO), Defence Public Sector Undertakings (DPSUs) and the Ordnance Factory Board (OFB). A new chapter (Chapter III-A) has been added laying down the procedure in greater detail for obtaining AoN for such cases and monitoring the implementation of such projects. However, as has been the case so far, design and development would continue to be undertaken by these organisations as per their own procedures, after the AoN is accorded by the competent authority.
The chapter containing the procedure for defence shipbuilding (Chapter IV) has been split into two chapters, one dealing with shipbuilding and the other with refit and repairs. This is more or less a self-contained chapter, running into 200-odd pages, which will be of relevance to the Indian Navy and the Coast Guard.
Another new chapter (Chapter VIII) on post-contract management has been added to provide guidance to the contract operating agencies, ostensibly to ensure smooth execution of contracts. The chapter containing Fast Track Procedure (Chapter V), however, remains more or less unchanged.
New Procurement Concepts
In line with innovative practices followed by many countries, the draft includes several new concepts of procurement. This includes the Performance Based Logistics (PBL), Life Cycle Support Contract (LCSC) and Comprehensive Maintenance Contract (CMC). In a departure from the past, the services will now be required to procure, along with the main equipment, product support for at least three to five years beyond the warranty period. The services will also be required to take approval of the competent authority for the type of maintenance support they want to be included in the main contract. These steps are likely to improve the serviceability of the equipment being acquired.
Revised Offset Guidelines
The draft DPP makes a number of changes to give teeth to the existing offset guidelines. In a departure from the past, the focus of the revised offset guidelines is clearly on technology, investment and export of major platforms (as opposed to components). Towards this end, changes have been made in the avenues for discharge of offset obligations, the list of items eligible for offset transaction and multipliers applicable in various situations (see Table 3).
The avenues for discharge of the offset obligation have been modified to allow the Indian industry to receive technologies for which the foreign original equipment manufacturers (OEMs) will be entitled to receive direct credit. The higher technologies are, however, reserved for the government entities such as DRDO, DPSUs and OFB.
Offset banking, which has been an important feature of the offset guidelines since DPP-2008, has been removed from the guidelines, possibly to prevent vendors from claiming offset credits for the transactions undertaken as a part of their routine business. However, this seems to have been compensated by allowing vendors, other than the main supplier and their Tier-I vendors, to discharge the offset obligation on behalf of the main supplier. To improve transparency and accountability, the guidelines provide for online submission of offset discharge claims, timeframes for some key activities, and a mechanism to settle differences and disputes in a time-bound manner.
|Offset Discharge Avenue||IOP||Offset Discharge Subject To||Multiplier|
|Direct purchase of eligible defence products & Services||Both private and public sector including DPSUs / OFB||List of eligible defence products in seven categories (civil infrastructure generally excluded)||0.5 for components of eligible product; 1.0 for eligible products; 1.5 if IOP is Micro Small and Medium Enterprise (MSME)|
|Investment for manufacture of eligible defence products*||Private sector / DPSUs / OFB||List of eligible defence products in seven categories (civil infrastructure generally excluded); No restriction on production, sale or export||2.0 if investment is in notified Defence Industrial corridors; 1.5 in other places|
|Transfer of technology for manufacture of eligible products||Private sector / DPSUs / OFB||List of eligible defence products in seven categories (civil infrastructure generally excluded).||2.0|
|Technology acquisition for government institutions*||DRDO / DPSUs / OFB, etc.||Identified list of technologies in 49 areas||3.0|
|Technology acquisition*||DRDO||List of critical technologies in 32 areas||4.0|
Note: *: Offset discharge is permitted by entities other than the main vendor and its Tier-I sub-vendor on a case to case basis.
Source: Adapted from Draft DPP-2020, Ministry of Defence, Government of India.
Recognising that defence acquisition is a specialised and complex task, the draft DPP-2020 has provided for institutionalised training of acquisition officials from the services, various MoD departments and defence finance. For the time being, the officials will be trained at training institutions in India and abroad. In future, the training will be formalised in the curriculum of the proposed Indian National Defence University (INDU).
Standard Contract Document
With the notable absence of the clause on limitation of liability, some new clauses have been included in the contract document relating to monitoring of projects, title and risk of loss, severability, and survival of certain clauses after cancellation or expiration of the contract. An important sub-clause included in the document seeks to ensure MoD’s right to optimise life cycle support, costs and systems enhancement through indigenous eco-system, while at the same time, acknowledging the seller’s intellectual property rights (IPRs) over the equipment being bought by the MoD.
Some other significant changes have also been made in the contract document. First, all taxes and duties shall now be excluded while determining L1. Second, delivery in all procurement cases will be on Delivery Duty Paid (DDP) terms or International Commercial Terms (Incoterm). This implies that the seller is deemed to have delivered the goods when these are placed at the disposal of the buyer at the named place of delivery, with the seller bearing all the costs and risks involved in bringing the goods to the place of delivery.
Third, the Bank Guarantees will be based on the total contract value less the taxes and duties. Fourth, the Performance-cum-Warranty Bank Guarantee will uniformly be five per cent of the contract value. And fifth, sellers will now be able to furnish multiple Bank Guarantees from all public and private sector banks authorised to undertake government transactions.
Draft DPP-2020: Some Issues for Consideration by MoD
The draft DPP-2020 contains many features that would hasten the procurement process and provide a further fillip to the Make in India initiative in defence. Some issues which need consideration by the MoD before finalisation of the draft are discussed below:
Multiplicity of Procurement Categories
The changes envisaged in draft DPP-2020 will increase the number of procurement categories from just two in 2003 (‘Buy’ and ‘Buy & Make’) to eight (six prioritised categories plus the ‘Leasing’ and Strategic Partnership Model). In addition, there are ‘Make’ and ‘Innovation’ categories, with several sub-categories, which are meant for prototyping by using indigenous or imported technology with a high percentage of indigenous content. Post successful development of the prototype, procurement is undertaken through ‘Buy (Indian-IDDM)’ or ‘Buy (Indian)’ categories.
Proliferation of these categories could make the categorisation process confusing, cumbersome and time-consuming. For the sake of making the process simpler, there is a case for clubbing some of the categories. For example, ‘Buy and Make (Indian)’, ‘Buy and Make’ and SPM could be clubbed since quintessentially their defining attributes are the same. For the same reason, ‘Buy (Indian–IDDM)’ and ‘Buy (Indian)’ categories too could be clubbed. This restructuring will, of course, require fleshing out the attributes of the combined categories.
There seems to be no specific requirement for the ‘Buy (Global Manufacture in India)’ as its objectives can also be met through the ‘Buy and Make’ category. Be that as it may, the provision in draft DPP-2020 that ‘Buy (Global – Manufacture in India)’ contracts can be executed by foreign vendors through their subsidiaries in India needs to be harmonised with the foreign direct investment (FDI) policy which stipulates mandatory government approval in cases where FDI exceeds 49 per cent and links such approval to the FDI proposal resulting in access to modern technology.
Capacity Building for Costing
Between 2001 and 2018, about 40 per cent of the total capital procurement of Rs. 7,45,000 crore was through Inter-Government Agreements (IGAs), including the Foreign Military Sales (FMS) programme of the United States (US) Government. Together with contracts signed on nomination basis with DPSUs and OFB, the share of single-source procurement is overwhelmingly high. Reasonability of cost assumes great significance in such single-source procurements.
While there is an internal cost assessment mechanism for products manufactured by DPSUs and OFB, this task is left to the Costing Committees, headed by Cost Advisors in the Capital Acquisition Wing. This may, however, not be adequate as cost assessment (including determination of a benchmark price before opening the commercial bids) requires extensive database, specialisation in defence-related costing techniques, etc. This inadequacy is evident from several instances of a wide difference between final contract price on the one hand and the AoN and benchmarking costs on the other, which is known to have slowed down the decision making.
Though draft DPP-2020 provides for institutionalised training of acquisition personnel, costing is an area which requires special focus. Several countries have created a vast costing set up with requisite knowledge base built over decades. There is not only a need to study the institutional mechanism of other countries, particularly the US, the United Kingdom (UK) and France, but also to lay down a detailed methodology for costing for the guidance of the Costing Committees and to ensure uniformity in costing.
Improving the process of costing would have little impact unless the process of determining the availability of funds is also streamlined. Persistent shortage of funds even to honour the committed liabilities indicates that no robust system is in place to ensure that new contractual liabilities are undertaken only if there is a reasonable certainty that funds will be available when required. This mechanism should ideally be a part of DPP.
Development of Military Materials and Aero-engines
The draft DPP-2020 seeks to promote use of artificial intelligence and indigenously developed software and military materials, ostensibly through incorporation of these requirements in the QRs. While this is a welcome directive, provisions made in the draft regarding development of military materials to meet the future needs and to treat the development of aero-engines and FAB as projects of national importance are sketchy and overlap with the mandate of DRDO. There are issues like economy of scales, funding cost of projects, assurance of post-development purchase order, etc., which will need to be resolved before any such projects are undertaken.
Applicability of Offsets to IGA and FMS Cases
There seems to be an anomaly between two provisions related to applicability of offsets. While para 12 of Chapter I in draft DPP-2020 stipulates that offsets are applicable to “all ‘Buy (Global)’ cases of more than Rs 2000 crores other than Single Vendor Cases (SVC) being progressed based on IGAs including FMS”, the Offset Guidelines at Appendix D to Chapter II do not support this. This requires to be clarified.
Case for Stipulating Different Quantum of Offsets in IGA/FMS/Single Vendor Contracts
There is a need to weigh the costs and benefits of having uniform offset quantum in all single-source procurement cases. Offsets come with a cost which gets minimised in competitive tendering. Since there is no competition in IGA/FMS contracts, the vendors and their governments possibly load all the offset-related costs on the main contract. This is the reason why some countries have different offset requirement in single-source procurement. South Korea, for instance, demands only 10 per cent offsets in FMS-type of contracts, whereas its offset requirement is 50 per cent in all competitive defence contracts. A similar approach could be considered by the MoD to prevent paying high cost of discharging the offset obligation in single-source procurement cases. Additionally, the possibility of creating a mechanism to ascertain how much cost the vendors load on the main contract due to offset obligations in IGA/FMS contracts need to be explored.
Specific Offsets Through RFP
Transfer of technology has been added to the existing avenues for discharging the offset obligation. While this is a welcome step, it may be more effective if the MoD demands transfer of specific technologies for discharge of the offset obligation by specifying the requirement in RFP.
Apart from considering the inclusion of the clause on limitation of liability in the contract template, it would be desirable to consider the inclusion of an ‘entire agreement clause’ under which parties to the contract agree that the terms of the contract between them are contained within the text of the contract document and nowhere else. There is also a need to make it clear in the template whether or not liquidated damages (LD) are the final and only remedy for delay in meeting the delivery timelines, apart from termination of contract without invocation of the Bank Guarantees. In the interest of fair-play, it will be desirable to consider inclusion of a reverse LD clause in the contact for delayed payments to the sellers.
Code of Integrity for Public Procurement
The Pre-Contract Integrity Pact template of the DPP contains a provision that seeks to encourage the sellers to have an internal code of conduct, restraining employees from bribery and unethical behaviour and have a compliance programme for the implementation of the code. For the sake of reciprocity, a Code of Integrity for Public Procurement (CIPP) could be prescribed for the acquisition personnel who should also be required to sign a declaration on the lines of the relevant provisions in the Ministry of Finance’s Manual for Procurement of Goods 2017.
Policy on Suspension and Debarment of Companies
The draft DPP-2020 makes a number of references to the Guidelines of the Ministry of Defence for Penalties in Business Dealings with Entities to clarify its position about various penalties/punishment that could be invoked in case any company’s conduct is found inconsistent with the highest standards of propriety during the entire phase of procurement. However, the said guidelines are unduly stringent and not in line with the best international practices. More significantly, its implementation is not necessarily in India’s national security interests as suspension and banning of companies reduces whatever little competition is there among the vendors and seriously jeopardises the serviceability of the procured items.
Defence industry worldwide, because of limited suppliers and its importance to national security, is considered as a national asset and is treated differently from its civilian counterparts. The normal practice is to give exemplary punishment to the guilty officials involved in corrupt practices and punish the concerned company through stringent financial penalties, as opposed to banning them from any business dealing, unless such action is on account of supply of sub-standard material. The practice of imposing financial penalty is worth considering in the Indian context.
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