Ministry of Defence releases new defence procurement procedure, DPP-2008

by Ajai Shukla

Business Standard, 2nd Aug 08

Defence Minister, AK Antony, today released the new policy that will govern defence procurements over the next two years. The Defence Procurement Policy of 2008, or DPP-2008 for short, supersedes the earlier DPP-2006; the new policy will take effect from 1st Sept this year.

The most important changes in DPP-2008 relate to the new offset policy, which will immediately impact offset proposals for India’s Rs 47,000 crores purchase of 126 medium multi-role combat aircraft (MMRCA). Over the next five years, offsets will arise from defence purchases worth an estimated Rs 300,000 crores. Any defence contract worth more than Rs 300 crores requires vendors to spend 30% of the contract value on Indian defence goods or services.

The new offset policy accepts a key request of foreign vendors, permitting them to bank offsets towards a future contract liability. The banked offsets can be utilised against any tender that is issued within two years of the date when the offsets were banked. If a foreign vendor joins an offset-related partnership with a private Indian company, the Indian partner will not need a defence-manufacturing license from the Ministry of Defence (MoD).

The new policy also waives offset liabilities on any procurement under the fast-track procedure, which is employed when Indian needs defence goods in an emergency.

Another major step in the DPP-2008 is a two-year “roll-on acquisition plan”, in which procurement projects do not lapse at the end of a financial year; instead, they are included in the next year’s Annual Acquisition Plan. The earlier procedure involved going through the entire procedure of proposals and sanctions for procurements that lapsed.

Another important decision in the DPP-2008 grants procurement powers to the military for purchases up to Rs 50 crores; and the Defence Secretary can sanction up to Rs 75 crores worth of purchases. Earlier, purchases of under Rs 40 crores needed to go to the Defence Procurement Board (DPB); if the purchase was above Rs 40 crore, it needed to go to the Defence Acquisition Council. This not only created delays in smaller purchases (which make up a significant part of the overall defence procurement) but also tied down those important committees in making decisions that have now been deemed within the financial powers of the military.

The Indian military is feared by vendors for the rigorous trials --- in all kinds of operating conditions, in deserts, plains and extremes of altitudes --- which it conducts on any equipment that it proposes to buy. Now DPP-2008 lays down that Requests for Proposals (RfP) must lay down clearly the methodology for user trials by the military. The trial process will also be far more transparent; not only will vendors be given daily briefings on the performance of their equipment, that communication will be confirmed in writing.

There is disappointment amongst Indian companies, however, that the DPP-2008 does not simplify the “Make” procedure, which was envisaged as a way of bringing in Indian companies into the manufacture of complex defence systems. So far, not a single Indian company has manufactured a single defence item under this procedure, but the new DPP does not modify the “Make” procedure to make it more attractive to Indian companies.

The New DPP-2008:

WHAT’S THERE                            WHAT’S NOT

Offset banking                            Indirect offsets
Offset waiver on fast-track            Technology as offsets
Two-year roll-on plan                   Timelines for purchases
More transparent trials                  Improved “Make” procedure
Licensing waived for industry          RuR announcements