New procurement policy to boost India's self-reliance in arms

Defence companies welcome "pathbreaking" policy

By Ajai Shukla

Business Standard, 21st Apr 13

The Defence Acquisition Council (DAC), the apex decision-making body of the Ministry of Defence (MoD), has revised the Defence Procurement Procedure (DPP) that details the process for buying defence equipment for the military. The MoD announced today that the new policy, DPP-2013, has the twin objectives of “infusing greater efficiency in the procurement process and strengthening the defence manufacturing base in the country.”

DPP-2013 goes beyond the earlier DPPs of 2002, 2005, 2006, 2008 and 2011 in explicitly backing indigenous defence industry. It stipulates that Indian defence companies will get access to the military’s long-term equipment roadmap, providing them with the time needed for developing the equipment that the military needs in the future; provides a level playing field between the defence public sector undertakings (DPSUs) and the private defence companies; simplifies the “Buy & Make (Indian)" procedure to benefit Indian industry; and defines ambiguous terms in the DPP like “indigenous content.”

As Business Standard has reported (Apr 13, “Ministry's initiative to push indigenous development”) DPP-2013 stipulates that the “categorization” of each procurement case should favour indigenization, with equipment being bought internationally only if developing and building it in India proves impossible. “Categorization” is a key decision in each acquisition project, in which the MoD decides whether the equipment should be developed and built in India (“Buy Indian” and “Make” categories); or built in India by an indigenous consortium (“Buy & Make Indian”); or built in India with transfer of technology (“Buy & Make with ToT”); or bought over-the-counter from a foreign vendor (“Buy Global”).

The MoD announcement says that DPP-2013 “provides for a preferred order of categorisation, with global cases being a choice of last resort. The order of preference, in decreasing order, shall be: (1) ‘Buy (Indian)’; (2) ‘Buy & Make (Indian)’; (3) ‘Make’; (4) ‘Buy & Make with ToT’; and (5) ‘Buy (Global)’. Any proposal to select a particular category must now state reasons for excluding the higher preferred category/ categories.”

The MoD has also granted a longstanding request by private defence companies for access to the military’s 15-year Long Term Integrated Perspective Plan (LTIPP), so that they have the lead time needed to meet future equipment needs. Today the MoD stated, “The DAC has approved the release of a public version of its 15-year perspective document (LTIPP), outlining the “Technology Perspective and Capability Roadmap” (TPCR) against LTIPP 2012-2027. The TPCR will provide useful guidance to the Indian Defence Industry for boosting its infrastructural capabilities and directing its R&D and technology investments.”

An advantage that DPSUs and the Ordnance Factory Board (OFB) have enjoyed over private defence companies has been the MoD’s nomination of selected DPSUs as the recipients of Maintenance Transfer of Technology (MToT) from foreign vendors in major acquisitions. For example, in aircraft purchases (Jaguar, Sukhoi-30, Hawk, etc) Hindustan Aeronautics Ltd has been nominated by the MoD as the MToT partner, entitling it to receive the technology and infrastructure needed to maintain, service, overhaul and upgrade the aircraft through its service life. Now, levelling the playing field between DPSUs and private industry, the MoD says, “MToT has been hitherto reserved largely for OFB and DPSUs through the nomination process. A DPP amendment has been approved that does away with nomination by Department of Defence Production and facilitates selection of MToT partners by Indian bidders. This measure is expected to have a positive impact on private sector participation in maintenance, repairs and overhaul work.

Besides finalizing DPP-2013, the DAC today also clarified important issues relating to defence licensing. A “Defence Items List” has been finalized and sent to the Department of Industrial Policy and Promotion (DIPP, under the Commerce Ministry). An explicit list of defence items will clarify which items actually need a defence licence. The MoD has also informed the DIPP that dual-use items (with civil as well as military applications) will not require licences.

The DAC has also allayed apprehensions amongst foreign vendors and governments that information, documents and technology transferred to the Indian defence industry may not be secure. The DAC today finalized “Draft Security Guidelines” that will be circulated for consultations with stakeholders, including licensed defence industries. The MoD says, “a complete security framework for Indian private industries participating in defence cases will be in place in the near future.”

The MoD also cleared a keenly anticipated mechanism for providing Micro, Small and Medium Scale Enterprises (MSMEs) with funds for developing defence equipment. According to the MoD, “SIDBI has decided to earmark an amount of Rs 500 crore for providing loans (to defence MSMEs), and further, a fund of Rs 50 crore for equity support out of ‘India Opportunities Fund’ managed by its subsidiary, namely, SIDBI Venture Capital Ltd.”

DPP-2013 goes a long way towards addressing longstanding demands of the Indian defence industry, particularly the private sector. Rahul Chaudhry, CEO of Tata Power (Strategic Electronics Division) and Co-chair of Ficci’s Defence Committee says: “The steps enumerated today will take India and Indian industry towards substitutive self-reliance. The MoD has addressed several key industry recommendations.  We welcome this and eagerly await the details in the fine print of DPP-2013.”

Separately, in a bid to speed up financial sanctions for capital procurement, the DAC has tripled the financial powers of the army, navy, air force and coast guard chiefs from the current Rs 50 crore to Rs 150 crore.

Finally, after a succession of arms procurement scandals, most recently around the procurement of AgustaWestland VVIP helicopters, defence minister AK Antony has divested himself of discretionary powers to approve deviations from the DPP. Henceforth, only the DAC will have this power.

Ten major changes in DPP-2013

1.   Self-Reliance: Indigenous development and manufacture to be favoured over foreign procurement.

2.    Road map: Private industry to be given a Technology Perspective and Capability Roadmap (TPCR).

3.   Level playing field: Maintenance ToT to be given through bidding, not nomination of DPSUs/OFB.

4.   Industry in loop: Military to consult industry well before procurement so that acquisition plans can be translated into “national defence R&D and production plans”.

5.   Simplification: “Buy & Make (Indian)” procedure to be simplified to benefit private industry.

6.   Clearing backlog: Pending indigenous cases worth Rs. 1,20,000 crore in "Make" and "Buy & Make (Indian)" categories to be cleared quickly.

7.   Licensing: “Defence Items List” to be finalised to simplify licensing.

8.   Security framework: Draft Security Guidelines finalised. Being sent for consultation with stakeholders.

9.   Finance for MSMEs: SIDBI to earmark Rs 500 crore for defence MSMEs.

10.  Enhanced financial powers: Service chiefs' financial powers tripled from Rs 50 crore to Rs 150 crore

Winners                                        Losers

Larsen & Toubro                                            International defence majors

Tata Power (SED)                                          Hindustan Aeronautics Ltd

Bharat Forge                                                 Bharat Electronics Ltd

Godrej & Boyce                                             Bharat Earth Movers Ltd

Kirloskar Engineering                                      Ordnance Factory Board

Reliance Industries Ltd

Defence R&D Organisation (DRDO)