MoD’s new tough rules on indigenisation

By Ajai Shukla

Business Standard, 3rd May 13

On Saturday, the defence ministry (MoD) released the Defence Procurement Procedure of 2013 (DPP-2013), which had only been outlined earlier. The full policy document contains unprecedented clauses and rules that add teeth to the MoD’s declared intention to promote indigenisation.

A key step towards this is a far more stringent definition of “indigenous equipment.” So far, successive DPPs of 2002, 2005, 2006, 2008, 2009 and 2011 have regarded all equipment purchased from Indian suppliers as “indigenous”, even when it contains 80-90 per cent foreign-built items, with just 10-20 per cent Indian components, often in secondary fields like assembly and delivery. Now, indigenisation will be gauged all the way down the chain of vendors and sub-vendors. The MoD has ruled, “Import content in the products supplied by the sub-vendors will not qualify towards indigenous content.”

Companies like Bharat Electronics Ltd (BEL), which traditionally do large volumes of “indigenous” business that actually consist of assembling imported components, will struggle to meet the MoD’s new definition of indigenisation.

An entire new Appendix to DPP-2013 precisely defines “indigenous content.” It stipulates that the following will be deducted from the cost of indigenous equipment: the direct costs “of all materials, components, sub-assemblies, assemblies and products imported into India”; costs of all services obtained from non-Indian entities; all royalties, license fees, technical fees etc. that are paid abroad.

The new procurement policy charges the prime vendor (with which the MoD has signed a procurement contract) with compiling the actual indigenisation achieved by all his sub-vendors. Each level of manufacture/production/assembly is required to compile and report their actual level of indigenisation --- based on the MoD’s new definition --- to the level above them. The policy stipulates, “The final aggregation of indigenous content shall be undertaken by the prime (main) contractor with whom an acquisition contract is signed by the Ministry.”

Interestingly, DPP-2013 recognises that the MoD has only a limited ability to monitor entire production chains for multiple contracts that it simultaneously handles. Therefore, each prime contractor is required to self-certify the indigenisation achieved by his supply chain. The ministry, however, will conduct random audits at any level in the production chain. Alternatively, the audit could be conducted by “an agency/institution/officer(s) nominated by the Ministry.”

Payments by the MoD will only be made after “a certificate of indigenous content issued by the Chief Financial Officer of the prime/main contractor.” In addition, a certificate is required from the vendor’s company auditor.

DPP-2013 provides for banning or suspending a vendor for up to 5 years if any false certification is detected, or if a vendor fails to achieve the mandated levels of indigenisation. However, the new procedure provides for allowing a vendor who is facing difficulties in indigenising at an early stage of the contract, to make up the deficiency at a later stage.

The new DPP recognises that the “Buy and Make (Indian)” and the “Make” procedures must be simplified to attract more Indian companies into defence production and, thereby, enhance indigenisation. In the former category, the requirement for a “Project Appraisal Committee” to short-list vendors has been done away with. The validity of an Acceptance of Necessity (AoN) --- an MoD sanction that recognizes the military need for the equipment being procured --- has been kept at two years in order to permit detailed consultations with defence industry.

The MoD says that the simplification of the “Make” procedure is also under way and “is expected to be completed in a few months.”

Defence Minister AK Antony clearly expects that mandating a greater role for Indian industry is the route to indigenisation. He states in the introduction to DPP-2013, “The emphasis this time has been on giving a boost to the Indian Defence Industry, both in the Public and the Private sector, by according a higher preference to the ‘Buy (Indian)’, ‘Buy and Make (Indian)’ and ‘Make’ categorisation, bringing further clarity in the definition of the ‘Indian Content’ and simplifying the ‘Buy and Make (Indian)’ procedure.”

However, private defence companies see DPP-2013 as only a first step. “Unless structural discrimination against the private sector is addressed, this will only be a pretty-sounding expression of intent. The MoD must protect us against exchange rate variation (ERV); and bring tax and import duty regimes in line with what the public sector and foreign vendors enjoy,” says the CEO of an IT engineering company with interests in defence.