Defence industry ambivalent about new defence procurement policy: DPP-2020

By Ajai Shukla

Business Standard, 5th Apr 20

The defence industry has mixed reactions to the proposed Defence Procurement Procedure of 2020 (DPP-2020), which the ministry of defence (MoD) released in draft form on February 20.

The MoD has invited suggestions and recommendations by April 17. After that, DPP-202 will be promulgated and will govern all acquisitions initiated thereafter. It will supersede DPP-2016 as the MoD’s handbook for purchasing of weapons, warships and equipment from the defence capital budget.

A Business Standard survey of small, medium and large defence firms reveals broad agreement that DPP-2020 has been hurriedly finalised and uploaded. Important annexures and appendices have been left out and even page numbering has not been done.

Like successive DPPs since the first in 2002, the draft DPP-2020 is longer and more complex than any other that preceded it. This despite the MoD’s stated aim of simplifying acquisition procedures to speed up the military’s modernisation.

A whopping 719 pages long, the draft DPP-2020 is far wordier than its predecessor – the 430 page long DPP-2016, which has, over the last four years, been amended 47 times for “business process reengineering.”

This is so, even though the draft DPP-2020 excludes an entire chapter on the “Strategic Partnership Model” of procurement. This has been left out since no changes are being recommended to the version in DPP-2016.

Abhishek Jain of software firm Zeus Numerix sees “a change of soul in DPP-2020.” Unlike previous DPPs, which he says primarily laid out guidelines on procuring foreign equipment,  “This time around there is a full chapter on indigenous innovation, including how single vendor purchase is acceptable for an innovative product developed by an Indian company, which has 50 per cent indigenous content.”

However Rahul Chaudhry, erstwhile chief of Tata Power (Strategic Electronics Division), believes the draft DPP 2020 scatters its focus on various government policies at the cost of practicality. “DPP-2020 aims to implement Make in India, Start Up India and support to medium, small and micro enterprises (MSMEs). These policies should be left to other government agencies such as the Department of Industrial Policy and Promotion, Securities and Exchange Board of India, and the Technology Development Board. These agencies, with their specialised capabilities, must be allowed to implement these national policies without MoD interference. This will make the DPP simpler and implementable,” says Chaudhry. 

There is appreciation across the defence industry of DPP-2020’s proposed enhancement of indigenous content requirements in foreign procurements, most of which have been raised by 10 per cent. “This increase will boost self-reliance, allow a greater role for the indigenous defence manufacturing ecosystem and reduce the life cycle cost of the foreign equipment we buy,” said Jayant Patil, who oversees Larsen & Toubro’s defence vertical and heavy engineering division.

While there is appreciation of some of the proposed measures to expedite equipment procurement – such as simplifying the procedure for accord of necessity (AoN) for procurements -- there is broad dismay that DPP-2020 does not reduce procurement time frames. The target for completing the acquisition of an equipment remains 70-126 weeks, in addition to the time required for the military to frame the requirement and obtain AoN from the MoD. 

“The current 92 week deadline for a Make-1 category prototype development contract is too high. If we cut procurement time the vendors would be able to reduce prices by 10-20 per cent,” says Jain of Zeus.

Ashok Atluri of Zen Technologies believes procurement could be speeded up by building transparency into the process, through measures like publicly posting the movement of the procurement file. He also suggests the laying down of stringent penalties for vendors who are found to have overstated indigenisation levels.

Atluri also points to positives in DPP-2020, such as a new clause that allows the MoD to fall back on the second-lowest cost vendor (L-2), if the lowest cost (L-1) vendor backs out during cost negotiations.

Rajesh Dhingra, who heads Reliance Defence, applauds the newly introduced option to lease equipment, where purchase would be too expensive and cost-ineffective. “Leasing will spare funds for capital acquisition. However, DPP-2020 should clearly identify the role of local industry in leasing cases, specifying responsibility for maintaining, operating and training,” said Dhingra.

Others believe leasing should be approached with caution, being a potential debt trap. “Increased liabilities from leasing, including embedded interest pay out, could cut the capital funds available for fresh procurement contracts,” says Patil of L&T.

The new offset rules remain an area of concern for industry, with DPP-2020 proposing to exempt government-to-government (G2G) purchases from offsets. “With the lion’s share of the capital budget going on G2G procurements, this will cut down offsets significantly,” said Dhingra.

There is also concern that the DPP-2020 reduces government funding for “Make-I” category procurements, in which indigenous firms develop complex platforms and systems, with financial support from the MoD. Till 2016, the government’s share of funding for “Make I” projects was 80 per cent and DPP-2016 increased that to 90 per cent. DPP-2020, however, proposes to slash government funding to just 70 per cent. “This would dissuade our defence industry from participating in large platform development programs, where the prototype development cost exceeds a few hundred crore,” says Patil.