Towards a New Defence Procurement Procedure in 2016

By Amit Cowshish

The Ministry of Defence (MoD) created a flutter last month when it made public the changes being made in the existing capital procurement procedure, seen by many as too complex to facilitate expeditious procurement of equipment, weapon systems and platforms required by the armed forces.
Though the revised procedure for capital procurement is yet to be finalised in its entirety, the preview of the things to come has generally been received well by the Indian industry which has for long been striving to come into its own in the monopsonic defence market in India, dominated so far by the foreign vendors and the Indian public sector undertakings.
All capital acquisitions are regulated by the Defence Procurement Procedure (DPP), first promulgated in 2002. This document has been revised several times since then but misgivings about the efficacy of the procedure persist, largely on account of the painfully slow pace at which the procurement proposals move from the stage of initiation to award of the contract, many of them falling through at the intervening stages.
Stagnation in indigenisation has exacerbated the problem. Defence production was opened to the private sector in 2001 and the successive governments have reiterated their commitment to indigenisation but India continues to depend on import, with just about 30 to 40 per cent of the requirement being met through indigenous sources, mostly the public sector.
These factors have had a debilitating effect on India’s military capabilities. From artillery guns to fighter aircraft and from night vision capabilities to ammunition, the insidious voids in military capabilities have only grown over the years, with grave implications for the national security.
Mindful of the need to adopt a multi-pronged approach to fix an indolent procurement system and involve the private sector in defence production, the present government set up a committee of experts in May 2015 to recommend a policy framework for promoting ‘Make in India’ in the defence sector and suggest concomitant amendments required to be made in the existing procurement procedure. The report, submitted in July 2015, contains several recommendations ranging from the mundane to the extraordinary.
It has, for example, recommended that the term ‘Indian vendor’ be clearly defined, attributes of the existing procurement categories be spelt out, minor deviations from the qualitative requirements specified in the Request for Proposal (RFP) be permitted, retraction of the RFPs in single-vendor cases be resorted to only as an exception, and improvements be made in the model contract document. These, and many other similar mundane recommendations, are clearly intended to remove the procedural glitches that tend to derail procurement proposals.
At the other end of the spectrum, there are extraordinary recommendations, such as setting up of a defence procurement executive, supported by specialist wings and personnel, but working outside the staff-oriented environment of the government of India. The committee has also recommended an innovative funding mechanism to channelize the foreign direct investment coming through the offsets.
But, arguably, the most significant of all the extraordinary recommendations is the one about forging strategic partnership with the private industry to ‘support sustainability and incremental improvements in the capability of platforms through technology insertions over their lifetime’. A follow-up committee set up by MoD to recommend the bases for selection of these partners could also seems to have submitted its report.
Between these two ends of the spectrum, the committee has made several pragmatic recommendations concerning taxation, incentives to the private industry, policy on agents in defence and blacklisting of firms, export facilitation, and single-window clearance, to mention a few. These recommendations need to be accorded priority as they have a direct bearing on ease of doing business.
The idea is not to list out all the recommendations but to point out that the decisions taken by MoD last month touch only the tip of the iceberg, as it were. There is much more to come but, given the nature of some of the recommendations, it would be unrealistic to expect all the changes, recommended by the committee and acceptable to the government, being effected immediately as some of them will require inter-ministerial consultation, while some others would require MoD to work out the details.
Be that as it may, one thing is quite clear: the decisions taken so far indicate MoD’s willingness to go beyond the recommendations of the experts’ committee. For example, the committee has not recommended any change in the basic architecture of the procurement procedure which is predicated on categorization of purchases into five categories – Buy (Indian), Buy and Make (Indian), Make, Buy and Make and Buy (Global) – and a procurement process that comprises ten stages from formulation of the Services Qualitative Requirements (SQRs) to the award of contract.
However, MoD has gone ahead and approved introduction of a new category – Buy (Indian Designed, Developed and Manufactured), or Buy (IDDM). Under this category, the Indian designed equipment will be acceptable to the MoD with just 40 per cent indigenous content. Undoubtedly, this category is intended to incentivise the Indian companies for designing the defence equipment but, considering that under the existing Buy (Indian) category the equipment to be offered by the vendors has to have only 30 per cent indigenous content, categorization of proposals as Buy (Indian) or Buy (IDDM) may present some difficulty. Hopefully, the fine print of the new DPP will make the position clear.
Apart from introduction of this new category, MoD has also decided to make the following changes:

1. Essential parameters will be divided into two categories. Contracts will be signed based on category ‘A’ of the essential parameters. Vendors can then work on category ‘B’ of the essential parameters, involving changes to the existing product specifications, on receipt of the assured orders.
2. Vendors meeting the enhanced performance parameters specified in the Request for Proposal (RFP) will be given additional weightage while evaluating the cost of their product.
3. Offset obligations will be applicable only in those cases where the acquisition cost exceeds INR 2,000 crore. The threshold for technical oversight is also being increased from INR 300 crore to INR 2,000 crore.
4. Private industry will be involved as production agency and technology transfer partner.
5. RFPs will not be retracted as a matter of course if only a single vendor is left in the fray at the stage of submission of bids or after the technical/staff evaluation.
6. ‘Make’ procedure will have three sub-categories. For Make I government-funded developmental projects, the cost of development of the prototypes will be increased from the existing 80 per cent to 90 per cent and  the remaining 10 per cent will also be reimbursed if the RFP is not issued within 24 months of the successful development of the prototype.  There will be a provision for mobilization advance of 20 per cent.
7. The development cost of Make II category projects, which are initially self-funded by the industry, will also be reimbursed in full if the RFP is not issued within two years of successful development of the prototype.
8. Make III projects, where the estimated cost of development is less than INR 3 crore, will be similar to Make II projects but these will be reserved for the Micro, Small, Medium Enterprises (MSMEs).

These decisions may not amount to doing away with any of the ten stages that constitute the procurement cycle but they should go a long way in easing the rigours of doing business with the MoD. This is extremely important from the point of view of improving the eco-system which is a sine qua non for galvanizing the private industry and making it a partner in the government’s quest for making India a manufacturing hub.
Defence manufacturing is one of the 25 sectors identified by the government under its Make in India initiative. This sector has a great potential, both for the growth of the Indian industry as well as for the foreign companies to do business in India, especially as technology partners. Resurgence of defence production in India would not only attract foreign investment and spawn skill development but also give a fillip to technological innovation.
The ministry has taken some very decisive steps in that direction but major challenges lie ahead. To start with the MoD must carefully select the recommendations which can be implemented immediately and make sure that the decisions it takes on those recommendations are incorporated in the DPP in unambiguous terms that do not lend themselves to varying interpretations.The temptation to address larger policy issues, such as creation of a procurement executive, may perhaps be avoided at this stage. These issues cannot be resolved immediately and further delay in promulgation of the new DPP will rob the government of the opportunity to claim the credit for bringing about a paradigm shift in the area of defence production and procurement as it is bound to take two to three years for the new provisions to start showing some tangible results.

(The author is a former Financial Advisor (Acquisition), Ministry of Defence and retired from the Indian Defence Accounts Service in 2012 and is presently associated with the Institute for Defence Studies and Analyses as a Distinguished Fellow. He writes regularly on matters concerning financial management in defence, procurement policy and procedures, defence budget, planning and other related issues.)