Analysis of DPP 2020

Introduction

The Ministry of Defence (MoD) on March 20, 2020, released the draft Defence Procurement Procedure 2020 (DPP 2020). The draft is a culmination of a review process which was set in motion by Defence Minister Rajnath Singh in August 2019 and builds upon Defence Procurement Procedure 2016 (DPP 2016) which had undergone forty seven (47) amendments as part of the ‘Business Process Reengineering’.

Objective of DPP 2020

DPP 2020 intends to achieve two (2) broad objectives:

(i) fastening the procurement process by removing procedural bottlenecks; and
(ii) promoting ‘Make in India’ in the armed forces.

New introductions in DPP 2020

DPP 2020 revised the existing procurement categories under DPP 2016. The requirement of indigenous content (IC) under various categories has increased and new concepts of defence procurement have been incorporated. The existing offset guidelines have been revised and various changes have been made in the contract template and other provisions of the document. Some of the important changes are as following:

(i) New Category Buy (Global – Manufacture in India) has been introduced as a prioritised procurement category in DPP 2020 with minimum fifty per cent (50%) indigenous content on cost basis of total contract value. Only the minimum quantity of necessary equipment will be bought from abroad while the balance quantities will be manufactured in India. This is intended to promote the ‘Make in India’ initiative in the armed forces, providing an opportunity to the foreign vendors to manufacture in India through their subsidiaries and jobs will be created in the country.

(ii) IC ratio hiked - DPP 2020 increased the IC stipulated in various categories of procurement by about ten per cent (10%) to support the ‘Make in India’ initiative. According to DPP 2016 the IC ratio had to be more than or equal to forty per cent (40%) and DPP 2020 raised the IC ratio to more than or equal to fifty per cent (50%). A simple and realistic methodology has been incorporated for verification of IC. As per the new methodology, the prime vendor is required to capture import content of its own items and items supplied by its vendors equivalent to a minimum of eighty per cent (80%) of the main contract value. The methodology would ease the industry’s burden of computation of IC in all supplies down to the smallest of the sub-suppliers in the value chain.

(iii) Indigenous military software - To further improve IC in defence production, DPP 2020 includes provisions for greater use of indigenous military materials and software, the latter being a strong forte of Indian software industry. Provisions have been made in the tendering process to identify these critical inputs and promote their greater use through various incentive mechanisms to achieve higher self-reliance. At present, a large proportion of the materials used for domestic arms production are imported. Use of raw materials, special alloys and software incentivised as use of indigenous raw material would form a very important aspect of ‘Make in India’.

(iv) Assurance of procurement on a single vendor basis from ‘Aero Engine’ manufacturing unit and chips from fabrication facilities to manufacture silicon wafers manufacturing units established in the country. The purchase assurance is likely to incentivise potential players to invest in these areas which require huge upfront investment.

(v) Leasing introduced as a stand-alone category - Leasing has been introduced as a new category for acquisition in addition to existing ‘Buy’ & ‘Make’ category of DPP 2016 which includes more than or equal to fifty per cent (50%) of the ‘Make in India’ portion to substitute huge initial capital outlays with periodical rental payments. In order to provide a greater thrust to the ‘Make in India’ initiative in defence production, DPP 2016 introduced a new procurement category, ‘Buy’ & ‘Make’ category which is used as a prioritisation mechanism which would be used for procurement of all locally designed and developed items. Leasing is permitted under two (2) categories:

(a) Lease (Indian) where lessor is an Indian entity and is the owner of the assets; and
(b) Lease (Global) where lessor is a global entity.

This will be useful for military equipment not used in actual warfare like transport fleets, trainers, simulators, etc.

(vi) Post contract management - A new chapter has been introduced for procurement of software and systems related projects as in such projects, obsolescence is very fast due to rapid changes in technology and flexibility in the procurement process is required to keep up with the technology. It is intended to facilitate and provide clear guidelines for issues arising during the contract period as defence contracts last for a long period. This is one of the most important aspects of maintenance of any weapon system. So far, the focus of DPP 2016 has been mainly on the acquisition part and further spares supply and the repair of rotables have been a grey area. Since technological changes are rampant, there always comes a need for technological upgradation. This issue has been addressed in DPP 2020.

(vii) Timelines for procurement have been revised in DPP 2020 by reducing the process on the accord of Acceptance of Necessity (AoN) which remains the same as in DPP 2016 i.e. six (6) months. However there is a revision of the procurement boards with regard to the single stage of projects which are less than five hundred crore rupees (Rs. 500 crore) and in case of repeat orders having a valuation of less than five hundred crore rupees (Rs. 500 crore). With considerable increase in the financial power of approval of respective boards, it will fasten up the procurement process as the administrative lead time, that is, from initiation of the proposal to AoN sanction will be reduced since decision making at lower level will be faster. This ultimately will fasten the procurement process as the six (6) months period for AoN validity has been retained.

The procedure for narrowing down the AoN sanctions is that once the qualitative requirements (QR) is approved the procurement agency (Service Headquarters) works out the quantitative requirements and accordingly the tentative cost of the acquisition. Accordingly, the proposal is put up to the competent vendor for accord of AoN sanction. The competent authority is decided based on the vested financial powers. Once AoN is accorded, it is valid for six (6) months.

For the QR formulation, the Service Headquarters issue Request for Information (RFI) in the QR formulation process to various agencies dealing in the respective fields. After getting responses, various parameters are specified and the General Staff Qualitative Requirements (GSQR) is formulated. The approval of GSQR in majority of the cases gets inordinately delayed as it takes many years to get the final approval. This in turn unreasonably delays the entire procurement process which ultimately results not only in cost over-runs but also at times phased out technology by the time of induction as technological changes are taking place rapidly particularly in the defence sector. In order to control this avoidable situation the DPP 2020 has fixed a timeline of six (6) months (from the date of receiving responses to the request for information) for the formulation of QR up to one (1) year for seeking AoN from the competent authority. To make the process faster, .i.e. the procurement process in order to avoid further delay for AoN, the financial power of Services Procurement Board (SPB) has been enhanced from one hundred fifty crore (Rs. 150 crore) to three hundred crore (Rs. 300 crore) in DPP 2020. Accordingly, the Defence Procurement Board (DPB) powers enhanced from three hundred crore (Rs. 300 crore) to five hundred crore (Rs. 500 crore) and only the cases exceeding five hundred crore (Rs. 500 crore) will go to Defence Acquisition Council (DAC), headed by the Defence Minister Rajnath Singh, for obtaining AoN.

Thus, most of the cases for routine requirement (other than big capital acquisition) would be covered within the delegated financial powers of SPB and DPB which would ensure prompt accord of AoN sanction.

(viii) Services Qualitative Requirement Formulation Committee – ‘Trial methodology and Quality Assurance Plan’ is to be part of a multi-disciplinary ‘Services Qualitative Requirement Formulation Committee’ (SQRFC). The SQRFC will be under the chairmanship of a ‘Brigadier’ level officer for preparation of QR which are the same as GSQR, as formulated by the tri services for procurements. The SQRFC consists of members from the armed forces services headquarters, representatives from Defence Research and Development Organization (DRDO) as well as Department of Defence Production (DDP), expert scientists from various concerned DRDO labs, representatives from ordinance factories, ordinance factory board as well as other expert members according to the requirement. QR refers to the essential parameters required by the respective services as per their future plans of induction which are normally based on Long Term Perspective Planning (LTPP) of Government of India. The future weapon induction system is planned by the respective services considering the existing weapon and force level scenario, expected future requirements based on the perceived threat perception, the weapon acquisition planned by the potential enemy countries keeping in mind the current and future technological requirement. Accordingly the Line Directorates in the Indian Army as well as respective directorates in other forces formulate the requirement of weapon induction planning giving various essential parameters depending on the latest technology available in the world market as well as futuristic battle scenario. These are then assessed by the SQRFC at different levels and finally the GSQR is formulated. Finally, based on the financial situation, the future inductions are planned. This would help in the formulation of realistic QR which have been problematic in the past, resulting in delays, cost overrun and capability void. This is likely to bring greater clarity and objectivity in the formulation of specifications.

(ix) Revised offset guidelines –DPP 2016 amongst others are mainly focused on – (a) ‘Capital Acquisitions’ categorized as ‘Buy Global’ i.e. outright purchase from foreign/Indian vendor; (b) Direct purchase of eligible products manufactured by or services provided by Defence Public Sector Undertakings; (c) Foreign Direct Investment (FDI) in joint ventures with Indian enterprises (equity investment) for the manufacture; and/or maintenance of eligible products and provision of eligible services, investment in terms of transfer of technology (TOT); (d) investment in terms of provision of equipment through the non-equity route; and (e) technology acquisition by the DRDO in areas of high technology.

DPP 2020 further elaborates on these existing offset guidelines. In a departure from the past, the focus of the revised offset guidelines is on technology, investment and export of major platforms. DPP 2020 amongst other aspects includes – (a) changes that have been made in the avenues for discharge of offset obligations; (b) the list of items eligible for offset transaction; and (c) multipliers applicable in direct purchase of eligible defence products and services.

The avenues for discharge of the offset obligation have been modified to allow the Indian industry to receive technologies for which the foreign Original Equipment Manufacturers (OEM) who will be entitled to receive direct credit. The higher technologies are reserved for the government entities. To improve transparency and accountability, the aforesaid offset guidelines provide for online submission of offset discharge claims, timeframes for some key activities and a mechanism to settle differences and disputes in a time-bound manner. Thus, it would ensure the transfer of critical technologies which would boost our indigenous capability.

The offset clause would be applicable for the ‘Buy and Make’ categories of procurements where the estimated cost of acquisition is two thousand crore rupees (Rs. 2000 crores) or more, on the date of accord of AoN. However, DAC may consider partial or full waiver of offset clause. In case of a waiver for a particular acquisition case, eligible/selected Indian vendors need to be exempted from the corresponding IC stipulations. Majority of the routine procurements are expected to be within the delegated powers of Services Headquarters, DPB and DAC. The powers of approval of procurement cases are as follows:

(a) Upto three hundred crore rupees (Rs.300 crore)– Vice Chief of Defence Staff, Vice Chief of Army Staff, Vice Chief of Naval Staff, Vice Chief of Air Staff, and Director General.

(b) Above three hundred crore rupees (Rs.300 crore) and upto five hundred crore rupees (Rs. 500 crore) - Defence Secretary.

(c) Above five hundred crore rupees (Rs. 500 crore) and upto two thousand crore rupees (Rs. 2,000 crore)–Defence Minister.

(d) Above two thousand crore rupees (Rs. 2,000 crore) and uptothree thousand crore rupees (Rs. 3,000 crore) - Finance Minister.

(e) Beyond three thousand crore rupees (Rs. 3,000 crore) – Cabinet Committee of Securities (CCS).

(x) Field Evaluation Trials are to be conducted by specialised trial wings and the objective of trials will be to nurture competition rather than elimination for minor deficiencies. This is very much in conjunction with the ‘plus and minus leeway’ with regard to the GSQR in order to promote Prime Minister’s ‘Aatmanirbhar Bharat’ initiative. According to DPP 2016, the GSQR and the weapon system specifications formulated by the tri services for procurements were extremely stringent. As per DPP 2016, the field evaluation trials were done to ascertain if all the parameters as specified in the approved GSQR were met in different environmental as well as geographical conditions (deserts, plain, mountainous terrain; high, sub-zero temperatures and rainy conditions). Any deviation whether, minor or major from the GSQR couldn’t be decided at the field trial level and the same needed to be put up to the competent authority approving the GSQR. Accordingly no leeway was given in DPP 2016 regarding acceptance of any deviation in GSQR during field trial evaluation. In DPP 2016, the focus was the procurement of cutting edge technology product at the most economical cost by generating competition amongst various vendors, whether indigenous or global. However in DPP 2020 more emphasis is given on indigenous development to make India self-reliant in the field of defence production in order to reduce dependence on imports. The suggestion as brought out above is valid and needs a serious deliberation at the appropriate level. A suitable mechanism needs to be formulated to address the concern without compromising with the quality. This would ensure a push and encourage the domestic industries to put in more efforts towards the indigenous development as it would instil confidence that their quality products would not be rejected on flimsy grounds.

(xi) A comprehensive chapter has been introduced in DPP 2020 for ‘Make’ to cover procurement from manufacturers in India including start-ups and innovators and from research projects of DRDO. The ‘Make’ category was introduced for the first time in DPP 2006, was split into two (2) sub-categories in DPP 2016:

(a) Make I (Government Funded); and
(b) Make II (Industry Funded).

A third sub-category, ‘Make III (Indigenously Manufactured)’, has been added to these two. The ambit of this category has been expanded by creating a similar category called ‘Innovation’. The ‘Innovation’ category brings the existing two (2) schemes, Innovation for Defence Excellence (iDEX) and Technology Development Fund (TDF), under the ambit of capital acquisition.

(xii) Product support - The scope and options for ‘Product support’ have been widened to include contemporary concepts, namely ‘Performance Based Logistics’ (PBL), ‘Life Cycle Support Contract’ (LCSC), ‘Comprehensive Maintenance Contract’ (CMC), etc. to optimise life cycle support for equipment. The capital acquisition contract would include support for five (5) years beyond the warranty period.

(xiii) Guidelines of the MoD for penalties in business dealings with entities – DPP 2020 lists out various penalties that could be invoked in case any company’s conduct was found inconsistent with the highest standards of propriety during the entire phase of procurement.

(xiv) Code of integrity for public procurement - DPP 2020 contains a provision that seeks to encourage the sellers to have an internal code of conduct, restraining employees from bribery and unethical behaviour and have a compliance programme for the implementation of the code.

Burden of legacy issues and understanding Government’s stand

DPP 2020 suffers from legacy issues as the future maintenance aspects of the products being procured ex-import, which are costing below two thousand crore rupees (Rs. 2,000 crores) has not been addressed in the latest draft. Certain legacy issues remain confounded as offset implementation clauses have not been clearly spelt out to the minute level giving full transparency to the contact clauses. There have been certain textual ambiguities and opaque controls to the controlling authorities giving lot of discretionary powers based on subjective assessment an individual’s interpretation. This in a way defeats the basic purpose of procedural transparency. In case of partial/non fulfilment of offset obligations, the guidelines referred for suspension, banning or debarment of the firms need clarity. The offset guidelines propose scrutiny of the technical and commercial offset proposals by the Technical Offset Evaluation Committee (TOEC) and the Contract Negotiation Committee (CNC) respectively to ensure their conformity with the offset guidelines. This seems to be in contrast to the basic tenants of the contract provisions as no changes should be permitted once the contract is finalised and supply orders placed as it may amount to disadvantage to the other competing vendors and may give undue favour to the supplier.

It may be noted that the offset guidelines provide for pre-scrutiny of the offset proposals submitted by vendors while responding against the Request for Proposal (RFP) and once the same has been evaluated and approved by TOEC and CNC, there should be no need for further scrutiny of the same. It could be interpreted as an implied admission of ambiguities in the offset guidelines and a clear indication of undefined controls the MoD wanting to exercise on the process. Scrutiny under these circumstances can be subjective, especially in the absence of any publicised checklist followed by the MoD to determine conformity of a proposal with the offset guidelines. In fact there should be a clear checklist giving each and every specific detail of the offset clauses to be implemented by the vendor or with his Indian Officer Partners (IOP) jointly.

However, certain practical problems could be understood:

(a) Transfer of technology (TOT) is a matter of subjective evaluation. It cannot be evaluated in a strait-jacket manner due to the nature and quality of the technology.

(b) Software can be categorised as a product as well as a service. Pre-installed software in the weapon system at the time of purchase could be interpreted as a part of the product and further maintenance and upgradation etc. for the maintenance of the weapon system during its lifetime could be categorised as a part of services.

(c) TOT/ maintenance and manufacturing facility involves training of personnel as well as future upgradation of technology in addition to the installation of the basic infrastructure. This may not be possible to quantify in monetary terms and the valuation is bound to be subjective.

(d) Weapon system acquired ex-import are normally operated in India much beyond the life originally prescribed by the OEM. As a result, the weapon systems remain operational in India even when the manufacturing/assembly line is closed down in the country of its origin. It is therefore imperative that the IOP selected by the vendors must be able to meet the country’s requirement throughout the life cycle of the weapon system.

(e) Defence procurements may not always be a simple business transaction. It also might depend on geo-political scenario and the relations between two (2) countries to some extent. Therefore, it might be governed by the mutual relations between two (2) countries depending upon their national interest.

DPP 2020 gives broad guidelines of the defence procurement giving specific details of the offset clauses. However, the procurement proposals finalised by the Government at strategic level might not only be the financial/monetary consideration every time considering the technical know-how (expertise) at the domestic level. In order to acquire the cutting edge technology, a practical approach is needed wherein a standard checklist covering all minute details which could fit for every procurement case is not possible to be formulated as there are several varieties of weapon systems in use in various fields. Therefore, there is bound to be a subjective consideration to have a practical approach for evaluation at the appropriate level. Albeit, there is a scope to fine-tune the system by making provisions more specific related to offset clauses to address the legacy issues.

Conclusion

Defence procurement is one of the most vital elements of our economy. In a developing country like India, which is facing enormous challenges from inside as well as external threats, national security is of paramount importance. As a consequence, the dependence on foreign imports kept on increasing and it finally resulted to drainage of foreign exchange considerably in addition to non-development of indigenous production.

With changed geo-political scenario and considerable technological upgradation as well as world class infrastructure development taking place all over the country, now the time has come to give a boost to the indigenous industries and exploit their full potential to become self-reliant in the field of defence production. India has the basic infrastructure like Ordnance Factories and various civil industries in place. The requirement as on date is to streamline the procurement process by making it faster and user-friendly. There also needs to be a hand holding mechanism with the industries to instil confidence in them to encourage for more research and development (R&D) as well as produce the world class equipment.

An effort in the direction of “Make in India” is being made by incorporating new provisions in DPP 2020 as well as by fine-tuning and tweaking the earlier provisions of DPP 2016 to ensure faster procurement of required quality products at the most economical rate from the indigenous vendors to the extent possible. Accordingly the financial powers of the competent authority at various levels have to been enhanced, which would ensure faster AoN sanction and speedier procurement. The DPP 2020 has also addressed a very critical area of the obsolescence management. This would ensure that the indigenous vendors produce cutting edge technology products of global standard with further gradual improvements in future. This wouldn’t have come at more appropriate time when most of the high end technology companies are shifting from China due to the COVID19 fiasco and majority of them are showing interest in shifting base to India.

This update is by Shambhavi Singh, Advocate & Associate at Agarwal Jetley & Co., Advocates & Solicitors. Contact: Email: shambhavisingh@agarwaljetley.com or Mob: (+91) - 9650424966