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DPP 2016 – A Step Towards Indigenization of Indian Defense

The defence ministry has revealed the new Defence Procurement Procedure from private companies, in the Defence expo in Goa. The policy intends to increase the participation of domestic Indian companies as suppliers for defence expenditure.

What is the meaning of DPP?

Defence Procurement Procedure (DPP) is a set of guidelines approved by Defence Acquisition Council (DAC) for procurement of defence equipment and technology. Though defence procurement is a complex and strategic process involving various factors, DPP only provides the framework and criteria for allotment of defence contracts to private players.

defence procurement procedure policy 2016

The defence procurement procedure was laid out way back in 1992 and came into effect only in 2002. The DPP has since been revised in 2005, 2006, 2008, 2009, 2011, 2013 and now in 2016.

What does the new DPP policy state?

With the new DPP, the government has given a big push to the domestic players in the defence sector. The DPP has a new category called Indian Designed Developed and Manufacture (IDDM) and it has been given the highest priority. Technology development plays a vital role in defence sector but not much importance has been given till now, but with the new DPP in place – design and development has been given the highest priority, pushing the private players to invest more into Research and Development.

With 100% refund in delay of procurement from vendor by the government is definitely a pro defence industry step. The government will pay if they delay their procurement by more than 24 months, including R&D cost. With India being the world’s largest importer of arms (Source), the DPP 2016 takes the first step towards making the Indian defence system self-reliant and cutting down imports.

Highlights of DPP 2016:

  • Highest priority given to Buy (Indian – IDDM) and Buy (Indian).
  • Offset clause raised to Rs 2000 Cr. for Buy (Global) category from previously Rs 300 Cr. This means if a foreign vendor sells arms to India, then it has to invest 30% of procurement cost directly or indirectly into Indian firms. Now if the foreign vendors equipment cost is Rs 2000 Cr or greater then it needs to invest 30% of the deal in Indian firms directly or indirectly.
  • Government to fund 90% (previously 80%) of the project cost for projects under ‘Make Category'(Acquisitions of equipment, components or upgrades thereof, to be designed, developed and manufactured by an Indian and is funded by government ).
  • Project under Rs 10 Cr within government funded and projects under Rs 3 Cr. within industry funded are reserved for MSMEs (Micro, Small & Medium Enterprises). 
  • Fast tracking of urgently required equipment, which earlier was done in times of war only. 
  • If the government doesn’t place an order within 24 months of development of product, the government will refund  the 100% contribution made by the company.
  • In case of delay in supplies by the vendor, the vendor shall be levied Liquidated Damages (LD) @ 1.5% per week subject to maximum of 15% of value of delayed equipment.
  • Performance bank guarantee puts contractual obligations on  the vendor to deposit 10% of the total deal value in an international bank as a guarantee for the performance and service of the equipment provided.

What is Defence Offset Policy?

Defence Offset Policy states that if the government is signing a contract/deal with a foreign vendor of worth more than Rs 2000 Cr, then the foreign vendor needs to invest/spend 30% of the deal value into the domestic firms. For example a foreign vendor signs a contract of Rs 1000 Cr with the government, then the foreign vendor needs to spend Rs 300 Cr (30%) in domestic firms for co production of the equipment or else the foreign vendor can invest Rs 300 Cr (30%) in the domestic firms and promote technology transfer, exports and marketing assistance etc. The various categories of the firms which are eligible for the foreign investment/spending will be listed out by the defence ministry. This offset policy is generally used to promote the domestic firms with the manufacturing process and technology to assist in future production of defence equipment.

Capital Acquisition Priorities:

DPP 2016 explicitly mentions that the following priorities have to be taken into account while procuring the defence equipment, in the order of high priority to low priority. 

  1. Buy (Indian – IDDM): This is where an Indian vendor either
    1. designs and manufactures the product in India (with at least 40% Indigenized components, including basic cost, spares and test equipment)
    2. manufactures the product in India but is designed/developed abroad (but here, 60% Indigenized components, including basic cost, spares and test equipment)
  2. Buy (Indian): This where an Indian vendor manufactures in India, but  designed/developed abroad with only 40% Indigenized components. (If he’s able to bump this up to 60% Indigenized, then he’ll go up to the IDDM priority)
  3. Buy and Make (Indian): This is where the initial procurement of equipment is in a fully formed state, from an Indian vendor which has a tie up with foreign OEM and starts manufacturing in India with 50% indigenous     content and starts the transfer technology from foreign OEM in phased manner.
  4. Buy and Make: This category refers to initial procurement of equipment from foreign vendors, followed by domestic production and involving transfer of technology in a phased manner.
  5. Buy (Global): Refers to outright purchase of equipment from foreign or Indian vendors.

Overview:

The basic idea behind the 2016 DPP is to give the domestic defence industry a push and make it a manufacturing hub with initial technology from the foreign partners. With the new category IDDM, there’s definitely a huge inflow of funds into Research and development sector.

The scope has also been provided for smaller players to supply the Indigenous parts for the foreign vendors. The increase in offset to Rs 2000 Cr. from previously Rs 300 Cr. has been put in place because foreign players used to easily inflate contracts above the lower limit of 300 Cr. just so that they can cover the investment (30% of the product deal) they need to do  in Indian firms because of offset clause.  (Contracts above the limit don’t have the indigenization requirements)

With 100% refund for delayed procurement by government addresses the previous issues of risk taken by industry on R&D. On the other end, the government has also put liquidated damages charges if there is delay in delivery by the vendor. (1.5% per week, maximum up to 15% of contract value.)

The earlier DPP didn’t entertain single vendor situations, but now in case of single vendor bid, the procurement commences if all the criteria are met.

Though the new DPP is revolutionary compared to its predecessors but still the defence industry in India faces problems. The first one being the monopoly in defence technology maintained by government backed defence PSU’s and the second being the partiality towards the foreign vendors. Majority of the technology is controlled by PSU’s and domestic private players are just meager assemblers or supplier of small parts. For domestic private players to come in the forefront is still a long way away.

Compared to foreign vendors Indian manufacturers need to wait for the c
ertification from defence ministry whereas foreign vendors are self-certified. Also the foreign vendors are exempted initially from customs duty where as domestic vendors need to get their duty (excise/customs) reimbursed which is a tiring process. Still, the new DPP is definitely aiming towards the positive side of the Make in India program and is a pro Indian defence industry.

Companies which might get advantage from the DPP 2016:

Ashok Leyland defence Systems: Provides defence logistics to the military. Has tied up with Lock Heed Martin to develop light armored vehicle and light specialist vehicle.

Reliance defence Systems: Has tied up with French defence Company Thales to manufacture underwater systems. Has acquired Pipavav defence and offshore engineering.

Astra Microwave: Provides technology and equipment for RADAR, telemetry and ground based surveillance for defence. Has made a JV with Israel’s Rafael tactical radio communications and electronic warfare systems

Bharat Electronics: Provides a range of indigenous developed products which includes, radars, avionics, electro -optics, simulators, weapon systems etc. 

Bharat Forge: Provides artillery system to defence. Has JV with Swedish major SAAB.

Mahindra & Mahindra: Has signed a JV with BAE systems to develop high mobility vehicle, armored vehicles.

Larsen & Toubro: Develops a range of high profile defence systems including Land Based Weapon Launch system, air defence and artillery systems, naval weapon launch systems with fire control solutions, bridging systems, communication and avionics.

Solar Industries: Supplies War Heads, Explosives and ammunition to the Indian defence.

Other companies to watch for : Punj Lloyd, Rolta India, BEML, Walchandnagar Industries

Our View

Nothing changes overnight, but this policy will help Indian manufacturers provide more to our defence procurement, which is the single largest expenditure (after interest payments) of the central government. Foreign vendors have been preferred largely because politicians have been able to channel kickbacks from them abroad, and the biggest example was the Bofors deals in the 80s. 

Now that we can buy more from India, it’s up to companies to step up their manufacturing to meet defence requirements. It’s also up to the government to reduce corruption so that defence bureaucrats will not jeopardize procurement from Indian players. In fact the defence Minister Parrikar has said to the effect that instead of bribing people, just reduce the price of your contracts instead!

Either this becomes a new era in the Indian defence sector, or the bureaucracy gangs up to hurt the intentions of both maximizing Indian content and minimizing corruption. Time will tell, but let’s hope it’s all positive.