DPP 2011 amendments

DPP 2011 Amendments - EY Analysis

DPP 2011 Amendments, April 2013

DPP amendments and their effect

S No. DPP Amendment EY View

1

Prioritization of Various Categories for Capital Acquisitions under Defence Procurement Procedure

Preference for indigenous procurement in the Defence Production Policy 2011 has now been made a part of DPP through an amendment that provides for a preferred order of categorization, with global cases being a choice of last resort. The order of preference, in decreasing order, shall be: (1) “Buy (Indian)”; (2) “Buy & Make (Indian)”; (3) “Make”; (4) “Buy & Make with ToT”; and (5) “Buy (Global)”. Any proposal to select a particular category must now state reasons for excluding the higher preferred category/ categories

Categorization used to always take place at the SCAPCHC stage. At the SCAPCC stage, which takes place prior to the SCAPCHC, Indian Pvt. Industry; DPSU’s and DRDO were given the opportunity to make presentations on available indigenous capability. The priority at this stage was also to provide preference to the Indian players. However the armed forces would also have a say as it would impact their operational prepared-ness.

This prioritization is now out in the open but is not a real amendment in the true sense. There is now the possibility that additional documentation would be required to categorize programs as Buy/ Buy & Make Global and associated delays.




2

Release of Public Version of Long Term Integrated Perspective Plan (LTIPP)

The DAC has approved the release of a public version of its 15-year perspective document (LTIPP), outlining the “Technology Perspective and Capability Roadmap” (TPCR) against LTIPP 2012-2027. The TPCR will provide useful guidance to the Indian Defence Industry for boosting its infrastructural capabilities and directing its R&D and technology investments

This intention of releasing the LTIPP was first introduced in DPP 2009 (amendment to DPP 2208). It was also a part of para 9(a) in DPP 2011. However we are yet to see any such document in the public domain.

It remains to be seen if the Pvtsector does make any investments basis the LTIPP.

3

Maintenance ToT (MToT) no longer through Nomination

MToT has been hitherto reserved largely for OFB and DPSUs through the nomination process. A DPP amendment has been approved that does away with nomination by Department of Defence Production and facilitates selection of MToT partners by Indian bidders. This measure is expected to have a positive impact on private sector participation in maintenance, repairs and overhaul work

As per para 28 of DPP 2011, pvt.Indian companies were permitted as valid recipients of MToT.

Through the present amendments the procedure of nominating a MToT recipient by the DDP has been done away with.

We hope that the nomination process is not allowed for Foreign bidders as well.




4

Advance Consultations for “Make” Procedure

The DAC has approved an amendment mandating consultations to begin sufficiently in advance of actual procurement by Service Head Quarters (SHQs), so that capital acquisition plans can be translated into national defence R&D and production plans. In addition, a high-level Committee has also been constituted for simplification of “Make” procedures, with a view to unleash the full potential of this important category

Indian private industry has traditionally raised the issue of insufficient development time to produce a prototype. LTIPP will help the Indian Pvt industry plan as 15 years is a significant horizon.

Also we believe that the concept of RUR’s has been done away with and the entire Indian industry has now been placed at par. Thus a new selection criteria needs to be looked at for MAKE programs.

Of the two MAKE programs that were launched, one has been called off (FICV) and the other (TCS 2000) is making slow progress. Any simplification would be welcome

5

Simplification of “Buy & Make (Indian)” Procedure

The DAC has approved an amendment further simplifying this complex category. Its procedures have been brought on par with other categorizations, resulting in faster processing of cases under this category

We look forward to the ‘simplifications’ that have been incorporated.

It remains to be seen if the only on-going project in this category, the Indian Navy’s Surface Surveillance Radar’ project will benefit from these ‘ simplifications’




6

Clear Definition of Indigenous Content

Increased indigenization is important for our Armed Forces, in order that they have access to reliable supply chains in times of urgent need. Indigenous content has now been defined in an unambiguous manner, providing requisite clarity and a common understanding

DPP 2011 (para 4) has no clear definition of Indigenous content. For Buy Indian programs the indigenous content is pegged at a minimum of 30% and for MAKE it is pegged at 50%. In addition Para 5.9 of the D.O.G. (1st Aug 2012) also mentions the subject of Value addition. In no place is there a definition of Indigenous content nor is there a method shown to calculate the same.

We hope the recent amendment will help shed some light on these issues. We could also take guidance from Global methodologies where they use the Subtraction method and / or the Aggregate method for calculating the indigenous content.

7

Ensuring faster progress in “Make” and “Buy & Make (Indian)” cases

The Ministry has a limited number of acquisition cases under “Make” and “Buy & Make (Indian)” categories, with an estimated value of Rs. 1,20,000 crore. Instructions have been issued for speedier conclusion of these cases

We believe that most if not all of these programs are through the DRDO R&D platform. If the pvt. Sector is given an opportunity to play its role in productionizing these technologies, it would prove to be great boon for India.




8

Defence Items List

Indian defence industry was opened up in May 2001 for 100% private sector participation subject to licensing. The Defence Items List has been finalized by the Ministry and sent to DIPP for notification, which will bring required clarity in the licensing process

The MoD has lately been inundated with IL applications from the DIPP. This is primarily because under DPP 2006, IL was mandatory to become an IOP. Under DPP 2008 this condition was removed but still OEM’s insisted that the IOP have an IL or at least apply for one. Today most of the programs under execution or advance negotiations are under these two DPP’s. DPP 2011 permitted IOP’s in civil aerospace as well and also very clearly replaced the term Defense with ELIGIBLE vis a vis the Offset guidelines. Yet many OEM’s still insist that their IOP’s have an IL or a letter stating that an IL is not required. Thus the number of IL applications is yet to reduce. Many business plans have been adversely affected because IL applications can take up to 2 years to clear and letters stating that No IL is required could take up to 9-12 months. The MHA also did not provide any security clearance for IL applicants as there was no pre-set template for providing such a clearance.

We understand that the Defense items list will be taking guidance from the WASSENAAR arrangement and that any item not on the list will not require an IL. We hope the DIPP issues a notification to this effect very soon.

Also the MHA template has been in the works since last June and we hope this is released soon.

9

Licensing for Dual Use Items

The Ministry has categorically clarified to DIPP that dual-use items will not require licensing, thereby bringing added clarity to the licensing process

10

Consultations on Security Guidelines for Indian Defence Industry

Draft Security Guidelines that will apply to all licensed defence industries have been circulated for consultations with various stakeholders. It is expected that a complete security framework for Indian private industries participating in defence cases will be in place in the near future




11

Resolution of Tax-related Issues

Resolution of deemed exports status for certain defence projects and rationalization of tax and duty structures impinging on the Indian defence industry has been taken up by the MoD with the Ministry of Finance

This is a welcome step on the part of MoD and if Ministry of Finance agrees for the same, it may result in removal of tax anomalies on supplies by indigenous manufacturers.

Hopefully, Ministry of Finance also work for removing the differential treatment for private players viz. a viz. PSUs for e.g. grant of exemptions from duties on goods manufactured in India.

12

Funds for MSMEs in the Defence Sector

The Defence Production Policy 2011 requires the setting-up of a fund to provide necessary resources for development of defence equipment. In order to ensure regular supply of funds to MSMEs involved in manufacturing of defence products, SIDBI has decided to earmark an amount of Rs. 500 crore for providing loans, and further, a fund of Rs. 50 crore for equity support out of “India Opportunities Fund” managed by its subsidiary, namely, SIDBI Venture Capital Ltd

Para 11 of the Defense Production Policy stated the creation of a separate fund for SME’s to support their R&D efforts.

This addition to the DPP with more precise details should go to great lengths in widening the indigenous defense industrial base.

One question remains though, whether other public / private institutions are also permitted to set-up such funds and if there could possible be any offset credits for such investments?




13

Efficiency and Transparency in Defence Procurement

A stipulation to freeze the SQRs before the “Acceptance of Necessity” (AoN) stage has been accorded, and the validity of AoN has also been reduced from two years to one year. These measures are expected to expedite the acquisition process and increase transparency

This seems like a reaction to the recent VVIP helicopter scandal.

Previously the user directorate’s used to find it challenging to release RFP’s within the two year time-span after receiving the AoN. A case in example being the P75I program where the AoN has lapsed twice. It remains to be seen if the RFP’s can now be issued within the one year time-span. If it does happen, we hope the procurement process speeds up and our forces get quicker access to world-class platforms.

14

Enhanced Delegation of Financial Powers

The financial powers of Service Chiefs/ DG Coast Guard have been enhanced from Rs. 50 crore to Rs. 150 crore for capital acquisition cases

Many small requirements of the end-user(armed forces) can now be addressed at the SHQ level itself.

15

Powers to DAC

Approval for all deviations from the Defence Procurement Procedure will henceforth be sought from the Defence Acquisition Council instead of the Defence Minister

The RM has devolved his individual powers and instead placed them with the DAC thus showing faith in a collegium system of decision making. We hope this step increases transparency and at the same time does not slow down decision making.


List of Abbreviations


List of Abbreviations

► SCAPCHC - Service Capital Acquisition Plan Categorization Higher Committee► SCAPCC - Service Capital Acquisition Plan Categorization Committee► DPSU - Defence Public sector Undertaking► DRDO - Defence Research and Development Organization► DAC - Defence Acquisition Council► DPP - Defence Procurement Procedures► LTIPP - Long Term Integrated Perspective Plan► TPCR - Technology Perspective and Capability Roadmap► MToT - Maintenance Transfer of Technology► DDP - Department of Defence Production► SHQ - Service Headquarters► FICV - Future Infantry Combat Vehicle► TCS - Tactical Communication System► DOG - Defence Offset Guidelines► OEM - Original Equipment manufacturer► IOP - Indian Offset partner► MoD - Ministry of Defence► IL - Industrial License► MHA - Ministry of Home Affairs► MSME - Medium Small and Micro Industries► SIDBI - Small Industries Development Bank of India► RM - Raksha Mantri

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DPP 2011 amendments

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