DPP-2016: ‘Make in India’ Paradigm – A new era dawns

By K. V. Kuber

KVKuber

The much awaited DPP-2016 (Defence Procurement Procedure), just released by India‘s Ministry of Defence (MoD) in absolute harmony with the inaugural ceremony of the DEFEXPO-2016 held in Goa (for the first time outside of New Delhi), has created enough hype to justify its formulation or so we would like to believe.

For the first time, since it evolved, the DPP was preceded by an Experts’ Committee that made recommendations for the new DPP and then a task force that took a deep dive into one of the recommendations of the Experts’ Committee.

The Defence Minister, this time, has been leading from the front, providing the much needed leadership to the bureaucracy and for the first time the MoD gets to hear a first-hand account of an entrepreneur, voice of a small enterprise, all of this and more, finding its way into the defence quagmire.

The minister has provided a voice to the small enterprises, the entrepreneurs, start-ups and many others who never had one, despite the numerous associations that exist. In many a first, some of these concerns have been addressed.

The Preamble

Let’s begin our analysis with the ‘Preamble‘. This DPP incorporates a Preamble, just like the one enshrined in the Constitution. The idea is noble; it is expected to provide the acquisition executive with the wisdom to choose the “spirit” from the “letter”.

The acquisition executive is many a time, “Prisoner to Procedure”; MoD officials dealing with acquisition are often called as “Prisoners to Procedures”, since they are most rigid when it comes to the DPP, for fear of criminal investigations and an unknown, that may haunt them, down the line.

Well, the Preamble is expected to address some of these concerns and open the acquisition executive’s mind to a more rational application of the procedures in the interest of the acquisition at hand.

Should there be a doubt in application of any of the procedural paragraphs, the acquisition executive is expected to refer to the “Preamble”, for a clarification and then follow the preamble, just like what the judiciary would.

The question is, if the said Preamble has a chosen text, with the ability to provide overarching clarity to the procedures enshrined therein. A great deal of effort is required in choice of words and the formulation of the “Preamble”. The fine print somehow falls short of expectations.

The Preamble sadly begins on a negative note, “Defence acquisition is not a standard open market commercial form of procurement, and has certain unique features such as supplier constraints,…”, and so on. Well, we could have begun on a positive note, after all, so much effort has gone into making of this landmark DPP.

The Preamble definitely lacks the ability to stand out as a Preamble, with an ability to provide overarching support to the execution executive. MoD may do well to take corrective actions in a more robust formulation of the Preamble.

Indigenous Design

A path-changing inclusion in the DPP is the introduction of a new category called, “Buy IDDM” (IDDM stands for Indigenous Design Development and Manufacture). For the first time, since its inception in 2002, the DPP places importance on “indigenous design”, development and manufacture.

Although these attributes such as design, development and manufacture, were present in a subtle manner in the DPP-2013, and inherent in the “Buy Indian” category, they have now got their pride of place in the DPP. This is actually the essential ingredient to “Make in India”, philosophy and will receive more AoN (Acceptance of Necessity) awards, as the year begins from April 1, 2016. This is extremely good and I believe the minister personally intervened for incorporation of such a category.

So what then are the implications? The categorisation believes that if the design is indigenous then a manufacturing indigenous content of 40 per cent would suffice to pass muster and should the design not be indigenous then the manufacturing content required is 60 per cent. Well, this beats basic logic. Lets see how.

If the design is home-grown, then the design would most probably rely on indigenous supply chain and chances of indigenous content are high, whereas, if the design is foreign then chances of having higher indigenous content are low, after all, any foreign design would conform to a foreign supply chain attitude. However, paradoxically, the IDDM category demands just the reverse.

Is this demand based on realistic assessment of the domestic industry or was it a fancy tool to impress upon a theory devoid of logic? It would be a challenge for the industry to reconcile to the situation.

Does the Preamble clarify, if the spirit of the DPP is to place an emphasis on indigenous design? For example, if there are two solutions for a programme – one based on indigenous design and the other on a foreign design – will the MoD encourage a competition between the two? Will not the foreign companies exploit this and push for their design in the systems of Indian armed forces?

There is a third challenge here, that is, there is no difference between IDDM with indigenous design and the next higher category, namely, “Buy Indian”. Both of them demand a 40 per cent indigenous content, never mind the lack of design or incorporation of it. How will the MoD, in the former, ascertain that the design is indigenous, considering that every design may not be patented (are we likely to open a Pandora’s box here by asking for patent filings, and such?). Well, we would be entering into a new variety of quick sand.

While recognising the importance of indigenous design and according it the pride of place right on top of the categorisation priorities, the MoD has shied away from a complete and total lifting of the abeyance order placed on design services amongst others. The abeyance order that was issued on a knee jerk reaction based on an alleged wrong-doing by an Indian Offset Partner (or IOP, which is still at large), the entire services industry in India was debarred from offsets discharge as eligible IOPs.

Despite many representations, this ban, thanks to the rationale application of logic and reason, was lifted, albeit, partially, by the present government. If the government truly believes in promoting indigenous design, then a case exists for a total lifting of the abeyance order. The entire DPP must conform to the spirit and the spirit needs to be established in the Preamble.

DPP-2016 must have a flavour for all upgrades and MRO (Maintenance, Repair and Overhaul) type of activity. It would be a treat to see that all upgrades are necessarily under “Buy Indian” category, at best under “Buy and Make Indian“. The type of investments being made by the Indian industry is pretty encouraging, like Reliance Defence in Mehan, Maharashtra, VEM in their new integration facility in Andhra Pradesh and so many more.

Indian industry is now ready to take on all type of upgrades and so the DPP may come out clear on this aspect. However, the formulation in the DPP is not exactly that. It reads, “Para 15…Such cases could be categorised under any of the categories as given in the paragraphs 6 – 11 (Chapter I)…”. I would like to see all upgrades being covered under either ‘Buy Indian’ or at best ‘Buy and Make Indian’ categories.

That could encourage domestic industry to make investments ahead of time. Although, I believe, the spirit of the DPP was to get all upgrades in-house.

RFI, AoN, RFP

The DPP was expected to clearly differentiate the planning process from the execution process. While the HQ IDS (Headquarters Integrated Defence Staff) would coordinate the complete planning process till accord of AoN, the Acquisition Wing would take on from there and issue the RFP (Request for Proposals, or just tender), and proceed till signature of the contract.

This clarity is essential to avoid duplication of work. Everyone in the system need not do everything. It should be teamwork. Like a relay race, the baton must pass from one stage to another. There is a tendency in the MoD for each successive stage to re-invent the wheel, this tendency must be curbed. This DPP has not brought in this clarity.

The RFI (Request for Information) process must essentially be a commitment for purchase. Many times the industry is encouraged to make investment on the basis of the RFI and hence, the MoD must draw up the RFI for a reason, and the reason is procurement by the armed forces.

Sadly, the formulation, otherwise, reads as follows: “The RFI would be published on MoD and SHQ (Service Headquarters) websites for seeking relevant information, on specific procurement schemes. The issue of RFI is not a commitment for procurement.” How do we expect the industry to have a show of hands when the RFI is not serious enough to lead to a commitment of procurement?

Insofar as SQRs (Staff Qualitative Requirements) are concerned, the balance of decision-making must shift to the armed forces. Let not the necessity, to make generic SQRs, broad based SQRs and SQRs that can generate a multi-vendor situation, not deprive the armed forces of a system they require. I like the concept of “Essential Parameters A”, “Essential Parameters B”, and “Enhanced Parameters”.

While the concept of broad-based QRs seems to apply only to the “Essential Parameters A”, the forces can use the enhanced parameters to get more out of a system, since no system is designed for exclusive use of the Indian armed forces. Also, by an intelligent use of “Essential Parameters B”, the forces can get more, even as the production begins.

This concept is an intelligent insertion by the MoD, based on the leadership provided by the minister himself. The MoD has expressed a willingness to incorporate technical experts to have a deliberate examination at this stage of the planning process, a very welcome move, exhibiting the open-mindedness of the Government of India.

There is an effort to cut down the time in the planning process, by reducing the AoN to RFP time to six months/1 year for either a ‘Buy Indian’ or ‘Buy and Make Indian’ programme. This may be cosmetic, since I believe that the planning process may as well take a little longer, cutting down of time is more necessary in the execution process.

Offsets

Offsets have been pegged at a threshold value of Rs. 2,000 crore ($300 million), which comes with a mixed feeling. While the industry would have liked to have the offsets continued at the present threshold of Rs. 300 crore ($45 million) or even lesser, to enable more offsets business.

However, considering that the Rs. 300-crore limit was fixed more than a decade ago and that more and more programmes are likely to go the domestic route, the Indian industry is likely to be engaged more effectively by the MoD in the indigenous categorisation, such a decision may have been taken.

Also, the MoD is probably not able to effectively manage the offsets, given the other stakeholders/players introduced in the system, such as the CGDA (Controller General of Defence Accounts) for an audit. For effective monitoring, maybe, the number of programmes will reduce by increasing the threshold. This seems to be a smart move.

A new insertion in this DPP is the design and development by DRDO/DPSUs/OFB at para 71 of Chapter 1. It would have been a great idea to also include private industry at this stage. The confidence reposed in the private industry by the MoD would have been reflective by such an insertion.

This, therefore, leads to a conflict at para 101, that reads, “…Cases which are being undertaken by DRDO/DPSUs/OFB/Indian private industry as design and development projects, would not fall in the category of Single Vendor cases…”. Therefore, the MoD does visualise cases that are undertaken by private industry also, besides the Make I and Make II category of cases. Therefore, para 71 may demand a small inclusion of private industry as well.

A great deal of credit is to be given to the MoD for the far-sighted “MAKE” procedure, with incorporation of MAKE 1 and Make 2 categories. Forward looking, industry friendly, ability to give large advances to the domestic industry for undertaking ‘Make’ programmes, will provide an unprecedented boost to the indigenous industry.

A definite boost for MSMEs (Micro, Small and Medium Enterprises) is clearly visible in this category, once again a pioneering move by the defence minister to encourage the small industry sector.

The minister has attacked the ‘Defence Industrial Base‘, and addressed some of the concerns of the small scale units that are pegged at the base of the development pyramid.

If India lives in villages, the industry lives in the MSMEs sector. Ninety percent funding in Make 1 category by the government and a 20 per cent advance are key highlights. A reimbursement of cost of the remainder 10 per cent, should the MoD not procure after a successful development, is another key highlight, once again unprecedented. What a welcome move!

Provision of test facilities for industry and other key benefits accruing from such a move are very encouraging, this will boost exports of defence items from the country.

The fine print is out. Devil is in the details, they say. Let us hope, this time, when we see the DPP of March 28, 2016, may be, we find an angel in the details.

(The writer is a retired Indian Army Colonel with vast field, staff and acquisition wing experience)

Author: indostrat

IndoStrat is a media outfit that brings you news from the Indian defence and strategic sectors. If you are an avid watcher of India's military, diplomacy and strategic affairs, this is the place to come to for satiating your appetite for latest news, opinions, facts, tidbits and some informed gossip.

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