A comparative overview of DPP 2013 and DPP 2011 indicates that for the first time, there is greater clarity on defining indigenisation and how this is to be achieved. Attempts have been made to establish a level playing field between the public and private sector as well as Indian and foreign vendors. Effective monitoring of offsets is envisaged thereby ensuring value addition in terms of transfer of technology.

Procurement for the armed forces in India is governed by the Defence Procurement Procedure (DPP). These regulations were adopted as an outcome of the Group of Ministers Report on national security reforms in 2001. The Ministry of Defence (MoD) set up the Defence Procurement Management Structures and Systems and the first DPP was issued in 2002. The DPP is revised every two years based on experience gained in implementation, requirements of the services and developments in defence research and development (R&D) and industry. This has led to considerable refinement in defence procurement to include introduction of offsets and integrity clause, improvements in the ‘Make Procedure’ and sustained focus on indigenisation.

DPP 2013 promulgated by the MoD on June 1, 2013, is a result of this progressive evolution and is a follow up of DPP 2011. The main changes and additions made in DPP 2013 vis-à-vis DPP 2011 are outlined as follows:

The thrust areas identified in DPP 2011 were expansion of offset eligibility to include civil aerospace, internal security and training. The procedure for ‘Make’, under shipbuilding category was also elaborated. DPP 2013 on the other hand includes some fundamental changes with greater thrust given to indigenisation. Broadly speaking DPP 2013 is a more comprehensive document. This is also obvious from the sheer volume of 428 pages in DPP 2013 as against 291 pages of DPP 2011.

Covering some of the specific issues, for the first time, a preferred order of categorisation has been outlined in DPP 2013 which defines the order of priority for procurement from indigenous sources. Thus the Categorisation Committee, while considering capital acquisition, has to ensure that the following priorities are adhered to:

• Buy (Indian)
• Buy & Make (Indian)
• Make (Indian)
• Buy & Make
• Buy (Global)

There are no fundamental changes in categorisation in DPP 2011 and 2013 which remain the same as stated below:

Acquisitions covered under the ‘Buy’ decision: ‘Buy’ means an outright purchase of equipment. In ‘Buy (Indian)’ and ‘Buy (Global)’, ‘Indian’ would mean Indian vendors only and ‘Global’ would mean foreign as well as Indian vendors. ‘Buy Indian’ must have minimum 30 per cent indigenous content if the systems are being integrated by an Indian vendor.

Acquisitions covered under the ‘Buy and Make’ decision: ‘Buy & Make’ decision means purchase from a foreign vendor followed by licensed production/indigenous manufacture in the country.

Acquisitions covered under the ‘Buy & Make (Indian)’ decision: ‘Buy & Make (Indian)’ decision mean purchase from an Indian vendor including an Indian company forming joint venture/establishing production arrangement with the original equipment manufacturer (OEM) followed by licensed production/indigenous manufacture in the country. ‘Buy & Make (Indian)’ must have minimum 50 per cent indigenous content on cost basis.

Acquisitions covered under the ‘Make’ decision: Acquisitions covered under the ‘Make’ decision include high technology complex systems to be designed, developed and produced indigenously.

As per DPP 2013, the statement of case (SOC) seeking acceptance of necessity (AON ) is required to include detailed justification for recommending categorisation as well as reasons why each of the higher preferred categorisation has not been considered. For instance if AON is sought for tank ammunition in the ‘Buy (Global)’ category which is the lowest in the order of preference, a detailed justification for not considering other higher preferences will have to be given in the SOC.

In a move to ensure timely completion of process, tendering service qualitative requirements (SQRs) are required to be frozen before AON has been accorded, and validity of AON has also been reduced from two years to one year. Thus service HQs will have to complete all formalities including preparation of a draft request for proposal (RFP) to ensure that the AON does not expire as period of validity is reduced to one year.

Given the thrust on indigenisation, “indigenous content” has been defined in DPP 2013. This is to be arrived at by excluding from the total cost of equipment/item the following elements at all stages (tiers) of manufacturing/production/assembly:

• Direct costs (including freight/transportation and insurance) of all materials, components, sub-assemblies, assemblies and products imported into India.
• Direct and indirect costs of all services obtained from non-Indian entities/ citizens.
• All licence fees, royalties, technical fees and other fees/payments of this nature paid out of India, by whatever term/ phrase referred to in contracts/ agreements made by vendors/sub-vendors.
• Taxes, duties, cesses, octroi and any other statutory levies in India of this nature.

Moreover, this is not restricted to OEMs but extends all the way to the lowest tier of the sub-vendor, and import content in the products supplied by the sub-vendors will not qualify towards indigenous content.

Transfer of technology (ToT) is also defined in various categories in DPP 2013, which had not been included in DPP 2011. This will overcome ambiguity existing at present. There are five categories of ToT with the highest being where complete transfer is involved and lowest where there will be no transfer. These categories are outlined as follows:

• Category 1: Complete transfer of technology.
• Category 2: Complete transfer of technology of sub-vendor.
• Category 3: Partial transfer of technology with non transfer of technology of sub-vendor.
• Category 4: Only drawings will be provided.
• Category 5: Proprietary item – no transfer of technology.

DPP 2013 also specifies for the first time that all commercial transactions including evaluation will be carried out based on international norms as per International Commercial Terms (INCOTERMS 2010). This will bring payment terms for Indian bidders on par with those for foreign bidders; ensure specificity in stages and modes of payment and removal of excise duty in determination of L-1 or lowest bidder.

In an attempt to derive greater benefit from offsets, MoD had issued revised defence offset guidelines (DOG) which was applicable from August 1, 2012. These have now been included in DPP 2013. Under these provisions, the Defence Offset Monitoring Wing (DOMW) has been set up and has become functional under the Department of Defence Production (DDP).

The offsets proposals submitted by the vendor will henceforth be evaluated by the Acquisition Wing which will also conclude offset contracts with vendors, alongside the main contract. Post-contract monitoring and auditing of offsets will be done by the DOMW. While offsets have been introduced for the first time in DPP 2005, the value derived was limited. Offset monitoring by DOMW is expected to overcome this deficiency.

To establish a level playing field, maintenance transfer of technology (MTOT) is now open to public as well as private sector. Hitherto fore MTOT was reserved for ordnance factories and defence public sector undertaking and was done through nomination.

In a boost to the micro, small and medium enterprises sector, while DPP 2011 had identified setting up of a fund to provide necessary resources for development of defence equipment, the source has been specifically identified in DPP 2013. The Small Industries Development Bank of India (SIDBI) will 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.

Given the emerging concerns on cyber security, vendors will have to certify that the hardware and software being offered, as part of the contract, does not contain embedded malicious code that would inhibit functioning of the equipment or cause physical damage to the user. In such cases, firms will be held liable and will be debarred from participation in future contracts of MoD/Government of India.

Consultations on security guidelines for Indian defence industry are also required to be issued by the MoD as per DPP 2013. Draft Security Guidelines that will apply to all licensed defence industries have been circulated for consultations with various stakeholders. This will establish a strong security framework for Indian private industries participating in defence production.

DPP 2013 has also enhanced delegation of financial powers from Rs. 50 crore to Rs. 150 crore for capital acquisition by the Service HQs. This will to some extent reduce necessity for processing cases to the Defence Acquisition Council (DAC). Approval for all deviations from the DPP, however, will henceforth be sought from the DAC instead of the Defence Minister.

To sum up, a comparative overview of DPP 2013 and DPP 2011 indicates that for the first time, there is greater clarity on defining indigenisation and how this is to be achieved. Attempts have been made to establish a level playing field between the public and private sector as well as Indian and foreign vendors. Effective monitoring of offsets is envisaged thereby ensuring value addition in terms of transfer of technology. It is now up to the Defence Acquisition Wing and the DDP, the Services and HQ Integrated Defence Staff, to ensure that these provisions are implemented to achieve the aim of DPP 2013 that is timely procurement preferably through indigenous sources while deriving best value for money.

The author is a strategic analyst and a prolific writer on strategic affairs.