Changes announced in Defense Procurement Procedure

The Indian defense ministry announced a number of changes approved by the Defense Acquisitions Council (DAC) in the Defense Procurement Procedure that would apply to all defense procurement from this year.

These changes are skewed to favor and encourage defense industry in India, some of which appear to have been influenced by reactions to corruption scandals, like the one related to the procurement of VVIP helicopters from AgustaWestland, to minimize procurement from foreign vendors; the premise, presumably, being that corruption is largely committed by foreign companies and is lower when Indian companies/industry/entities are involved.

So while we’re busy collating comments from defense industry on the changes announced, do have a look at the list of changes, copied and pasted, verbatim, from the defense ministry press release.

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1. Prioritization of Various Categories for Capital Acquisitions under Defense Procurement Procedure

Preference for indigenous procurement in the Defense 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.

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 Defense Industry for boosting its infrastructural capabilities and directing its R&D and technology investments.

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 Defense 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.

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 Defense 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.

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.

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.

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.

8. Defense Items List

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

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 Defense Industry

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

11. Resolution of Tax-related Issues

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

12. Funds for MSMEs in the Defense Sector

The Defense Production Policy 2011 requires the setting-up of a fund to provide necessary resources for development of Defense equipment. In order to ensure regular supply of funds to MSMEs involved in manufacturing of Defense 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.

13. Efficiency and Transparency in Defense 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.

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.

15. Powers to DAC

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

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