New Defence Procurement Procedure to push 'Make in India' initiative

Over a year after the government promised a new Defence Procurement Procedure (DPP), a top body of the Defence Ministry on Monday, approved a new policy document in this regard which provides for increase in contract threshold from Rs 300 crore to Rs 2,000 crore for offsets, tweaking the L1 policy and pushing the 'Make in India' initiative.

The new document - DPP 2016 - which will take at least another two months for it to be notified, allows government funds up to 90 per cent of development costs to private companies to push research and innovation, and aims to enhance private sector participation and speed up procurement process.

It has also brought down the Acceptance of Necessity (AoN) validity to six months from earlier one year, which means that the forces will have to issue tenders faster.
However, the Defence Acquisition Council, chaired by Defence Minister Manohar Parrikar, deferred decisions on critical issues of blacklisting, agents and selection of sector-wise strategic partners.

"We have finalised the DPP 2016. The major part of the changes have been approved today. What is now left is minor changes," Parrikar said addressing reporters.

The significant change in the DPP has been the decision to raise the contract threshold of Rs 300 to Rs 2,000 crore for offsets. This means that only those deals which are worth over Rs 2,000 crore will have an offset obligation.

"We currently have signed offsets worth USD 5 billion and another USD 8 billion is in pipeline. We may not be able to absorb all of this. Moreover, offsets also increase the cost of the product by 14-18 per cent," Parrikar said explaining why the threshold has been increased.

The Defence Ministry has also approved changes its L1 policy of selecting lowest bidder. Under the new move, 10 per cent extra weightage will be given if a system displays better qualities than required.

Another major change in the DPP is the policy to fund Indian private entities in Research and Development to encourage more local development.

"Medium and small scale industries will get opportunities," he said, adding that the Department of Defence Production will fund up to 90 per cent of the R&D. Remaining 10 per cent of the development cost would be reimbursed, if the RFP for the equipment developed is not issued within 24 months from the date of successful development of prototype," he said.

Under the new DPP, a new category called the 'IDDM' or 'Indigenously Designed, Developed and Manufactured' platforms has been created. This category, with at least 40 per cent indigenous content, will get top priority and will be first to be chosen for tenders. 

Under the new DPP, Make (Indian) category has been divided into three parts. One is 90 per cent government funded while the second is industry funded and third reserved for medium and small enterprises.

Parrikar also made it clear that in cases of single vendor, when the requirements are specific, it will go through. He said that the DPP will apply to only new projects and not to those which are already in process.

Parrikar also said that the blacklisting policy will be different from the defence procurement policy and will be issued separately. He said that only those companies that have been cleared by CBI will be taken off the blacklist. Parrikar also took dig at former Defence Minister A K Antony saying he will will not keep companies on blacklist to protect "so called image".

The Minister said that only firms with majority stake and controlled by resident Indians will be eligible for projects under Make category.

"Companies need to be registered for five years, three years in case of MSMEs. Companies need to have a minimum credit rating of B++, issued by recognised rating agencies.

"For projects with development costs equal to or exceeding Rs 5,000 crore, a minimum 'net worth' of 5 per cent of the development cost, subject to maximum of Rs 1,000 crore, should be there. In all other cases, positive net worth is the minimum eligibility criteria," Parrikar said.