Draft DPP 2020 holds promise, but the implementation may pose a bigger challenge

Published: March 25, 2020 2:19:24 PM

A high-level committee headed by the director-general (acquisition) and assisted by several sub-committees have put together this 700+ page document after labouring over it for more than six months.

Draft DPP 2020,  defence minister, ministry of defence, Manufacture in India, make in india category, draft DPP 2020A new category called ‘Buy (Global – Manufacture in India)’ has been proposed, ostensibly to promote Make-In-India initiative of the government which has not had much of a success in the defence sector so far.

By Amit Cowshish

The much-awaited draft of the defence procurement procedure (DPP) 2020 was released by the defence minister in the capital on 20 March 2020. It aims at promoting indigenous manufacturing and reducing the painfully long time it presently takes to complete the procurement cycle.

A high-level committee headed by the director-general (acquisition) and assisted by several sub-committees have put together this 700+ page document after labouring over it for more than six months. Though the industry representatives were associated with the deliberations of the committee, the ministry of defence (MoD) has sought comments, suggestions and recommendations on the draft by 17 April 2020. It is an opportunity for all the interested parties to pitch in and help MoD in promulgating policies and procedures which serve the purpose for which these are made.

What sets the draft DPP 2020 apart from its predecessors are several new concepts and special procedures that have been included in it. The most innovative of them all is the provision for leasing of equipment from the Indian and global suppliers. This will save capital expenditure on outright purchase and save the trouble of having to dispose of the asset after it completes its useful life.

New chapters have been added, and the existing provisions amplified, prescribing or streamlining the procedure for execution of software-based projects, performance-based logistics, life cycle support, comprehensive maintenance contract, field evaluation trials, involvement of start-ups and innovators in the ‘Make’ projects, promotion of more extensive use of artificial intelligence and locally developed special materials, and many other activities.

Perhaps for the first time ever, the contracts will acknowledge the intellectual property rights of the seller over the equipment being supplied to the MoD. This should address a long-standing demand, especially of foreign companies, though this concession is sought to be balanced by the standard provision in the contracts that would allow the MoD to indigenise assemblies and sub-assemblies of the equipment.

Talking about indigenisation, while the method of calculating the indigenous content has been simplified to some extent and, therefore, should be welcomed by the industry, the move to increase the requirement of indigenous content in the equipment procured across practically all the categories to a minimum of 50 per cent is a bit intriguing.It may well turn out to be a difficult target to achieve.

A new category called ‘Buy (Global – Manufacture in India)’ has been proposed, ostensibly to promote Make-In-India initiative of the government which has not had much of a success in the defence sector so far. This takes the number of procurement categories from two, when the first DPP was promulgated in 2002, to six. These are in addition to the ‘Make’ category with its three sub-categories and another category meant to promote innovation, not to forget the strategic partnership model introduced in 2017 which remains unchanged in the draft DPP 2020.
This is a needless complication, as many of these categories overlap and have similar defining attributes, as in the case of the ‘Buy (Indian Designed, Developed and Manufactured) category introduced in 2016which overlaps with the ‘Buy (Indian)’ category.

The proposed category refers to outright purchase of equipment from foreign vendors with a minimum of 50 per cent indigenous content which can be achieved by them by manufacturing either the entire equipment or its spares/assemblies/sub-assemblies maintenance, or by repairing, maintaining and overhauling the equipment, through its subsidiary in India.

This objective could well be achieved through the existing ‘Buy and Make’ category by just stipulating that the foreign vendors’ subsidiaries will also be eligible to function as the Indian production agencies. By the way, foreign direct investment is presently allowed through the automatic route only up to 49 per cent. If the foreign vendor is to be allowed to execute contracts under the proposed category through its subsidiary, the policy will have to be modified to permit investment beyond 49 per cent through the automatic route.

Alternatively, norms applicable to investment beyond that limit – presently permissible only through government approval – will have to be eased to ensure that the foreign vendors do not get bogged down in the complex process of obtaining the government approval.

For more than a decade, offsets have been an important component of procurement from foreign vendors. The policy has had limited success so far despite several changes made over the years. The proposed move to incentivise discharge of offsets through higher multipliers in areas like defence industrial corridors and transfer of technology to defence public sector undertakings and ordnance factories is a calculated gamble.

Many roadblocks come up while a contract is being executed. This could be because of some inherent flaw in the contract, interpretation of a clause, or because of unforeseen circumstances. Draft DPP 2020 contains a full chapter on post-contract management to deal with such problems.

This should go a long way in ensuring smooth execution of contracts, but ultimately its success would depend on the speed and quality of decision-making which have been the bane of defence acquisitions in the past.

(The author is former Financial Advisor (Acquisition), Ministry of Defence. Views expressed are personal.)

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