'Make in India' gets a critical push in Defence

- Varun Sharma   12-01-2016


Parts of the new Defence Procurement Procedure (DPP) have been finalised in a council meeting on Monday. Defence Minister Manohar Parrikar has stressed upon the focus on a higher level of indigenization of systems, rather than depending on foreign imports.

DPP was drafted in 1992, comprehensively reviewed in 2002, and revised in 2003, 2005, 2006, 2008, 2011 and 2013. The latest revision bans the roles of middle agents and has a revision of the blacklisting policy of vendors.

The new policy document provides for an increase in the contract threshold from Rs 300 crore to Rs 2,000 crore for offsets. It has also tweaked the L1 (lowest bidder) policy. This entails that all deals, which are over Rs 2,000 crore will have an offset obligation.

Earlier, the DPP mandates called for any contract above Rs 300 crore to fall under the ‘Buy and Make’ category. Offsets corresponding to 30 per cent of the total value of the contract had to be compulsorily invested in the Indian industry. Considering the Indian defence industry is still in a nascent state, the absorption of technology is difficult and has not yielded any significant results and has delayed procurement over the past decade.

"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.

It will take another two months before the DPP 2016 gets notified, allowing up to 90 per cent of the development funds to private companies in order to push innovation and research. 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. The aim is to increase private sector participation and a speedy procurement process.

Some changes to the DPP are yet to be finalised, the defence minister said at a briefing following the council meeting. Chapters for shipbuilding remain pending for approval and the chapter on ‘strategic partners’ and blacklisting is also missing. The latter would lay the guidelines that identify private sector partners for key strategic manufacturing.

The improved DPP hopes to give a boost to the governments ‘Make in India’ initiative; giving a greater role to the private sector manufacturers, by promoting small and medium scale industries.

A new category, Indigenously Designed, Developed and Manufactured (IDDM) has been created. Any equipment with at least 40 per cent of indigenous content will get a priority for tenders over foreign manufacturers.

The L1 lowest bidder policy has also been modified, and now has a 10 per cent breathing room given to the L2 bidder (second lowest) if its equipment performance justifies the added cost.

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.