New DPP announcement further delayed as chorus for level-playing field grows

By Ashok Dixit

New Delhi, Dec.25 (ANI): Plans for announcing the new Defence Procurement Policy (DPP) have been postponed till January 2016, reportedly because the government, and more specifically the Ministry of Defence, wants some more time to study the recommendations of the Dhirender Singh Committee and also to assess both its short and long-term implications.

According to sources, the recommendations of the Dhirender Singh Committee and the follow-up action being undertaken by a task force headed by Dr. V.K. Aatre, former scientific adviser to Defence Minister, is being carefully reviewed in the wake of questions being raised about the government’s controversial move to limit the selection of strategic partners for defence projects to only top notch Indian companies.

As of now, it is being reported that the task force led by Dr. Aatre may be reconsidering and reworking some of the recommendations to rule out complaints of bias, and its report is expected on or around January 15. The new DPP, therefore, won’t be out before the end of January.

The announcement of a new DPP was first made in May this year. The procurement policy sets norms for capital procurement of defence weapons and equipments for the short as well as the long term.

The Dr. Aatre-led task force has been entrusted with laying down rules for the selection of strategic partners in the private sector in long-term defence projects and was constituted in September.

It was set up in line with the recommendations on DPP 2015 made by the Dhirendra Singh Committee.

The committee had recommended the creation of a strategic partnership model under the ‘Make in India’ scheme to manufacture aircrafts, helicopters, warships, submarines and missiles among others. The defence ministry is also reportedly keen on having a detailed agreement with every private defence firm laying down specific parameters to avoid future ambiguity.

Last week, , while launching a Make in India portal of the Department of Defence Production, Defence Minister Manohar Parrikar said the DPP is in its final stages and will be forwarded to the Defence Acquisition Council (DAC) for approval.

He revealed that the ministry is targeting raising indigenized defence procurement from 30 percent currently to 40 percent in the coming fiscal, and to 70 per cent in five years.

In the last three years, the average annual value of total procurement of defence items has been an estimated Rs. 85,020 crores and domestic firms have supplied 62 per cent of these items.

The basic expenditure tenet of a government is to offer fair price through fair competition. Private defence manufacturers want a level-playing field, but it seems giving firm monopolistic commitments to select conglomerates or original equipment manufacturers (OEMs) through a sophisticated nomination process is in the offing.

Small manufacturers further claim that the Dr. Aatre-led task forcehas only amplified the Dhirender Singh Committee’s recommendations by suggesting methodology for implementation.

The proposed selection process has seven fundamental parameters and identified six areas for strategic partnership, namely aircraft, warships, submarines, armoured fighting vehicles, complex weapons that rely on guidance system, C4ISTR and critical materials.

Dr. Aatre’s task force has reportedly further divided these six areas into 15 sub-segments; with each sub-segment having one strategic partner. It says an evaluation committee and an on-site committee will evaluate eligibility of private companies. Evaluation will be 50 per cent on technical criteria, 30 per cent on financial criteria and 20 per cent on platform specific criteria.

The conclusion appears to be that only big companies with large capital bases can deliver on big contracts.

Most small defence manufacturers declared ineligible are saying the defence ministry is using the Dhirender Singh Committee and the Dr. Aatre -led task force’s recommendations to find alternatives to existing and established PSU model.

The financial criteria is the most contentious, as it recommends that foreign holding for listed companies should be less than five per cent, while unlisted companies have no foreign holding.

Listed companies should have annual assets worth at least Rs.750 crores and an annual turnover of Rs.4000 crores for three consecutive three years to qualify for a strategic partnership. Unlisted companies must have assets worth Rs. 250-500 crores and an annual turnover of Rs. 1000 crores for the same period.

The financial criterion, small players say, is biased and their demand is for the bidding process to be open.

Private firms, observers and experts have suggested the following six criteria for possible implementation:

. Financial Capability: Any type of quantitative restriction should be avoided. Let all companies compete and the existing bank guarantees/EMD requirements carry versus balance sheet provision.

. Serious Contender: That the company is an ongoing company and has provided a funding model for a given project, should be adequate to consider it as a serious contender for strategic partnerships.

. Financial Prudence: Since most of the projects are Greenfield projects and companies are without any previous background, putting credit ratings as one of the criterion has no meaning, as these companies would have no track record of any business done in those specific areas.

.Technical Capability: A company should be assessed in terms of their global reach, networking and ability to form close associations with large global companies. No company in India today has domain specific capability. Probably, only small industry, working in tandem with DPSU’ OFB’s and the DRDO, are the only ones with limited domain knowledge. By this definition and parameter alone, most companies get eliminated.

. R & D Capability: Aspirant companies must be able to demonstrate the fund that they are going to allocate for creation of infrastructure once the contract is awarded to them. They must also be in a position to deposit EMD or Security as initial guarantee and subsequently demonstrate their capability and the financial strength of their OEM partner, which in turn will form the basis final selection. The said company should have had a past record of having invested in creation of new technologies and creation of their own IPR’s.

. Executive Track Record: The Company should have executives with proven track records to be eligible.

Observers say elimination on the basis of size holds no water and believe smaller companies can create a consortium or a credible joint venture to execute a procurement project cost-effectively.

They say listing subjective standards like competence in system engineering; supply chain management to manage life cycle support and looking for assured revenue streams can easily be addressed by any small or medium industry. Imagining that these competencies are non-existent in small companies is a fallacy that will invite debate, criticism, and be declared anti-SME, a key focus area of the government.

Wisdom suggests transparent open competition based on relevant parameters. The winner can be called a “strategic partner” and be assured of a return on investment.

The two advantages are (a) Fair price determination in any contracts/procurement on the basis of competition. By having evolved strategic partners, decision makers will not need to make adverse comments or go for judicial intervention, and (b) Most segments have over two OEM’s, and competing and completing in all cases is possible.

. The strategic partner selection should be based on ability to bring in technology not available domestically. This should carry the most weight (50 percent).

. The second enabling criterion should be past record in forging relationships with SME’s having core competencies in the field for which they are applying and ability to absorb or create relevant leading edge technologies and their own IPRs. (25 percent)

. Ability to provide adequate financial guarantees/warranties, EMD, security deposits and authentic funding program etc. (20 percent)

. Executive cadre should have experience of and competence in their chosen segment (five percent)

The proposed DPP-2015 must avoid scandals, legal challenges regarding violation of monopolistic practices, or cartelization in any direct and indirect form. The selection of strategic partners must be done only on competitive bids.

Simultaneously, all technology deals should be only done on a G2G basis. Rest should be open and competitive to industry. The proposed DPP-2015 should not be decided by sector or on basis of multiple overlaps into other defence industry sectors. (ANI)

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