procurement procedure in nutshell
 
 

DEFENCE PROCUREMENT PROCEDURE 2016: SALIENT ISSUES

Introduction
1.    The Ministry of Defence (MoD) has recently released the revised Defence Procurement Procedure (DPP) on 28 March 2016. The document came into effect from 01 April 2016 and is applicable to all procurement since then. However a key chapter on strategic partnership and all the relevant annexures, appendices and schedules are still a work in progress and are expected to be released later as part of the comprehensive DPP-2016. Nonetheless, the revised document has set the tone to boost the ‘Make in India’ initiative in the defence sector, and to speed up the procurement process. The DPP-2016, running into 100 pages, envisages an array of features that include a preamble to the document which articulates the peculiar nature of defence acquisition and the imperatives of self-reliance in defence production, a brand new procurement category, favouring purchase of locally designed, developed and manufactured products, higher yet flexible indigenisation content requirement in the existing ‘Buy (Indian)’ and ‘Buy and Make (Indian)’ procurement categories, a comprehensively revamped ‘Make’ procedure; an institutionalised set of steps for processing the request for information (RFI) and certain measures to deal with procurement in single-vendor situations. The DPP comprises of the preamble and seven chapters as listed below:-

(a)    Preamble to the Defence Procurement Procedure
(b)    Chapter I –     Operational Context, Acquisition Categories and Acquisition                 Plans
(c)    Chapter II –     Procurement Procedure for categories under ‘Buy’, and ‘Buy                 and Make’ schemes
(d)    Chapter III –     Procedure for ‘Make’ Category of Acquisition
(e)    Chapter IV –     Procedure for Defence Ship Building
(f)    Chapter V –     Fast Track Procedure
(g)    Chapter VI –    Standard Contract Document
(h)    Chapter VII –    Strategic Partners and Partnerships (to be notified
separately)


Salient Aspects

2.    ‘Buy (Indian-IDDM)’ Category. To provide a greater thrust to the ‘Make in India’ initiative in defence production, DPP-2016 has introduced a new procurement category, Buy (Indian–Indigenously Designed, Developed and Manufactured), or ‘Buy (Indian – IDDM)’. In terms of prioritisation, the new category, which would also be used for procurement of all locally designed and developed items under the revamped ‘Make’ procedures, is placed above the existing ‘Buy (Indian)’ category which, in turn, is placed above the other categories, namely the ‘Buy and Make (Indian)’, ‘Buy and Make’ and ‘Buy (Global)’, in that order. Under the new category, indigenously designed equipment with 40 per cent indigenous content (IC), or equipment not necessarily designed in-house but having a 60 per cent IC, is intended for procurement from the local industry. The intent is clearly to promote in-house design capacity and higher localisation, two critical aspects, which, if implemented in the right spirit, could deepen the role of domestic industry, especially the private sector, in defence production. It is, however, to be noted that the responsibility to prove an indigenous design rests with the industry, while the final say would be that of the government. To examine the industry’s claim, DPP-2016 provides for a committee system comprising scientists from the Defence Research and Development Organisation (DRDO) and members of the concerned Service Headquarters (SHQs). The guidelines, on the basis of which the committee would verify the claims, would be promulgated later by the MoD.

3.    Higher yet Flexible Indigenous Content Requirement. With a clear intention to boost the local content in procurement and drive the larger ‘Make in India’ initiative, the revised DPP has enhanced the indigenous content requirement under the existing ‘Buy (Indian)’ category from the earlier 30 per cent to 40 per cent. However, while setting the higher target, the DPP has not lost the sight of the unique procurement cases which require a different indigenisation requirement. For such cases, DPP-2016 provides flexibility to the procurement authorities to stipulate either higher or lower indigenisation content, depending on the merits of the projects. 

4.    New Make Chapter.    Effecting a crucial change, the new DPP has divided the ‘Make’ projects into two categories – Make-I (Government Funded) and Make-II (Industry Funded) – besides giving a decisive say to the Micro, Small and Medium Enterprises (MSMEs), which had long craved government attention for their role in defence indigenisation efforts. As the names suggest, for the category of Make-I projects, it is the government that would take the lead in funding prototype development by the industry; whereas for the latter category, which is largely confined to import substitution, it is the industry that would bear the full cost of development. For Make-I (Government Funded) projects, the new procedure envisages a higher government funding commitment of up to 90 per cent (in comparison to up to 80 per cent under the earlier ‘Make’ procedures) for prototype development, with a further provision that 20 per cent of the total developmental cost would be paid in advance. In order to bring in a degree of accountability and to follow best commercial practices, the new procedure provides for the mandatory issuance of the request for proposal (RFP) within two years’ of successful development, failing which the balance 10 per cent funded by the industry would be reimbursed to it.

5.    For the MSMEs, the new procedure provides them the first right to undertake prototype development up to Rs. 10 crore under the government-funded ‘Make’ projects (up to Rs. 3.0 crore in case of Make (Industry Funded)). In other words, only when MSMEs are not interested in taking up small valued projects, it can be opened up for participation by the bigger industry players. In a move to clarify as to who would be eligible for the ‘Make’ programme, DPP-2016 has restricted the participation in such a programme to “only Indian vendors including Association of Persons (AoP)” to be detailed in an appendix that would be notified separately as part of the complete DPP-2016. This would ensure that decision-making and the crucial intellectual property rights (IPR) of the ‘Make’ designs would stay in the hands of the resident Indians. The eligibility criteria would include a minimum five years of operational experience (three years for MSMEs) besides a credit rating of B++ issued by reputed credit rating agencies.

6.    DPP-2016 makes the SHQs own and be responsible for, ‘Make’ projects. SHQs would be now be entrusted with the task of identifying potential ‘Make’ projects and undertaking feasibility studies for each identified project in consultation with other stakeholders. Under the new ‘Make’ procedures, the SHQs, including the Coast Guard, are also required to establish a permanent Make-Project Management Unit (Make-PMU) comprising a two star serving officer as the head and officers drawn from various ranks/branches/specialisation as other members. In a move to ensure continuity in decision-making, the head of the Make-PMU is required to have a minimum tenure of three years, whereas other officials are required to have a longer tenure. The Head and the members are also required to serve as key members in the important multidisciplinary Integrated Project Management Team (IPMT), which has the key responsibilities of preparing the Project Definition Document (PDD), issuing the Expression of Interest (EoI), short listing the developmental agencies, and monitoring the progress of prototype development.

7.    RFI Institutionalised as a Process.  DPP-2016 has institutionalised the request for information (RFI) process, which was not so under the earlier DPPs. Although the new measure has increased the number of procurement steps involved in ‘Buy’ and ‘Buy and Make’ schemes by one more to 12, it has brought about clarity in the vital step of procurement, which has major implications on the source of procurement, indigenisation, the degree of competition, and more importantly, the timeliness of procurement. Besides articulating the objectives and format of the RFI process, it also stipulates the specific inputs that the procurement authorities would seek through the institutionalised step. In addition, the RFI is now required to be formulated by the concerned SHQ in consultation with other relevant stakeholders; including DRDO, DDP and HQ IDS (earlier the SHQs were only responsible for preparing the RFI). This would ensure that collegiate views on a particular proposal would be taken at the very beginning of the procurement stage, rather than leaving these to later stages and thus causing unnecessary delays.

8.    Characteristics of SQR.     All capital acquisitions are based on Services Qualitative Requirements (SQR), which need to lay down the fundamental user requirements in a comprehensive manner. The DPP-2016 has divided SQRs into two parts Essential Parameters (EP) A & B. As per the new provisions, the EP-A would capture some of features of the “contemporary equipment available in the market, and form core of Services Qualitative Requirements (SQRs)” for the purpose of testing and validation at the crucial Field Evaluation Trial (FET) stage. The EP-B, on the other hand, may not be available at the time of FET (hence won’t be tested/validated at that stage), but can be developed/achieved by the vendor within a specified time frame as stipulated in the contract. To ensure that a vendor does not renege from its commitment of meeting the EP-B, it is required to provide an additional bank guarantee of up to 10 per cent of the contract value. It is important to note that EPB, whose inclusion in the RFP is necessarily to be approved by the DAC, must be met prior to the commencement of delivery of the contracted item. It is also important to note that the incorporation of the EP-B will not be part of the RFP if at least two vendors claim to possess the same at the RFI stage.

9.    Introduction of L1-T1 Methodology for Award of Contracts. In a clear departure from the past, DPP-2016 has, for the first time, introduced what is widely known as the L1-T1 methodology for selecting the vendor under the ‘Buy’ and ‘Buy and Make’ schemes. The new methodology, in essence, means that the final bidder would not necessarily be selected on the basis of lowest price quoted by the technically-compliant vendors (the so-called L1methodology), but by a combination of price and superior technology offered by qualified vendors. The new methodology is intended to buy equipment with Enhanced Performance Parameters (EPP) – a newly introduced features – which are a notch higher than the Essential Parameters required to be mandatorily met by all the suppliers participating in MoD tenders, in order to stay in competition. The new methodology is also intended to provide an additional incentive to equipment suppliers who would otherwise be reluctant to participate in the bidding process because their products are much superior and, therefore, expensive and uncompetitive vis-à-vis the ones fielded by rival bidders with no EPP.

10.    As per the DPP-2016 provisions, for the purpose of evaluation of the final bidder, vendors offering approved EPP would get an additional credit score of maximum 10 per cent, with each parameter not exceeding a score of three per cent. In other words, the commercial quote of a vendor offering EPP would be suitably deflated by a credit factor ranging between = 0.9 and < 1.0, to arrive at the bid selection. As an illustration, if a vendor quotes USD 1.0 billion for a product with EPPs attracting a maximum 10 per cent credit score (or a credit factor of 0.9), the commercial quote for the purpose of the L1 evaluation would be USD 900 million (1.0 billion x 0.9). The vendor would, however, get USD 1.0 billion if it wins the contract.

11.    Provision for ‘Single OEM, Multiple Bids’ and ‘Multiple Bids by Single Indian Vendor’.    Accepting the uniqueness of defence procurement, DPP-2016 has incorporated two provisions – ‘single OEM, multiple bids’ and ‘multiple bids by single Indian vendor’ – in which although the bids are single-vendor in nature they would not be retracted because of lack of competition. The first case is likely to arise in ‘Buy and Make (Indian)’ category in which a single foreign original equipment manufacturer (OEM) offers the same product through multiple bids in collaboration with a number of Indian companies. In such a situation, the new provision allows the authorities to continue with the procurement process, provided that the Defence Acquisition Council (DAC) decides that changes in the RFP condition will not invite participation of any more foreign vendors.

12.    The second case is likely to arise under the ‘Buy and Make’ procurement category in which one Indian company submits multiple bids in collaboration with a number of foreign vendors. Such a case is now acceptable under the new DPP. The main argument for accepting such a case as not a single vendor situation is that the technical and commercial arrangement of one foreign vendor would vary from that of others.

13.    Single Vendor Situation.    In a major departure from the earlier DPPs, DPP-2016 has allowed the procurement process to continue in certain situations where only one bid is received in response to an RFP. The continuation of the process is, however, subject to the approval of the DAC, which must certify that there is no scope for change of the RFP conditions.

14.    Reduced Validity and Sanctity of AoN.   In a move to cut down the procurement time frame under the ‘Buy’ and ‘Buy and Make’ schemes, the new DPP makes two subtle changes, one by reducing the validity of the AoN from the earlier one year to six months, and the other by making the validity period sacrosanct. The reduced validity of AoN would mean that the RFP has to be issued within six months (from the date sanction of AoN), failing which the SHQ would “re-validate the case and seek fresh AoN with due justification for not processing the case in time.” Making the AON validity sacrosanct, the new provision makes it mandatory for the SHQs to re-issue any retracted RFP within the original validity of AoN. Earlier, the validity of AoN for the re-tracked RFP was increased by one year from the date of retraction, causing unpredictable delay and lack of accountability in the procurement process.

15.    Definition of Indian Vendor.    Providing clarity as to who is an Indian vendor, DPP-2016 defines the same as an Indian entity (which could include incorporation, ownership model, and proprietorship, among others) that is established under the Companies Act or any other applicable regulations. The definition does not, however, mean that all Indian vendors are eligible to participate in all types of defence tenders. Bringing further definitional clarity, the DPP divides Indian vendors into two categories: one for defence products requiring industrial license (IL) and the other for not requiring IL. (The Department of Industrial Policy and Promotion (DIPP) has already announced a list of defence products that are subject to IL). What this division means is that companies in the first category could participate in almost all defence tenders (subject to certain restrictions under the ‘Make’ procedure), whereas companies falling under the second category can participate in tenders involving non licensable items only.

16.    Hike in Offset Threshold Limit.    DPP-2016 has raised the offset threshold limit to Rs 2,000 crore (approximately USD 305 million) from Rs 300 crore.

Other Provisions

17.    In addition to the above mentioned provisions, DPP-2016 also includes the following new provisions:-

(a)    Provision for Equipment Policy Committee (SEPC) to hire experts including from academia and industry for the purpose of “review, rationalisation and finalisation of SQRs.” (The list of experts is to be maintained by HQ IDS and the SHQs).
(b)    No IC requirement from Indian companies in a ‘Buy (Global)’ contract if offset is waived off. This is intended to provide a level-playing field between foreign OEMs and Indian companies.
(c)    Provision for change of name of vendor in any stage between RFI and execution of contract to enable un-hindered progress in procurement.
(d)    In certain cases specifically stipulated in the RFP, the cost of low-value items is to be reimbursed to vendors qualified in the FET stage. This is intended to incentivise wider participation, especially by the smaller companies which may have reservations due to the high cost of participation in extensive field trials.
(e)    The cost of Buyer Nominated Equipment (BNE) procured from the Ordnance Factory Board (the departmental production agency under the DDP) would not be taken into consideration for the purpose of selection of L1 vendor. This is intended to insulate the L1 vendors from an arbitrary hike in price by the OFB post submission of the commercial bid.
(f)    In certain ‘Buy and Make’ programmes, in which foreign OEMs are allowed to select their Indian Production Agency (PA), the RFP would stipulate the eligibility criteria for selection.
(g)     The scope of Fast Track Procedures (FTP) is expanded to apply to items “where undue/unforeseen delay, due to reasons beyond the control of acquisition set up, seem to be adversely impacting the capacity and preparedness of the regular and Special Forces.