Of Matters Military. Mrinal Suman
Thus, Indian value addition would remain limited to low-tech manufacture and associated services.
Conclusion
Whereas amplification of certain provisions to remove ambiguities was a welcome step, the euphoria created by the media was totally misplaced. One was reminded of the excitement generated in 2006 when ‘Make (Hi Tech)’ policy was introduced to promote indigenous development of projects based on proven or matured technologies. It had been a total non-starter. Not a single project had got initiated under that category during the previous three years. It was feared that ‘Buy & Make (Indian)’ category would also meet the same fate as the procedure spelt out appeared to be highly convoluted and imprecise.
Defence Procurement Procedure – 2011
The much awaited Defence Procurement Procedure – 2011 (DPP-2011) was formally released on 13 January 2011. The new procedure aimed at ‘expanding India’s defence industrial base, encourage indigenous defence production and reduce defence imports’. Salient changes made in the procedure were as given below.
(a) Shipbuilding
The chapter on shipbuilding was split into two sections. The first section contained guidelines for placing orders on a nominated public sector shipyard for ships, submarines and other crafts. The second section allowed private sector shipyards to participate in competitive bidding to bag orders. Although it was claimed that seminal policy changes had been incorporated in the ship building procedure to provide a level-playing field to the private sector, knowledgeable observers were sceptical about it. They feared that all major proposals would be categorised under the first section and the competitive section would get activated only after the public sector shipyards got fully loaded.
Industry associations had recommended that shipbuilding be kept under a single section, providing equal opportunities to the private sector shipyards to compete for orders, thereby harnessing their potential as well. However, with a view to provide protection to public sector shipyards; the Ministry of Defence (MoD) decided to reserve the right to award shipbuilding contracts by nomination. Private sector shipyards had reasons to be highly disappointed. They knew that they would have to wait indefinitely to get overflow of a few minor contracts.
(b) Offsets
Terming it as a major change, MoD announced inclusion of civil aerospace sector, internal security sector and training within the ambit of eligible products and services for the discharge of offset obligations. A comprehensive list of all such products and services was provided in the procedure. It was claimed that the changes would provide a wider range of offset opportunities to vendors participating in defence procurements.
At the face of it, it appeared to be a progressive step. However, a close look at the newly included products and services revealed an entirely different picture. As regards the internal security sector, all products and services were the same as needed by the armed forces; and the manufacturers were already eligible to be offset partners, and interestingly, almost all were in the public sector. Similarly, inclusion of civil aviation meant little, with HAL being the only major aircraft manufacturer in the country. Therefore, expansion of offset sectors was not meant to increase offset opportunities for foreign vendors but benefit the public sector as the newly added products were in their monopoly domain.
(c) Commercial Terms
Commercial terms offered to vendors were modified to simplify and streamline the procedure. Earlier, vendors had to submit two separate financial bonds for performance of contract and warranty of equipment. Each bond had to be for 5 percent of the total contract value. Now vendors were required to submit a single consolidated Performance-cum-Warranty Bond of 5 percent of the total contract value. This change was expected to help vendors save considerable financial overheads.
To rationalise evaluation of bids by discounted cash flow method, it was mandated that borrowing rate of 9 percent would be considered instead of 9.5 percent as stipulated earlier. In an effort to ensure that Indian industry was placed at par with the public sector entities, Exchange Rate Variation (ERV) clause was made applicable to all Indian vendors when in competition with their foreign counterparts under the ‘Buy Global’ category. ERV, however, remained available in cases categorised as ‘Buy (Indian)’ except for public sector units in ab-initio single vendor cases or when nominated as the production agency.
Interestingly, Integrity Pact Bank Guarantee (IPBG) replaced earnest money/security deposit. IPBG was to be Rs 1 crore in cases where the cost as estimated by the buyer was above Rs 100 crore and Rs 3 crore if above Rs 300 crore. The validity of IPBG would be 45 days post validity of commercial offer and for the successful bidder this would be extended unto the completion of contract. As there was little change in the content, nomenclature was perhaps changed to emphasise the importance of Integrity Pact.
In case of delay in supplies under the Fast Track Procedure, liquidated damages would be levied on the vendor @ 1.5 percent per week subject to maximum of 15 percent of value of delayed stores. Earlier the upper cap was at 10 percent. The penalty of getting blacklisted for non-performance was removed. It was a step in the right direction. Blacklisting of vendors had proved counter-productive. Financial penalty would prove to be a more effective deterrent against deliberate default.
(d) Transfer of Technology for Maintenance
Earlier, MoD was required to specify a list in RFP of public or private sector firms for receipt of technology for maintenance and it was for the foreign vendor to choose any one of them. It provided adequate flexibility to him to identify the most suitable entity after carrying out an appraisal of their inter-se capability to absorb concerned technology. In a major turnaround, MoD decided to empower Department of Defence Production (DDP) to nominate the recipient and the vendor had to abide by that. The recipient could be any Indian entity incorporated under the Companies Act 1956, including DPSU or entities like Ordnance Factories/Army Base Workshops/Naval Dockyards/Base Repair Depots.
This was a retrograde step, initiated with the sole intent of aiding the public sector. As all DPSUs and ordnance factories come under DDP, no private sector company had a chance of getting nominated even if it was better equipped to absorb technology.
(e) Other Issues
MoD introduced four other small but significant changes as well. One, Service HQ (SHQ) was now required to include likely timelines for the procurement to fructify in the proposal for procurement. Two, in cases where the original Request for Proposals (RFP) was issued within the stipulated period of two years from accord of Acceptance of Necessity (AoN) and later retracted for any reason, AoN would continue to remain valid as long as the original decision and categorisation remained unchanged. However, the subsequent RFP had to be issued within one year from the date of retraction of the original RFP.
Three, an additional grace period of 30 days could now be granted by respective SHQ to vendors to field their equipment for field trials. However, equal opportunity had to be provided to all vendors while granting such grace period. Finally, in the Fast Track Procedure, vendors were now required to be given 30-45 days instead of 30 days to respond to RFP.
Major Infirmities Left Unaddressed
Every review of a policy must aim at its reformation and refinement. It is generally a three-stage process. To start with, failure of the policy to meet envisaged objectives must be accepted honestly with due focus on deficiencies. Temptation to brush failings under the carpet must be resisted.Secondly, an in-depth diagnostic study should be carried out to identify impeding provisions. Finally, bold remedial initiatives must be initiated to cure the infirmities.
Unfortunately, MoD went through the review more as a routine ritual rather than a sincere exercise to perfect the system. Major weaknesses of the policy, though well known to the officials, continued to remain unaddressed.
(a) Multitude of Categories and Resultant Confusion