Atmanirbhar Bharat in Defence: The new DAP to focus on making India a global manufacturing hub : 29-09-2020

To turn India into a global manufacturing hub of military platforms, the defence minister Rajnath Singh has officially released the new Defence Acquisition Procedure (DAP). The new policy replaces Defence Procurement Procedure (DPP) 2016. In the new DAP there are steps outlined which are expected to help in reducing not only the timelines for procurement of defence equipment, but also talks about the easy mechanism to buy essential items through Capital Budget for the three services.

“Indian Industry is hopeful that DAP 2020 will unleash the huge capacity and potential of Indian industry to provide a boost to Make in India for ‘Atamnirbhar Bharat’,” opine experts.

According to an official statement issued by the Ministry of Defence on Monday (Sept 28,2020), “The Offset guidelines under the new DAP have been revised and preference will be given to defence majors who would offer to manufacture products in India, rather than meeting the obligations through other routes.”

There are new chapters which are on the acquisition of systems developed by the state-run defence entities including DRDO, DPSUs, information and communication technologies, and post-contract management.

The defence minister while releasing the report said, “There are provisions which have been included to encourage foreign direct investment (FDI) to establish manufacturing facilities which will be both for import substitution and exports, while protecting the interests of the Indian domestic industry.”

The new policy has a provision for single-stage accord of AoN (Acceptance of Necessity) in all cases up to Rs 500 crore. This has been done in an effort to cut delays in approval of acquisition proposals.

It also talks about new measures to reform pre-induction testing of defence equipment.

What is new & has it incorporated the feedback of the industry?

Industry sources who wished to remain anonymous say, `No.’ The document has revised the existing acquisition categories, increased the requirement of indigenous content (IC) by 10% across various categories to support Make in India created new categories ‘Buy (Global – Make in India)’ and ‘Make –III’ and also incorporated a new concept of Leasing and some new chapters.

Leasing has been introduced as a new category for acquisition to substitute huge initial capital outlays with periodical rental payments

According to industry sources, “In the context of an increase in the limit of FDI from 49% to 74% under the automatic route, Indian industry had recommended that acquisition categories viz. ‘Buy(Indian-IDDM)’, ‘Buy (Indian)’, ‘Buy & Make (Indian)’ and ‘Make (Make-1, II & III)’ categories and the projects being pursued under SP model must be reserved for the domestic Indian industry owned and controlled by resident Indians.”

“However, as per the detailed Press Release issued by MoD, only the categories of Buy(Indian-IDDM), Make I, Make II, Production Agency in Design &Development, OFB/DPSU and SP model will be exclusively reserved for Indian Vendors meeting the criteria of Ownership and Control by resident Indian Citizens with FDI not more than 49%. Hence, JVs created by foreign OEMs in India with more than 49% FDI in the defence sector will be eligible to participate in RFPs issued under ‘Buy(Indian)’ and “Buy & Make (Indian) categories, besides the new category of Buy (Global- Manufacture in India) being created in DAP-2020,” the industry sources added.

The Strategic Partnership (SP) model notified under DPP-2016 on May 31, 2017, is based on the concept of creation of additional capacity in the private sector over and above the production capacity existing in the public sector, thereby enabling new System Integrators to emerge in the private sector.

“Private industry had strongly recommended against allowing DPSUs/OFB to compete for the projects being pursued under SP Policy either as OEM or as SP and such a fundamental policy change in the SP model will undermine the Government’s credibility. DPSUs have long been strategic partners of the government without any encouraging results to cut down defence imports,” they say.

For Make I projects, Government Funding has been reduced from 90% to up to 70% with a cap of Rs 250 crore/DA and selection of DAs based on bidding criteria. Initially, the government funding for Make 1 projects was 80% of the development cost of the prototype and in DPP-2016 it was enhanced to 90%. Limiting government funding up to 70% of the cost of prototype development with a cap of maximum Rs.250 crores per DA would put an extra financial burden on the industry and may seriously hamper the ongoing efforts towards the creation of indigenous capability for “Make in India” programs in the defence sector.

What had the Industry suggested for Offsets?

Indian industry had made the following recommendations to MoD regarding defence offset policy: –

Offsets should continue to be applicable to capital acquisitions made under IGA and FMS route, as hitherto fore, given the fact that between 2001 and 2018, about 40% of the total capital procurement was thru’ IGAs, including FMS programme of the USG. Therefore, it is not in the interest of Indian industry if such cases are excluded from the purview of Offset policy.

  • Offset banking which was introduced in Banking in DPP-2008 effective from 1st Sept 2008 should continue to be part of the Offset policy for faster development of an ecosystem in India.
  •  In terms of the Draft Production & Export Promotion Policy released recently by the MoD on 3 August 2020 ‘Investments would be encouraged to provide a specific focus on certain identified segments and technological areas. Investments in aviation sector which helps in co-development and strengthening defence ecosystem would be facilitated in association with the Ministry of Civil Aviation’.

“Therefore, the synergistic sectors – civil aerospace and internal security should be part of Offsets guidelines as there should not be any contradiction in the two policies of MoD, i.e. Offset Policy and Draft Production and Export Promotion Policy (DPEPP)-2020,” they opine.

Indian industry had also strongly recommended that ‘Space’ and ‘Cyber Security’ should also, be part of the Defence Offset policy as this would provide increased business opportunities to Indian industry thru’ the offset route and also facilitate in achieving the production and export targets by 2025 set out in the DPEPP-2020.

What is the view of a former Financial Advisor (Acquisition) in MoD?

Amit Cowshish, a former Financial Advisor (Acquisition), Ministry of Defence, says, “The new procedure, which will regulate all capital acquisitions for the armed forces and the Indian Coast Guard, aims at empowering the Indian domestic industry with the ultimate objective of turning India into a global manufacturing hub – in no way a new objective.”

Towards this end, several procurements categories, such as Buy (Indian Designed, Developed and Manufactured), Make I & II, and the Strategic Partnership Model have been reserved for Indian entities which are owned and controlled by the Indian citizens.

“There is nothing new about preference being given to procurement from the Indian vendors. This has been the guiding principle of capital procurements since 2013. If anything, increase in the extent of the indigenous content requirement by 10 percentage points under certain procurement categories may make things more difficult for the Indian vendors,” Amit Cowshish, opines.

“New provisions have been included to promote indigenisation of imported spares, use of indigenous military material and software, innovation, acquisition of systems designed and developed by the Defence Research & Development Organisation, leasing as a means of operating assets without owning them, and formulation of realistic qualitative requirements (QRs),” Amit Cowshish observes.

In conclusion, he says, “Some recent decisions, such as an embargo on the import of 101 items and raise in the cap on foreign direct investment has been included in DAP 2020 along with a revised offset policy that focuses on the manufacture of complete systems rather than small parts and components.

Changes have been made in the standard clauses of the contract to enable progressive indigenisation of assemblies and sub-assemblies and a simplified procedure has been introduced to enable the services to procure essential items in a time-bound manner.

It remains to be seen if these provisions will succeed in delivering the intended outcomes. Much will depend on activation of the Project Management Unit (PMU) which the DAP 2020 promises to set up to support contract management.”

Source : Economic Times

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