DPP and its Impact on Indian Aerospace & Defence Industry


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In this document I have tried to analyze the effect which DPP has done on Indian Aerospace & Defence Industry. I have also elaborated the major guidelines of DPP 2011 and its latest amendment. Finally I have given some recommendation which can be included in next DPP to encourage growth of A&D sector in India.

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DPP and its Impact on Indian Aerospace & Defence Industry

  2. 2. 1. DPP  2011:  A  Brief  Overview   2. Why  DPP  is  important  now  then  ever  for  Aerospace  Sector  In  India?   3. Basic  Terms  of  DPP  2011     4. Major  Guidelines  laid  by  DPP  2011  (Amended)   5. Impact  of  DPP  Guidelines  on  A&D  Industry  (till  2012)   6. Major  Amendments  made  in  DPP  2011  and  their  Impact  on  A&D  Industry  in  India   7. Forecasted  Impact  of  DPP  Guidelines  on  Aerospace  Industry  in  India   8. Recommendation     CONTENTS2  
  3. 3. 21 DPP  2011:  A  Brief  Overview   Budgetary resources. While achieving the same, it DPP   Stands   for   Defense   Procurement   will demonstrate the highest degree of probity and Procedure,  it  was  first  published  by  Ministry  of   public accountability, transparency in operations, Defense   (MOD)   India   in   2005.   Now   we   are   free competition and impartiality. In addition, the following   DPP   2011,   which   was   amended   in   goal of achieving self-reliance in defence equipment Aug  2012.     will be kept in mind.” As   India   is   one   of   the   worlds   fastest   growing   Aerospace   &   Defense   (A&D)   Market   and   it   is   Hence   DPP   becomes   an   important   tool   expected   that   during   next   decade   India   is   going   which   can   help  the   government  boost   A&D   to   ink   100   Billion   USD   of   A&D  deals.  All   global   Industry.  Though  initially  DPP  was  made  to   players   Boeing,   EADS,   Lockheed   Martin,   BAE   increase   the   transparency   &   remove   Systems,   Dessault   Systems,  Sukhoi   etc   all  want   corruption   from   the   defense   deals.   But   to  grab  a  pie  in  this  share.   with   time   it   becomes   a   more   of   economy     development  tool.  With  the  manufacturing   “The objective of this procedure is to ensure expeditious Industry   still   struggling,   the   DPP   has   the   procurement of the approved requirements of the Armed power  to  develop  A&D  Industry  which  can   Forces in terms of capabilities sought and time frame revive   the   Manufacturing   Sector   of   prescribed by optimally utilizing the allocated company.   . 3  
  4. 4. 21 Basic  Terms  of  DPP  2011       DPP  2011  is  an  exhaustive  document  and  I   “Buy  &  Make  (Indian)”  decision  would  mean   will  not  be  able  to  cover  all  the  aspects  of   purchase  from  an  Indian  vendor  including  an   it,  I  will  just  give  the  gist  and  highlight  the   Indian  company  forming  joint  venture  /   points,  which  are  important  for  industry.     establishing  production  arrangement  with   Before  jumping  to  guidelines  I  will  define   OEM  followed  by  licensed  production  /   the  basic  concepts  one  should  know.  Types   indigenous  manufacture  in  the  country.  ‘Buy  &   of  acquisition:   Make  (Indian)’  must  have  minimum  50  %     indigenous  content  on  cost  basis.   “Buy  Indian”  it  refers  only  to  products  or     services  made  by  Indian  companies.    Min   “Make”  include  high  technology  complex   30%  of  indigenous  content  and  the   systems  to  be  designed,  developed  and   company  should  be  incorporated  as  per   produced  indigenously.   Companies  Act  1956.   *All  types  of  upgrades  either  services  or  product     will  also  fall  in  either  of  previous  categories  of   “Buy  Global”  All  other  products  in  buy   acquisition.     segment  except  produced  by  Indian   Types  of  Acquisition  plans:   companies.   1. 15  years  Long  Term  Integrated  Perspective     Plan  (LTIPP).   “Buy  &  Make”  mean  purchase  from  a   2. 5  years  Services  Capital  Acquisition  Plan   foreign  vendor  followed  by  licensed   (SCAP).   production  /  indigenous  manufacture  in   3. Annual  Acquisition  Plan  (AAP).   the  country.   (Fig shown is replicated from Indian  Defence  Sector  by  KPMG  ) 4 [Type  text]  
  6. 6. The major guidelines are: 1. FDI   Manufacturing  of  defense  equipment  in  India  is  subject  to  a  26%  cap  on  FDI.       2. Timeline  for  receipt  of  responses  of  RFP   Time  of  receipt  of  responses   for   RFP  has  been  reduced  from   3   months  to   3   weeks  but   the  total  time  period  from  issue  of  RFP  to  remains  at  12  weeks.     3. Offset  Policy   a. These   provisions   will   apply   to   all   Capital   Acquisitions   categorized   as   ‘Buy   (Global)’,   i.e.   outright   purchase   from   foreign/Indian   vendor,   or   ‘Buy   and   Make   with   Transfer   of   Technology’,   i.e.   purchase   from   foreign   vendor   followed   by   Licensed  Production,  where  the  estimated  cost  of  the  acquisition  proposal  is  `  300   crore  or  more.   b. A  uniform  offset  of  30%  of  the  estimated  cost  of  the  acquisition  in  ‘Buy  (Global)’   category   acquisitions   and   30%   of   the   foreign   exchange   component   in   ‘Buy   and   Make’   category   acquisitions   will   be   the   minimum   required   value   of   the   offset.   Offset   obligations   may   be   discharged   only   with   reference   to   “eligible”   products   and  eligible  services.   c. The   DAC   may,   after   due   deliberation,   also   prescribe   varying   offset   percentages   above   30%   or   waive   off   the   requirement   for   offset   obligations   in   very   special   cases.   Such   directions   may   be   made   applicable  for   different   classes   of   cases   or   for   individual  cases  depending  upon  the  factors  involved  such  as  type  of  acquisition,   strategic   importance   of   the  acquisition  or  technology,  enhanced  ability  of  Indian   defence   industry   to   absorb   the   offset,   export   potential   generated,   etc.   However,   offset   will   not   be   applicable   in   ‘Option   Clause’   cases,   where   the   same   was   not   envisaged  in  the  original  contract.   d. These  provisions  will   also  apply   with  appropriate  modifications   to   ‘Buy’   and  ‘Buy   and   Make   with   TOT’   components   for   warship   construction   where   the   estimated   cost   of   individual  contracts   is   `  300   crore   or   more.   In  such   cases,  references  to  the   Acquisition  Wing   will   mean  the  DDP  or  shipyard    which  is  building  the  ship   and   procuring  the  system  or  sub-­‐systems.  6  
  7. 7. e. This  offset  condition  will  form  a  part  of  the  RFP  and,  subsequently,  of  the  contract.   Offset  conditions  as  specified  in  the  RFP  will  be  binding.   f. These   provisions   will   not   apply   to   procurements   made   under   Fast   Track   Procedure.   g. New   offset   guidelines   will   be   applicable   on   all   capital   acquisition   programs   regardless  of  them  being  governed  by  capital  acquisition  procedures  of  DPP  2005,   2006  or  2008.   h. Training  has  been  added  to  service  list  which  brings  all  training  services,  tools  &   simulators   under   offset   policy.  (Annexure   for  details  newly  inducted   products   &   services)     2. Defence Offset Obligations 1 For the purpose of defence purchases made under the DPP 2011, offset obligations shall be discharged directly by any combination of the following methods: a) Direct purchase of, or executing export orders for, eligible products and components manufactured by, or services provided by, Indian industries, i.e. Defence Public Sector Undertakings, the Ordnance Factory Board and private Indian industry. b) Direct foreign investment in Indian industries for industrial infrastructure for services, co-development, joint ventures and co-production of eligible products and components. c) For the purpose of discharge of offsets, ‘services’ will mean maintenance, overhaul, upgradation, life extension, engineering, design, testing of eligible products and related software or quality assurance services with reference to eligible products as indicated in Annexure VI and training. Training may include training services and training equipment (e.g. simulators) but exclude civil infrastructure. d) Direct foreign investment in Indian organisations engaged in R & D as certified by Defence Offset Facilitation Agency (DOFA). While certifying, DOFA shall not consider civil infrastructure and such technologies that are otherwise easily available in the open market. 7  
  8. 8. e) Foreign vendors could consider creation of offset programs in anticipation of future obligations. Offset credits so acquired can be banked and discharged against future contracts. Banked offset credits would not be transferable except between the main contractor and his sub-contractors within the same acquisition program. The main contractor would be required to submit a list of such sub-contractors at the time of signing the contract. Guidelines for banking of offsets are placed at Annexure-VII to the Appendix-D. 2. The   Indian   industries   or   organisations   concerned   are   here   after   referred   to   as   the   Indian   offset   partner.   The   Indian   offset   partner   shall,   besides   any   other   extant   regulations   in   force,   also   comply   with   the   guidelines/licensing   requirements   issued   by  the  Department  of  Industrial  Policy  and  Promotion.     3. The   offset   obligations   are   to   be   fulfilled   co-­‐terminus   with   the   period   of   the   main   contract.   4. All  offset  offers  which   satisfy  the  minimum  eligibility  conditions  will  be   placed  on  par   and  no            preference  will  be  given  for  any  extra  amount  offered.     5. Monitoring  Implementation  of  the  Offset  Contract     1.   The   vendor   will   submit   quarterly   reports   in   the   format   in   Annexure-­‐V   on       implementing   the   offset   contract   to   the   Acquisition   Manager   concerned.   The   Offset   Monitoring   Cell   in   the   MoD   will   assist   the   Acquisition   Manager   concerned   in   the   Acquisition   Wing   in   monitoring   the   implementation   of   the   offset   contract.   Where   necessary,   an   audit   by   a   nominated   official  or  agency   may   be  conducted   to  confirm   the  actual  status  of  implementation.     2.   A   vendor   may,   giving   reasons,   request  re-­‐phasing  of   the  offset   obligations   within   the  period   of   the  main  contract.  Director   General  (Acquisition)  may  allow  the  request   in  consultation  with  DOFA  if  the  reasons  are  considered  justified.   3. Any request on exceptional grounds for extension of the period of the offset contract beyond the period of the main contract will be examined by the Acquisition Wing in8  
  9. 9. 5.   Any   differences   or   disputes   will   be  settled   through   discussions.   The   decision   of  the   Acquisition   Wing   will   be   final.   The   provisions   in   the   main   contract   regarding   arbitration  will  apply  to  the  offset  contract  also.  4. Defence Offset Facilitation Agency1. The functions of ‘Defence Offset Facilitation Agency’ (DOFA) set up under the DDP as asingle window agency are to: (a) Facilitate implementation of the offsets policy. (b) Assist potential vendors in interfacing with the Indian industry. (c) Assist in vetting offset proposals technically. (d) Assist in monitoring the offset provisions. (e) Suggest improvements in the policy and procedures. (f) Interact with Headquarters Integrated Defence Staff and Service Headquarters. (g) Advise, in consultation with the Headquarters Integrated Defence staff, Services and Defence Research and Development Organisation, areas in which offsets will be preferred. (h) Promote exports of eligible products and services. 4. “Acceptance of Necessity” Stage (Amendment)For   cases   where   the   original   RFP   has   been   issued   within   2   years   from   accord   of   AON  (Acceptance  Of  Necessity)  &  later  retracted  the  RFP  for  any  reason  the  AON  will  continue  to  be  valid  ,  as  long  as  original  decision  &  categorization  remains  unchanged,  provident  subsequent  RFP  is  issued  within  the  date  of  retracement  of  RFP.       *  The  RFP  includes  the  requirement  of  field  evaluation  on  a  “No  Cost  No  Commitment”   (NCNC)   basis.   Compliance  of   offers  would  be  determined  only   on  the   parameters  spelt   out  in  the  RFP.   9  
  10. 10. Impact of DPP Guidelines on A&D Industry (till 2012)As on 14 May 2012 those 17 contracts worth If we study the requirements it is very difficult for4.27 Billion USD were signed as defence SMEs to enter into aerospace & defence market asoffsets which makes offset business to 1.28 the investment is huge. It is a high precision industryBillion USD in past 5 years. Out of this, 3.43 demanding the best material, best machinery andBillion USD were for IAF- related projects highly skilled labour. Govt should promote SMEsand 843 m USD for Naval projects. Nothing venturing into Aerospace & Defence sector. Now it’sfor the Army; may be some would come in the responsibility of large players and PSUs too tothe coming months. If we calculate as per concentrate on tier 1&2 supplier segment leave trieroffset policy @30% nearly 1.28 Billion USD 3 & 4 supplier segment for SMEs. Also a SEZ ishave been invested in Indian Aerospace & required for such a rapidly developed Industry. ThereDefense Industry. is a proposal in Bangalore for A&D SEZ but thingsThis mother of all Indian defence deals the are moving at their own slow pace.“Rafael Deal” is still included. That alone will (Fig shown is replicated from Indian  Defence  Sector  by   KPMG  )  boost about 3 Billion USD in IndianAerospace & Defence Industry. But one mayask that even after so much investment we arenot able to see the results, but unfortunatelymost of it is for Govt. Units, Large PrivateSector Units and DRDO /Other High-End R& D with almost none for micro and smallenterprises. SMEs are likely to figure towardsthe tail-end unless OEMs prefer them.Offsets-Cash/Kind-given to large units areslated to yield low returns for the IndianDefence Industry for various reasons. 10  
  11. 11. Forecasted Impact of DPP Guidelines on Aerospace Industry in India1.  Original  Equipment  Manufacturers  (OEMs)/vendors   The  implication  of  this  revised  TOT  guideline  will  be  to  are  to  be  provided  with  an  incentive  to  transfer   ensure  that  the  Indian  industry  would  b e  free  to  market  specified  technologies  to  the  Defense  Research  and   any  equipment  that  is  built  using  the  technology  Development  Organization  (DRDO).  The  revised  Policy   transferred  as  offsets.  permits  a  multiplier  of  up  to  3  on  technologies  that  are   The  new  Policy  states  that  where  multiple  sub-­‐vendors  transferred  to  the  DRDO,  which  will  make  offsets  a   incur  offset  liabilities,  the  sub-­‐vendors  can  individually  viable  route  for  obtaining  key  and  critical  required   discharge  their  own  liabilities,  but  the  main  vendor  shall  technologies.   be  responsible  for  ensuring  that  offsets  are  discharged  in  -­‐  This  has  not  been  very  successful  till  now.  No  major   full.  TOT’s  (Transfer  Of  Technologies)  have  been  done;  there   -­‐  This  protects  the  liability  of  local  manufacturers  to  have  been  a  few  JVs  but  mostly  among  PSUs  &  Global   limited  and  also  lays  stress  on  TOT.  leaders.  But  when  it  comes  to  TOT,  global  players  prefer   4.  Discharge  of  Offset  obligations  b y  a  foreign  vendor  has  companies  setting  up  their  own  R&D  and  they  are   been  extended  by  2  years.  The  earlier  Policy  mandated  getting  tax  benefits  from  it.  In  a  way  it  is  creating   that  offset  liabilities  must  be  discharged  alongside  the  employment  &  improving  skills  but  ultimately  the   main  contract.  manpower  it  is  not  helping  to  upgrade  technology   -­‐This  has  been  done  to  make  industry  more  attractive  for  required  by  Indian  Industry  for  the  place  India  want  to   Global  Players.  As  the  industry  was  expected  to  slow  achieve  in  the  Globe.     down  because  of  Euro-­‐zone  economic  crisis.  2.  Extending  the  validity  of  Banked  Offset  credits  from  2   5.  Finally,  the  revised  offset  guidelines  provide  an  to  7  years.   incentive  to  small  and  medium  enterprises  (SMEs)  by  -­‐This  helps  in  reducing  working  capital  for  the  company   allowing  foreign  vendors  to  select  micro,  small  and  and  hence  helps  the  industry.  But  this  has  only  received   medium  enterprises  (MSMEs)  as  their  offset  partners  by  a  lukewarm  response.     introducing  a  multiplier  of  1.5  for  all  offsets  discharged  3.   Recognizing   TOT   as   eligible   for   discharge   of   offset   through  MSMEs.  This  implies  that  by  sourcing  $1  million  obligations:   work  from  Indian  MSMEs,  a  foreign  vendor  will  be  able  to  a.  Must  be  complete,  including  documentation,  training,   discharge  offset  liabilities  worth  $1.5  million.  The  SMEs  and   consultancy   (but   not   civil   infrastructure   and   will  be  identified  through  the  monetary  guidelines  equipment)     specified  b y  the  Department  of  M SMEs  of  the  b.  It  specifies  that  the  TOT  should  be  provided  without  a   Government  of  India.  license   fee   and   there   should   be   no   restriction   on   -­‐This  is  expected  to  boost  the  offset  business  given  to  domestic   production,   sale,   or   export   of   the   said   SMEs  &  MSMEs  as  the  Global  Players  will  now  be  m ore  technology   interested  to  take  advantage  of  this  clause.  This  will     strengthen  the  basic  foundation,  which  are  SMEs  &     MSMEs  for  the  Aerospace  Industry.   11  
  12. 12. Multiplier Matrix (Is replicated from A Critique of Indias Defence Offset Guidelines 2012 By Mr. Laxman Behera)12  
  13. 13. Forecasted Impact of DPP Guidelines on Aerospace Industry in India *Offset for Medium Multi Role Combat Aircraft (MMRCA) is fixed at 50% and rest others at 30%       The   above   graph   shows   the   major   offset   deals   in   India   from   year   2012     to   2017  the   total  offset  business  is  expected  to  be  9.65  Billion  USD  in   next   decade.   This   is   only   from   Defence   sector,   we   have   to   add   Civil   Aviation  and  homeland  security  too.     This   9.65   Billion   USD   is   approximately   7.5   times   of   1.28   Billion   USD   which   we   did   in   last   5   years.   It’s   a   huge   opportunity   and   even   government   is   planning   to   make   a   SEZ   near   Bangalore   for   A&D   Industry  specifically.     It   is   a   high   growth   Industry   and   with   the   reaching   of   Automobile   Industry  into   a   mature   phase  (as  it   appears)  this   is  the   industry,  which   can  boost  Indian  GDP  growth  rate.     13  
  14. 14. RecommendationsThough   DPP   2011   is   much   improved   than   the   previous   version   DPP   2008,   but   we   can’t   say  that   it   is   perfect.   I   have   some   recommendations   which   I   feel   will   help   the   growth   of   A&D  Industry.     1. The   Inclusion   of   Service   &   Products   together   under   the   cap   of   30%   offset   is   not   a   good   step   as   this   would   lead   all   the   bidders   to   focus   on   services   rather   than   products   and   this  will  have  a  negative  effect  on  already  ailing  manufacturing  sector.  DPP  should  have   kept  the  manufacturing  portion  of  offset  intact  and  can  increase  the  service  portion  of   offset  separately.     2. Clarification   on   the   undue   advantage   to   non   defence   IOP   (Indian   Offset   Partners),   as   private  Indian  Defence  companies  are  subjected  to  licensing  and  26%  FDI  cap  which  is   not   applicable   for   Civil   Aviation     inland/costal   security   and   service   sector.   Or   simply   companies  in  this  companies  can  become  IOP  without  licensing  and  FDI  constrain.     3. Private   help   for   DOMW   (Defence   Offset   Monitoring   Wing).   As   to   improve   the   monitoring   capability   of     DOMW   by   taking   help   of   private   firms.   But   as   these   private   firms   are   mainly   catering   to   industry   there   may   arise   a   serious   conflict   of   interest   if   agencies   happen   to   audit   compliance   reports   of   their   clients.   This   aspect   should   be   addressed  to  avoid  any  risks  emerging  in  future.     4. DPP  can  encourage  increase  the  R&D  investment  in  country  by  separately  encouraging   bidders  to  take  help  of  technological  research  institutes  such  as  IITs  &  IISc.     5. DPP  should  now  focus  on  developing  assembly  lines  &  tier  1  suppliers  in  India  rather   than   Teir   2   &   3.   Encouraging   JV   of   bidders   with   corporate   houses   can   do   this.   At   present   bidders   are   getting   into   JVs   with   PSUs   which   are   not   much   effective   and   efficient.              14  
  15. 15. References     1. Defence  Procurement  Procedure  (DPP)  2011.   2. www.defence-­‐update.com   3.  Aerospace   and   Defense   Manufacturing   in   India:   Commencement   of   growth   phase   by   ICC  (Indian  Chamber  of  Commerce  &  Aviotech)   4. Changing  Dynamics:  Indian  Aerospace  Industry  by  CII  &  PWC   5. http://indiandefenceindustry.blogspot.in/   6. A  Critique  of  Indias  Defence  Offset  Guidelines  2012  By  Mr.  Laxman  Kumar  Behera   7. www.frost.com   8. Future   of   India   Aerospace   Industry   2019   by   Mr.   Roger   Moser,   Mr.   Heiko   A   von   der   Gracth  &  Tobias  Gnatzy.   9. Indian  Defence  Sector  by  KPMG     10. Defence  Procurement  Procedures  2011  by  Ernst  &  Young                                           15  
  16. 16. Compiled  By:   ASHISH JUDE MICHAEL MBA from IIM Shillong with 5 Years of Experience in Aerospace /Electronics Industry (Quality & Production) !  5 years of experience in Quality, Manufacturing & SCM activities of Aerospace /Electronics Industry. !  One Year MBA in International Business from Indian Institute Of Management, Shillong and a Mechanical Engineering Graduate. !  Worked with companies such as Bharat Electronics Ltd, ITC Ltd. !  Served clients such as Boeing, UTC, Indian Air Force, Indian Navy. !  Worked on prestigious Light Combat Aircraft (LCA) Project which is of national importance. Skill Set: TQM, AS9100, ISO14001,ISO9001,AS9102, 8D, SPSS, Mini-Tab, PPAP,FMEA, GAP Analysis, APQP, RRCA, Quality Clinic, Project Management, Kaizen, LEAN manufacturing, SPC, Vendor Management, Process Improvement, Poka-Yoke, Benchmarking, FAI, Production Management, Cross Culture Team Management, Negotiation Skills. ADDITIONAL INFORMATION !  Publication: Written few reports on Eurozone Crisis: Impact on China & India, Development Opportunity: Aerospace & Defense in BRIC and Challenges for Marketing in China all published at www.mbaskool.com , are only for academic purpose. !  INTRESTS: Traveling, Reading, Cooking and watching movies. !  Languages: English (Fluent), Hindi (Native), German (Intermediate) and Chinese (Beginner). !  Date of Birth: 10th March 1984. !  Linkedin: http://www.linkedin.com/pub/ashish-michael/24/895/431 !  Contact No. +91 8974011742 !  Email D: ashishjudemichael@gmail.com, jude.pgpex12@iimshillong.in   ***  16