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DPP 2011 amendments


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DPP 2011 amendment 4 released on 20th April, 2013 by Indian MoD

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DPP 2011 amendments

  1. 1. DPP 2011 Amendments - EY Analysis
  2. 2. DPP 2011 Amendments, April 2013Page 2DPP amendments and their effectS No. DPP Amendment EY View1Prioritization of Various Categories forCapital Acquisitions under DefenceProcurement ProcedurePreference for indigenous procurement in the DefenceProduction Policy 2011 has now been made a part of DPPthrough an amendment that provides for a preferred order ofcategorization, with global cases being a choice of last resort.The order of preference, in decreasing order, shall be: (1) “Buy(Indian)”; (2) “Buy & Make (Indian)”; (3) “Make”; (4) “Buy & Makewith ToT”; and (5) “Buy (Global)”. Any proposal to select aparticular category must now state reasons for excluding thehigher preferred category/ categoriesCategorization used to always take placeat the SCAPCHC stage. At the SCAPCCstage, which takes place prior to theSCAPCHC, Indian Pvt. Industry; DPSU’sand DRDO were given the opportunity tomake presentations on availableindigenous capability. The priority at thisstage was also to provide preference tothe Indian players. However the armedforces would also have a say as it wouldimpact their operational prepared-ness.This prioritization is now out in the openbut is not a real amendment in the truesense. There is now the possibility thatadditional documentation would berequired to categorize programs as Buy/Buy & Make Global and associateddelays.
  3. 3. DPP 2011 Amendments, April 2013Page 3DPP amendments and their effectS No. DPP Amendment EY View2Release of Public Version of Long TermIntegrated Perspective Plan (LTIPP)The DAC has approved the release of a public version of its 15-yearperspective document (LTIPP), outlining the “Technology Perspectiveand Capability Roadmap” (TPCR) against LTIPP 2012-2027. TheTPCR will provide useful guidance to the Indian Defence Industry forboosting its infrastructural capabilities and directing its R&D andtechnology investmentsThis intention of releasing theLTIPP was first introduced in DPP2009 (amendment to DPP 2208). Itwas also a part of para 9(a) in DPP2011. However we are yet to seeany such document in the publicdomain.It remains to be seen if the Pvtsector does make any investmentsbasis the LTIPP.3Maintenance ToT (MToT) no longer throughNominationMToT has been hitherto reserved largely for OFB and DPSUs throughthe nomination process. A DPP amendment has been approved thatdoes away with nomination by Department of Defence Production andfacilitates selection of MToT partners by Indian bidders. This measureis expected to have a positive impact on private sector participation inmaintenance, repairs and overhaul workAs per para 28 of DPP 2011, pvt.Indian companies were permittedas valid recipients of MToT.Through the present amendmentsthe procedure of nominating aMToT recipient by the DDP hasbeen done away with.We hope that the nominationprocess is not allowed for Foreignbidders as well.
  4. 4. DPP 2011 Amendments, April 2013Page 4DPP amendments and their effectS No. DPP Amendment EY View4Advance Consultations for “Make”ProcedureThe DAC has approved an amendment mandatingconsultations to begin sufficiently in advance of actualprocurement by Service Head Quarters (SHQs), so thatcapital acquisition plans can be translated into nationaldefence R&D and production plans. In addition, a high-levelCommittee has also been constituted for simplification of“Make” procedures, with a view to unleash the full potentialof this important categoryIndian private industry has traditionally raisedthe issue of insufficient development time toproduce a prototype. LTIPP will help theIndian Pvt industry plan as 15 years is asignificant horizon.Also we believe that the concept of RUR’s hasbeen done away with and the entire Indianindustry has now been placed at par. Thus anew selection criteria needs to be looked at forMAKE programs.Of the two MAKE programs that werelaunched, one has been called off (FICV) andthe other (TCS 2000) is making slow progress.Any simplification would be welcome5Simplification of “Buy & Make (Indian)”ProcedureThe DAC has approved an amendment further simplifyingthis complex category. Its procedures have been brought onpar with other categorizations, resulting in faster processingof cases under this categoryWe look forward to the ‘simplifications’ thathave been incorporated.It remains to be seen if the only on-goingproject in this category, the Indian Navy’sSurface Surveillance Radar’ project will benefitfrom these ‘ simplifications’
  5. 5. DPP 2011 Amendments, April 2013Page 5DPP amendments and their effectS No. DPP Amendment EY View6Clear Definition of IndigenousContentIncreased indigenization is important for our ArmedForces, in order that they have access to reliablesupply chains in times of urgent need. Indigenouscontent has now been defined in an unambiguousmanner, providing requisite clarity and a commonunderstandingDPP 2011 (para 4) has no clear definition ofIndigenous content. For Buy Indian programs theindigenous content is pegged at a minimum of 30%and for MAKE it is pegged at 50%. In addition Para5.9 of the D.O.G. (1st Aug 2012) also mentions thesubject of Value addition. In no place is there adefinition of Indigenous content nor is there a methodshown to calculate the same.We hope the recent amendment will help shed somelight on these issues. We could also take guidancefrom Global methodologies where they use theSubtraction method and / or the Aggregate methodfor calculating the indigenous content.7Ensuring faster progress in “Make”and “Buy & Make (Indian)” casesThe Ministry has a limited number of acquisitioncases under “Make” and “Buy & Make (Indian)”categories, with an estimated value of Rs. 1,20,000crore. Instructions have been issued for speedierconclusion of these casesWe believe that most if not all of these programs arethrough the DRDO R&D platform. If the pvt. Sector isgiven an opportunity to play its role in productionizingthese technologies, it would prove to be great boonfor India.
  6. 6. DPP 2011 Amendments, April 2013Page 6DPP amendments and their effectS No. DPP Amendment EY View8Defence Items ListIndian defence industry was opened up in May2001 for 100% private sector participationsubject to licensing. The Defence Items List hasbeen finalized by the Ministry and sent to DIPPfor notification, which will bring required clarity inthe licensing processThe MoD has lately been inundated with IL applicationsfrom the DIPP. This is primarily because under DPP 2006,IL was mandatory to become an IOP. Under DPP 2008this condition was removed but still OEM’s insisted thatthe IOP have an IL or at least apply for one. Today mostof the programs under execution or advance negotiationsare under these two DPP’s. DPP 2011 permitted IOP’s incivil aerospace as well and also very clearly replaced theterm Defense with ELIGIBLE vis a vis the Offsetguidelines. Yet many OEM’s still insist that their IOP’shave an IL or a letter stating that an IL is not required.Thus the number of IL applications is yet to reduce. Manybusiness plans have been adversely affected because ILapplications can take up to 2 years to clear and lettersstating that No IL is required could take up to 9-12months. The MHA also did not provide any securityclearance for IL applicants as there was no pre-settemplate for providing such a clearance.We understand that the Defense items list will be takingguidance from the WASSENAAR arrangement and thatany item not on the list will not require an IL. We hope theDIPP issues a notification to this effect very soon.Also the MHA template has been in the works since lastJune and we hope this is released soon.9Licensing for Dual Use ItemsThe Ministry has categorically clarified to DIPPthat dual-use items will not require licensing,thereby bringing added clarity to the licensingprocess10Consultations on SecurityGuidelines for Indian DefenceIndustryDraft Security Guidelines that will apply to alllicensed defence industries have been circulatedfor consultations with various stakeholders. It isexpected that a complete security framework forIndian private industries participating in defencecases will be in place in the near future
  7. 7. DPP 2011 Amendments, April 2013Page 7DPP amendments and their effectS No. DPP Amendment EY View11Resolution of Tax-related IssuesResolution of deemed exports status for certain defenceprojects and rationalization of tax and duty structuresimpinging on the Indian defence industry has been takenup by the MoD with the Ministry of FinanceThis is a welcome step on the part of MoD and ifMinistry of Finance agrees for the same, it mayresult in removal of tax anomalies on supplies byindigenous manufacturers.Hopefully, Ministry of Finance also work forremoving the differential treatment for privateplayers viz. a viz. PSUs for e.g. grant ofexemptions from duties on goods manufacturedin India.12Funds for MSMEs in the Defence SectorThe Defence Production Policy 2011 requires the setting-up of a fund to provide necessary resources fordevelopment of defence equipment. In order to ensureregular supply of funds to MSMEs involved inmanufacturing of defence products, SIDBI has decided toearmark an amount of Rs. 500 crore for providing loans,and further, a fund of Rs. 50 crore for equity support outof “India Opportunities Fund” managed by its subsidiary,namely, SIDBI Venture Capital LtdPara 11 of the Defense Production Policy statedthe creation of a separate fund for SME’s tosupport their R&D efforts.This addition to the DPP with more precisedetails should go to great lengths in widening theindigenous defense industrial base.One question remains though, whether otherpublic / private institutions are also permitted toset-up such funds and if there could possible beany offset credits for such investments?
  8. 8. DPP 2011 Amendments, April 2013Page 8DPP amendments and their effectS No. DPP Amendment EY View13Efficiency and Transparency in DefenceProcurementA stipulation to freeze the SQRs before the “Acceptance ofNecessity” (AoN) stage has been accorded, and the validityof AoN has also been reduced from two years to one year.These measures are expected to expedite the acquisitionprocess and increase transparencyThis seems like a reaction to the recent VVIPhelicopter scandal.Previously the user directorate’s used to findit challenging to release RFP’s within the twoyear time-span after receiving the AoN. Acase in example being the P75I programwhere the AoN has lapsed twice. It remains tobe seen if the RFP’s can now be issuedwithin the one year time-span. If it doeshappen, we hope the procurement processspeeds up and our forces get quicker accessto world-class platforms.14Enhanced Delegation of Financial PowersThe financial powers of Service Chiefs/ DG Coast Guardhave been enhanced from Rs. 50 crore to Rs. 150 crore forcapital acquisition casesMany small requirements of the end-user(armed forces) can now be addressed at theSHQ level itself.15Powers to DACApproval for all deviations from the Defence ProcurementProcedure will henceforth be sought from the DefenceAcquisition Council instead of the Defence MinisterThe RM has devolved his individual powersand instead placed them with the DAC thusshowing faith in a collegium system ofdecision making. We hope this step increasestransparency and at the same time does notslow down decision making.
  9. 9. DPP 2011 Amendments, April 2013Page 9List of Abbreviations
  10. 10. DPP 2011 Amendments, April 2013Page 10List of Abbreviations► SCAPCHC - Service Capital Acquisition Plan Categorization Higher Committee► SCAPCC - Service Capital Acquisition Plan Categorization Committee► DPSU - Defence Public sector Undertaking► DRDO - Defence Research and Development Organization► DAC - Defence Acquisition Council► DPP - Defence Procurement Procedures► LTIPP - Long Term Integrated Perspective Plan► TPCR - Technology Perspective and Capability Roadmap► MToT - Maintenance Transfer of Technology► DDP - Department of Defence Production► SHQ - Service Headquarters► FICV - Future Infantry Combat Vehicle► TCS - Tactical Communication System► DOG - Defence Offset Guidelines► OEM - Original Equipment manufacturer► IOP - Indian Offset partner► MoD - Ministry of Defence► IL - Industrial License► MHA - Ministry of Home Affairs► MSME - Medium Small and Micro Industries► SIDBI - Small Industries Development Bank of India► RM - Raksha Mantri
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