Simply put: Raised offset threshold, other features of new defence procurement norms

The new DPP is expected to pave the way for ‘Make in India’.

Written by Pranav Kulkarni | New Delhi | Published: January 14, 2016 12:18:34 am
CAG, defence ministry, defence minister, manohar parrikar, who is defence minister, Comptroller and Auditor General, helicopters Defence Minister Manohar Parrikar. Express Photo

The Defence Acquisition Council this week cleared certain clauses of the proposed new Defence Procurement Policy (DPP), including raising the offset limit baseline to Rs 2,000 crore from Rs 300 crore. Important takeaways from the new policy:

What are ‘offsets’?

Offsets are essentially benefits that a buyer gets from a seller — technology/capability that Indian industry gets from a foreign vendor selling equipment to India. The policy on offsets was first introduced as part of the Defence Procurement Procedure (DPP) 2005, and has undergone revisions since then. The DPP 2013 says the objective of the Defence Offset Policy is “to leverage capital acquisitions to develop Indian defence industry by fostering development of internationally competitive enterprises, augmenting capacity for research, design and development related to defence products and services, and encouraging development of synergistic sectors like civil aerospace and internal security”.

Offset provisions of 30% of contract value apply to capital acquisitions categorised as ‘Buy (Global)’, meaning outright purchase from foreign/Indian vendor, or ‘Buy and Make with Transfer of Technology’, meaning purchase from foreign vendor, followed by licensed production, and to Indian firms or their joint ventures under ‘Buy (Global)’ procurements. The minimum contract value for which offsets are mandatory has now been revised from Rs 300 crore to Rs 2,000 crore.

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How will raising the offset baseline benefit ‘Make in India’?

Another way of looking at the decision is that offsets will no longer be applicable to defence deals worth less than Rs 2,000 crore. While many analysts feel that the decision will allow many smaller contracts to escape the offset obligation, Defence Minister Manohar Parrikar this week justified raising the threshold to Rs 2,000 crore by arguing that India has so far been spending 14-18% more on these contracts only because of the offset obligation. His argument was that the government has so far mobilised defence contracts worth Rs 2 lakh crore, which will bring in offset worth Rs 1 lakh crore over the next 15 years. He argues that Indian industry doesn’t have the capability to absorb more offsets at this rate.

What are the other elements of the DPP?

The new DPP is expected to pave the way for ‘Make in India’. It will have a new category, ‘Indigenously Designed, Developed and Manufactured’ as a preferred category for buying. This means that a piece of defence equipment designed, developed and manufactured in India would get preference.

The new DPP will have three different sub-categories under “make” procedures. Make I will involve 90% funding of the development cost by the government; in Make II, the government will refund 100% of the development cost in case the Request for Proposal (RfP) is not issued for two years from the time of development of prototype; and Make III will be reserved for small- and medium-scale enterprises. For the first time, the DPP will have provisions to offer “up to 10% more price” to better equipment — something that will be extended as prior benefit to bidding companies. Reduced timelines is another important aspect.

What about strategic partnerships, blacklisting, and middlemen agents?

The new DPP is the outcome of groundwork done by the Dhirendra Singh Committee, which was constituted by Parrikar on May 1. The Defence Acquisition Council has accepted 90% of the panel’s recommendations. On strategic partnerships, the committee had recommended the constitution of a task force under former DRDO chief V K Aatre. The task force is scheduled to submit its report by Friday.

On blacklisting, the Ministry is of the view that representatives who are on the payroll of a defence firm should not be called agents. It defines agents as those whose income/remuneration is dependent on whether they are able to win the contract. The thinking within the Ministry is that wrongdoings on behalf of individuals and organisations should be dealt with by law enforcement agencies, and should affect only those contracts to which the wrongdoings pertain.

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