DPP 2011 takes concrete steps towards liberalizing offsets : CII-PWC Analysis
Written by Anand   
Thursday, 20 January 2011
The new offset policy accepts a key request of foreign as well as Indian vendors in the aviation and homeland security sectors by expanding the existing list of offsettable products to include internal security and civil aircraft. These are adjacent markets to the defence sector with similar products where growth of one has the ability to affect the other. By allowing these products, the confusion which prevailed regarding their acceptance has been removed, besides improving our ability to absorb offset obligations. A number of SMEs which are in the field of homeland security are bound to gain from the new offset policy.

Comprehensive growth of an aerospace industry, related services such as Engineering R&D, MRO and Training also need a boost.  Though all these have been permitted as offsets since 2007, there existed an unexplained confusion regarding training services, including simulators. Inclusion of these services has been a demand of the armed forces and DPP 2011 has finally formalized them.

The DPP, however, does not address a number of expectations of the Indian Industry in the form of allowing TOT and extending the time limit of banking of offsets. The “Make” and “Buy and Make Indian” categorizations were introduced to encourage domestic industry. The procedures under these categorizations however, are very cumbersome in their original form and to date, not a single proposal under these categories has fructified. Unfortunately, the new policy has not made any attempt to simplify them.

On the positive side, DPP 2011 introduces a number of measures to make the acquisition process industry friendly and to increase transparency. The Government has finally addressed a long standing demand of Indian industry by making the Exchange Rate Valuation clause applicable for Rupee contracts with Indian vendors in Buy Global cases, thus providing protection against currency fluctuation. This would partially level the playing field for Indian industry when it competes with foreign OEMs. Further, as per RBI Policy, the base rate of RBI has been replaced by the prime lending rate. Performance and warranty bonds have been clubbed at 5%. This would save the industry from the expenditure to be incurred on two separate bonds. Similarly, with the Integrity Pact bank guarantee being linked to the validity of the commercial offer, vendors need not deposit the same for five years.

Participating in  Fast track procedures has been made more convenient for the industry by providing an additional grace period of 30 days for  submission of technical/commercial offer and removing the penalty of blacklisting for non performance.

The new DPP has also introduced limited measures to cut down procurement time.  In case a RFP is retracted, the original Acceptance of Necessity (AON) will now remain valid provided the subsequent RFP is issued within one year, thus removing the need to go back to the DAC a second time. Further, nomination of the agency to absorb Maintainance TOT will be carried out by the Department of Defence Production (DDP) early in the categorization process (at the SCAPCHC stage) and timelines for milestones have been cut down and given in weeks in place of months. These are small measures to speed up the procurement process but may only affect a limited number of cases.   Inclusion of officers with adequate seniority in Technical Oversight Committee or increasing the grace period for trials to may not have any significant impact in anyway.

The stress of the ship building policy appears to be to fast track and monitor the progress of projects allotted to DPSUs. The ship building procurement policy has now been divided into two different sections, one for acquisition by nomination to DPSUs and another for acquisition on a competitive basis. The procedure for procurement of ship-borne equipment for ships being constructed by DPSUs has also been modified, where by all weapons and related sensors purchases whether indigenous or imported will now be done through technical negotiations/price negotiations by a committee constituted by the shipyard with representatives of the Navy, MoD (Finance), and DDP. Moreover, an Apex Steering Committee will now be constituted under the chairmanship of Secretary (DP) to review and monitor the physical progress of the project with specified reference to performance against laid down milestones. It is hoped that these amendments will not insulate DPSUs from competition but instead place greater accountability on them.

Mr Gurpal Singh, Deputy Director General, Confederation of Indian Industry (CII) stated that ‘It can be seen as a move towards fast tracking the existing procurement procedures, facilitating absorption of offsets and introducing industry friendly procedures. As far as measures for   indigenization or achieving a level playing field for domestic private industry is concerned, DPP 2011 does not live up to expectations.’

Mr Dhiraj Mathur, Aerospace and Defence Leader, PricewaterhouseCoopers stated that ‘The revised DPP reflected the Government’s consistent effort to rationalize and make transparent Defence acquisitions. The change in offset policy is welcome. Adding Civil Aerospace and internal security reflects pragmatism as it will assist development of our industry in both the sectors, while also improving our ability to absorb offsets. ‘

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