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Buy (IDDM) or Buy (Indian): Horns of a Dilemma

Mr Amit Cowshish is a former Financial Advisor (Acquisition), Ministry of Defence and former Distinguished Fellow, Manohar Parrikar Institute for Defence Studies and Analyses, New Delhi. Click here for Detailed Profile
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  • April 29, 2016

    All defence acquisition proposals were required to be classified under one of five categories until the incomplete version of the Defence Procurement Procedure (DPP) 2016, released on 28 March 2016 on the opening day of DefExpo 2016 at Goa, added yet another category to the list. Termed ‘Indian (Designed, Developed and Manufactured)’, or Buy (IDDM), this category replaces ‘Buy (Indian)’ as the most preferred category in the hierarchical order of procurement categories. Besides these two categories, the hierarchy of categories consists of ‘Buy and Make (Indian)’, ‘Buy and Make’, and ‘Buy (Global)’, in that order.

    There is another category, called ‘Make’, which has been delinked from this hierarchy but nevertheless retained in DPP 2016 with some modifications. The ‘Make’ projects entail design, development and manufacture of prototypes of equipment by Indian companies. The ‘Make’ category is different from the ‘Buy (IDDM)’ category. While the former entails development of prototypes of futuristic equipment, weapon systems and other platforms, the latter is intended for outright purchase of equipment.

    The ‘Buy (IDDM) category has ostensibly been devised to encourage indigenisation of defence products. But it may have made the process of categorisation more complex. According to DPP 2016, not just ‘Buy (IDDM)’ but all the three categories in the ‘Buy’ group “refer to an outright purchase of equipment.” This implies that the basic product to be purchased under any of these three categories should be available for outright purchase off-the-shelf, although such a product may also require some customisation to meet the qualitative requirements specified in the Request for Proposal (RFP).

    If an indigenously designed, developed and manufactured product is available with an Indian vendor, it must also have a minimum of 40 per cent indigenous content to be eligible for purchase under the most-preferred ‘Buy (IDDM)’ category. Confusion arises because products with 40 per cent indigenous content can also be bought under the ‘Buy (Indian)’ category, even if such products are not designed, developed and manufactured in India. What compounds the confusion is that while a product that is not indigenously designed, developed and manufactured can be bought under the ‘Buy (Indian)’ category with just 40 per cent indigenous content, if it is categorised under the ‘Buy (IDDM)’ category, it must have an indigenous content of 60 per cent.

    To further add to the complexity, DPP 2016 says that the onus of proving that the equipment design is indigenous rests with the vendor. This claim will be verified by a committee comprising of scientists from the Defence Research & Development Organisation (DRDO) and representatives of the Services Headquarters (SHQs). In order to substantiate their claim, vendors will have to present the “documents issued by (the) authorised agencies” and this process has to be completed before initiating the statement of case for categorisation.

    The guidelines for verifying the claims are to be issued by the Director General (Acquisition). No matter how brilliantly the guidelines are drafted, scouting for vendors who could offer products that are designed, developed and manufactured in India and verifying their claims about the extent of indigenous content before initiation of the procurement proposal is not going to be easy, especially if one also takes into account what the DPP says about indigenous content.

    According to the DPP, the percentage of indigenous content is to be measured with reference to the total value of the contract. At the same time, the prescribed percentage is also required to be present in the basic cost of the equipment, Manufacturer’s Recommended List of Spares (MRLS), Special Maintenance Tools (SMT), and the Special Test Equipment (STE), taken together, at all stages, including Field Evaluation Trials. This is as complicated as it gets.

    This also contradicts with a new provision in DPP 2016 which allows the vendor to modify/customise equipment after the award of contract to make it compliant with ‘Essential Parameters B’ that need not be present when the equipment is fielded for trials. Some vendors could aim at achieving the requisite level of indigenous content at this stage. Such vendors will not be able to establish the claim that their product has the requisite level of indigenisation before the initiation of the procurement proposal.

    One cannot help but wonder what is it that ‘Buy (Indian)’ could not achieve that is now sought to be achieved through ‘Buy (IDDM)’. There was nothing in the earlier DPPs that prevented Indian vendors from offering products that were designed, developed and manufactured in India, with just 30 per cent indigenous content, under the ‘Buy (Indian)’ category although nothing much actually got procured through that route. It is going to be much more difficult for them now with the requirement of indigenous content being raised to 40 per cent for such products.

    Achieving the requisite levels of indigenous content could be very challenging. Indigenisation of spares, tools and equipment, in particular, may not always be commercially viable, especially if the required quantity is low. In such situations, vendors will be compelled to increase the extent of indigenous content in the main product to meet the overall requirement. Past history of indigenisation of defence production shows that this is easier said than done.

    Little thought seems to have been given to the cost implications of indigenisation. There is no conclusive evidence that an indigenously designed, developed and manufactured product (as also spares, tools and equipment) would be cheaper than the product that does not meet these criteria.

    The Contract Negotiation Committees (CNC) will find it difficult to recommend procurement of an indigenously designed, developed and manufactured product that costs much more than the price at which the same product was being procured in the past when it was not indigenously designed, developed and manufactured. The vendor who takes the trouble of increasing the indigenous content in his product will find it very hard to satisfy the CNC that the price of his product has gone up because of the higher percentage of indigenous content in that product.

    CNCs normally work out the reasonable rate on the basis of the Last Purchase Price (LPP), which is suitably escalated to factor in inflation since the time the product was last purchased. CNCs also base their calculations on market survey or go by the Professional Officers’ Valuation. All these methods may throw up a reasonable price, with reference to which the price quoted for an indigenously designed, developed and manufactured product may appear exorbitant.

    A clear policy directive that the reasonable price (benchmark) of an indigenously designed, developed and manufactured product must be worked out with due regard to the cost of indigenisation will help get over this problem.

    Considering that the full and final version of DPP 2016 is yet to be released, an opportunity exists for ironing out all such issues and lay down in specific terms the circumstances that must be taken into account by the Services Headquarters while deciding which procurement category should be adopted for a particular purchase proposal before the final version of DPP 2016 is released.

    One last thought: if a product is indeed indigenously designed, developed and manufactured, should the extent of indigenous content in that product really matter so much?

    Views expressed are of the author and do not necessarily reflect the views of the IDSA or of the Government of India.