DPP 2011 – An Analysis

Changes Vis-à-vis Ammendments issued to DPP 2008 in the year 2009 and DPP 2008

Advisory Investments
Rahul Gangal Director – Defence Advisory and Investments Rahul@Aviotech.com

202 ,
In collaboration with:-

Ankur Gupta Senior Consultant – Aerospace and Defence Ankur4.Gupta@in.ey.com

Segment by Segment Changes
Detailed changes and implications NOTE : COVERAGE – Buy, Buy and Make and Make Categories under the Defence Procurement Procedures - 2011

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Policy Changes
Table of Contents / Renaming of broad categories
Defence Procurement Procedures 2008 “Indigenous Naval Ship Building Procedure” Defence Procurement Procedures 2011 “Procedure for Defence Ship Building” Implications Dropping of the term Indigenous

Introduction of DPP
Defence Procurement Procedures 2008 Defence Procurement Procedures 2011 Amendment of Ammendments issued to DPP 2008 in the year 2009 Incorporated in DPP 2011 Acquisitions covered under the ‘Buy & Make (Indian)’ decision would mean purchase from an Indian vendor including an Indian company forming joint venture / establishing production arrangement with OEM followed by licensed production / indigenous manufacture in the country. ‘Buy & Make (Indian)’ must have minimum 50 % indigenous content on cost basis Implications

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Policy Changes
Chapter 1 – Defence Procurement Procedures for ‘Buy’ and ‘Buy & Make’ Categories
Para No. Defence Procurement Procedures 2008 Defence Procurement Procedures 2011 Formal Incorporation of Clause 9A from Ammendments issued to DPP 2008 in the year 2009 amendments Implications This clause requires sharing of 15 year perspective plans with the Industry DPP 2011 tries to make the SQRs more realistic and more in-sync with globally available/under development equipment thereby minimizing unrealistic functional characteristics which had earlier adversely impacted several capital acquisition programmes

9A

13

Formal Incorporation of Clause 13 from Ammendments issued to DPP 2008 in the year 2009 amendments

15

Formal Incorporation of Clause 15 from Ammendments issued to DPP 2008 in the year 2009 amendments Formal Incorporation of Clause 18 from Ammendments issued to DPP 2008 in the year 2009 amendments Addition to Clause:For cases where the original RFP has been issued within two years from accord of AON and later retracted for any reason, the AON would continue to remain valid, as long as the original decision and categorization remain unchanged, provided the subsequent RFP is issued within one year from the date of retraction of original RFP.

18

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This addition will help in reducing process time in cases where a retracement of RFP has happened.

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Policy Changes
Chapter 1 – Defence Procurement Procedures for ‘Buy’ and ‘Buy & Make’ Categories
Para No. Defence Procurement Procedures 2008 Defence Procurement Procedures 2011 Formal Incorporation of Clause 25A from Ammendments issued to DPP 2008 in the year 2009 amendments The Indian entity could be a company incorporated under The Companies Act 1956, including DPSUs or entities like OFB / Army Base Workshops/ Naval dockyards / Base Repair Depots of Air Force. This entity would be nominated by DDP at SCAPCHC stage and would be included in the recommendations of SCAPCHC as also in the SoC submitted to DAC for seeking approval of AON. Addition to the clause:An additional grace period of up to 30 days may be obtained by Service Headquarters from their respective Vice Chief keeping in view the practical time period necessary for trials. Equal opportunity would be provided to all vendors while granting such grace period. Addition to the clause:46 Members nominated should have adequate seniority and experience and should not be involved with that acquisition case. This move is aimed to bringing greater transparency and impartiality in the entire acquisition process The additional grace period makes it more flexible for the OEM to provide the equipment at the designated location ensuring that all the shortlisted vendors are present in the trial process Implications This clause requires sharing of 15 year perspective plans with the Industry

25A

28

The Indian firm to be selected would be from a list of public or private firms which would be specified in the RFP. These firms would be DPSUs / OFB / Raksha Udyog Ratnas (RURs) or any other firm as selected by the DDP.

DPP 2011 has removed the mention of RUR. It has also broadened the recipients of MTOT. However by specifying that the potential recipient has to be incorporated under Companies Act 1956, it creates an issue for established companies which were incorporated in earlier versions of the Companies Act.

41

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Policy Changes
Appendix A (Refers to para 18 of chapter 1)
Para No. Security Classification Security Classification Defence Procurement Procedures 2008 Defence Procurement Procedures 2011 Introduction of DPB in categorisation status as well as on Reference Number Allocated Formal Incorporation of clause 3.(G) (ii) and 3.(G)(iii) from Ammendments issued to DPP 2008 in the year 2009 Addition of clause 3.(p) Timeline for Procurement. Are there likely to be deviations to the timelines given at Appendix C to Chapter 1 of DPP? If so, deviations and week-wise targets to be proposed by SHQ with justification (Format of proposed timeline is given at Annexure to this Appendix). Rationalisation of para 6.(a) to include Buy (Global), Buy (Indian), Buy and Make, Buy and Make (Indian) and Make projects. Rationalisation of Clause 15 by Introduction of DPB in categorisation status as well as on Reference Number Allocated The introduction of this clause requires any anticipated delays in the acquisition process to be accounted for and justified beforehand for consideration of SCAPHC/DPB and DAC as per the value of the programme. Implications This appears to be a harmonisation of the chart vis-à-vis the text in Para 18.

Security Classification

Security Classification

Security Classification

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Policy Changes
Appendix (Refers to para 3(p) of Appendix A)
Para No. Defence Procurement Procedures 2008 Defence Procurement Procedures 2011 Addition of Annexure detailing proposed timeline for procurement Implications

Notes to Appendix A1 (Refers to para 18 of chapter 1)
Para No. Defence Procurement Procedures 2008 Defence Procurement Procedures 2011 Clarification and addition of reference to notices issued in 2006 and 2007 vis-à-vis the delegation of powers at level of SHQ/IDS and Quantity vetting and composition of CNC Implications

Notes Point (e) Point (f)

Appendix B (Refers to Para 47 of chapter 1)
Para No. Defence Procurement Procedures 2008 Defence Procurement Procedures 2011
Addition of an introduction to the appendix Bin lieu of note at the end of clause in DPP 2008 (Approval of Director General (Acq.) to be solicited for any change in the compositions mentioned above. However, in the delegated power cases member of any other agency apart from the prescribed members can be associated with the approval of Vice I N D Chiefs/CISC/DG C o r p o r a t e T o w e r , S I A : S e w a ICG.)

Implications

Introductory clause

Standard CNC composition can be altered with prior permission of DG (Acq.) and other members may additionally be nominated from other agencies with prior approval of Vice Chiefs /CISC and DGICG

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Policy Changes
Appendix C (Refers to para 74 of Chapter 1) – Broad Timeframe for Procurement
Para No. Defence Procurement Procedures 2008 Defence Procurement Procedures 2011 The entire procurement timeline is in weeks rather than in months as in DPP 2008 Each activity has been given its own serial number and its own timeline as against clubbing of activities in DPP 2008. Activities like pre-bid meeting and dispatch of pre-bid reply are deemed as separate activities. The time allowed for receipt of responses to RFP has been reduced from 3 months to 3 weeks However the total time period from Issue of RFP to receipt of responses remains at 12 weeks. Implications

This may make it difficult for OEMs to respond in time

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Policy Changes
Appendix D (Refers to Para 22 of Chapter 1)
Para No. Defence Procurement Procedures 2008

Provisions for implementation of Offsets
Implications This has very significant implications whereby it allows the new offset guidelines to be applicable on all eligible capital acquisition programmes regardless of them being governed by the capital procurement procedures as laid out in DPP 2006/ DPP 2008.

Defence Procurement Procedures 2011

Introduction

Removal of mention of version of DPP

Addition to the clause 1.2 Offset obligations may be discharged only with reference to “eligible” products and eligible services. Formal Incorporation of clause 1.3 from Ammendments issued to DPP 2008 in the year 2009 “eligible products” “Indian Industries” “Defence Products” “Indian Defence Industries” This has been done to include items and manufacturers /service providers of Homeland Security and Civil aerospace This allows for addition of Training services, tools and products including simulators to be counted as offset

1.3

2.1.a)

DPP 2008 : 2.1.a) has been modified to the extent of DPP 2011 2.1.c) related to Services being categorized under a separate point. Training has been added as an item in the services list

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Policy Changes
Appendix D (Refers to Para 22 of Chapter 1)
Para No. Defence Procurement Procedures 2008

Provisions for implementation of Offsets
Implications

Defence Procurement Procedures 2011 Formal Incorporation of clause 6.3 from Ammendments issued to DPP 2008 in the year 2009 Greater clarity to the clause

6.3

6.4

Annexure VI to Appendix D (Refers to Para 2.1a to Appendix D)
Para No. Defence Procurement Procedures 2008 Defence Procurement Procedures 2011 Products for Internal Security • Arms and their ammunition including all types of close quarter weapons. • Protective Equipment for Security personnel including body armour and helmets. • Vehicles for internal security purposes including armoured vehicles, bullet proof vehicles and mine protected vehicles. • Riot control equipment and protective as well as riot control vehicles. • Specialized equipment for surveillance including hand held devices and unmanned aerial vehicles. • Equipment and devices for night fighting capability including night vision devices. • Navigational and communications equipment including for secure communications. • Specialized counter terrorism equipment and gear, assault platforms, detection devices, breaching gear, etc. • Training aids including simulators and simulation equipment. Implications

2

Introduction of Internal security items as offset qualifiable products

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Policy Changes
Annexure VI to Appendix D (Refers to Para 2.1a to Appendix D)
Para No. Defence Procurement Procedures 2008 Defence Procurement Procedures 2011 Implications Introduction of Civil Aerospace Products as offset qualifiable products Another key aspect is the introduction of the Raw material and semi-finished goods in the DPP 2011 thereby making the product scope for offset obligation fulfillment easier

3

Civil Aerospace Products • All types of fixed wing as well as rotary aircraft including their air frames, aero engines, • aircraft components and avionics. • Aircraft design and engineering services. • Technical publications • Raw material and semi-finished goods. • Flying training institutions and technical training institutions (excluding civil infrastructure).

Appendix E1 (Refers to Para 24(b) of Chapter 1)
Para No. Defence Procurement Procedures 2008 Defence Procurement Procedures 2011 Implications The DPP 2011 allows for one single combined Performance cum warranty bond of 5% the Total contract value instead of two separate bonds of 5% each as Performance Bond and Warranty Bond in DPP 2008 thereby bringing in some savings to bidders. This is also reflected in the Appendix B to Schedule I

Part 1 5(j)

Performance-cum-Warranty Bond both equal to 5% value of the contract is required to be submitted after signing of contract.

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Policy Changes
DRAFT RFP FORMAT
Para No. Defence Procurement Procedures 2008 Defence Procurement Procedures 2011 Formal Incorporation of clause 16A from Ammendments issued to DPP 2008 in the year 2009 Implications

16 A

APPENDIX F to Schedule 1
Para No. Defence Procurement Procedures 2008 Defence Procurement Procedures 2011 Modification to Clause 5 An LC can be established in any of the Four Public Sector Banks i.e. S.B.I , Bank of Baroda, Canara Bank or Syndicate Bank The Performance Bond should be valid for a period until three months from the date of receipt of last consignment and should be furnished within 30 days of signing the contract. The Performance-cum- Warranty Bond should be valid for a period of three months beyond the warranty period as specified in the contract and should be furnished within 30 days of signing the contract. Indemnity Bond : With regard to Payment Clauses including Bank Guarantee for Advance and Performance cum Warranty, for Defence PSUs being issued RFPs as a nominated production agency or on an ab-initio single vendor basis, submission of BGs need not be insisted upon. They should give Indemnity Bond. This is a departure from DPP 2008 wherein an Irrevocable LC could have been established in any of the 27 public sector banks besides SBI Change of validity of the performance cum warranty bond which is now valid for 3 months from end of warranty period. This has arisen due to a combined performance cum warranty bond in DPP 2011 instead of separate performance and warranty bonds in DPP 2008 Implications

7

8

The mention of Indemnity bond in para 7 of Appendix F of schedule 1 has now been elaborated into a separate point.

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Policy Changes
APPENDIX F to Schedule 1 – Payment Terms
Para No. Defence Procurement Procedures 2008 Defence Procurement Procedures 2011 Amplification of Clause 11 ERV scope has been expanded and now covers Rupee contracts with Indian vendors under Buy ‘Global’ Implications This benefit has been expanded from its earlier coverage of DPSUs only. This is also reflected as an additional paragraph 1A in annexure III to Appendix F

ANNEXURE 1 to Appendix F – Application of DCF technique
Para No. Defence Procurement Procedures 2008 Defence Procurement Procedures 2011 Change of Borrowing rate 3 9.5% 9% Implications Reduction in borrowing rate to be considered while applying DCF technique

ANNEXURE 3 to Appendix F – Guidelines to protection of ERV in contracts
Para No. 1.(b) Defence Procurement Procedures 2008 Deletion of clause 1.(b).2 Elaboration on the ERV clause and limiting its applicability only to cases where delay is on account of the buyer Defence Procurement Procedures 2011 Implications Rationalisation of the clause This change makes it impossible for DPSUs to claim ERV benefit when the delays if any , are on their account.

1.(b).(iv)

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Policy Changes
ANNEXURE 3 to Appendix F – Guidelines to protection of ERV in contracts
Para No. Defence Procurement Procedures 2008 Defence Procurement Procedures 2011 New Clause Added 3 Paying authority, is to undertake a preaudit of the documents before payment. This is a change from DPP 2008 where the authority conducted a post audit Implications

New Clause Added
Documentation for Claiming ERV:- The following documents would need to be submitted in support of the claim on account of ERV :(a) A bill of ERV claim enclosing worksheet. (b) Banker's Certificate / debit advice detailing Foreign Exchange paid and Exchange rate as on date of transaction. (c) Copies of import orders placed on the suppliers. (d) Invoice of supplier for the relevant import orders.

4

Elaboration on the documents which are to be presented to claim ERV benefit

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Policy Changes
ANNEXURE IV to Appendix F – Draft Copy of Performance-Cum-Warranty Indemnity Bond
Para No. Defence Procurement Procedures 2008 Defence Procurement Procedures 2011 New Annexure Added Implications

ANNEXURE H to Schedule 1 – Agents / Agency Commission
Para No. Defence Procurement Procedures 2008 Defence Procurement Procedures 2011 Modification of existing clause 19 Refund to the Government of India from Indian companies will be at 2% per annum above the Base Rate of SBI Implications

ANNEXURE 1 to Appendix H – Integrity Pact Bank Guarantee (IPBG)
Para No. Defence Procurement Procedures 2008 Defence Procurement Procedures 2011 Renaming of this clause to Integrity Pact Bank Guarantee (IPBG) Ernest Money / Security Deposit 8 Validity of EM/SD at 5years or conclusion of contractual obligations Implications

A list of specific banks has been included in lieu of any Indian Nationalised Bank in DPP 2008 The validity of the IPBG is 45 days post validity of commercial offer. For a successful bidder this would be extended unto the completion of contract.

Reduced burden on bidders who are not successful. This is also reflected in the relevant annexure of Format of Integrity Pact Bank Guarantee (IPBG)

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Policy Changes
ANNEXURE 1 to APPENDIX H to SCHEDULE 1
Para No. Defence Procurement Procedures 2008 Defence Procurement Procedures 2011 Implications

12

Formal Incorporation of clause 16A from Ammendments issued to DPP 2008 in the year 2009

1/6/2011
Defence Advisory Investments
INDIA : Sewa Corporate Tower, Sector 25, MG Road, Gurgaon 122002 UK: 31A - St James`s Square, London SW1Y 4JR

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