Almost fourteen months after becoming Defence Minister, and after missing numerous self-imposed deadlines, Manohar Parrikar announced the contours of the Defence Procurement Policy of 2016 (DPP-2016), which will guide military acquisitions after it is promulgated in another two months.

The policy will include imaginative and far-reaching changes, including a first-time emphasis on indigenous design, reduction of export content in weaponry, a boost to the “Make” programme in which the government subsidises equipment development and encouragement to small-scale industry.

In future, vendors offering equipment designed and built in India – termed Indian Designed, Developed and Manufactured (IDDM) products – will be preferred to vendors offering equipment designed abroad.

The Defence Ministry is incentivising defence industry, so far focused on licensed manufacture, into the higher-tech realm of designing and developing Indian weaponry.

There are far-reaching changes in the “Make” procedure, which currently involves the government funding 80 per cent of the design and development cost of indigenous weapons platforms, with vendors paying 20 per cent. In DPP-2015, the “Make” procedure will be expanded into three types.

In the first type, termed Make I, the government will fund 90 per cent of the development cost, instead of just 80 per cent. Further, if after successfully developing a prototype, the vendor does not get an order within 24 months; his 10 per cent expenditure would be refunded.

This indirectly addresses an oft-expressed concern of the defence industry: the high cost of capital, which effectively raised its 20 per cent share to 40-45 per cent by the time the government reimbursed its expenditure. Now, say industry leaders, their 10 per cent expenditure would raise to 20 per cent.

The second type, Make II, involves industry funding, rather than government funding, for prototype development. If a tender is not issued within two years of the successful prototype development, the Defence Ministry would refund the entire development cost to the duly selected vendor.

The third type, Make III, seeks to galvanize innovation in micro, small and medium enterprises (MSMEs). While procedural similar to Make II (industry-funded Make), this is reserved for projects with a development cost of less than Rs 3 crore, which will be exclusively reserved for MSMEs.

For the first time, the army, navy and air force will each have dedicated “Project Management Units”, headed by two-star general rank officers. They will drive all Make projects relating to their respective services.

To participate in a Make contract, a firm must have a majority Indian stake and be controlled by resident Indians. The company must be registered for at least five years; three years for MSMEs. It must have a minimum rating of B++ from a recognized credit rating agency. For projects worth Rs 5000 crore or more, the participating company’s net worth must be 5% of the development cost, subject to a maximum of Rs 1000 crores. For projects worth under Rs 5000 crore, the eligibility criterion is a positive net worth.

Source: Business Standard