IDR Interview: M M Pallam Raju, Minister of State for Defence

The revised Defence Procurement Procedure was promulgated on 1 September 2006. It is a very comprehensive document and covers the complete spectrum of procurement activities. Clarifications with respect to some major issues like development of indigenous defence industry, continued delays, role of middlemen and probity contract were sought from Minister of State for Defence, M M Pallam Raju.

Though Defence Procurement Procedure - 2006 mentions self-reliance as one of the objectives, no major policy initiative has been introduced to advance it?

DPP-2006 has incorporated the following measures to facilitate increased participation of Indian Industry in defence sector:

• Categorisation of equipment: Acquisitions covered under the ‘Buy’ category would be classified as ‘Buy (Indian)’ and ‘Buy (Global)’. ‘Buy (Indian)’ Category must have minimum 50% indigenous content if the systems are being integrated by an Indian Vendor.

• ‘Make’ Procedure: The aim of the procedure is to undertake Indigenous Research, Design and Development and Production by Indian defence industries. Projects under this procedure would involve design and development of High Technology Complex Systems indigenously. These projects are to be undertaken by Raksha Udyog Ratnas (RURs)/Indian Industry/Defence Public Sector Undertakings (DPSUs)/Ordnance Factory Board (OFB)/Consortia on a level playing field. This procedure would also be adopted for all upgrades categorised as ‘Make’.

• Transfer of Technology for Maintenance Infrastructure: In all ‘Buy’ Category cases where equipment is being bought from foreign vendors the provision of Transfer of Technology to an Indian Public/Private firm, for providing Maintenance Infrastructure would be applicable. In such cases, the foreign vendor would have to identify an Indian firm which would be responsible for providing base repairs and the requisite spares for the entire life cycle of the equipment.

• Offset provision is applicable for all procurement proposals where the indicative cost is above Rs 300 crores involving the outright purchase from foreign/Indian vendors and purchase from foreign vendor followed by Licensed Production. These Offset obligations shall be discharged directly by the direct purchase of, or executing export orders for, defence products and components manufactured or services provided by Indian Defence Industries. These offset obligations may also be discharged by direct foreign investment in Indian defence industries, and in Indian organisations engaged in research in defence R&D.

• A level playing field for the Indian industry has been ensured in DPP-2006 by incorporating the following guidelines to neutralise the impact of taxes and duties payable by Indian industry while carrying out evaluation of bids to determine L1 vendor, without making any changes in the tax structure :

• In case of foreign supplier, the basic cost (CIF) quoted should be the basis for the purpose of comparison of various tenders.

• In case of indigenous suppliers, excise duty on fully formed equipment would be offloaded.

• Sales tax and other local levies, i.e. octroi, entry tax etc. would be ignored in case of indigenous suppliers including Defence Public Sector Undertakings (DPSUs)/Ordnance Factories (OFs).

• The payment conditions should be similar for domestic private suppliers, Defence PSUs/Ordnance Factories and the foreign suppliers.

All countries promote and protect their indigenous defence industry through tax concessions and purchase/price preferences. India has taken no step in this direction.

It would be incorrect to say that we have not taken any step in this direction. As already indicated above, the long pending demand of the Indian private sector to provide a level playing field to them in the field of Defence Procurement has been addressed in DPP-2006 and DPM-2006. In order to neutralise the impact of taxes and duties payable by Indian industries while carrying out evaluation of bids to determine L-1, the following guidelines would be followed:-

• In case of foreign supplier, the basic cost [Cost, Insurance and Freight(CIF) ] quoted by him should be the basis for the purpose of comparison of various tenders.

• In case of indigenous suppliers, Excise duty on fully formed equipment would be offloaded.

• Sales tax and other local levies, i.e., Octoi, entry tax etc would be ignored in case of indigenous suppliers including Defence PSUs and OFs.

• The payment conditions should be similar for domestic private suppliers, Defence PSUs, Ordnance Factories and the foreign suppliers.

Ministry of Defence permitted registration of middlemen vide its letter No.3(2)/PO(Def) 2001 dated 2 Nov 2001. The letter has not been rescinded. But Defence Procurement Procedure-2006 specifically debars middlemen and demands a certificate from the vendor to that regard. Both instructions are mutually contradictory, leading to confusion.

On the basis of Ministry of Finance’s instructions issued on 31^st January, 1989 relating to Indian Agents of foreign suppliers for all the Ministries/ Departments under the Government of India, supplementary instructions were issued by the Ministry of Defence in April, 1989 and in November, 2001 to regulate authorised Indian representatives/agents of foreign suppliers. The instructions provide for the regulation of representational arrangements through a system of registration, categorical and open declaration by the foreign suppliers of the services to be rendered by their authorised representatives/agents and the remuneration payable to them by way of fees, commission or any other method. So far no authorised Indian Representative/Agent has been registered by the Ministry of Defence in terms of these instructions.

Defence Procurement Procedures provide for direct dealing with Original Equipment Manufacturers (OEMs) or Authorised Vendors or Government Sponsored Export Agencies (applicable in case of countries where domestic laws do not permit direct export by OEMs).

There is no embargo on the foreign suppliers to open their own offices in India in terms of RBI Notification No.FEMA 22/2000-RB dated 3^rd May, 2000 and employing their representatives in such offices.

All major defence deals continue to be signed with foreign vendors and the public sector. The private sector remains a peripheral player and is, therefore, wary of committing large resources. How does the Government plan to convince private sector entrepreneurs of fair and just treatment?

One of the areas of thrust in the DPP-2006 is to avoid single vendor situations and generate competition. It also provides that cases, which are being undertaken by DRDO/Defence PSUs/OFB and RURs, with the prior approval of the Defence Acquisition Council, as a design and development projects, would not fall in the category of single vendor cases. RURs, being selected, are private sector companies and they would be treated at par with the Defence PSUs and OFB in terms of the provisions of DPP-2006.

For the first time, the concept of ‘Shared Development Cost’ has been introduced in the ‘Make’ procedure, which provides sharing of cost in the ratio of 80:20 between the Government and the Industry in cases where the system configuration is complex, development lead time is relatively long and technological risks are substantial. The private sector entrepreneurs have been provided fair and just treatment in the procurement procedures and they have to compete in order to get the orders.

Though expeditious procurement is the stated objective of the new procurement procedure, there has been no improvement on ground. What are the impediments and how do you propose to overcome them?

Following steps have been taken in DPP-2006 to speed up the Defence Acquisition:

• Time frame for procurement activities has been incorporated in DPP-06 and major deviation would be monitored at the highest level. The time frames as prescribed in DPP-06 would lead to cutting down of internal lead time for procurements as it brings in checks and balances to avoid multi-layered examination on file and following a path of collegiate functioning at all levels. All major decisions as per the procedures in vogue are being taken at the initiation of the case at the highest level in a time bound manner, which is aimed to reduce the overall lead time for procurement. These include:-

(a) Acceptance of Necessity

(b) Quantities to be procured

(c) Categorisation i.e. ‘BUY’, ‘MAKE’ or ‘BUY and Make’.

(d) Single vendor Clearance (if applicable)

(e) Offset percentages (if applicable)

(f) Detailed scope of trials

(g) Nomination of production agency in cases involving Transfer of Technology (ToT).

• In order to reduce time taken at commercial negotiations and in line with the recommendations of CVC, there would be no negotiations normally with L1 bidder in multi vendor cases.

• The financial powers of Raksha Mantri and Finance Minister have been enhanced along with delegation of financial powers to SHQRs (upto Rs 10 crores) which would speed up the acquisition process.

Many people question the logic of making Integrity Pact applicable to contracts of over Rs 100 crores only. Why have the contracts of lesser value been exempted?

‘Integrity Pact’ has been made applicable to Capital Acquisition cases under DPP-2006 in respect of procurement schemes over Rs 100 crores based on the recommendation of Standing Committee on Defence.