Indian Defence Review

Credit is due to the Indian Ministry Of Defence (MoD) for its continuous endeavour to streamline the defence procurement procedures. There have been three revisions during the last four years. The latest, Defence Procurement Procedure—2006 (DPP-2006) is a very comprehensive document. The stated objective of the DPP-2006 is threefold:-

The Government has not been able to put in place a responsive, dynamic and effective defence procurement regime. The complete process suffers from indifference, apathy, inefficiency and lassitude. Old bureaucratic mindsets and penchant for status-quoism inhibit forward thinking.

Additionally, MoD has declared its aim to have 70 percent of defence requirements sourced from indigenous sources by 2010.Realising that this aim would remain a pipe dream unless the private sector was co-opted, the defence industry was thrown open to the private sector in May 2001. The Government also permitted 100 per cent equity with a maximum of 26 per cent Foreign Direct Investment (FDI) component, both subject to licencing. Subsequently, detailed guidelines for the issuance of licence for the production of arms and ammunition were issued in January 2002.

However, despite all efforts, there has been no speeding up of the procurement process. Funds continue to get surrendered while the services remain deprived of critical equipment. Decision making continues to be highly sporadic and erratic. Questions are still raised regarding lack of transparency and objectivity of the process. Competition remains limited. Comptroller and Auditor General of India has faulted the system for overuse of single vendor provisions. There has been no appreciable increase in indigenous defence production. India continues to depend on imports for all major requirements while the indigenous production is limited to low-tech low-end items and a few products based on bought technology.

The Impediments

There are a number of reasons for the unsatisfactory state of affairs.As will be seen subsequently, the Government has not been able to put in place a responsive, dynamic and effective defence procurement regime. The complete process suffers from indifference, apathy, inefficiency and lassitude. Old bureaucratic mindsets and penchant for status-quoism inhibit forward thinking. Deficiency of quality procurement staff is another major contributory factor. Doing business with the defence continues to be a highly complex and daunting task for the companies.

Attitudinal Problems

Rather than considering them as partners in enhancing the nation’s defence preparedness, companies are treated as adversaries who should be kept at an arm’s length. Many Government functionaries still view businessmen as unprincipled and scheming characters who are out to make a quick buck. They feel that businessmen vitiate the environment through unethical dealings. This adversarial relationship results in total lack of communication resulting in misapprehensions, and thereby giving rise to doubts about the transparency and fairness of the process. Many aspiring entrants lose heart and get dissuaded.

Also read: India’s Defence Procurement Procedure (DPP) prevents procurement

There is no Government agency to guide prospective vendors as regards procurement processes, impending tenders and contact points for further information. Moreover, Indian companies are unable to obtain appointments with procurement functionaries to discuss genuine issues. According to some vendors, they are openly shunned.

No Public Declaration of Long Term Acquisition Plans

DPP-2006 mandates that based on the Defence Planning Guidelines, Headquarters Integrated Defence Staff (HQ IDS), in consultation with the Service Headquarters (SHQ), would formulate Long Term Integrated Perspective Plan (LTIPP) for 15 years. HQ IDS would also break down the broad capabilities so as to list out the programmes and projects needed to be taken up to achieve the capabilities required. Five Year Defence Plans, flowing from LTIPP, would also include Five Year Services Capital Acquisition Plan (SCAP). SCAP would indicate the list of equipment to be acquired, keeping in view operational exigencies and the overall requirement of funds.

Rather than considering them as partners in enhancing the nations defence preparedness, companies are treated as adversaries who should be kept at an arms length.

Though DPP-2006 lays down guidelines for perspective planning, it is totally silent about making it public. In all probability, it will remain a classified document and the defence industry will never learn of long term procurement plans. This is a matter of major concern.

Long term perspective plans help all prospective vendors to identify areas of interest and initiate necessary action well in advance, as detailed economic viability studies are essential for all investment decisions. Scouting for technology partners and establishment of required infra-structure are also time consuming activities. It is, therefore, imperative that necessary information be disseminated well in advance to enable companies to do preparatory work and be ready to participate in tenders when issued.

Additionally, Requests for Proposals (RFP) are issued for one-time piecemeal quantities without indicating the envisaged total requirement over a period of time, whereas every producer seeks economies of scale and assured continuous orders. Unfortunately, Indian procurement regime precludes both.

Absence of Centralised Registration of Vendors

India has over 150 defence procurement agencies. In addition to the Acquisition Wing of MoD, some of the other entities that carry out procurement functions independently are as follows:-

Although Director General Quality Assurance is the designated authority for certifying the potential of a company, almost all defence procurement agencies have independent systems for registration of vendors. Any vendor desirous of doing business with the defence has to approach all procurement agencies separately for product-specific registration to become eligible to receive tender enquiries. It is a herculean task and tests the perseverance of even die-hard optimists.

No Centralised Notification of Defence Procurement Tenders

All defence procurement agencies function independently. Many tenders are not made public on security considerations; whereas others are published in papers with limited reach. Additionally, many deals are negotiated on the basis of single or limited tender enquiries on grounds of urgency. Thus, most tender enquiries tend to get restricted publicity.

India has no designated agency to help aspiring vendors who want to do business with defence. It is for the vendors to fend for themselves. For new entrants, it is a highly intimidating task.

As there is no system in place for centralised notification of all defence procurement tenders, prospective vendors have to learn about impending tender enquiries by direct liaison with all procurement agencies. It implies that vendors have to keep in contact with all of them to remain informed. Even worse, as per the procurement procedure, once RFP is issued, no new vendors can be added to the list. As a result, many vendors lose business by default and the country loses benefits accruing from enhanced competition. The problem gets compounded for foreign vendors as they are not allowed to employ agents in India to maintain liaison.

Ambiguities of Offset Policy

India has made offsets mandatory for all contracts over 300 crore rupees. Though the policy has been promulgated in 2005, a number of major issues remain imprecise. As per the policy, offset obligation can be discharged through any of the following routes:-

DPP-2006 defines the Indian defence industry as consisting of Defence Public Sector Undertakings, the Ordinance Factory Board, and any private defence industry manufacturing these products or components under an industrial licence granted for such manufacture. Further, for the purpose of defence offsets, ‘services’ mean maintenance, overhaul, upgradation, life extension, engineering, design, testing, defence related software or quality assurance services.

By the above definition, mostly public sector companies qualify as Indian defence industries as very few licences have been issued to the private sector. In any case licences are required to be issued only for the manufacture of arms and ammunition, whereas defence production covers a vast canvas. For example, IT companies require no licence to produce defence related software. It is not clear if they get counted as a part of the Indian defence industry for offsets. Will export of defence related software by Infosys, Wipro or Satyam be acceptable against offset obligations?

The Confederation of Indian Industry has been taking a number of creditable steps to acquaint companies with Indian defence procurement regimes.

Similarly, provisions are not clear as regards FDI in defence R&D. Though there is an upper cap of 26 percent on FDI in defence production, it is not clear if it applies to defence R&D as well. The policy is silent about it. Most major foreign defence manufacturers are wary of these ambiguities and want a clear-cut long term policy.

Purchase Preference to the Public Sector

According to the directive issued by the Government of India (Department of Public Enterprises) on 26 October 2004, all Central Public Sector Enterprises will be given purchase preference if the price quoted by any of them is within 10 per cent of the lowest bid. This provision is applicable to all tenders where the value is Rs 5 crores or more. Additionally, Defence Procurement Manual 2005 stipulates that small scale industries can be given price preference of up to 15 per cent in comparison to large industries.

The Government claims to be creating a level playing field for all vendors with equal opportunities for the private sector. Yet, it continues with such archaic and highly inequitable stipulations, which militate against the basic canons of free and fair market play.

Dissuasive Provisions of FDI in Indian Defence Industry

The Government permitted 100 per cent equity with a maximum of 26 per cent FDI component, both subject to licencing in May 2001. The applicant company has to be either an Indian company or a partnership firm and the management control must remain in Indian hands with majority representation in the board. Moreover, the Chief Executive has to be a resident Indian.

India thus, expects a foreign investor to invest his resources in a venture where he has no significant control, strict capacity/product constraints, no purchase guarantee, no open access to other markets (including exports) and an unfair advantage to the local public sector. Such an expectation defies logic. No wonder that the response has been highly lukewarm so far. Many feel that such a dissuasive policy was destined to be a damp squib.

Official Apathy

Britain has constituted Defence Suppliers Service (DSS) in MoD. It is a small team of experienced staff that performs the functions of a focal point for companies interested in becoming defence suppliers. DSS staff interacts with company representatives and advises them regarding procedures and opportunities. It also highlights the need for third party Quality Assurance certification and outlines some of the current major initiatives in the field of defence acquisition and the roles of various parts of the MoD.

India has no designated agency to help aspiring vendors who want to do business with defence. It is for the vendors to fend for themselves. For new entrants, it is a highly intimidating task. No one tells them about the procedures and the contact persons. Many private sector companies have the capability to manufacture the whole range of defence requirements but do not know whom to approach to ascertain details. They are ignorant of the procurement agencies, their policies and procedures. This ignorance makes them wary of dealing with the defence.

The Confederation of Indian Industry has been taking a number of creditable steps to acquaint companies with Indian defence procurement regimes. It conducts highly acclaimed Defence Acquisition Management Course periodically and also provides assistance to the aspiring companies through its specialised Defence Technical Assessment and Advisory Service. Sadly, there has been no Government initiative in this direction.

The British System

MoD is the British industry’s largest single customer with 32,000 suppliers. It has around 1,800 buyers committed to purchasing high-quality goods and services at the most economic prices and best value for money terms. MoD has put in place a highly responsive and effective system to assist and support both suppliers and buyers within the defence industry by providing access to a wide variety of information at different levels. It has adopted an approach of providing reasonable opportunity to all companies to compete in an impartial and consistent environment through maximum publicity of defence purchases.

DSS carries out the following functions:-

Preferential treatment of the public sector is contrary to the stated aim of “˜open and equitable competition. Purchase preference granted to the public sector cannot be justified at all. Nothing causes more damage to the credibility of a system than playing favourites.

The Defence Contracts Bulletin (DCB), published by the DSS, is available both in print and wire editions. It provides a gateway to new business opportunities for companies, large and small, who wish to compete for defence business either directly as a main contractor or indirectly as a sub-contractor.

Defence procurement website provides total guidance to companies as regards doing business with the MoD. It also contains a host of related information and a wide variety of links to other procurement-related sites. Guide to Defence e-Business is designed to explain the various applications and techniques that are used or could be used in commercial relationships between the MoD and its industrial partners.

‘Selling to the MoD’ is a comprehensive guide published by the DSS to explain how a company may become a defence supplier at prime, sub-contract and local purchase level. The brochure also provides points of contact for exports, standardisation, research, diversification and many other key areas.

Recommendations

Every responsive procurement regime is readily recognised by the presence of a number of features which contribute to its functional effectiveness, as is seen in the British system. In case the Indian Government is really serious about reforming the defence business environment, it has to develop a positive approach towards business entities and initiate major changes with respect to the following:-

Innovative, Unambiguous and Vibrant Policy Framework

The Government of India had set up a committee under Mr Vijay Kelkar to recommend measures to bring about improvements in defence acquisitions and production.The Committee commenced work in July 2004 and submitted its report in two parts in April 2005 and November 2005 respectively. Although the Government has accepted most of its recommendations, implementation on ground has been tardy.

Presently, the Department of Defence Production (DDP) in MoD looks after the public sector enterprises only. The private sector remains neglected. There is an urgent need to have an agency that the aspiring companies can approach to obtain clarifications and guidance.

The Kelkar Committee had strongly advocated evolution of 15 Year Long Term Plan for defence acquisitions and wanted it to be shared with the industry. Nearly two years have passed since the submission of the Committee’s report, but no such plan has been finalised as yet. The industry continues to grope in the dark as regards impending defence requirements.

Security classification of procurement proposals hampers publicity, resulting in fewer vendors participating in a tender. With advances in information-gathering technology, it is time the Government and the services have a re-look at the complete methodology of the classification system.

FDI is a highly effective route to obtain foreign technology collaborations. But it has to be attractive enough for foreign companies and investors to make business sense. The failure of the current policy should propel the Government to revisit it in its entirety to remove all dissuasive provisions.

Preferential treatment of the public sector is contrary to the stated aim of ‘open and equitable’ competition. Purchase preference granted to the public sector cannot be justified at all. Nothing causes more damage to the credibility of a system than playing favourites. The public sector must learn to do without state protection and compete on its own efficiency. Additionally, the public sector should not be given advance notice of impending procurements as it gives them an unfair time advantage to negotiate collaborations.

While seeking transfer of imported technology, a selection of Indian recipients should be based purely on merit. A private sector company may be more suited to receive incremental technology rather than a public sector nominee, as is the practice at present. Endeavour should be to utilise existing capacity optimally rather than creating infructuous duplication.

Policy on offsets should be made free of all ambiguities. All defence related activities should be accepted against the fulfillment of obligations. There should be no attempt to classify defence industry for the purpose. Offset banking may be introduced in due course after gaining sufficient experience. FDI in defence R&D may be pegged at an appealingly higher percentage.

Procedural Reforms

There is immense resistance to centralised registration of vendors. All procurement agencies want to retain powers to register vendors under their own aegis as it gives them liberty to patronise a selected few. It also helps in restricting competition by issuing tender enquiries to locally registered vendors. The Government has to initiate tough measures to force a central registry of approved vendors.

As is being done in Great Britain, the Government should have a portal wherein all tender notices in excess of a prescribed value should be displayed. Any vendor desirous of doing business with the defence should be able to download details of all tender notices. It is terribly frustrating for companies to struggle to gather information from over 150 procurement agencies.

Broad parameters of equipment proposed to be procured should be made known to prospective vendors six months prior to the issuance of RFP to give them adequate time to take well considered business decisions and carry out preparatory work. Similarly, time given for the submission of technical and commercial proposals needs to be considerably increased, especially in cases where offsets are mandated.

Instead of piecemeal buys, the Government should encourage procurement agencies to plan bulk procurements for economies of scales. Additionally, long term requirement should be communicated to indicate likely flow of orders. This will prompt companies to commit resources for establishing necessary production facilities.

Procedure should be made user-friendly. Participation of small and medium enterprises in defence production should be encouraged by facilitating an easy and hassle-free entry.

Structural Improvements

Presently, the Department of Defence Production (DDP) in MoD looks after the public sector enterprises only. The private sector remains neglected. There is an urgent need to have an agency that the aspiring companies can approach to obtain clarifications and guidance. It has been generally accepted that the DDP should be reorganised and called the Department of Defence Industry (DDI), with a much wider mandate to integrate the private sector as well.

The Government has to realise that both public and private sectors are national assets and harnessing of their potential is essential if India wants to achieve self reliance in defence production.

There is an urgent need to have a mechanism in place to facilitate the participation of Indian private sector in defence industry. A dedicated set-up, called the Defence Industry Service Group (DISG), should be established under the recommended DDI to act as the nodal agency for the complete defence industry. It should consist of experienced officials and act as an effective institutionalised interface between the MoD, the services and the industry for regular interaction.

In addition to advising companies as regards procedures and opportunities, it should also help remove general misconceptions about the fairness of India’s procurement regime. Publication of brochures covering all aspects of procurement structures and procedures in simple language will go a long way in encouraging companies. It should also be tasked to maintain a portal notifying all procurement tenders and policy directives.

Such a mechanism can also assist companies, on payment of fees, in ascertaining their current technical/manufacturing prowess and potential for entry into the defence production sector. Advisory service can also be offered to companies as regards the availability of opportunities for the supply of their current products to the defence. It could also suggest defence products which a company can manufacture with marginal addition to its facilities and indicate related areas for possible development/diversification.

A directory of credible defence manufacturers should be compiled with details of all assessed companies. This directory should be made available to every defence procurement agency to facilitate identification of companies for the issuance of tenders. The directory could also help foreign producers to locate potential Indian partners for collaboration and offset fulfillment.

Conclusion

Reforms are a continuous process. The Government has displayed its resolve, commitment and keenness to remove all infirmities in the acquisition process by periodic reviews and bold policy initiatives. Although a number of steps have been taken to make it industry-friendly, actual progress on ground has been negligible. Prospective companies continue to find the whole environment highly intimidating and dissuasive. Leaving aside a few highly visible companies, entry for new players has been woefully painstaking.

Effectiveness of any regime is primarily dependent on the credibility that it enjoys. All policy ambiguities should be removed to eliminate discretionary dispensations and promote transparency in decision making. A procedure is as good as the functionaries who implement it. It is, therefore, absolutely essential that the acquisition staff be selected with utmost care and given adequate orientation training to equip them for the highly specialised task of defence procurements. Emergence of a truly dynamic, vibrant and responsive defence procurement regime will not only cut down delays but also affect major savings.

Finally, the Government has to realise that both public and private sectors are national assets and harnessing of their potential is essential if India wants to achieve self reliance in defence production. It should not play favourites and treat both as equal partners in progress. Archaic mindset of pro-public sector bias has to be replaced by a broader outlook towards defence industry as a whole.