In a significant departure, the Ministry of Defence (MoD) has made public the report of the 10-member Experts Committee that was set up in May 2015 to both evolve a policy framework for facilitating ‘Make in India’ within the purview of the Defence Procurement Procedure (DPP) and streamline the procurement process.1 More significantly, the report has been put in the public domain even before the government has taken action on its key recommendations, indicating the keenness to solicit views from the wider public on the vital issue of self-reliance, which has so far dogged policy makers despite several policy announcements in the past decade-and-a-half. This Issue Brief examines the key recommendations of the Experts Committee, especially those that pertain to the defence industry.
About the Committee and the Structure of the Report
Like many other MoD appointed committees, the Experts Committee included members from all the key stakeholder institutions: the armed forces, various wings of the MoD [Department of Defence Production (DDP), Department of Defence (DoD) and Defence Research and Development Organisation (DRDO)], and the industry. Chaired by Dhirendra Singh, a former Director General (Acquisition) (DG (Acq.)), the Committee had also the benefit of the expertise of another former DG (Acq.) – Satish B. Agnihotri – who has had hands-on experience of DPP-2013, the latest procurement manual in vogue for capital acquisition. As expected, the Committee had interacted with a vast range of stakeholders including industry (both domestic and foreign), various wings of the defence establishment, thinks tanks (including the Institute for Defence Studies and Analyses) and other relevant stakeholders. To the credit of the Committee, the voluminous 263-page report has been submitted to the government in a record time of three months.
The Report of the Committee is divided into seven chapters, with the last chapter being devoted to “enabling framework and summary of observations and recommendations”. The first two chapters – Defence Material and Defence Industry –although more of an introductory in nature, nonetheless have a vital bearing on some of the key recommendations made in the subsequent chapters. The next four chapters – Make in India, DPP, Trust and Oversight and Beyond DPP – deal with issues pertaining to procurement and industry. What is significant about the report is its detailed analysis of each problem affecting the defence industry (particularly the private sector) and the procurement system as well as the ease with which the various complex issues have been analysed.
The report contains 43 recommendations. Of these, the Committee identifies 15 recommendations as pertaining directly to ‘Make in India’ while the remainder relates to DPP. However, given that many of the DPP provisions have a direct impact on indigenous arms production, the industry related recommendations (both direct and indirect) are therefore more than what the Committee has identified. Some of the key recommendations that would have an impact on the ‘Make in India’ initiative are:
Strategic Partnership Model
The signature recommendation of the Experts Committee pertains to various models for the private sector. After taking into account the unique nature of defence equipment and the configuration of the global defence industry, the Committee has arrived at three models for the Indian set up – Strategic Partnership, Developmental Partnership and Competitive Partnership. According to the Committee, the choice of the model should be based on “strategic needs, quality criticality and cost competitiveness.”
Among the three models, Strategic Partnership is somewhat akin to the Raksha Udyog Ratna (RUR) concept. First suggested by the Kelkar Committee, RUR failed to take off apparently due to objections from trade unions affiliated with public sector defence companies and reservations expressed by some industry players on the manner in which the Prabir Sengupta Committee had identified a dozen or so companies as RURs. Surprisingly, the Dhirendra Singh Committee has neither referred to the RUR concept of the Kelkar Committee nor to the RURs identified by the Sengupta Committee. Nonetheless, like the RUR concept, the strategic partnership model also visualises selective identification of a few big private players and nurturing them through preferential treatment, which would entail co-opting them for ‘Buy and Make’ and Government-to-Government procurement programmes.
While suggesting the strategic partnership model, the Experts Committee has also identified the following six segments in which Strategic Partners (SP) from the private sector would be identified:
- Aircraft: fighter, transport and helicopter and their major systems.
- Warships of stated displacements, and submarines and their major systems.
- Armoured fighting vehicles and their major systems.
- Complex weapons which rely on guidance systems to achieve precision hits, which may include anti-ship, air defence, air-to-air, air-to-surface, anti-submarine, land attack.
- Command, control, communication and computers, intelligence, surveillance, target acquisition and reconnaissance.
- Critical materials (titanium alloys, aluminium alloys, carbon composites, nickel/cobalt alloys etc.).
It may be noted that while identifying the different segments, the committee has categorically suggested that just one or two private players would be identified in each segment, limiting the number of players to almost the same number of players identified through the RUR selection process. In order to prevent ‘conglomerate monopoly’, the Committee has further suggested that only one SP should be permitted in one segment, and once it chosen in a particular segment it should not be considered directly or indirectly (through cross holdings in another company) in the other segments. This has apparently not gone down well in the industry, especially the bigger ones which aspire to play a larger role in different segments of defence production. The industry’s reservations notwithstanding, the idea of strategic partnership is as relevant as the earlier RUR concept since India cannot afford to have a very large and frequently changing number of players in every segment of major defence platforms. Even in the United States, the biggest defence market in the world, the production of major platforms and weapon systems is consolidated among a few major companies. Having said this, the major challenge for the government now is to select the SP in each segment. Given the earlier experience in the selection of RURs, it would be worth watching how the government proceeds on the SP concept.
Industry Friendly Procurement System
A major focus of the Expert Committee is on streamlining the acquisition process and structure so as to create more opportunities for the local industry. The Committee argues that for ‘Make in India’ to succeed, the procurement system must recognize the unique and strategic nature of defence equipment, which is characterised by high-technology content, stringent quality standard, limited vendor base, low production rate, rapid obsolescence and restricted mobility across borders. In such a scenario, for the local industry to prosper, there is a need to take it into confidence in every possible procurement step, beginning with the planning process. Highlighting the current weakness whereby the local industry does not have information about the type and nature of the long term equipment requirement of the armed forces, the Committee has suggested that the relevant information as contained in various plans and other documents be shared with the industry with the sole objective of enabling the latter to make a concrete decision on investment or technology partnership. In specific terms, the Committee has suggested the revision of the current Technology Perspective Capability Roadmap (TPCR) so as to reflect the type and nature of the equipment required by the armed forces in the next 15 years. At the same time, the Committee has also suggested that schemes amenable to ‘Make’ projects be shared with the industry along with the details of other schemes as contained in the 5-year Services Capital Acquisition Plan (SCAP).
The Committee is of the opinion that for the Indian industry to contribute meaningfully to ‘Make in India’, the procurement system needs to move towards indigenous design, development and production or ‘Make’ projects. In this regard, the Committee while broadly agreeing with the MoD’s revised and simplified ‘Make’ procedure, also makes some specific suggestions to further strengthen it. It rightly argues that since ‘Make’ projects involve a long-gestation period, the decision on such projects must precede that of other categories by at least one plan period (five year) or more. Such pre-positioning of ‘Make’ projects would give much needed leeway to the industry and the services to iron out any issue that may arise at the developmental stage without significantly disturbing the planned induction schedule. The eligibility criteria for soliciting expression of interest (EoI) from the industry should be liberal to include not only the big players but also all the ‘innovative and agile industry’ including from the Micro Small & Medium Enterprises (MSME) sector. Moreover, the industry executing the ‘Make’ project should be given tax incentives by way of allowing their developmental cost (of 20 per cent) as being qualified as R&D expenditure.
The Committee is also of the firm opinion that for the local industry to grow, the current approach of the procurement system towards single vendor situations needs a relook. As the Committee rightly observes, single bid situation is an emerging reality, particularly in cases involving ‘Buy and Make’ and ‘Buy and Make (Indian)’ projects. Rejecting such proposals for the sake of competition not only delays acquisition, but hampers the interest of the local industry which is now expected to play a much larger role under the ‘Make in India’ initiative. Aligning with the concept of strategic partnership, the Committee therefore recommends suitable changes in the DPP to reflect the emerging reality.