Despite repeated assertions of the Government that the huge potential of the private sector must be tapped to achieve self sufficiency in defence production, little progress has been achieved on ground. Leaving aside a handful of highly aggressive big corporate entities, most private sector companies continue to wait on the sidelines, struggling to gain entry into defence business. Whereas old players are aware of the functioning of the Ministry of Defence (MoD) and have developed close network with key functionaries, new aspirants find the whole environment highly dissuasive.
There is a total absence of an effective institutionalised interface between the MoD, its procurement agencies and the industry. On one hand, industry complains of a total lack of clarity as regards the confirmed requirements of the armed forces, procurement structures, procedures and policies. Many private sector companies who have the capability to manufacture the whole range of defence equipment do not know whom to approach for ascertaining details.
Many private sector companies who have the capability to manufacture the whole range of defence equipment do not know whom to approach”¦
On the other hand, procurement agencies are unaware of indigenous Indian companies that can manufacture and supply required defence hardware as the capability and potential of Indian companies has not been authentically catalogued as yet. It is easier to obtain details of foreign manufacturers than to identify Indian companies for the issuance of RFP.
Industry Needs Inputs
Before taking an investment decision, every company needs inputs regarding likely annual demand of the product over short, medium and long terms; procurement agency that is likely to issue Request for Proposals (RFP) with likely timelines; and need for vendor registration and the process thereof. Presently none of the above inputs are available to a prospective vendor, as shown below:-
- Defence Procurement Procedure – 2011 (DPP-2011) mandates that the future needs of the armed forces must be shared with the industry. For that, a public version of perspective document outlining the technology perspective and capability road map covering a period of 15 years is required to be made public. As can be appreciated, such a document can at best be of limited value. It is purely indicative in nature and does not contain concrete demand projections. Additionally, absence of assured commitment of funds and frequent changes in priorities reduce the sanctity of the perspective plans. Thus no prospective producer can bank his investment decision on it.
Every country that aspires to develop its defence industry has to provide support and incentives to local entrepreneurs.
- There are over 150 major procurement agencies under MoD that resort to large scale purchases – Acquisition Wing (MoD), the three Service Headquarters (SHQ), Coast Guard, nine defence public sector undertakings, 40 Ordnance Factories, fifty two Defence Research and Development Laboratories, Army Base Workshops and Air Force Base Repair Depots. Additionally, all Command Headquarters and subordinate formations make purchases under their delegated financial powers. All defence procurement agencies function independently. 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.
- 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. 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. As per DPP-2011, no new vendor can be added to the list after the issuance of RFP. It implies that vendors have to keep in touch with all procurement agencies to ensure that they do not lose business opportunities by default. In case they fail to anticipate a proposal and contact the procurement agency prior to the issuance of tender documents, they miss the bus.
Due to the above mentioned infirmities of the system, private sector players find the environment highly dissuasive. There is no Government agency to guide prospective vendors as regards procurement processes, impending tenders and contact points for further information. New entrants face further challenges. They keep groping in the dark, not knowing how to proceed ahead. Once frustration and despondency set in, they lose heart and get forced to reconsider their decision to enter the defence sector. Absence of a genuine facilitator acts as the biggest deterrent for the new aspirants.
Bridging the Communication Gap
Every country that aspires to develop its defence industry has to provide support and incentives to local entrepreneurs. The British 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 handles a base of 1,800 buyers and 32,000 suppliers. With a view to ensure that all stakeholders remain updated with the latest developments, it publishes a fortnightly ‘Defence Contracts Bulletin’. This was introduced in 1986 to increase transparency in defence contracts and to alert potential vendors of forthcoming business opportunities. It acts as a gateway for aspiring companies to enter defence business, either directly as a prime contractor, or indirectly as a sub-contractor.
Once frustration and despondency set in, they lose heart and get forced to reconsider their decision to enter the defence sector. Absence of a genuine facilitator acts as the biggest deterrent for the new aspirants.
DCB is an exhaustive publication containing details of possible future purchases (with deadline for Expression of Interest, summary of requirements and quality assurance standards); tenders invited; contracts awarded – both competitive and single source (with date of award, name of company and price at which awarded); sub-contract opportunities; and various Government policy announcements and related reports. It also contains advertisements placed by different companies. DCB is available both in print and wire editions. All tenders of non-warlike stores in excess of GBP 93,000 and warlike stores of over GBP 500,000 are published in DCB. In addition to providing advance information, DCB contains details of contact points for further assistance.
Established in July 2004, the European Defence Agency (EDA) has been tasked to improve European defence capabilities, promote armament co-operation and develop a competitive With a view to promote mutual transparency and accountability, EDA has created an Electronic Bulletin Board (EBB) to advertise all new defence contracting opportunities in the subscribing states. The aim is to enable suppliers based in the territory of the participants to visit a single website for all defence procurement contract opportunities advertised by the subscribing member states.
The US National Defence Industrial Association disseminates information regarding the latest developments in technology, equipment and other important business issues through a monthly publication. In addition to daily announcement of all contracts valued at USD 5 million, the Department of Defence (DoD) maintains a highly informative web site. Subscribing entities can keep themselves posted of the latest business opportunities and contract notices.
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Similarly, South Korean monthly magazine ‘Defence and Technology’ and Finland’s ‘Finnish Defence Contracts Bulletin’ carry details of latest policy directives, update on emerging defence technologies and proposed acquisitions. It is only in India that despite repeated declarations of developing indigenous defence industry, no Government initiative has been taken to keep the environment informed of procurement policies/procedures, impending tenders and contact points for further information. It is left to the patience, stamina and perseverance of vendors to enter defence business.
The Way Forward
MoD must initiate two measures at the earliest. One, the Department of Defence Production should issue a periodic communiqué covering all defence industry related developments. Two, a directory of credible defence manufacturers should be compiled and issued to all procurement agencies. Both the suggested measures are elaborated below.
Defence Procurement Communiqué (DPC) should be a monthly bulletin and published both in print and electronic forms, striving to provide news, information and other inputs to prospective sellers to help them take informed business decisions. It should consist of five sections as follows:
Section I – Policy Directives
The aim should be to keep the environment abreast of all the up-to-date developments that affect regular functioning. This section should include latest policy changes and clarifications/amplification of various provisions. It should also notify changes in equipment philosophy, procurement structures and functionaries. This section should also contain non-classified aspects of Annual Acquisition Plans with a compendium of important Government policies as a handy reference book.
As India is a new entrant, its offset policy is under evolution. There are large gaps, both in structures and policy. There is no single empowered authority to oversee the complete gamut of offset activities.
Section II – Procurement Matters
This section should act as a single-point official source of all business opportunities for companies who wish to compete for defence business, either directly as a prime contractor or indirectly as a sub-contractor. In addition to containing information regarding technological developments and latest trends in military equipment, this section should contain details of all impending procurement proposals and anticipated defence requirements. It should be mandatory for every procurement agency to notify all procurement orders having an indicative value of over Rs 20 crores.
All Requests for Information (RFI) must be published to enable prospective vendors to carry out product adaptation. The endeavour should be to provide adequate advance information of all forthcoming requirements, both in terms of performance parameters and quantities. It will help prospective vendors to get forewarned about impending RFP and can get their names included in the approved vendors list.
MOU signed between foreign vendors and Indian companies, impending procurement proposals and emerging business opportunities in overseas defence markets.
Section III – Offset Aspects
Offsets have become an integral part of India’s defence procurement policy, with offset business likely to exceed USD 30 billion in the next ten years. As India is a new entrant, its offset policy is under evolution. There are large gaps, both in structures and policy. There is no single empowered authority to oversee the complete gamut of offset activities. Similarly, major ambiguities exist as regards approval, validation, discharge and measurement of offset contracts. This section of DPC should deal exclusively with offsets and carry policy changes. Clarifications should be provided in respect of common doubts. MoD can also indicate its preference for specific sectors in which offsets are desired.
It is therefore essential that MoD prepares an exhaustive compendium to help procurement agencies to increase vendor base by issuance RFP to a larger number of companies.
Section IV – Progress Update
This section, if managed with an open mind will provide a quantum boost to transparency and enhance credibility of the system. It should carry details of RFPs issued, trials in progress, selection of technically acceptable vendors, placement of orders and contract management. Progress of offset programmes and phased fulfillment of obligations should be made public on regular basis.
Revelations made in the progress reports will also put pressure on vendors to strictly adhere to implementation schedules lest they invite adverse publicity. Similarly, offset obligors will be forced to achieve contracted production targets, fearing being seen as defaulters. It will also make the concerned officials to monitor progress more diligently.
The existing communication gap between the numerous procurement agencies of MoD and Indian industry deters new aspirants. Through the issuance of DPC, MoD can act as a facilitator for the stress-free entry of small/medium enterprises and instill confidence in the fairness of Indias procurement regime.
Section V – General Reading
Thought provoking and analytical articles should be published in this section to generate new ideas for streamlining the system for optimum efficiency. Features carrying market researches/surveys and analysis of business environment will help companies take more-informed decisions. With a view to promote exports, relevant information regarding availability of business opportunities abroad should also be made available.
As regards the second recommendation, MoD must prepare a compendium of credible defence manufacturers. There is no data bank of Indian industries available at present. Resultantly, only a handful of highly visible and well-known companies are invited to bid for defence contracts. A number of other companies who possess the necessary competence lose by default. It is therefore essential that MoD prepares an exhaustive compendium to help procurement agencies to increase vendor base by issuance RFP to a larger number of companies. The said compendium will also prove useful for foreign buyers as they can identify Indian companies for the placement of orders. Further, foreign producers can make use of the compendium to identify suitable Indian partners, both for
co-production and offset fulfillment.
A word of caution will be in order here. Issuance of DPC will be intensely resisted by most procurement agencies. They are opposed to centralised publication of their tender documents. They want to continue with the current practice of limited regional publicity. It helps them to restrict the vendor base to patronise the favoured few. Issuance of tender documents to local vendors facilitates ring/pool/cartel tendering, in which procurement officials collude with a coterie of vendors to resort to the unethical practice of awarding contracts to venders by rotation. It defeats the very purpose of open and competitive bidding and allows the nominated vendor to hike his bid considerably. Therefore, MoD will have to be firm and force all procurement agencies to advertise their procurement schedules in DPC.
Finally, effectiveness of any regime is primarily dependent on the credibility that it enjoys. It can only be achieved by total transparency in defence deals. Many misplaced and unfounded misconceptions get removed when facts are made public in an honest and forthright manner. The existing communication gap between the numerous procurement agencies of MoD and Indian industry deters new aspirants. Through the issuance of DPC, MoD can act as a facilitator for the stress-free entry of small/medium enterprises and instill confidence in the fairness of India’s procurement regime. In addition to advising companies as regards procedures and opportunities, it should keep them informed of all procurement proposals. Similarly, compendium of Indian defence companies will provide a ready data base of vendors to MoD.
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