Major General Mrinal Suman (Indian Defence Review Sep 2009)
Although manufacture of components, assemblies and sub-assemblies was thrown open to the private sector in 1991, it was only in 1998 that the Ministry of Defence (MoD) took the first major step to involve the private sector in defence production. Six Joint Task Forces were constituted with the Confederation of Indian Industry to cover the following aspects:-
(a) Defence-Industry Long Term Partnership.
(b) Defence-Industry Partnership on Commercial Process.
(c) Public Sector Undertakings/Ordnance Factories/Private Sector Complementarity.
(d) DRDO-Industry Partnership.
(e) Defence Export Strategy.
(f) Defence-IT Industry Partnership.
Consequent to their recommendations, the Government opened defence production to the private sector in January 2002. It allowed 100 percent private equity with 26 percent Foreign Direct Investment (FDI). It was a major policy change. Subsequently, the Department of Industrial Policy and Promotion issued detailed guidelines for the issuance of licence to the private sector for the production of arms and ammunition.
The private sector was euphoric and anticipated huge business opportunities. However, their hopes were soon belied when they realised that the public sector continued to get all orders and the private sector had to remain content with the supply of some sub-assemblies and components. Moreover, as the stipulations governing foreign investments were highly skewed, there was no inflow of foreign funds. In short, there has been no change in the ground situation.
One of the major reasons for the continued neglect of the private companies in the defence sector is their failure to organise themselves into a collective effort. There is no business association in India exclusively for the defence industry. There are three major business associations in India, as follows:-
(a) Confederation of Indian Industry
Founded over 112 years ago, the Confederation of Indian Industry (CII) is a non-government, non-profit, industry led and industry managed organisation with a direct membership of over 6500 organisations from the private as well as the public sectors and an indirect membership of over 90,000 companies from around 350 national and regional sectoral associations. With 57 offices in India, 8 overseas (Australia, Austria, China, France, Japan, Singapore, UK and USA) and institutional partnerships with 240 counterpart organisations in 101 countries, CII strives to serve as a reference point for the Indian industry and the international business community.
CII membership is open to companies/firms engaged in manufacturing activity or providing consultancy services (engineering/technical/management) or in the service sector (banks, financial institutions, software development, hospitals, travel/tourism, hotels & hospitality). There is no individual membership in CII. CII works to create and sustain an environment conducive to the growth of industry in India, partnering industry and government alike through advisory and consultative processes. Defence, Aerospace and Research is one of its numerous divisions.
(b) Federation of Indian Chambers of Commerce and Industry
Set up in 1927, the Federation of Indian Chambers of Commerce and Industry (FICCI) has 1500 corporate members and over 500 chambers of commerce and business associations on its rolls. It claims to represent over 250,000 business units, belonging to large, medium, small and tiny segments of manufacturing, distributive trade and services. FICCI has formed Joint Business Councils (JBCs) with over 69 countries, including the US, Japan, South Korea, Australia and the People's Republic of China. FICCI stands for quality, competitiveness, transparency, accountability and business-government-civil society partnership to spread ethics-based business practices and to enhance the quality of life of the common people. It provides a forum for continuous government-industry interface for evolving a shared vision on economic matters.
Thirty-four specialized committees have been formed to focus on diverse segments of the economy and grapple with sectoral issues to provide solutions to business and to suggest pragmatic policies to the Government. Defence is one of them.
(c) Associated Chambers of Commerce and Industry of India
Established in 1920 by promoter chambers, the Associated Chambers of Commerce and Industry of India (ASSOCHAM) has in its fold more than 300 chambers and trade associations, and serves interests of more than 300,000 direct and indirect members. It represents the interests of industry and trade, interfaces with Government on policy issues and interacts with counterpart international organisations to promote bilateral economic issues. ASSOCHAM has identified a number of key areas for special focus and has opened some overseas offices as well. It has established partnership with business chambers in more than 45 countries. ASSOCHAM has 60 expert committees covering the entire gamut of economic activity in India, e.g. Information Technology, Biotechnology, Telecom, Banking & Finance, Company Law, Corporate Finance, Economic and International Affairs, Tourism, Civil Aviation, Corporate Governance, Infrastructure, Energy & Power, Education, Legal Reforms, Real Estate & Rural Development. Defence is one of them.
As can be seen above, all the three business associations look after the complete gamut of business and industrial activities. Defence is handled by one of their numerous committees. In other words, defence does not get the attention that it deserves. Although all associations organise seminars, publish papers and participate in defence exhibitions, they are unable to influence Government policies due to lack of integrated and focused approach.
There are two activities of CII that merit special mention. First, it provides Defence Technical Assessment and Advisory Services (DTAAS) to its member companies to facilitate their entry in defence sector. The service strives to bridge information gap existing between the aspirant companies and the defence procurement agencies. DTAAS team assesses a company’s capability to manufacture various defence projects both with their existing facilities and with incremental additions. The team also offers specialist consultancy services relating to defence procurement procedures and policies. The service has been outsourced by CII to a team of professionals.
Secondly, CII conducts much acclaimed Defence Acquisition Management Course in India and abroad. DAMC aims to familiarise senior managers with defence procurement structures and procedures. The course provides latest information pertaining to defence acquisition policies and quality assurance procedures. India’s defence offset policy is also covered in detail.
A Look Abroad
National Defence Industrial Association (NDIA) is America's leading defence industry association promoting national security. Though founded in 1997, it traces its history to the American Defence Preparedness Association (1919) and the National Security Industrial Association (1944). Its mission is to provide a legal and ethical forum for the promotion of insightful interaction between the Government and the industry on national security issues. NDIA provides individuals from academia, government, the military services, small businesses, prime contractors and the international community, opportunities to network effectively with the government. It addresses and influences issues as well as government policies critical to the health of the defence industry.
The International Division serves as the NDIA focal point and coordinating element for the identification, study and resolution of management and business problems associated with government policy and practices in the areas of foreign military sales. The Legislative Information Division aims to provide NDIA members with access to key government and industry officials and to monitor defence industry related legislation. NDIA's Procurement Division monitors and advances sound acquisition policies and processes.
South African Aerospace Maritime and Defence Industries Association (AMD) represents the collective interest of all the main players and interest groups within the Defence Related Industry. The membership represents in excess of 90% of defence related business in South Africa and in excess of 97% of all defence related exports. The Department of Trade and Industry recognises AMD as the Joint Export Action Group representing the Aerospace and Defence Industries sector.
With a view to promote Korean defence industry, Korean Defence Industry Association (KDIA) was founded in 1976 as a civilian non-profit organisation. Subsequently, it was designated as the sole approval agency for defense exports. In 1986, it took over the responsibility of being a financial guarantee agency for defense contracts. Enlarging its charter further, it was designated as an approval agency for defence imports in 1998. Interestingly, KDIA has much larger participation. Unlike defence associations in other countries, its membership is not limited to defence manufacturers only. Interestingly, concerned defence ministry officials are also on its rolls.
Australian Industry & Defence Network Incorporated (AIDN) was established in 1995 to facilitate business in the defence sector for small-to-medium enterprises (SMEs). It has over 800 members and acts as a focal point for interaction between the Government agencies and defence companies. It represents member companies at the highest Government levels and to the prime contractors over a wide range of issues. AIDN has continued to play an integral role in the development of new defence and industry policies to maximise SME participation.
Defence Manufacturers Association of the UK is often cited as an example of dynamically evolving industrial association. Due to synergy of activities, Association of Police and Public Security Suppliers has recently been incorporated in DMA. In further consolidation, DMA and the Society of British Aerospace Companies decided in March this year to merge the two organisations into one new trade association to create a more robust entity with much larger membership. The merged association will provide the industry with a more powerful voice, unified approach and a single point of contact with the Government. Representing a much wider network of large, medium and small companies across the complete supply chain, it will be able to influence Government policies effectively. The Government has also welcomed simplification of structure for interface with the industry.
It was in December 2005 that Canadian Defence Industries Association decided to widen the scope of the organisation's representation and mandate due to the increasingly integrated nature of the national defence and internal security. Canadian Association of Defence and Security Industries (CADSI) boasts of a membership of over 500 companies, providing employment to more than 70,000 Canadians and generating $7 billion in annual revenues, with half of it coming from international sales. It aims to facilitate closer relationship and dialogue between the government and the defence industry. CADSI membership provides benefits in terms of customer intelligence, company visibility, government recognition, influence and networking.
The following facts emerge from the above discussion:-
· In all countries, defence manufacturers have exclusive association to provide single point interface for effective interaction with their respective governments and other agencies to promote their interests.
· Although in most cases membership of the associations is restricted to companies associated with defence products and services, there are some notable exceptions. KDIA members are also drawn from ministries handling national defence, strategy and finance. Even the acquisition staff, defence R&D scientists and representatives of strategic think tanks join as members. Similarly, NDIA has both corporate and individual members.
· KDIA has been assigned additional functions by the Korean Government. It has been designated as the approving authority for defence exports and imports. Additionally, it performs the functions of a financial guarantee agency for defence contracts.
· In addition to promoting defence industry’s business interests, NDIA also acts as a think tank in that it has members drawn from academia to ensure continued existence of a viable competitive national technology and industrial base.
· All associations publish regular newsletters and prepare directory of their member companies for ease of reference.
Most importantly, all associations are granted due recognition by their governments and are regularly consulted while framing policies and procedures. Feedback obtained from the associations helps in streamlined functioning. Associations are considered as indispensable partners in national progress and given due recognition.
India Needs an Exclusive Association for Defence Industry
It is time Indian defence manufacturers come together to form an association with total focus on defence industry. They can continue their current membership of existing associations as well. The proposed Association of Defence Manufacturers of India (ADMI) should aspire to be the collective voice of the Indian defence industry. In addition to corporate members, ADMI should have associate members from academia and think tanks. Retired service officers should also be co-opted as they know the requirements and functioning of the services best. They can prove invaluable in establishing working level liaison. It should have the following groups:-
Policy Advisory Group
_Render advice on policies affecting defence industry
_Apprise Government of indigenous capabilities
_Help categorise new proposals
Self Reliance Group
_Promote Indian defence industry by showcasing local competence
_Advocate more ‘Buy Indian’ cases
_Encourage MOU with foreign vendors for increased local content
Internal Security Group
_Identify synergy between defence & internal security needs to develop commonality of goods
_Focus on emerging requirements of police & para-military forces
SME Group
_Assist SME move up the value chain
_Take up issues affecting SME
_Provide advice and facilities for SME to further their business
Cooperation Group
_Establish close relationship with foreign defence industry associations & other stake holders
_Develop network through regular
liaison & reciprocal visits
Research & Data Group
_Direct research in selected areas to obtain feedback for action
_Maintain databank of Indian and foreign procurement needs and policies, especially offsets
Offset Group
_Provide platform for exchange of views & data on offsets
_Help foreign vendors identify suitable Indian offset partners
_Take up offset policy related issues with Government
Export Group
_Assist Government to promote exports through pro-active policy
_Help Indian companies identify export opportunities
_Facilitate exports through liaison with foreign contacts & networking
ADMI should undertake the following major activities:-
(a) Interface with the Government
ADMI should provide a platform for regular interaction between the Government and the industry. Both the Government officials and representatives of the industry should be able to discuss all issues in a spirit of partnership and to promote Indian defence industry. Commercial interests of the industry should be in tandem with the broader national interests. Prior to framing defence procurement policies, the Government can sound the industry and obtain useful feedback. Similarly, the industry can project impediments faced by it and suggest measures for streamlining the procedures and processes.
The current policy on FDI in defence has failed to evoke interest amongst foreign investors. ADMI can propose changes to make FDI policy attractive. Similarly, a number of corrective steps can be suggested to facilitate defence exports.
(b) Promotion of Defence Exports
Whereas India imports defence goods worth billions of dollars, its defence exports are a paltry 50 million dollars annually. Despite its best efforts, the Government has not been able to penetrate foreign markets. ADMI can spur growth of exports through networking with associations of other countries. It can apprise foreign buyers of Indian product range and technological competence. It can recommend policy changes to the Government to facilitate smooth and speedy clearance of export proposals.
A close understanding can be developed with foreign defence companies through regular exchange of trade missions and participation in seminars and exhibitions. Such interaction will result in better appreciation of business opportunities available in the world arms market.
(c) Development of Indigenous Capability
The Government has been trying, albeit unsuccessfully, to reduce imports from the current level of 70 percent to 30 percent by sourcing most of the defence requirements from indigenous sources. Due to the continuing predominance of the public sector, full potential of the private sector remains unutilised. At times, procurement functionaries place orders on foreign vendors in complete ignorance of similar capability existing in the Indian private sector. ADMI can effectively bridge this communication gap by projecting indigenous capability effectively. Additionally, through collaborations with foreign vendors, technology can be imported for local production.
(d) Offset Facilitation
Indian offset policy is still in embryonic state. There are a large number of gaps that need to be filled. The Government remains undecided whether to accept technology against offset obligations for the development of an indigenous technology base. Similarly, a number of issues relating to offset value, offset threshold and acceptance of indirect offsets need urgent attention. In the absence of adequate experience, the Government is wary of making major policy changes. The current drift has created uncertainties in the environment.
ADMI can make effective contribution by suggesting desirable modifications in Indian offset policy, implementation procedure and monitoring system
(e) Research and Creation of Data Bank
The current crop of Indian think tanks appear more concerned with Kosovo and Iraq Wars as it is easy to churn out papers by ‘cut and paste’ of abundant material available in public domain. Sadly, no worthwhile research is undertaken in India on issues affecting defence industry, defence exports and procurement procedures. This critical void can be effectively filled by ADMI by co-opting experts from academia and the industry. Research findings can provide factual feed back and help the Government to make policy changes to further streamline the process. All research papers and study reports should be made public to generate debate.
(f) Facilitating Entry in Defence Sector of New Aspirant Companies
As discussed above, there is a huge information gap between the procurement functionaries and private sector companies. Whereas new entrants have little knowledge of defence procurement regime and procedures, procurement functionaries are ignorant of indigenous capability. ADMI can bridge this gap through the following steps:-
· Provide assessment and advisory service to the aspiring companies to help them identify areas in which they could operate fruitfully with their current product profile and with incremental add-ons.
· Publish directory/catalogue of all companies manufacturing defence goods and service providers. It should also include system integrators, platform producers and SME. The aim should be to cover the complete supply chain and provide due visibility to all players in defence industry.
· Conduct training capsules to apprise functionaries of procurement structures, procedures and processes.
· Conduct seminars, conferences and workshops to create better understanding between officials and the industry. Both sides must appreciate strengths and limitations of each other.
(g) Dissemination of Information
Dissemination of information to member companies is an important function that all associations perform. Members have to be kept informed as regards changes in Government policies, developments in equipment development, MOU signed between foreign vendors and Indian companies, impending procurement proposals and emerging business opportunities in overseas defence markets.
ADMI should issue a fortnightly/monthly news bulletin to cover all defence industry related developments. Additionally, a monthly/quarterly magazine containing thought provoking and analytical articles should be published to generate new ideas and thereby evolve future recommendations. ADMI could also undertake publication of compendium of important Government policies as a handy reference book.
Conclusion
India is expected to spend close to 100 billion dollars on the modernisation of the armed forces in the next 10 years, with imports accounting for 70 percent of the expenditure. Consequently, offset inflows worth 35 million dollars would get generated. It implies that the total defence business would amount to a mind-boggling 135 billion dollars.
CII, FICCI and ASSOCHAM are striving hard to assist their members’ entry in the defence sector. They deserve credit for forcing the Government to take the private sector seriously. They have been partnering organisation of exhibitions, seminars and conferences to improve visibility of the competence of the private sector. Such events have certainly helped bridge communication gap to some extent. However, there is little to show for tangible results on ground. By frequently resorting to ‘Buy and Make’ deals, entry of the private sector gets effectively blocked as recipient of imported technology for ‘make’ part is invariably a public sector undertaking. Thus, it is the public sector that continues to rule the roost while the private sector is still waiting in the wings for business opportunities to come its way.
The primary reason for the neglect of the Indian defence industry is the absence of a united, forceful and influential voice to project its viewpoint to the Government. CII, FICCI and ASSOCHAM are unable to provide focused attention to the defence sector as they handle vast array of subjects. In some cases, these associations compete against each other. Additionally, the Government does not get a coordinated and concerted opinion from the industry.
Creation of ADMI will in no way dilute the standing of the existing business associations. There is no contradiction in joining ADMI while retaining current membership of existing business organisations. ADMI should be viewed by all as an effective adjunct to facilitate closer industry-government interaction with respect to defence and security sectors rather than an unwelcome competitor.
Appendix A - US National Defence Industrial Association
US National Defence Industrial Association (NDIA) boasts of a membership base of over 1,100 corporate members and more than 36,000 individuals. A defence industrial-government network consisting of 29 Divisions and 5 Industrial Working Groups drives the future of defence through education, access and influence. The divisions maintain close contact with representatives of appropriate government agencies and through their constructive counsel have become institutions in American defence-industry relationships.
Areas of functioning of the committees can be broadly grouped as follows:-
· Armaments, Ballistics, Bomb & Warhead, Munitions, Combat Survivability, Combat Vehicles and Tactical Wheeled Vehicles
· Chemical Biological Defence, Environment & Energy, Health Affairs and Homeland Security
· Command, Control, Communications, Computers, Surveillance, Intelligence and Reconnaissance
· Expeditionary Warfare and Targets and UAVs & Range Operations
· Government Policy Advisory, Legislative Information, International
· Logistics, Manufacturing, Procurement and Small Business
· Robotics, Science and Engineering Technology and Systems Engineering
· Space and Missile Defence
· Special Operations/Low Intensity Conflict and Undersea Warfare
· Strike, Land Attack and Air Defense
· Technical Information and Test & Evaluation
The Industrial Working Groups are as follows:-
· Chemical Biological Defence Acquisition Initiatives Forum
· Committee of Small Arms Producers
· Industrial Committee of Ammunition Producers
· Industrial Committee of Tank and Automotive Producers
· Industrial Committee on Operational Test and Evaluation
Through its monthly journal ‘National DEFENSE’, information is disseminated about the latest developments in technology, equipment and other important business issues. NDIA has 52 chapters, located near major military commands, research centers and defence agencies to facilitate networking at local levels to gain first-hand knowledge of policy and trends.
In addition to managing defence tradeshows and symposiums, NDIA organises training courses on defence systems acquisition management to familiarise defence industry with the latest defence acquisition policy, reforms, initiatives and procedures. Faculty is made available by the Defence Acquisition University.
Wednesday, August 5, 2009
Sunday, August 2, 2009
Dissuasive Features of Indian Defence Procurement Regime
Major General Mrinal Suman (IDR March 2009)
Withdrawal of US helicopter manufacturer Bell from participating in India’s tender for 197 light utility helicopters (LUHs), citing difficulties in complying with the offset clause, has come as a surprise to the Government. The tender had been re-floated on the express request of Bell who had raised questions regarding the fairness of the evaluation procedure followed earlier. As regards the Indian offset policy, Bell has always been fully aware of it. Even the earlier aborted tender for LUH had the same mandatory provisions and Bell has been contemplating setting up a maintenance, repair and overhaul facility in India with an investment of up to 100 million dollars. Additionally, Bell is not new to fulfillment of offset requirements. According to the reports appearing in the press, Bell has entered into 17 offset programmes in 10 countries during the past two decades with the total value of offsets provided being more than one billion dollars. Apparently, the real reasons for Bell’s withdrawal lie elsewhere.
Earlier, both Boeing and Bell had withdrawn from bidding for Air Force’s tender for 22 combat helicopters, reportedly due to problems with India’s defence procurement procedure, thereby dealing a severe blow to India’s quest for procuring the best machines in global competition. Only AgustaWestland's AW129, Eurocopter's Tiger, Kamov's Ka-50 and Mil's Mi-28 are left in the fray. The Government is in a quandary. It would like to break the impasse and get Boeing and Bell back on board as they have incorporated some unique cutting-edge technologies in their machines.
It has been the endeavour of Indian Ministry of Defence (MoD) to generate maximum competition and promote transparency in defence procurements. A number of noteworthy policy initiatives have also been included in Defence Procurement Procedure - 2008 (DPP-2008). Therefore, withdrawal of major helicopter manufacturers has been causing consternation to the Government. What has forced them to decline to do business with MoD? Are their any irritants and dissuasive features of Indian defence procurement regime which need attention?
Detailed interaction with foreign vendors reveals that they are appreciative of Government’s resolve to have a transparent and impartial procurement process but are wary of procedural impediments, complex decision making process, bureaucratic mindset, condescending attitude and frequent questioning of vendors’ credibility. Some of the specific issues raised by them are discussed below.
Poorly Formulated Services Qualitative Requirements (SQR)
SQR are evolved by Service Headquarters (SHQ) to define minimum performance attributes, corresponding to the task/tasks to be performed by the system. Thus, they have to be need-based, spelling out users’ requirements in terms of functional characteristics in a comprehensive, structured and concrete manner. Through SQR vendors are told upfront as to what is being sought. They are also provided a well set bench-mark for subsequent inter-se appraisal of equipment on offer.
The current dispensation suffers from major inadequacies. All SQR are classified ‘essential’ and carry equal importance. Non-compliance of any SQR renders equipment unfit for procurement as no deviations are allowed. In an earlier case of procurement of helicopters, SHQ had laid down over 200 essential SQR and every vendor had to be fully compliant with all, their inter-se criticality not withstanding. An excellent system surpassing all vital performance parameters can get eliminated because of its non-compliance with some inconsequential SQR. This is a most bizarre way of carrying out procurement.
Additionally, there is a tendency to spell out SQR in imprecise, immeasurable and indeterminate language leading to multiple interpretations and subsequent acrimony. In many cases, poorly evolved SQR have resulted in non-fructification of major acquisition proposals. Once major flaws and infirmities come to notice, tender documents have to be retracted and the complete process reinitiated with reformulated SQR. Although India does suffer cost over-runs and delays, foreign vendors find the whole exercise to be wasteful in time and resources. They get disheartened and wonder whether their further participation would be worth the effort and expense.
Limited Time for Submission of Proposals
India had issued RFP for combat helicopters in May 2008. Proposals were to be submitted within a period of three months by 23 August. Boeing sought extension of two months to prepare and submit fully SQR compliant proposals. The Acquisition Wing, however, granted an extension of four weeks only - that is the maximum extension it can allow under its powers as per DPP-2008. Expressing its inability to submit its proposals in the given time frame, Boeing withdrew from the said deal.
Whereas the Government’s own way of working is highly laid back and bureaucratic with total lack of any urgency, it always gives inadequate time to vendors to submit their technical and commercial proposals. It can waste years vacillating, but once a procurement proposal is cleared it wants equipment straight away. Preparation of proposals is a highly deliberate, laborious and time consuming task especially for complex systems. Some of the major issues involved are as follows:-
· Most major arms producers are systems integrators. They procure systems and sub-systems from sources across the globe. Therefore, to prepare credible proposals, they have to obtain details of performance characteristics, costs, delivery schedules and export restrictions, if any. These have to be matched with SQR to ensure full compliance. Considerable communication flows between different entities before a cogent proposal emerges.
· RFP containing transfer of technology provisions for subsequent manufacture of equipment in India require detailed interaction with Indian technology recipient. Scope and extent of technology to be transferred have to be determined and costing finalised.
· In all major procurement cases, the Government is insisting that technology for maintenance be transferred to one of the companies specified in RFP. It implies that every foreign vendor has to interact with each entity mentioned in RFP to select the most suitable one and sign an agreement with it, including pricing norms.
· In cases entailing offset obligations, vendors are given a minimum period of three months to submit their offset proposals. However, as offsets imply a cost penalty, vendors have to do detailed preparatory work to factor it in their commercial quote which remains firm and fixed. This can be done only after selecting methodology of offset fulfillment and Indian partners.
As seen above, adequate time must be given to vendors at the very outset to enable them to do their home work deliberately and submit meticulously prepared proposals. Most foreign vendors get surprised at Government’s insistence on tight time frame and find it highly irksome to seek frequent extension of time for submission.
Unscientific Methodology of Evaluation of Equipment
Under the current policy all equipment that meet laid down SQR have to be considered at par and the lowest bidder is to be awarded the contract. With a view to preventing emergence of single-vendor situation at a later stage, there is a tendency amongst the services to pitch SQR at base levels. Thus, the twin conditions of low levels of SQR and according parity to all compliant vendors, act against the vendors whose equipment possess much higher performance parameters. It is indeed a strange way of buying defence equipment where the primary thrust is on competition. Nature of technology on offer and equipment’s superior potential mean little. For example, if a helicopter manufacturer has developed a high performance machine with latest avionics and night vision capabilities, its cost has to be more. But in India’s scheme of things, he would have to compete with much lesser machines and yet quote lowest price to bag the contract. Vendors find it strange that Indian Government takes no cognizance of cutting-edge technology and accords no weightage to it. It is one of the most unfair and dissuasive provisions. It deters leading manufacturers from participating in bids.
Ad-hoc Determination of Fair Price and Prolonged Negotiations
Determination of fair price has to be carried out prior to the opening of commercial bids of technically successful vendors. It is a complex and painstaking task, especially with rapidly developing new technologies. Due to secrecy shrouding all arms deals, prevalent market prices are not available as guidelines. Determination of precise fair price cannot be done by applying a factor of inflation to earlier procurements of similar equipment. As there is no set methodology, every country has to develop its own skills based on data base compiled.
Unfortunately, India has no exhaustive data base of past contracts. For that matter, as pointed out by Comptroller and Auditor General during his audit, the three services do not share details of their procurements with each other. Such a state of affairs results in ludicrous situations where they buy the same equipment from the same vendor at different rates, totally oblivious of each other. Apparently methodologies adopted by the three services to fix fair price vary. Most foreign vendors find the Indian way of determining fair price ad-hoc, naïve and unscientific as it ignores real value of new technology and market dynamics.
Although DPP-2008 mandates that in multi-vendor cases no price negotiations should be carried out with the lowest bidder if his bid falls within the fair price determined earlier, this provision is rarely adhered to. Almost all Commercial Negotiation Committees (CNC) insist on further price reductions. After having emerged as the winning vendor after a long and complex evaluation procedure, they consider it to be an arm-twisting ploy. Prolonged discussions result in undue delays, upsetting planned production schedules. Foreign vendors find this practice to be highly unfair and exasperating.
Dissatisfaction with Indian Offset Policy
As per the Indian offset policy, all defence contracts where the estimated cost of the proposal is Rs 300 crore or more will attract a minimum offset obligation of 30 percent of the estimated cost. Higher percentage may be prescribed by Defence Acquisition Council. In recent high value cases, offset percentage has generally been fixed at 50 percent. Offset obligations can be fulfilled through one or combination of the following routes:-
(a) Direct purchase of defence products and components manufactured by, or services provided by Indian defence industries.
(b) Direct foreign investment in Indian defence industries for industrial infrastructure for services, co-development, joint ventures and co-production of defence products and components.
(c) Direct foreign investment in Indian organisations engaged in research in defence
R & D as certified by Defence Offset Facilitation Agency.
MoD feels that the Indian offset policy is very liberal and vendor friendly – vendors can choose methodology and Indian partners as per their preference. However, foreign vendors find compliance of offset clauses to be a daunting task and are wary of defaulting. Bell Helicopters cited this as the main reason for withdrawing from the deal for LUH.
As seen above, India does not accept either indirect offsets or transfer of technology against offsets. Additionally, FDI cap at 26 percent makes the policy highly unattractive. Thus, it implies that offset fulfillment will be totally dependant on export of defence goods and services. Presently, Indian defence exports amount to a meager 50 million dollars annually. Therefore, foreign vendors are unconvinced that Indian defence can absorb offsets worth billions of dollars - export potential cannot be increased multi-fold in a short span of time.
Since 2006, foreign vendors had been demanding permission to generate potential offset credits through programmes undertaken prior to the award of main contract, for banking them for discharge against subsequent offset obligations. The Government acceded to their request and allowed offset banking in DPP-2008, albeit with many restrictive provisions. First, banked credits are non-transferable except between the main contractor and his sub-contractors within the same acquisition programme. Secondly, if not utilised within a period of two years, banked credits would automatically lapse. The new policy has fallen far short of expectations and disappointed most.
Attitudinal Problems
Indian officialdom is known for its haughty and pretentious attitude. Though called public servants, most officials consider themselves to be rulers and behave accordingly. Additionally, as awarders of high value contracts, they assume the role of dispensers of favours. They look at businessmen as seekers of wealth and tend to look down upon them. Indian business community has got used to such an equation and is reconciled to playing subservient role.
In developed countries, entrepreneurs are considered as partners in national progress and drivers for technological advancements. They are respected for their skills and excellence. Therefore, foreign vendors find overbearing behaviour of Indian officials to be highly gratuitous, insulting and exasperating. Communications remain unacknowledged and unanswered. Appointment for personal meeting are granted as a great favour after repeated requests.
“With our experience in the field and technological prowess, we can assist India in configuring defence systems for Indian requirements optimally. For that, we must be taken on board and treated as reliable and long term partners. Unfortunately, most officials are overly uncommunicative and reluctant to share even innocuous details with us. Despite repeated assertions to the contrary, Indian officials prefer to function at buyer and seller equation only. Every suggestion is suspected of ulterior motive and dismissed,” was the frank opinion of a major vendor in a seminar in London recently. Most other participants agreed. Condescending, pompous and supercilious attitude of Indian officials appeared to be a highly dissuasive factor.
The Way Forward
Undoubtedly, India has come a long way from the days of the ad hoc procurement procedure of pre-Kargil War period. A number of creditable policy initiatives have been instituted to streamline the procedure. However, reforms are a continuous process.
India must spell out SQR in the form of performance range and adopt matrix system of technical testing wherein equipment with better performance parameters (albeit within the specified range) gets credit in inter se evaluation. In such a methodology, minimum parameters in all characteristics are laid down. Through a well defined system of assigning relative weightage, performance excellence is duly rewarded. It will also help India in getting latest equipment with best value for money.
Time for submission of proposals should be liberal enough to cater for all activities. Recommendations can be sought from major vendors as regards time they would need to prepare their proposals. There is no sense in keeping it tight initially and granting piecemeal extensions later on.
As regards the procurement procedure, India has to expedite decision making. Most foreign vendors get put off by Government’s prolonged vacillation over every issue. Notes are prepared and files moved while vendors await decisions. Vendors are called for repeated presentations and clarification by different agencies involved in the procedure. At times, one agency sends a letter of rejection while the other seeks clarifications regarding equipment performance. Vendors do not know whom to approach for directions.
As mandated in DPP-2008, price negotiations should be banned in cases where the lowest bid falls within the previously calculated fair price. This single step will improve credibility of the system and reduce delays in finalizing contracts. Offset provisions have to be liberalised by way of allowing indirect offsets and transfer of technology. Similarly, trade in banked offset credits must be allowed to let vendors recover their cost of generating excess banked offsets by selling to needy vendors. Additionally, the period of validity of banked credits should be increased to 5 years.
In any trade transaction, both the buyer and the seller must feel comfortable. Their equation must be based on understanding and long-term affiliation. Both should be considered equal partners. Just because businessmen seek returns for their investments does not make them unscrupulous schemers who should be shunned. They must be treated with respect and made partners in long term mutually beneficial relationship. In case India wants to buy the best defence equipment available in the world market in maximum competition, procurement functionaries have to change their bureaucratic mindset and make the defence procurement regime vendor-friendly by removing all irritants.
Appendix A: Frequent Changes of Priorities
Capital procurement process consists of two different activities – planning and acquisition. Planning entails acceptance of necessity (including scaling and quantity vetting) and provision of budgetary support.
Planning commences with the formulation of 15 years Long Term Integrated Perspective Plan (LTIPP) by Headquarters Integrated Defence Staff (HQ IDS) in consultation with the Service Headquarters (SHQ). LTIPP is based on the Defence Planning Guidelines. Thereafter, HQ IDS prepares Five Year Defence Plans to include Services Capital Acquisition Plan (SCAP). SCAP lists out equipment to be acquired by the three services, keeping in view operational exigencies and the likely availability of funds. LTIPP and SCAP are approved by the Defence Acquisition Council (DAC). Annual Acquisition Plan (AAP) is a subset of SCAP and includes approved schemes.
Each SHQ prepares its own draft AAP as a two-year roll on plan, consisting of two parts. Part A comprises of carry over schemes from AAP of previous year and schemes approved during the year. Part B includes new proposals planned to be initiated in the forthcoming year. The Defence Procurement Board (DPB) approves AAP. Part A thus, becomes the working document. Schemes from Part B can be upgraded to Part A only after they are approved by the competent authority. Proposals not listed in SCAP can only be processed after due approval of DAC. Requirement of funds is prepared based on committed liabilities on account of ongoing schemes and proposed new schemes.
As the allotment of funds never matches the requirements projected, schemes included in AAP have to be prioritised. It has normally been seen that funds allotted are insufficient even to finance all schemes graded priority one. Thus, schemes on lower priority remain of academic value only but sponsoring directorates remain hopeful that their schemes may fructify in case any scheme on higher priority gets aborted and funds become surplus. In order to be ready to exploit such an eventuality, they go through the complete gamut of activities like calling prospective vendors to obtain information about latest equipment, indicative cost and allied issues. Foreign vendors, ignorant of the low priority allotted to a scheme, get deeply involved and invest considerable time, effort and resources to remain engaged. When the scheme fails to get progressed, they feel frustrated.
Additionally, DPB may carry out amendments to AAP on account of national security objectives, operational urgencies, budgetary provisions or any other exigency. There have been cases where procurement proposals have been aborted at commercial negotiations stage (after detailed technical evaluation) due to need for diversion of funds for schemes with revised higher priority. Understandably, foreign vendors find the whole exercise wasteful and resent it.
Appendix B: Retraction of Request for Proposals
Interestingly, the Government issues all Requests for Proposals (RFP) with the clause – “This RFP is being issued with no financial commitment and the Ministry of Defence reserves the right to withdraw the RFP and change or vary any part thereof at any stage.” In other words, the Government wants to keep the option of retracting RFP should developments so demand. Non-availability of adequate funds can understandingly be one of the reasons.
Additionally, Defence Procurement Procedure – 2008 (DPP-2008) cites the following conditions under which RFP should be retracted:-
· In case during the paper evaluation of technical proposals, Technical Evaluation Committee (TEC) finds a single vendor to be fully compliant with Services Qualitative Requirements (SQR), RFP should be retracted on approval of Director General (Acquisition). Further, a review of the acquisition scheme is required to be carried out by TEC to identify causes for the same to enable reissue of fresh RFP after reformulating SQR.
· If no vendor is found to be fully SQR-compliant during field evaluation, the case has to be foreclosed. No deviation to SQR is permitted, howsoever insignificant it may be. The whole case has to be progressed afresh with revised SQR.
Technical Oversight Committee (TOC) is required to check that selection of vendors, trial methodology adopted and trial evaluations for compliance to SQR are as per the laid down procedure. An adverse ruling by the committee would mean ‘no go’ and the Defence Secretary would have no other option than to abort the case by retracting RFP.
The affected foreign vendors find the above provisions highly dissuasive. For example, if a vendor emerges as the only SQR-compliant bidder by TEC, it is unfair to fault him for that. Why should he be penalized for other’s inability to submit technically compliant proposals? Similarly, minor deviations noticed during field trials should not result in the termination of a case, thereby wasting considerable resources of the Government and vendors. Finally, functionaries should be held accountable for any infirmity noticed by TOC in the procedure followed. Cancellation of a deal at that stage punishes the successful vendor rather than the defaulting functionaries. With so many riders and uncertainties, foreign vendors wonder if participating in Indian defence tenders makes good business sense and worth the risk.
Withdrawal of US helicopter manufacturer Bell from participating in India’s tender for 197 light utility helicopters (LUHs), citing difficulties in complying with the offset clause, has come as a surprise to the Government. The tender had been re-floated on the express request of Bell who had raised questions regarding the fairness of the evaluation procedure followed earlier. As regards the Indian offset policy, Bell has always been fully aware of it. Even the earlier aborted tender for LUH had the same mandatory provisions and Bell has been contemplating setting up a maintenance, repair and overhaul facility in India with an investment of up to 100 million dollars. Additionally, Bell is not new to fulfillment of offset requirements. According to the reports appearing in the press, Bell has entered into 17 offset programmes in 10 countries during the past two decades with the total value of offsets provided being more than one billion dollars. Apparently, the real reasons for Bell’s withdrawal lie elsewhere.
Earlier, both Boeing and Bell had withdrawn from bidding for Air Force’s tender for 22 combat helicopters, reportedly due to problems with India’s defence procurement procedure, thereby dealing a severe blow to India’s quest for procuring the best machines in global competition. Only AgustaWestland's AW129, Eurocopter's Tiger, Kamov's Ka-50 and Mil's Mi-28 are left in the fray. The Government is in a quandary. It would like to break the impasse and get Boeing and Bell back on board as they have incorporated some unique cutting-edge technologies in their machines.
It has been the endeavour of Indian Ministry of Defence (MoD) to generate maximum competition and promote transparency in defence procurements. A number of noteworthy policy initiatives have also been included in Defence Procurement Procedure - 2008 (DPP-2008). Therefore, withdrawal of major helicopter manufacturers has been causing consternation to the Government. What has forced them to decline to do business with MoD? Are their any irritants and dissuasive features of Indian defence procurement regime which need attention?
Detailed interaction with foreign vendors reveals that they are appreciative of Government’s resolve to have a transparent and impartial procurement process but are wary of procedural impediments, complex decision making process, bureaucratic mindset, condescending attitude and frequent questioning of vendors’ credibility. Some of the specific issues raised by them are discussed below.
Poorly Formulated Services Qualitative Requirements (SQR)
SQR are evolved by Service Headquarters (SHQ) to define minimum performance attributes, corresponding to the task/tasks to be performed by the system. Thus, they have to be need-based, spelling out users’ requirements in terms of functional characteristics in a comprehensive, structured and concrete manner. Through SQR vendors are told upfront as to what is being sought. They are also provided a well set bench-mark for subsequent inter-se appraisal of equipment on offer.
The current dispensation suffers from major inadequacies. All SQR are classified ‘essential’ and carry equal importance. Non-compliance of any SQR renders equipment unfit for procurement as no deviations are allowed. In an earlier case of procurement of helicopters, SHQ had laid down over 200 essential SQR and every vendor had to be fully compliant with all, their inter-se criticality not withstanding. An excellent system surpassing all vital performance parameters can get eliminated because of its non-compliance with some inconsequential SQR. This is a most bizarre way of carrying out procurement.
Additionally, there is a tendency to spell out SQR in imprecise, immeasurable and indeterminate language leading to multiple interpretations and subsequent acrimony. In many cases, poorly evolved SQR have resulted in non-fructification of major acquisition proposals. Once major flaws and infirmities come to notice, tender documents have to be retracted and the complete process reinitiated with reformulated SQR. Although India does suffer cost over-runs and delays, foreign vendors find the whole exercise to be wasteful in time and resources. They get disheartened and wonder whether their further participation would be worth the effort and expense.
Limited Time for Submission of Proposals
India had issued RFP for combat helicopters in May 2008. Proposals were to be submitted within a period of three months by 23 August. Boeing sought extension of two months to prepare and submit fully SQR compliant proposals. The Acquisition Wing, however, granted an extension of four weeks only - that is the maximum extension it can allow under its powers as per DPP-2008. Expressing its inability to submit its proposals in the given time frame, Boeing withdrew from the said deal.
Whereas the Government’s own way of working is highly laid back and bureaucratic with total lack of any urgency, it always gives inadequate time to vendors to submit their technical and commercial proposals. It can waste years vacillating, but once a procurement proposal is cleared it wants equipment straight away. Preparation of proposals is a highly deliberate, laborious and time consuming task especially for complex systems. Some of the major issues involved are as follows:-
· Most major arms producers are systems integrators. They procure systems and sub-systems from sources across the globe. Therefore, to prepare credible proposals, they have to obtain details of performance characteristics, costs, delivery schedules and export restrictions, if any. These have to be matched with SQR to ensure full compliance. Considerable communication flows between different entities before a cogent proposal emerges.
· RFP containing transfer of technology provisions for subsequent manufacture of equipment in India require detailed interaction with Indian technology recipient. Scope and extent of technology to be transferred have to be determined and costing finalised.
· In all major procurement cases, the Government is insisting that technology for maintenance be transferred to one of the companies specified in RFP. It implies that every foreign vendor has to interact with each entity mentioned in RFP to select the most suitable one and sign an agreement with it, including pricing norms.
· In cases entailing offset obligations, vendors are given a minimum period of three months to submit their offset proposals. However, as offsets imply a cost penalty, vendors have to do detailed preparatory work to factor it in their commercial quote which remains firm and fixed. This can be done only after selecting methodology of offset fulfillment and Indian partners.
As seen above, adequate time must be given to vendors at the very outset to enable them to do their home work deliberately and submit meticulously prepared proposals. Most foreign vendors get surprised at Government’s insistence on tight time frame and find it highly irksome to seek frequent extension of time for submission.
Unscientific Methodology of Evaluation of Equipment
Under the current policy all equipment that meet laid down SQR have to be considered at par and the lowest bidder is to be awarded the contract. With a view to preventing emergence of single-vendor situation at a later stage, there is a tendency amongst the services to pitch SQR at base levels. Thus, the twin conditions of low levels of SQR and according parity to all compliant vendors, act against the vendors whose equipment possess much higher performance parameters. It is indeed a strange way of buying defence equipment where the primary thrust is on competition. Nature of technology on offer and equipment’s superior potential mean little. For example, if a helicopter manufacturer has developed a high performance machine with latest avionics and night vision capabilities, its cost has to be more. But in India’s scheme of things, he would have to compete with much lesser machines and yet quote lowest price to bag the contract. Vendors find it strange that Indian Government takes no cognizance of cutting-edge technology and accords no weightage to it. It is one of the most unfair and dissuasive provisions. It deters leading manufacturers from participating in bids.
Ad-hoc Determination of Fair Price and Prolonged Negotiations
Determination of fair price has to be carried out prior to the opening of commercial bids of technically successful vendors. It is a complex and painstaking task, especially with rapidly developing new technologies. Due to secrecy shrouding all arms deals, prevalent market prices are not available as guidelines. Determination of precise fair price cannot be done by applying a factor of inflation to earlier procurements of similar equipment. As there is no set methodology, every country has to develop its own skills based on data base compiled.
Unfortunately, India has no exhaustive data base of past contracts. For that matter, as pointed out by Comptroller and Auditor General during his audit, the three services do not share details of their procurements with each other. Such a state of affairs results in ludicrous situations where they buy the same equipment from the same vendor at different rates, totally oblivious of each other. Apparently methodologies adopted by the three services to fix fair price vary. Most foreign vendors find the Indian way of determining fair price ad-hoc, naïve and unscientific as it ignores real value of new technology and market dynamics.
Although DPP-2008 mandates that in multi-vendor cases no price negotiations should be carried out with the lowest bidder if his bid falls within the fair price determined earlier, this provision is rarely adhered to. Almost all Commercial Negotiation Committees (CNC) insist on further price reductions. After having emerged as the winning vendor after a long and complex evaluation procedure, they consider it to be an arm-twisting ploy. Prolonged discussions result in undue delays, upsetting planned production schedules. Foreign vendors find this practice to be highly unfair and exasperating.
Dissatisfaction with Indian Offset Policy
As per the Indian offset policy, all defence contracts where the estimated cost of the proposal is Rs 300 crore or more will attract a minimum offset obligation of 30 percent of the estimated cost. Higher percentage may be prescribed by Defence Acquisition Council. In recent high value cases, offset percentage has generally been fixed at 50 percent. Offset obligations can be fulfilled through one or combination of the following routes:-
(a) Direct purchase of defence products and components manufactured by, or services provided by Indian defence industries.
(b) Direct foreign investment in Indian defence industries for industrial infrastructure for services, co-development, joint ventures and co-production of defence products and components.
(c) Direct foreign investment in Indian organisations engaged in research in defence
R & D as certified by Defence Offset Facilitation Agency.
MoD feels that the Indian offset policy is very liberal and vendor friendly – vendors can choose methodology and Indian partners as per their preference. However, foreign vendors find compliance of offset clauses to be a daunting task and are wary of defaulting. Bell Helicopters cited this as the main reason for withdrawing from the deal for LUH.
As seen above, India does not accept either indirect offsets or transfer of technology against offsets. Additionally, FDI cap at 26 percent makes the policy highly unattractive. Thus, it implies that offset fulfillment will be totally dependant on export of defence goods and services. Presently, Indian defence exports amount to a meager 50 million dollars annually. Therefore, foreign vendors are unconvinced that Indian defence can absorb offsets worth billions of dollars - export potential cannot be increased multi-fold in a short span of time.
Since 2006, foreign vendors had been demanding permission to generate potential offset credits through programmes undertaken prior to the award of main contract, for banking them for discharge against subsequent offset obligations. The Government acceded to their request and allowed offset banking in DPP-2008, albeit with many restrictive provisions. First, banked credits are non-transferable except between the main contractor and his sub-contractors within the same acquisition programme. Secondly, if not utilised within a period of two years, banked credits would automatically lapse. The new policy has fallen far short of expectations and disappointed most.
Attitudinal Problems
Indian officialdom is known for its haughty and pretentious attitude. Though called public servants, most officials consider themselves to be rulers and behave accordingly. Additionally, as awarders of high value contracts, they assume the role of dispensers of favours. They look at businessmen as seekers of wealth and tend to look down upon them. Indian business community has got used to such an equation and is reconciled to playing subservient role.
In developed countries, entrepreneurs are considered as partners in national progress and drivers for technological advancements. They are respected for their skills and excellence. Therefore, foreign vendors find overbearing behaviour of Indian officials to be highly gratuitous, insulting and exasperating. Communications remain unacknowledged and unanswered. Appointment for personal meeting are granted as a great favour after repeated requests.
“With our experience in the field and technological prowess, we can assist India in configuring defence systems for Indian requirements optimally. For that, we must be taken on board and treated as reliable and long term partners. Unfortunately, most officials are overly uncommunicative and reluctant to share even innocuous details with us. Despite repeated assertions to the contrary, Indian officials prefer to function at buyer and seller equation only. Every suggestion is suspected of ulterior motive and dismissed,” was the frank opinion of a major vendor in a seminar in London recently. Most other participants agreed. Condescending, pompous and supercilious attitude of Indian officials appeared to be a highly dissuasive factor.
The Way Forward
Undoubtedly, India has come a long way from the days of the ad hoc procurement procedure of pre-Kargil War period. A number of creditable policy initiatives have been instituted to streamline the procedure. However, reforms are a continuous process.
India must spell out SQR in the form of performance range and adopt matrix system of technical testing wherein equipment with better performance parameters (albeit within the specified range) gets credit in inter se evaluation. In such a methodology, minimum parameters in all characteristics are laid down. Through a well defined system of assigning relative weightage, performance excellence is duly rewarded. It will also help India in getting latest equipment with best value for money.
Time for submission of proposals should be liberal enough to cater for all activities. Recommendations can be sought from major vendors as regards time they would need to prepare their proposals. There is no sense in keeping it tight initially and granting piecemeal extensions later on.
As regards the procurement procedure, India has to expedite decision making. Most foreign vendors get put off by Government’s prolonged vacillation over every issue. Notes are prepared and files moved while vendors await decisions. Vendors are called for repeated presentations and clarification by different agencies involved in the procedure. At times, one agency sends a letter of rejection while the other seeks clarifications regarding equipment performance. Vendors do not know whom to approach for directions.
As mandated in DPP-2008, price negotiations should be banned in cases where the lowest bid falls within the previously calculated fair price. This single step will improve credibility of the system and reduce delays in finalizing contracts. Offset provisions have to be liberalised by way of allowing indirect offsets and transfer of technology. Similarly, trade in banked offset credits must be allowed to let vendors recover their cost of generating excess banked offsets by selling to needy vendors. Additionally, the period of validity of banked credits should be increased to 5 years.
In any trade transaction, both the buyer and the seller must feel comfortable. Their equation must be based on understanding and long-term affiliation. Both should be considered equal partners. Just because businessmen seek returns for their investments does not make them unscrupulous schemers who should be shunned. They must be treated with respect and made partners in long term mutually beneficial relationship. In case India wants to buy the best defence equipment available in the world market in maximum competition, procurement functionaries have to change their bureaucratic mindset and make the defence procurement regime vendor-friendly by removing all irritants.
Appendix A: Frequent Changes of Priorities
Capital procurement process consists of two different activities – planning and acquisition. Planning entails acceptance of necessity (including scaling and quantity vetting) and provision of budgetary support.
Planning commences with the formulation of 15 years Long Term Integrated Perspective Plan (LTIPP) by Headquarters Integrated Defence Staff (HQ IDS) in consultation with the Service Headquarters (SHQ). LTIPP is based on the Defence Planning Guidelines. Thereafter, HQ IDS prepares Five Year Defence Plans to include Services Capital Acquisition Plan (SCAP). SCAP lists out equipment to be acquired by the three services, keeping in view operational exigencies and the likely availability of funds. LTIPP and SCAP are approved by the Defence Acquisition Council (DAC). Annual Acquisition Plan (AAP) is a subset of SCAP and includes approved schemes.
Each SHQ prepares its own draft AAP as a two-year roll on plan, consisting of two parts. Part A comprises of carry over schemes from AAP of previous year and schemes approved during the year. Part B includes new proposals planned to be initiated in the forthcoming year. The Defence Procurement Board (DPB) approves AAP. Part A thus, becomes the working document. Schemes from Part B can be upgraded to Part A only after they are approved by the competent authority. Proposals not listed in SCAP can only be processed after due approval of DAC. Requirement of funds is prepared based on committed liabilities on account of ongoing schemes and proposed new schemes.
As the allotment of funds never matches the requirements projected, schemes included in AAP have to be prioritised. It has normally been seen that funds allotted are insufficient even to finance all schemes graded priority one. Thus, schemes on lower priority remain of academic value only but sponsoring directorates remain hopeful that their schemes may fructify in case any scheme on higher priority gets aborted and funds become surplus. In order to be ready to exploit such an eventuality, they go through the complete gamut of activities like calling prospective vendors to obtain information about latest equipment, indicative cost and allied issues. Foreign vendors, ignorant of the low priority allotted to a scheme, get deeply involved and invest considerable time, effort and resources to remain engaged. When the scheme fails to get progressed, they feel frustrated.
Additionally, DPB may carry out amendments to AAP on account of national security objectives, operational urgencies, budgetary provisions or any other exigency. There have been cases where procurement proposals have been aborted at commercial negotiations stage (after detailed technical evaluation) due to need for diversion of funds for schemes with revised higher priority. Understandably, foreign vendors find the whole exercise wasteful and resent it.
Appendix B: Retraction of Request for Proposals
Interestingly, the Government issues all Requests for Proposals (RFP) with the clause – “This RFP is being issued with no financial commitment and the Ministry of Defence reserves the right to withdraw the RFP and change or vary any part thereof at any stage.” In other words, the Government wants to keep the option of retracting RFP should developments so demand. Non-availability of adequate funds can understandingly be one of the reasons.
Additionally, Defence Procurement Procedure – 2008 (DPP-2008) cites the following conditions under which RFP should be retracted:-
· In case during the paper evaluation of technical proposals, Technical Evaluation Committee (TEC) finds a single vendor to be fully compliant with Services Qualitative Requirements (SQR), RFP should be retracted on approval of Director General (Acquisition). Further, a review of the acquisition scheme is required to be carried out by TEC to identify causes for the same to enable reissue of fresh RFP after reformulating SQR.
· If no vendor is found to be fully SQR-compliant during field evaluation, the case has to be foreclosed. No deviation to SQR is permitted, howsoever insignificant it may be. The whole case has to be progressed afresh with revised SQR.
Technical Oversight Committee (TOC) is required to check that selection of vendors, trial methodology adopted and trial evaluations for compliance to SQR are as per the laid down procedure. An adverse ruling by the committee would mean ‘no go’ and the Defence Secretary would have no other option than to abort the case by retracting RFP.
The affected foreign vendors find the above provisions highly dissuasive. For example, if a vendor emerges as the only SQR-compliant bidder by TEC, it is unfair to fault him for that. Why should he be penalized for other’s inability to submit technically compliant proposals? Similarly, minor deviations noticed during field trials should not result in the termination of a case, thereby wasting considerable resources of the Government and vendors. Finally, functionaries should be held accountable for any infirmity noticed by TOC in the procedure followed. Cancellation of a deal at that stage punishes the successful vendor rather than the defaulting functionaries. With so many riders and uncertainties, foreign vendors wonder if participating in Indian defence tenders makes good business sense and worth the risk.
Offset Banking in Defence Deals: Need for Caution
Major General Mrinal Suman (USI Journal Sep 2007)
The Government of India introduced offsets in defence procurements in Defence Procurement Procedure – 2005 and detailed guidelines were issued in May 2006. The policy is applicable to all purchases where indicative cost is over Rs 300 crores for ‘Buy’, ‘Buy and Make with Transfer of Technology’ and ship-building cases. Offsets higher than 30 percent may be specified for specific cases. For joint ventures where Indian firm is bidding, the foreign partner will have to discharge offset obligation.
Offset obligation is to be completed coterminous within main contract and can be discharged through any of the following routes:-
_Direct purchase of or executing export orders for, defence products and services provided by Indian defence industries.
_Foreign Direct Investment (FDI) in Indian defence industries.
_FDI in Indian organisations engaged in research in defence R&D.
Generally, offsets are of two types - direct and indirect. In direct offsets, the compensatory dispensation remains confined to the main weapon system, its sub-assemblies and components. On the other hand, indirect offsets have a much wider scope and transcend other economic and social activities. However, India has decided to adopt a semi-direct path and demands offsets related to the defence industry as a whole.
Offset obligations are measured in terms of offset credits. As India does not use offset multipliers, the value of offset credit is equal to the monetary value of the obligation. It implies that in case a foreign vendor carries an offset obligation of Rs 100 crore, he has to either purchase goods/services worth Rs 100 crore or invest the amount in Indian defence industry/defence R&D. Of course, he can have a mix but the total value must add up to Rs 100 crore.
A Defence Offset Facilitation Agency (DOFA) has been established as a ‘single window’ under the Department of Defence Production to facilitate implementation of offset policy, vet offset proposals technically, provide advisory clarifications on policy and procedures (in consultation with the Acquisition Wing, where necessary) and assist vendors in interfacing with industry for identifying potential offset products/projects.
For products which contain imported components, only the value addition in India will count towards offset obligations. Offset contract will be signed with the main contract. A vendor cannot delay execution of main contract on the plea of inability of Indian offset partner to execute offset contract.
A penalty equivalent to 5 percent of unfulfilled portion of obligation in an year will be imposed on the defaulter. Vendor failing to complete offset obligation during the period of main contract (or during the period extended) will be debarred by Acquisition Wing for future, after giving him opportunity to explain.
The Indian policy has the following major distinctive provisions:-
_All proposals that meet minimum offset requirement are to be treated at par. No weightage is allowed for the quality or quantum of offsets. No preference is given for extra offsets offered.
_It is for the vendor to select methodology and Indian partner for the fulfillment of offset obligation.
_No offset multipliers are applicable.
_Offset banking has not been provided for.
The US India Business Council has been spiritedly advocating a number of policy changes. One of their recommendations relates to offset banking. It wants the Government to permit banking of offset credits to enable foreign vendors to accumulate them in advance.
Generation of Bankable Offset Credits
A vendor may generate potential offset credits through programmes undertaken prior to the award of main contract for ‘banking’ purposes for future use against likely obligations. Many vendors feel that pre-contract offset activities make sound economic sense for the following reasons:-
_Vendors show their earnestness and commitment to the host country and thereby create a favourable impression.
_As most contracts stipulate co-terminus completion of offset programmes, vendors confident of winning main contracts get early-starter advantage.
_Banked credits create an informal pressure on the host country and improve a vendor’s chances of bagging the targeted main contract, although pre-contract offset credits do not offer any such guarantee.
_In case a vendor does not get the hoped-for contract, he is at liberty to sell the accumulated offset credits to recover his costs with profit.
Bankable offsets can be created in the following two ways:-
_By excess generation through ongoing offset programmes.
_By executing fresh offset-centric programmes, in anticipation of bagging future defence contracts.
Execution in Excess of Current Obligation
A foreign vendor may decide to continue with an ongoing offset programme even after his obligation has been fully met, provided he is allowed to ‘bank’ extra credits earned through additional activity. These extensions benefit the host country as well. Such arrangements can materialise under the following circumstances:-
_An offset programme may not be financially viable due to lack of economies of scale. A vendor may well decide to scale-up his commitment, provided he is allowed to ‘bank’ surplus credits earned.
_In the case of export of goods and services, a vendor may find the business financially lucrative. After having invested in the development of new markets and having acquired related experience, it may make economic sense to carry on as long as the market conditions remain conducive.
_In case a vendor has invested in the indigenous defence industry against partial/full fulfillment of his offset obligation, he may decide to have a more intimate partnership and invest additional funds. Presently, the Government has put a cap of 26 per cent for Foreign Direct Investment (FDI) in the defence industry. There are three scenarios in which investment of additional funds is possible:-
o In case earlier investment was less than 26 percent, a vendor can increase it to the permissible limit.
o In case the capital base of the Indian company is increased, vendor can pick up additional equity up to the allowed cap.
o The Government may revise its policy and increase/remove FDI ceiling.
_Investment in defence R&D has to be flexible as cost and time overruns are fairly common. R&D programmes cannot have rigid financial funding. A foreign vendor has to remain invested and committed till the fructification of the project. At times, he may get forced to invest additional capital to protect his earlier investment.
Execution of Anticipatory Pre-contract Offset Programmes
In some countries, vendors are permitted to undertake approved programmes which would fetch them offset credits, in anticipation of getting major defence contracts. The UAE permits anticipatory offset credits in designated areas, provided it is convinced that the proposed activity would create new economic wealth and will be in the interest of the UAE.
A vendor who is confident of bagging a major defence contract may seek permission of the host country to commence offset programmes in advance. Offset credits thus earned are ‘banked’ to defray subsequent offset obligations. In case the vendor fails to get the anticipated contract, he is at liberty to trade his offset credits.
Functional Complexities and Need for Caution
Management of offset banking is a highly intricate and complex task. If banking is allowed, trade in offsets has to be accepted. Both are intrinsically and mutually contingent. Experienced vendors know how to exploit ambiguities in policies and lacunae in implementation to their advantage. Unless competently handled the whole exercise can prove infructuous and even counter-productive.
Given the option, every vendor would choose the easiest and most remunerative alternative. For example, many vendors will find it profitable to outsource defence software from India to earn offset credits. But gains to India may be illusory as India’s IT exports are already robust and thriving.
As offset banking may entail economic activities worth thousands of crores of rupees, it is absolutely essential that the Indian Government takes a well considered decision. Offset banking should not be viewed in isolation, but as an important and integral element of long-term national policy. The Government must weigh all issues involved to evolve a comprehensive and explicit policy directive.
Need for Pre-Approval of ‘Bankable’ Offset Programmes
India allows direct offsets (related to the main system under procurement) and semi-direct offsets (connected to defence industry). As all pre-contract activities are anticipatory in nature, they have to relate to semi-indirect offsets. It implies that under pre-contract activities, a vendor can export defence goods/services or invest in the Indian defence sector (including defence R&D) without reference to any specific acquisition proposal of the Indian Government.
As seen above, a vendor may earn offset credits simply by buying any product from Indian defence industry. It becomes a pure counter-trade arrangement. But, export of goods/services is considered to be the least beneficial form of offsets. As value of an offset programme depends primarily on its appropriate selection, the policy should also indicate the areas in which offsets are preferred and also offer suitable incentives for the same.
The Government of India introduced offsets in defence procurements in Defence Procurement Procedure – 2005 and detailed guidelines were issued in May 2006. The policy is applicable to all purchases where indicative cost is over Rs 300 crores for ‘Buy’, ‘Buy and Make with Transfer of Technology’ and ship-building cases. Offsets higher than 30 percent may be specified for specific cases. For joint ventures where Indian firm is bidding, the foreign partner will have to discharge offset obligation.
Offset obligation is to be completed coterminous within main contract and can be discharged through any of the following routes:-
_Direct purchase of or executing export orders for, defence products and services provided by Indian defence industries.
_Foreign Direct Investment (FDI) in Indian defence industries.
_FDI in Indian organisations engaged in research in defence R&D.
Generally, offsets are of two types - direct and indirect. In direct offsets, the compensatory dispensation remains confined to the main weapon system, its sub-assemblies and components. On the other hand, indirect offsets have a much wider scope and transcend other economic and social activities. However, India has decided to adopt a semi-direct path and demands offsets related to the defence industry as a whole.
Offset obligations are measured in terms of offset credits. As India does not use offset multipliers, the value of offset credit is equal to the monetary value of the obligation. It implies that in case a foreign vendor carries an offset obligation of Rs 100 crore, he has to either purchase goods/services worth Rs 100 crore or invest the amount in Indian defence industry/defence R&D. Of course, he can have a mix but the total value must add up to Rs 100 crore.
A Defence Offset Facilitation Agency (DOFA) has been established as a ‘single window’ under the Department of Defence Production to facilitate implementation of offset policy, vet offset proposals technically, provide advisory clarifications on policy and procedures (in consultation with the Acquisition Wing, where necessary) and assist vendors in interfacing with industry for identifying potential offset products/projects.
For products which contain imported components, only the value addition in India will count towards offset obligations. Offset contract will be signed with the main contract. A vendor cannot delay execution of main contract on the plea of inability of Indian offset partner to execute offset contract.
A penalty equivalent to 5 percent of unfulfilled portion of obligation in an year will be imposed on the defaulter. Vendor failing to complete offset obligation during the period of main contract (or during the period extended) will be debarred by Acquisition Wing for future, after giving him opportunity to explain.
The Indian policy has the following major distinctive provisions:-
_All proposals that meet minimum offset requirement are to be treated at par. No weightage is allowed for the quality or quantum of offsets. No preference is given for extra offsets offered.
_It is for the vendor to select methodology and Indian partner for the fulfillment of offset obligation.
_No offset multipliers are applicable.
_Offset banking has not been provided for.
The US India Business Council has been spiritedly advocating a number of policy changes. One of their recommendations relates to offset banking. It wants the Government to permit banking of offset credits to enable foreign vendors to accumulate them in advance.
Generation of Bankable Offset Credits
A vendor may generate potential offset credits through programmes undertaken prior to the award of main contract for ‘banking’ purposes for future use against likely obligations. Many vendors feel that pre-contract offset activities make sound economic sense for the following reasons:-
_Vendors show their earnestness and commitment to the host country and thereby create a favourable impression.
_As most contracts stipulate co-terminus completion of offset programmes, vendors confident of winning main contracts get early-starter advantage.
_Banked credits create an informal pressure on the host country and improve a vendor’s chances of bagging the targeted main contract, although pre-contract offset credits do not offer any such guarantee.
_In case a vendor does not get the hoped-for contract, he is at liberty to sell the accumulated offset credits to recover his costs with profit.
Bankable offsets can be created in the following two ways:-
_By excess generation through ongoing offset programmes.
_By executing fresh offset-centric programmes, in anticipation of bagging future defence contracts.
Execution in Excess of Current Obligation
A foreign vendor may decide to continue with an ongoing offset programme even after his obligation has been fully met, provided he is allowed to ‘bank’ extra credits earned through additional activity. These extensions benefit the host country as well. Such arrangements can materialise under the following circumstances:-
_An offset programme may not be financially viable due to lack of economies of scale. A vendor may well decide to scale-up his commitment, provided he is allowed to ‘bank’ surplus credits earned.
_In the case of export of goods and services, a vendor may find the business financially lucrative. After having invested in the development of new markets and having acquired related experience, it may make economic sense to carry on as long as the market conditions remain conducive.
_In case a vendor has invested in the indigenous defence industry against partial/full fulfillment of his offset obligation, he may decide to have a more intimate partnership and invest additional funds. Presently, the Government has put a cap of 26 per cent for Foreign Direct Investment (FDI) in the defence industry. There are three scenarios in which investment of additional funds is possible:-
o In case earlier investment was less than 26 percent, a vendor can increase it to the permissible limit.
o In case the capital base of the Indian company is increased, vendor can pick up additional equity up to the allowed cap.
o The Government may revise its policy and increase/remove FDI ceiling.
_Investment in defence R&D has to be flexible as cost and time overruns are fairly common. R&D programmes cannot have rigid financial funding. A foreign vendor has to remain invested and committed till the fructification of the project. At times, he may get forced to invest additional capital to protect his earlier investment.
Execution of Anticipatory Pre-contract Offset Programmes
In some countries, vendors are permitted to undertake approved programmes which would fetch them offset credits, in anticipation of getting major defence contracts. The UAE permits anticipatory offset credits in designated areas, provided it is convinced that the proposed activity would create new economic wealth and will be in the interest of the UAE.
A vendor who is confident of bagging a major defence contract may seek permission of the host country to commence offset programmes in advance. Offset credits thus earned are ‘banked’ to defray subsequent offset obligations. In case the vendor fails to get the anticipated contract, he is at liberty to trade his offset credits.
Functional Complexities and Need for Caution
Management of offset banking is a highly intricate and complex task. If banking is allowed, trade in offsets has to be accepted. Both are intrinsically and mutually contingent. Experienced vendors know how to exploit ambiguities in policies and lacunae in implementation to their advantage. Unless competently handled the whole exercise can prove infructuous and even counter-productive.
Given the option, every vendor would choose the easiest and most remunerative alternative. For example, many vendors will find it profitable to outsource defence software from India to earn offset credits. But gains to India may be illusory as India’s IT exports are already robust and thriving.
As offset banking may entail economic activities worth thousands of crores of rupees, it is absolutely essential that the Indian Government takes a well considered decision. Offset banking should not be viewed in isolation, but as an important and integral element of long-term national policy. The Government must weigh all issues involved to evolve a comprehensive and explicit policy directive.
Need for Pre-Approval of ‘Bankable’ Offset Programmes
India allows direct offsets (related to the main system under procurement) and semi-direct offsets (connected to defence industry). As all pre-contract activities are anticipatory in nature, they have to relate to semi-indirect offsets. It implies that under pre-contract activities, a vendor can export defence goods/services or invest in the Indian defence sector (including defence R&D) without reference to any specific acquisition proposal of the Indian Government.
As seen above, a vendor may earn offset credits simply by buying any product from Indian defence industry. It becomes a pure counter-trade arrangement. But, export of goods/services is considered to be the least beneficial form of offsets. As value of an offset programme depends primarily on its appropriate selection, the policy should also indicate the areas in which offsets are preferred and also offer suitable incentives for the same.
To ensure that routine commercial investments and trading activities are not shown as offset programmes to earn credits, it must be ascertained that all pre-contract activities relate to new products/services or new markets or conspicuously enhanced scale of existing operations. DOFA should be the designated authority to approve all proposals against which offset credits would be permitted. DOFA has to make sure that the additional economic activity generated through offsets is in consonance with national policy imperatives. It will prevent misuse of the facility by knowledgeable vendors.
All countries that allow offset banking have an elaborate procedure in place to estimate anticipated immediate, short term and long term benefits to their national economy. Expert groups are constituted for different projects and their reports included in the contract document. Therefore, programmes should be selected on the basis of their viability, estimated offset credit value, ease of monitoring and demonstrability of accruing benefits.
Application of Multipliers
As noted earlier, it is not the type of offset but its relevance to own needs that should guide the selection. It is imperative that all pre-contract offset activities be intelligently directed towards programmes involving investment and/or transfer of technology. For this purpose, offsets are commonly assigned ‘multiplier value’. It is a factor applied to the actual value of an offset activity to calculate the credit value earned. It is a methodology of assigning differential weigtage to various offset programmes to provide vendors with irresistible incentives to offer offsets in targeted area of their choice.
India must adopt application of multipliers if it wants to derive full benefits. For example, no vendor is going to invest in India’s defence R&D where the risks and uncertainties due to time and cost overruns are enormous. It is only through the application of multipliers that the foreign vendors can be persuaded to invest in the pre-selected areas.
Efficient Monitoring Mechanism
Inadequately monitored offset activities have always proved wasteful. Monitoring not only helps in achieving the objectives of the programme, but also provides invaluable feedback for data storage and further fine-tuning of the policy.
Monitoring is a multifaceted and complex task for the following reasons:-
_There are no well-developed tools for measurement and evaluation of cost-benefit equation.
_As limited data is made public in respect of defence offset activities, no standard monitoring mechanism has been evolved so far.
Offset banking needs regular and close oversight. Many host nations have found to their dismay that old and routine activities were presented to them under the garb of offset programmes by smart vendors. India must take due precautions before permitting ‘banking’ and have a properly constituted monitoring system in place to carry out periodic reviews of the process and apply corrections, where necessary. DOFA, duly strengthened by experts, could be assigned this task.
Regulation and Penalties for Default
All nations have inbuilt safeguards in the form of penalty clauses. The Indian policy also has clauses for penalties for default. But these are applicable to offset obligations emerging from defence contracts and not pre-contract activities. In case India decides to introduce offset banking, it has to have systems and procedures in place to ensure that vendors fulfill their commitments diligently.
Vendors should not be permitted to treat pre-contract programmes in a casual and slapdash manner. Though anticipatory in nature, all pre-contract activities consume considerable indigenous resources as well. In case a vendor loses interest (may be due to market dynamics) and wants to exit before completion, he must be penalised. He should not be permitted to renege on his commitments just because his initial offer was voluntary in nature and not due to any contractual obligations.
Transparency and Close Oversight for Probity
According to Transparency International, offsets are ‘very open to corruption’ as they remain on periphery and are subjected to less scrutiny. Moreover, they are formulated in broad and unspecific terms. Not all details of offsets are duly published. Security concerns of the host countries and the vendors’ reluctance to share data (terming it as commercially sensitive) render the whole programme open to manipulations. The problem of vulnerability gets further aggravated in case of offset banking.
Regular probity check is required in respect of the following aspects:-
_Grant of approval to only those programmes which bring in new economic gains to the country.
_Correct evaluation of credits, especially in cases of transfer of technology.
_Regular monitoring for adherence to agreed terms and conditions.
_Imposition of penalties for default.
Concerned functionaries have to ensure that no aspersions are ever caused as regards probity, and this can only be done by maximum transparency and laying down detailed instructions with no discretionary powers. Over-sensitivity to security should be avoided as it breeds unnecessary suspicions.
Conclusion
Offsets have come to stay. More than 130 countries are demanding offsets in one form or the other. The current market for offsets is estimated to be close to USD 50 billion and has given rise to a flourishing world wide trade in offset credits. These are bought from companies having surplus credits and sold at a profit to defence vendors who need them to fulfill their offset obligations. It is a highly cost-effective option in cases where a vendor has to execute offsets programmes in areas totally unrelated to his business. Growth of offset banking is a natural corollary of offset trade.
Australia found its Defence Offsets Credit Scheme to be too complicated and unwieldy, and replaced it with Defence Industry Investment Recognition (DIIREC) Scheme in 1995. Instead of granting ‘bankable credits’, Australia decided to introduce a recognition-centric scheme. DIIREC recognises investments made by overseas companies in Australia’s indigenous Defence capability and grants them favourable consideration in new Australian defence contracts.
As regards India, it has just introduced offsets in its defence procurement procedure and is yet to acquire the necessary skills. It has rightly decided to follow a graduated and phased approach. That is the reason why it has kept offset threshold at a high of Rs 300 crores and fixed offset value at a meager 30 percent. Provisions will be reviewed as India gains better understanding of dynamics of offsets.
As seen above, offset banking is a highly complex affair needing elaborate organisational setup with a dedicated expert agency. Unless handled with due care and caution, there is a likelihood of the country being taken in by clued-up vendors. Instead of economic gains, India may get saddled with infructuous and wasteful activities. Besides, it may give rise to unscrupulous dealings with consequent trading of charges. India must, therefore, tread warily and exercise due caution while considering introduction of offset banking.
Defence Procurements: Need for Independent Oversight
Major General Mrinal Suman (USI Journal Jun 2007)
Every major defence deal has been put to public and media scrutiny in the recent past, generally with adverse fallout. Numerous aspersions have been cast directly or indirectly. Almost all major deals have been referred to enquiry commissions or investigative agencies. Extensive media coverage, both informed and uninformed, has fuelled doubts about the probity of the whole procurement regime.
The above state of affairs has had a highly debilitating influence on the modernisation of the armed forces. Some other discernible effects are as follows:-
· There is a perceptible lack of faith in the uprightness of the whole system. People appear convinced that all defence deals are tainted and view all procurement functionaries to be lacking in required integrity. This has come to affect national morale, wherein a degree of despondency and resignation has set in.
· As all procurement activities come to be viewed with suspicion, functionaries become wary of taking decisions. Deferring decision making is considered a more intelligent course of action than having one’s integrity questioned later on. Hence, the whole procurement process suffers due to delays and vacillation at various levels.
· The environment gets vitiated to the extent that vendors feel compelled to factor in illegal commissions in their commercial quotes, under the mistaken belief that they would lose out unless they resort to such practices.
· Reputation of many upright leaders and functionaries gets tarnished with adverse media reporting, based on conjectures and stories planted by losing vendors.
· And most seriously, troops tend to lose faith in the leadership. They wonder if the equipment being procured meets qualitative parameters or they are being saddled with sub-standard/unreliable hardware that may fail them in war.
Major Initiatives Taken
The Government is seized of the matter and has initiated major steps to overhaul and strengthen the complete procurement procedure. Defence Procurement Procedure – 2006 (DPP-2006) is an extremely comprehensive document. It is perhaps the only document of its kind in the whole world that covers the complete gamut of all procurement activities.
The Government’s intent to infuse transparency and impartiality is clearly discernible in various provisions of the procedure. With a view to generating competition, tenders are now issued to a much larger number of vendors. Formulation of qualitative requirements has been made more broad-based to widen vendor participation. Two-bid system has been adopted to prevent subsequent raising of commercial quotes by successful vendors.
In a bold move, vendors have been permitted to attend field trials of their equipment and results are conveyed to them at the trial site itself. Price negotiations have been eliminated in competitive bids. Single-vendor procurements have been minimised to the barest inescapable ones. And finally, an innovative Integrity Pact has been introduced for all high-value contracts.
Pre-Contract Integrity Pact
As per DPP–2006, ‘Pre-Contract Integrity Pact’ would be signed between government department and the bidders for all procurement schemes over Rs 100 crores. It is a highly laudable step. It is a binding agreement between the Government procurement agency (Buyer) and the vendors (Bidders). Salient features of the Pre-Contract Integrity Pact are as follows:-
(a) The Buyer undertakes that no official of the Buyer will demand or accept any bribe, directly or through intermediaries.
(b) The Bidder undertakes not to offer, directly or through intermediaries, any bribe, commission or inducement to any official of the Buyer.
(c) The Bidder commits to refrain from giving any complaint directly or through any other manner without supporting it with full and verifiable facts.
(d) The Buyer will appoint Independent Monitors for this Pact, in consultation with the Central Vigilance Commission (CVC). As soon as the Monitor notices, or believes to notice, a violation of this agreement, he will so inform the Head of the Acquisition Wing.
(e) The following set of sanctions can be imposed by the Buyer for any violation by a Bidder: -
· Denial or loss of contract.
· Forfeiture of the bid security and performance bond.
· Liability for damages to the principal and the competing bidders.
· Debarment for an appropriate period of time.
(f) The decision of the Buyer to the effect that a breach of the provisions of this Integrity Pact has been committed by the Bidder shall be final and binding on the Bidder. However, the Bidder can approach the monitor(s).
Deficiencies in the Integrity Pact
Though well intended, the Integrity Pact appears to have been incorporated in a hurry. Some of the major infirmities are discussed below.
Limited Applicability
Integrity Pact is required only in cases where the contract value is above Rs 100 crores. Interestingly, most of the contracts signed normally are of value less than Rs 100 crores. For example, a total of 123 contracts were signed in the wake of the Kargil War and their gross value was Rs 2163.09 crores. Almost all of them were less than Rs 100 crores. The much publicised casket contract was for under Rs 6 crores. Contract with Denel for anti-material rifles and ammunition was for Rs 23.22 crores (Denel has since been debarred for using undue influence).
It will thus be seen that the newly introduced Integrity Pact will apply to a handful of big ticket contracts only. Majority of procurements cases will stay outside its purview. It is an odd provision and conveys an impression that it is not essential to ensure integrity in cases of lesser value.
Pact is Loaded against Bidders
The Integrity Pact is between the Buyer and the Bidder. But all the provisions are loaded against the Bidder. The Bidder has to give numerous undertakings and also agree to accept sanctions as imposed by the Buyer. Interestingly, it is for the Buyer to decide that a breach of Integrity Pact has taken place.
On the other hand, the Buyer undertakes to initiate disciplinary and criminal proceedings against his defaulting officers. It is an infructuous undertaking. Even under the existing criminal laws in force and service rules, the Government is duty bound to initiate action against delinquent officials, even for lesser value contracts which are not covered by the Pact.
Ineffective Independent Monitors
Independent Monitor will be nominated by the Buyer on case to case basis, albeit in consultation with CVC. In all probability, it would be a well connected bureaucrat seeking post retirement rehabilitation. He will neither be independent nor effective as it will be prudent for him to remain ‘amenable’ to secure repeat assignments.
Additionally, the role assigned to him is totally imprecise and perfunctory. He is required to inform Director General Acquisition (the Buyer) if he ‘notices, or believes to notice, a violation of this agreement’. It is for the Buyer to proceed as deemed fit. As there is no mention of his functioning, it is a matter of speculation as to how a monitor shall detect violations.
Another interesting aspect relates to the power given to the Buyer to rule that the Bidder has violated provisions of the Pact. Such a decision is ‘final and binding’. The Pact, however, permits the aggrieved bidder to approach the Monitor. But there is no mention as to what the Monitor can do when the decision of the Buyer is already ‘final and binding’.
Lack of Complaint Redressal Mechanism
No arrangement can be credible unless an effective and prompt complaint redressal mechanism is put in place. The Integrity Pact has overlooked this critical requirement totally. An aggrieved Bidder has to report the matter to the Buyer ‘with full and verifiable facts’. Thereafter, it is for the Buyer to initiate action against the accused official for alleged misdemeanor. The Pact is totally silent as regards dispensation of justice to the wronged Bidder.
Every pact has to have an independent adjudicator to resolve disputes between the contracting parties after hearing both sides. However, in the Integrity Pact this authority has been abrogated by the Buyer to himself. Such an arrangement dilutes the value of the Pact and makes it appear as a pretense rather than a serious attempt to promote probity.
Necessity of a Credible Probity Assurance Mechanism
The primary aim of the Government should be to convince the nation that it is serious about ensuring probity in defence procurements and restore people’s faith in the system. As has been discussed earlier, India needs an arrangement with the following essential imperatives:-
_Ensure probity and uprightness in all defence procurements of capital nature, irrespective of their value. The system should be acknowledged by all to be transparent and principled.
_Dealing officials should fear punitive provisions for their subjective decisions.
_Bidders should have total confidence in the fairness of the system and should be convinced that their competitors would draw no inequitable benefit even if they attempt to resort to iniquitous practices.
_Aggrieved parties should be able to get redressal speedily.
_The armed forces must feel confident of the quality of weapon systems provided to them.
The recently introduced Integrity Pact falls woefully short on all counts and the probity of defence procurements will continue to remain suspect.
Defence Procurements Oversight Commission
India needs an oversight system which enjoys the confidence of all and which acts as a watchdog. India should set up a Defence Procurements Oversight Commission (DPOC). It should be a semi-judicial ombudsman and be permanent in nature.
Constitution
DPOC should consist of a Chairman and three members – Technical, Commercial and Legal. They should be selected by a committee consisting of the Defence Minister, Leader of the Opposition and a sitting judge of the Supreme Court. As the entire success of this mechanism depends on the credibility enjoyed by the Commission, all politically aligned personnel must be scrupulously kept away.
The Chairman should be a retired judge of the Supreme Court. He should be a man of impeccable reputation and standing. His name should invoke respect and confidence. All members of the Commission should have a fixed tenure of five years. Member Technical should be a retired service officer with experience in defence procurements. Member Commercial should be an economist of repute from academia or an expert from private sector financial sector. And, Member Legal should be a specialist in contract management and international trade. It will be prudent not to have retired bureaucrats, as their erstwhile long association with the Government may compromise their independence in the eyes of the people.
Role
DPOC will perform three major roles:-
(a) Monitoring Functions. It will monitor and oversee that all procurement activities from evolution of parameters to post-contract implementation are carried out as per the laid down procedures and in the true spirit of the Integrity Pact. It can ask for any file and attend any meeting being held between the Buyer and the Bidders to keep itself abreast of the developments. On noticing any violation by the either party, it could take immediate remedial measures to correct the infirmity. Such a timely intervention will prevent the whole process getting vitiated beyond redemption.
(b) Advisory Functions. The Commission can be of immense help in rendering pre-activity independent advice to the Buyer. Presently, the Ministry of Defence is devoid of any pre-audit advice. It has been requesting that either Central Vigilance Commission or any other statutory body should render probity advice to it before a contract is signed. DPOC will fulfill this need ideally. When in doubt about the correctness of an intended action, the Buyer can approach the Commission for advice. Such an arrangement will help officials take well-considered decisions without vacillation.
(c) Adjudicatory Functions. Both sides (the Buyer and the Bidders) should be permitted to bring violation of the Integrity Pact to the Commission’s notice. It should be for the Commission to seek full details and carry out its assessment of the issues involved. However, adjudicatory proceedings should not impinge upon the normal progress of the case. Depending on the gravity of the violation, The Commission could either call involved parties to reconcile differences or suggest remedial action. The power to recommend action against delinquent official or imposition of sanctions on defaulting Bidder(s) should rest with the Commission, which should send its report to the Defence Minister. The Commission may even recommend abrogation of a procurement proposal if it suffers from major irregularities.
Reporting Channel
DPOC should submit its reports to the Parliamentary Committee on Defence through the Defence Minister.
Functioning
DPOC is not intended to be a super Acquisition Wing. It must not interfere in routine procurement functions and decision making. Procurement officials should never feel constrained and curtailed. They must have full freedom of action.
The Commission should generally stay out of allocation of priorities to various proposals, acceptance of necessity and quantity vetting. Its interest in the formulation of parameters should be restricted to ensuring that they are broad based and not any vendor-specific. Similarly, it should leave the modalities of field trials to the services. Ideally, the Commission should place itself as an advisory and protective body to save the officials from subsequent harassment for decisions taken in good faith.
The current provision for technical oversight by an independent committee in respect of contracts of value above Rs 300 crores should be dispensed with.
Likely Opposition
The opposition to the constitution of DPOC should not be underestimated. It will be strident and vehement. Change is the very anti-thesis of bureaucratic inertia. Additionally, old mindsets and intellectual apathy spawn numerous arguments to stress non-viability of all new ideas. Opposition to DPOC is anticipated on the following counts:-
· It will curb freedom of officials.
On the contrary, the presence of the Commission will embolden the officials as they would know that they have a protective shield of the Commission to vouchsafe their conduct. Additionally, when in doubt the officials can seek guidance from the Commission in complex cases.
· Additional tier will cause delays.
This is a misplaced apprehension. The Commission will perform its functions concurrently. It will not be another link in the official hierarchy. The Acquisition Wing will continue with its regular activities. In fact, the Commission will facilitate speedier progress of cases as officials will have to justify excessive time taken over files. Oversight by DPOC will also save months and years spent on rescinding flawed procurement cases and re-initiating proposals.
· Additional set-up will entail extra expenditure.
Undoubtedly there will be additional expenditure. However, it will be miniscule compared to the expenditure presently incurred on various commissions of inquiries after almost all defence deals. Most importantly, strict adherence to integrity and probity norms will enable India to obtain best value for money. Even a nominal five percent reduction in contracted prices will result in a saving of USD 1.5 billion during the 7th Plan Period (2007-12), as India is likely to spend USD 30 billion on defence procurements during that period. The Commission should be seen as a facilitator rather than as a meddling irritant. It will act as an effective interface, especially to resolve differences. It will provide a platform where the Bidders can air their reservations, while the officials will get an opportunity to explain the underlying rationale of their decisions. That will enhance transparency. It will also force officials to take duly considered and defensible decisions. Most of the complaints arise due to misunderstandings and misapprehensions due to lack of effective communication.
Conclusion
Regular questioning of the uprightness of Indian defence procurements has caused immense damage to the national psyche and the morale of the armed forces. Media has been highlighting irregularities and creating doubts about the sanctity of the complete procurement process. Another fall-out has been tardy modernisation of the armed forces. It is an extremely grave situation and requires drastic steps.
The Government has taken a number of commendable measures. But the people continue to be skeptical. Therefore, the Government needs not only to ensure probity but also, and may be more importantly, convince the environment of its earnestness. The system must be accepted and acknowledged by all to be impartial, transparent and objective.
Pre-Contract Integrity Pact is a move in the right direction but needs to be made more equitable and stringent. Any worthwhile complaint resolving authority has to enjoy widespread credibility and all parties involved must have full faith in its impartiality. It should be easily approachable and should be able to dispense justice speedily.
Formation of an independent and credible overseeing Commission is essential to provide reassurance that defence procurements are above board. The Commission should act as a watchdog and an ombudsman on behalf of the public. That will be the only way to strengthen public confidence in the genuineness of the Government’s commitment. Inadequately evolved measures will prove illusory and wasteful.
Every major defence deal has been put to public and media scrutiny in the recent past, generally with adverse fallout. Numerous aspersions have been cast directly or indirectly. Almost all major deals have been referred to enquiry commissions or investigative agencies. Extensive media coverage, both informed and uninformed, has fuelled doubts about the probity of the whole procurement regime.
The above state of affairs has had a highly debilitating influence on the modernisation of the armed forces. Some other discernible effects are as follows:-
· There is a perceptible lack of faith in the uprightness of the whole system. People appear convinced that all defence deals are tainted and view all procurement functionaries to be lacking in required integrity. This has come to affect national morale, wherein a degree of despondency and resignation has set in.
· As all procurement activities come to be viewed with suspicion, functionaries become wary of taking decisions. Deferring decision making is considered a more intelligent course of action than having one’s integrity questioned later on. Hence, the whole procurement process suffers due to delays and vacillation at various levels.
· The environment gets vitiated to the extent that vendors feel compelled to factor in illegal commissions in their commercial quotes, under the mistaken belief that they would lose out unless they resort to such practices.
· Reputation of many upright leaders and functionaries gets tarnished with adverse media reporting, based on conjectures and stories planted by losing vendors.
· And most seriously, troops tend to lose faith in the leadership. They wonder if the equipment being procured meets qualitative parameters or they are being saddled with sub-standard/unreliable hardware that may fail them in war.
Major Initiatives Taken
The Government is seized of the matter and has initiated major steps to overhaul and strengthen the complete procurement procedure. Defence Procurement Procedure – 2006 (DPP-2006) is an extremely comprehensive document. It is perhaps the only document of its kind in the whole world that covers the complete gamut of all procurement activities.
The Government’s intent to infuse transparency and impartiality is clearly discernible in various provisions of the procedure. With a view to generating competition, tenders are now issued to a much larger number of vendors. Formulation of qualitative requirements has been made more broad-based to widen vendor participation. Two-bid system has been adopted to prevent subsequent raising of commercial quotes by successful vendors.
In a bold move, vendors have been permitted to attend field trials of their equipment and results are conveyed to them at the trial site itself. Price negotiations have been eliminated in competitive bids. Single-vendor procurements have been minimised to the barest inescapable ones. And finally, an innovative Integrity Pact has been introduced for all high-value contracts.
Pre-Contract Integrity Pact
As per DPP–2006, ‘Pre-Contract Integrity Pact’ would be signed between government department and the bidders for all procurement schemes over Rs 100 crores. It is a highly laudable step. It is a binding agreement between the Government procurement agency (Buyer) and the vendors (Bidders). Salient features of the Pre-Contract Integrity Pact are as follows:-
(a) The Buyer undertakes that no official of the Buyer will demand or accept any bribe, directly or through intermediaries.
(b) The Bidder undertakes not to offer, directly or through intermediaries, any bribe, commission or inducement to any official of the Buyer.
(c) The Bidder commits to refrain from giving any complaint directly or through any other manner without supporting it with full and verifiable facts.
(d) The Buyer will appoint Independent Monitors for this Pact, in consultation with the Central Vigilance Commission (CVC). As soon as the Monitor notices, or believes to notice, a violation of this agreement, he will so inform the Head of the Acquisition Wing.
(e) The following set of sanctions can be imposed by the Buyer for any violation by a Bidder: -
· Denial or loss of contract.
· Forfeiture of the bid security and performance bond.
· Liability for damages to the principal and the competing bidders.
· Debarment for an appropriate period of time.
(f) The decision of the Buyer to the effect that a breach of the provisions of this Integrity Pact has been committed by the Bidder shall be final and binding on the Bidder. However, the Bidder can approach the monitor(s).
Deficiencies in the Integrity Pact
Though well intended, the Integrity Pact appears to have been incorporated in a hurry. Some of the major infirmities are discussed below.
Limited Applicability
Integrity Pact is required only in cases where the contract value is above Rs 100 crores. Interestingly, most of the contracts signed normally are of value less than Rs 100 crores. For example, a total of 123 contracts were signed in the wake of the Kargil War and their gross value was Rs 2163.09 crores. Almost all of them were less than Rs 100 crores. The much publicised casket contract was for under Rs 6 crores. Contract with Denel for anti-material rifles and ammunition was for Rs 23.22 crores (Denel has since been debarred for using undue influence).
It will thus be seen that the newly introduced Integrity Pact will apply to a handful of big ticket contracts only. Majority of procurements cases will stay outside its purview. It is an odd provision and conveys an impression that it is not essential to ensure integrity in cases of lesser value.
Pact is Loaded against Bidders
The Integrity Pact is between the Buyer and the Bidder. But all the provisions are loaded against the Bidder. The Bidder has to give numerous undertakings and also agree to accept sanctions as imposed by the Buyer. Interestingly, it is for the Buyer to decide that a breach of Integrity Pact has taken place.
On the other hand, the Buyer undertakes to initiate disciplinary and criminal proceedings against his defaulting officers. It is an infructuous undertaking. Even under the existing criminal laws in force and service rules, the Government is duty bound to initiate action against delinquent officials, even for lesser value contracts which are not covered by the Pact.
Ineffective Independent Monitors
Independent Monitor will be nominated by the Buyer on case to case basis, albeit in consultation with CVC. In all probability, it would be a well connected bureaucrat seeking post retirement rehabilitation. He will neither be independent nor effective as it will be prudent for him to remain ‘amenable’ to secure repeat assignments.
Additionally, the role assigned to him is totally imprecise and perfunctory. He is required to inform Director General Acquisition (the Buyer) if he ‘notices, or believes to notice, a violation of this agreement’. It is for the Buyer to proceed as deemed fit. As there is no mention of his functioning, it is a matter of speculation as to how a monitor shall detect violations.
Another interesting aspect relates to the power given to the Buyer to rule that the Bidder has violated provisions of the Pact. Such a decision is ‘final and binding’. The Pact, however, permits the aggrieved bidder to approach the Monitor. But there is no mention as to what the Monitor can do when the decision of the Buyer is already ‘final and binding’.
Lack of Complaint Redressal Mechanism
No arrangement can be credible unless an effective and prompt complaint redressal mechanism is put in place. The Integrity Pact has overlooked this critical requirement totally. An aggrieved Bidder has to report the matter to the Buyer ‘with full and verifiable facts’. Thereafter, it is for the Buyer to initiate action against the accused official for alleged misdemeanor. The Pact is totally silent as regards dispensation of justice to the wronged Bidder.
Every pact has to have an independent adjudicator to resolve disputes between the contracting parties after hearing both sides. However, in the Integrity Pact this authority has been abrogated by the Buyer to himself. Such an arrangement dilutes the value of the Pact and makes it appear as a pretense rather than a serious attempt to promote probity.
Necessity of a Credible Probity Assurance Mechanism
The primary aim of the Government should be to convince the nation that it is serious about ensuring probity in defence procurements and restore people’s faith in the system. As has been discussed earlier, India needs an arrangement with the following essential imperatives:-
_Ensure probity and uprightness in all defence procurements of capital nature, irrespective of their value. The system should be acknowledged by all to be transparent and principled.
_Dealing officials should fear punitive provisions for their subjective decisions.
_Bidders should have total confidence in the fairness of the system and should be convinced that their competitors would draw no inequitable benefit even if they attempt to resort to iniquitous practices.
_Aggrieved parties should be able to get redressal speedily.
_The armed forces must feel confident of the quality of weapon systems provided to them.
The recently introduced Integrity Pact falls woefully short on all counts and the probity of defence procurements will continue to remain suspect.
Defence Procurements Oversight Commission
India needs an oversight system which enjoys the confidence of all and which acts as a watchdog. India should set up a Defence Procurements Oversight Commission (DPOC). It should be a semi-judicial ombudsman and be permanent in nature.
Constitution
DPOC should consist of a Chairman and three members – Technical, Commercial and Legal. They should be selected by a committee consisting of the Defence Minister, Leader of the Opposition and a sitting judge of the Supreme Court. As the entire success of this mechanism depends on the credibility enjoyed by the Commission, all politically aligned personnel must be scrupulously kept away.
The Chairman should be a retired judge of the Supreme Court. He should be a man of impeccable reputation and standing. His name should invoke respect and confidence. All members of the Commission should have a fixed tenure of five years. Member Technical should be a retired service officer with experience in defence procurements. Member Commercial should be an economist of repute from academia or an expert from private sector financial sector. And, Member Legal should be a specialist in contract management and international trade. It will be prudent not to have retired bureaucrats, as their erstwhile long association with the Government may compromise their independence in the eyes of the people.
Role
DPOC will perform three major roles:-
(a) Monitoring Functions. It will monitor and oversee that all procurement activities from evolution of parameters to post-contract implementation are carried out as per the laid down procedures and in the true spirit of the Integrity Pact. It can ask for any file and attend any meeting being held between the Buyer and the Bidders to keep itself abreast of the developments. On noticing any violation by the either party, it could take immediate remedial measures to correct the infirmity. Such a timely intervention will prevent the whole process getting vitiated beyond redemption.
(b) Advisory Functions. The Commission can be of immense help in rendering pre-activity independent advice to the Buyer. Presently, the Ministry of Defence is devoid of any pre-audit advice. It has been requesting that either Central Vigilance Commission or any other statutory body should render probity advice to it before a contract is signed. DPOC will fulfill this need ideally. When in doubt about the correctness of an intended action, the Buyer can approach the Commission for advice. Such an arrangement will help officials take well-considered decisions without vacillation.
(c) Adjudicatory Functions. Both sides (the Buyer and the Bidders) should be permitted to bring violation of the Integrity Pact to the Commission’s notice. It should be for the Commission to seek full details and carry out its assessment of the issues involved. However, adjudicatory proceedings should not impinge upon the normal progress of the case. Depending on the gravity of the violation, The Commission could either call involved parties to reconcile differences or suggest remedial action. The power to recommend action against delinquent official or imposition of sanctions on defaulting Bidder(s) should rest with the Commission, which should send its report to the Defence Minister. The Commission may even recommend abrogation of a procurement proposal if it suffers from major irregularities.
Reporting Channel
DPOC should submit its reports to the Parliamentary Committee on Defence through the Defence Minister.
Functioning
DPOC is not intended to be a super Acquisition Wing. It must not interfere in routine procurement functions and decision making. Procurement officials should never feel constrained and curtailed. They must have full freedom of action.
The Commission should generally stay out of allocation of priorities to various proposals, acceptance of necessity and quantity vetting. Its interest in the formulation of parameters should be restricted to ensuring that they are broad based and not any vendor-specific. Similarly, it should leave the modalities of field trials to the services. Ideally, the Commission should place itself as an advisory and protective body to save the officials from subsequent harassment for decisions taken in good faith.
The current provision for technical oversight by an independent committee in respect of contracts of value above Rs 300 crores should be dispensed with.
Likely Opposition
The opposition to the constitution of DPOC should not be underestimated. It will be strident and vehement. Change is the very anti-thesis of bureaucratic inertia. Additionally, old mindsets and intellectual apathy spawn numerous arguments to stress non-viability of all new ideas. Opposition to DPOC is anticipated on the following counts:-
· It will curb freedom of officials.
On the contrary, the presence of the Commission will embolden the officials as they would know that they have a protective shield of the Commission to vouchsafe their conduct. Additionally, when in doubt the officials can seek guidance from the Commission in complex cases.
· Additional tier will cause delays.
This is a misplaced apprehension. The Commission will perform its functions concurrently. It will not be another link in the official hierarchy. The Acquisition Wing will continue with its regular activities. In fact, the Commission will facilitate speedier progress of cases as officials will have to justify excessive time taken over files. Oversight by DPOC will also save months and years spent on rescinding flawed procurement cases and re-initiating proposals.
· Additional set-up will entail extra expenditure.
Undoubtedly there will be additional expenditure. However, it will be miniscule compared to the expenditure presently incurred on various commissions of inquiries after almost all defence deals. Most importantly, strict adherence to integrity and probity norms will enable India to obtain best value for money. Even a nominal five percent reduction in contracted prices will result in a saving of USD 1.5 billion during the 7th Plan Period (2007-12), as India is likely to spend USD 30 billion on defence procurements during that period. The Commission should be seen as a facilitator rather than as a meddling irritant. It will act as an effective interface, especially to resolve differences. It will provide a platform where the Bidders can air their reservations, while the officials will get an opportunity to explain the underlying rationale of their decisions. That will enhance transparency. It will also force officials to take duly considered and defensible decisions. Most of the complaints arise due to misunderstandings and misapprehensions due to lack of effective communication.
Conclusion
Regular questioning of the uprightness of Indian defence procurements has caused immense damage to the national psyche and the morale of the armed forces. Media has been highlighting irregularities and creating doubts about the sanctity of the complete procurement process. Another fall-out has been tardy modernisation of the armed forces. It is an extremely grave situation and requires drastic steps.
The Government has taken a number of commendable measures. But the people continue to be skeptical. Therefore, the Government needs not only to ensure probity but also, and may be more importantly, convince the environment of its earnestness. The system must be accepted and acknowledged by all to be impartial, transparent and objective.
Pre-Contract Integrity Pact is a move in the right direction but needs to be made more equitable and stringent. Any worthwhile complaint resolving authority has to enjoy widespread credibility and all parties involved must have full faith in its impartiality. It should be easily approachable and should be able to dispense justice speedily.
Formation of an independent and credible overseeing Commission is essential to provide reassurance that defence procurements are above board. The Commission should act as a watchdog and an ombudsman on behalf of the public. That will be the only way to strengthen public confidence in the genuineness of the Government’s commitment. Inadequately evolved measures will prove illusory and wasteful.
RUR: Another Failed Initiative
Major General Mrinal Suman (Gfiles)
The present Government will be remembered primarily for numerous failed policy initiatives with the nuclear issue heading the list. Despite repeated assertions of its progressive pretensions, the Government considers it prudent to sacrifice all innovative proposals at the altar of political expediency and an overpowering urge to remain in power. Proposal to grant Raksha Utpadan Ratna (RUR) status to select private sector companies is the latest addition to this casualty list.
It was in 1998 that the Ministry of Defence (MoD) took the first major step to involve the private sector in defence production. Six Joint Task Forces were constituted with the Confederation of Indian Industry to cover the following aspects:-
1. Defence-Industry Long Term Partnership.
2. Defence-Industry Partnership on Commercial Process.
3. PSUs/OFB/Private Sector Complementarity.
4. DRDO-Industry Partnership.
5. Defence Export Strategy.
6. Defence-IT Industry Partnership.
Consequent to the recommendations of the Task Forces, the Government announced a major policy change and opened defence production to the private sector in January 2002. It also allowed 26 per cent direct foreign investment. The private sector was euphoric and anticipated huge business opportunities. However, their hopes were soon belied when they realised that the public sector continued to get preferential treatment and the private sector had to remain content with the supply of some sub-assemblies and components. Moreover, as the stipulations governing foreign investments were highly skewed, there was no inflow of foreign funds. In short, there was no change in the ground situation.
Repeated representations to MoD resulted in the constitution of Kelkar Committee. It was tasked, inter alia, to examine and recommend modalities of integration of the user (services), the Defence Ministry and the Indian industry (both private and public) in the defence acquisition process. The Committee commenced work in July 2004 and submitted its report in two parts in April 2005 and November 2005 respectively. A number of presentations were made by the private sector entities. They wanted to be treated at par with the public sector as regards receipt of imported technology, fulfilment of offset obligations and joint development with Defence Research and Development Organisation.
Kelkar Committee concluded that the private sector has to be co-opted as an equal participant if India is to achieve the often stated objective of self-reliance in defence production. Instead of issuing a carte-blanche to the private sector, it suggested a discerning and judicious approach. It recommended that select private sector industry leaders be identified as RUR and treated at par with the public sector for all defence acquisition purposes, to include the following:-
· Design and development of high technology complex systems under the new ‘Make’ procedure.
· Bidding for defence contracts, production of platforms and integration of large weapon systems.
· Receipt of contracted foreign technology and indigenous production thereafter.
· Discharge of offset obligations.
· Receipt of funds for developmental projects.
The above suggestions were accepted by MoD. Department of Defence Production issued detailed guidelines in May 2006 spelling out eligibility criterion and laying down selection procedure. It was mandated that a company aspiring for RUR status has to be a public limited Indian company registered for minimum ten years with capital assets in India not less than Rs 100 crores and turnover not less than Rs 1000 crores for each of the past three years. Additionally, the company should have consistent profitable financial record showing profits in at least three years of the last five years and with no accumulated losses. Foreign holding was pegged at a maximum of 26 per cent. The company should have an established track record in engineering (including software) and manufacturing for real value addition. Most importantly, the company should either possess a licence/LOI for production of defence items or obtain the same within six months of application for seeking RUR status, wherever required.
The first Selection Committee was constituted in May 2006 under Mr Prabir Sengupta. It was asked to make recommendations in respect of each applicant company, to be placed before the Defence Acquisition Council for acceptance. Names of the companies recognised as RUR were to be declared by 31 March 2007. The private sector was ecstatic and responded enthusiastically. A total of 41 companies including most heavy weights applied. The Committee invited around 15 of them to make detailed presentations. It is learnt that 12 companies were short listed by the Committee for the award of the status RUR and recommendations forwarded to MoD in June 2007. The list reportedly included reputed players like L&T, Tata Group companies, Kirloskars, Ashok Leyland, Godrej and Boyce and Mahindra and Mahindra amongst others. However, there has been no official announcement so far. When queried, the Minister of State for Defence Production Rao Inderjit Singh admitted in February 2008 that the Committee report was with the Government and under examination.
Although certain amount of opposition was always expected from the public sector, its intensity and stridency has surprised most. For public consumption, imperilment of national security is being touted as the stated rationale for their opposition; whereas the real reason is a creeping sense of insecurity. Opposition has been orchestrated by the public sector undertakings through the trade unions affiliated to the Left parties, as they perceive RUR as a threat to their existing monopoly and domination. Fully aware of their own weaknesses, they are wary of competing against RUR companies on an equal footing. They are conscious of better efficiency of the private sector vis-à-vis their own functioning. Therefore, it is a question of survival for them.
More importantly, the public sector enterprises are exploiting their clout with the Department of Defence Production to scuttle the complete scheme. It has left the private sector wondering whether the Government is genuinely interested in their participation in the defence production. Many companies have invested considerable funds and signed multiple agreements with foreign firms. Their sense of exasperation was duly visible during the last Defexpo in Delhi and their enthusiasm appeared to be on the wane. “We have obtained licenses for the manufacture of a large variety of defence systems, signed a number of MOU with foreign companies and invested considerable resources over the last five years, but we are yet to get an order. I wonder as to how long can we continue like this,” commented a senior executive of a highly active private sector company. “Every time we are close to getting an order, it gets passed on to the public sector on some specious grounds,” he added dejectedly. It is time the Government arrests this slide towards despondency by displaying its resolve and converting stated intentions into implementation on ground.
The present Government will be remembered primarily for numerous failed policy initiatives with the nuclear issue heading the list. Despite repeated assertions of its progressive pretensions, the Government considers it prudent to sacrifice all innovative proposals at the altar of political expediency and an overpowering urge to remain in power. Proposal to grant Raksha Utpadan Ratna (RUR) status to select private sector companies is the latest addition to this casualty list.
It was in 1998 that the Ministry of Defence (MoD) took the first major step to involve the private sector in defence production. Six Joint Task Forces were constituted with the Confederation of Indian Industry to cover the following aspects:-
1. Defence-Industry Long Term Partnership.
2. Defence-Industry Partnership on Commercial Process.
3. PSUs/OFB/Private Sector Complementarity.
4. DRDO-Industry Partnership.
5. Defence Export Strategy.
6. Defence-IT Industry Partnership.
Consequent to the recommendations of the Task Forces, the Government announced a major policy change and opened defence production to the private sector in January 2002. It also allowed 26 per cent direct foreign investment. The private sector was euphoric and anticipated huge business opportunities. However, their hopes were soon belied when they realised that the public sector continued to get preferential treatment and the private sector had to remain content with the supply of some sub-assemblies and components. Moreover, as the stipulations governing foreign investments were highly skewed, there was no inflow of foreign funds. In short, there was no change in the ground situation.
Repeated representations to MoD resulted in the constitution of Kelkar Committee. It was tasked, inter alia, to examine and recommend modalities of integration of the user (services), the Defence Ministry and the Indian industry (both private and public) in the defence acquisition process. The Committee commenced work in July 2004 and submitted its report in two parts in April 2005 and November 2005 respectively. A number of presentations were made by the private sector entities. They wanted to be treated at par with the public sector as regards receipt of imported technology, fulfilment of offset obligations and joint development with Defence Research and Development Organisation.
Kelkar Committee concluded that the private sector has to be co-opted as an equal participant if India is to achieve the often stated objective of self-reliance in defence production. Instead of issuing a carte-blanche to the private sector, it suggested a discerning and judicious approach. It recommended that select private sector industry leaders be identified as RUR and treated at par with the public sector for all defence acquisition purposes, to include the following:-
· Design and development of high technology complex systems under the new ‘Make’ procedure.
· Bidding for defence contracts, production of platforms and integration of large weapon systems.
· Receipt of contracted foreign technology and indigenous production thereafter.
· Discharge of offset obligations.
· Receipt of funds for developmental projects.
The above suggestions were accepted by MoD. Department of Defence Production issued detailed guidelines in May 2006 spelling out eligibility criterion and laying down selection procedure. It was mandated that a company aspiring for RUR status has to be a public limited Indian company registered for minimum ten years with capital assets in India not less than Rs 100 crores and turnover not less than Rs 1000 crores for each of the past three years. Additionally, the company should have consistent profitable financial record showing profits in at least three years of the last five years and with no accumulated losses. Foreign holding was pegged at a maximum of 26 per cent. The company should have an established track record in engineering (including software) and manufacturing for real value addition. Most importantly, the company should either possess a licence/LOI for production of defence items or obtain the same within six months of application for seeking RUR status, wherever required.
The first Selection Committee was constituted in May 2006 under Mr Prabir Sengupta. It was asked to make recommendations in respect of each applicant company, to be placed before the Defence Acquisition Council for acceptance. Names of the companies recognised as RUR were to be declared by 31 March 2007. The private sector was ecstatic and responded enthusiastically. A total of 41 companies including most heavy weights applied. The Committee invited around 15 of them to make detailed presentations. It is learnt that 12 companies were short listed by the Committee for the award of the status RUR and recommendations forwarded to MoD in June 2007. The list reportedly included reputed players like L&T, Tata Group companies, Kirloskars, Ashok Leyland, Godrej and Boyce and Mahindra and Mahindra amongst others. However, there has been no official announcement so far. When queried, the Minister of State for Defence Production Rao Inderjit Singh admitted in February 2008 that the Committee report was with the Government and under examination.
Although certain amount of opposition was always expected from the public sector, its intensity and stridency has surprised most. For public consumption, imperilment of national security is being touted as the stated rationale for their opposition; whereas the real reason is a creeping sense of insecurity. Opposition has been orchestrated by the public sector undertakings through the trade unions affiliated to the Left parties, as they perceive RUR as a threat to their existing monopoly and domination. Fully aware of their own weaknesses, they are wary of competing against RUR companies on an equal footing. They are conscious of better efficiency of the private sector vis-à-vis their own functioning. Therefore, it is a question of survival for them.
More importantly, the public sector enterprises are exploiting their clout with the Department of Defence Production to scuttle the complete scheme. It has left the private sector wondering whether the Government is genuinely interested in their participation in the defence production. Many companies have invested considerable funds and signed multiple agreements with foreign firms. Their sense of exasperation was duly visible during the last Defexpo in Delhi and their enthusiasm appeared to be on the wane. “We have obtained licenses for the manufacture of a large variety of defence systems, signed a number of MOU with foreign companies and invested considerable resources over the last five years, but we are yet to get an order. I wonder as to how long can we continue like this,” commented a senior executive of a highly active private sector company. “Every time we are close to getting an order, it gets passed on to the public sector on some specious grounds,” he added dejectedly. It is time the Government arrests this slide towards despondency by displaying its resolve and converting stated intentions into implementation on ground.
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