Affordability in Defence Procurements

Affordability in Defence Procurements

Major General Mrinal Suman, AVSM, VSM, PhD

Affordability is one of the prime considerations in all purchase decisions. In day to day deals, its application is limited to cost factors. It becomes a measure of financial ability to bear the anticipated expenditure. Whereas detailed affordability studies should form the basis of decision making in all defence procurements, affordability has come to mean availability of budgetary support to finance acquisitions in India. The complete exercise is limited to prioritising procurement proposals and then progressing them as per the funds available for capital procurements.

The concept of affordability has a much wider application in defence procurements. As per the US Department of Defence (DoD), affordability can be defined as the degree to which the lifecycle cost of an acquisition programme is in consonance with the long-range plans relating to modernisation, force structure and manpower requirements. For that, both the individual DoD components as well as the DoD as a whole have to considered. Details are obtained by affordability assessors from the projection of resources (funding, manpower and forces) included in Future Years Defence Programme.

Unlike the US, India imports 70 percent of its defence equipment. Almost all major weapon platforms and systems which have long service life are imported. Therefore, affordability studies acquire additional dimensions and criticality. Sadly, no attention is paid to this crucial aspect. It will not be incorrect to say that affordability studies are alien to Indian defence procurement regime.

Affordability is a Function of Multiple Variables in Defence Procurements

Although cost is central to all financial decisions, there are a number of other equally vital factors that determine affordability. Defence equipment is expensive and has long service life. Every major deal results in long term contractual commitments which restrict buyer country’s economic, strategic and foreign policy maneuverability. Therefore, every arms deal should be judged for objectivity, rationality, judiciousness and long-term fall-out. A nation can ill afford to make its future decision-making freedom captive to poorly conceived deals.

· Cost and Budget

Fiscal constraints demand budgetary planning. Demand for new acquisitions far exceeds availability of funds. Therefore, prioritisation of proposals becomes necessary. Financial affordability thus becomes the initial criterion in decision making. Outlay has to include both acquisition costs and sustenance costs. Whereas acquisition costs impact available budgetary support, sustenance costs have to take into account likely budgetary allocations in the long term. Price escalation and inflation have also to be factored in. As sustenance costs become confirmed liabilities, they reduce availability of funds for future acquisitions. This aspect needs special attention as procurement of any equipment saddles the exchequer with fiscal burden during its entire life span.

· Manpower Planning

Every defence system needs manpower for its operation. Therefore, it is essential that every acquisition proposal examines manpower requirements in detail as availability of manpower is always at a premium. It is not enough to state that manpower would be found from within the existing resources. Milking of manpower from existing employments would invariably have an adverse effect on the functioning of affected components. Therefore, manpower planning must factor this aspect in. In case additional manpower is sought from the Government, proposal must include manpower costs as well, both initial and recurring.

· Fitment into Overall Equipment Profile

Modernisation of armed forces must take place in an integrated, planned and unified manner. As all constituents of a force are inter-dependent for optimum utilisation, equipment profile should always be orchestrated and developed in a synergised and mutually complementary manner. There is no point in having excessive potential with one constituent without other constituents possessing matching capability. Affordability mandates that all components should be in consonance with each other as per long term modernisation roadmaps. In India’s case, all procurements must be as per 15-year Long Term Integrated Perspective Plan and 5-year Services Acquisition Plan.

· Usable Capability

Another important aspect of affordability relates to own ability to exploit full potential of the equipment sought. Seeking an artillery gun with range well beyond own target acquisition capability militates against the concept of affordability. Similarly, if own divers are trained and tasked to dive to a maximum depth of 10 meters, demanding equipment meant for 40 meters depth is imprudent. In other words, military can ill afford to purchase equipment whose full capability cannot be utilised. It is a wasteful practice and must be avoided.

· Formulation of Qualitative Requirements

It is natural that militaries should seek the latest equipment available in the world market with optimum performance parameters. However, such an urge must be tempered with affordability. Cost-benefit analysis facilitates determining performance parameters with respect to affordable cost. At times minor dilution of parameters can reduce costs considerably, thereby bringing the deal within realms of affordability.

· Long Term Reliability of Foreign Vendor

While dealing with a foreign vendor, it is essential to consider whether the buyer country can afford to enter into a long term partnership with him. Reliability and credibility of a foreign supplier depends on his strict compliance with contractual obligations. India has suffered often due to its neglect of this crucial aspect. Recently, Russia has reneged from its duly negotiated terms for the supply of aircraft carrier Gorshkov, both as regards price and delivery schedule. If Russian assessors defaulted in estimating actual cost of refit, it is Russia which should bear the penalty and not India. It is quite possible that India would not have opted for the deal had the total cost of refit been indicated upfront.

Additionally, as defence systems have long in-service lives, they need regular support to remain functional. Assured and uninterrupted supply of spares becomes vital. Russia has been holding India to ransom with its uncooperative attitude. Earlier, the US denied essential components quoting compulsions of domestic laws. Russia has been most unresponsive in transferring technology after having contracted to do so. Britain’s failure to provide spares for Westland helicopters shows that India cannot afford to buy major systems from Britain without additional safeguards. It took time for Britain to convince India of its credibility as a supplier before it landed contract for Hawk trainers.

· Likely Future Fiscal and Policy Constraints

Purchase of every major defence system ties the country down to long term dependence on the supplier nation for debt repayment and other contractual obligations. Many call it ‘enslavement of future’. Undoubtedly, some developing nations have found to their chagrin that systems procured on seemingly attractive deferred payment basis have in fact landed them in unaffordable long term financial liabilities.

Another aspect which is generally overlooked relates to strings attached to many high-tech deals. For example, the US insists on End Use Monitoring of its exported equipment under which it reserves the right of periodic inspections. Many consider it to be an anathema to free trade. If a buyer country pays for equipment, it must exercise unbridled right over its usage. Therefore, before signing deals India must examine whether it can afford to have such restrictive provisions.

· Costing of Technology

Affordability of technology as a part of the overall purchase contract depends primarily on the following factors:-

o Its criticality as regards operational requirements.

o Degree of own inability to master it in the acceptable time frame.

o Cost of acquisition vis-à-vis anticipated cost of indigenous development.

o Capability to absorb technology.

o Multiple usage of technology for economies of scale.

Many countries have rued purchase of technology which resulted in infructuous facilities and proved economically unviable. Purchase of technology has to be commensurate with own needs and affordability, lest it results in the wastage of precious economic resources.

· Affordability with Respect to Offsets

One of the reasons for the introduction of offsets in defence deals was to counter opposition to defence expenditure after the end of the cold war. Public in many European countries questioned the need for huge defence outlays and procurements. The governments justified the expenditure by citing compensatory inflows for economic betterment of the country. The Government of South Africa countered public criticism of its massive defence deal of 1999 similarly. It quoted figures of expected offset inflows with resultant economic benefits and employment opportunities in support of its assertions, thereby making defence expenditure affordable.

Over a period of time, many countries have found to their dismay that the benefits flowing from offsets are suspect. Offsets carry a cost penalty and result in increased outflows. Promotion of economic activities remains illusory. Most figures quoted are speculative in nature as no detailed follow-up studies are undertaken to compute them. Worse, offsets are difficult to monitor and lend themselves to corrupt practices. Therefore, many economists are of the view that offsets do not make defence expenditure affordable. They feel that it is a myth perpetuated by governments to divert national resources from social sector to defence procurements.

The Way Forward

As seen above, affordability analysis must precede every major defence procurement proposal. Limiting the scope of affordability to cost considerations can prove highly misleading and disadvantageous in the long term. The country can get saddled with uncalled for fiscal and political liabilities. Therefore, affordability analysis must accompany every procurement proposal. It could be in the form of a criteria sieve through which a proposal must pass, as per the sample given below.

Affordability Criteria Sieve

Are adequate funds available to meet acquisition costs?

Can sustenance costs be borne over long term?

Is manpower available for operation and maintenance?

Is acquisition in synergy with overall equipment profile?

Is the capability sought usable?

Are qualitative requirements affordable and realistic?

Is the supplier considered reliable for long term support?

Are fiscal, policy and usage constraints affordable?

In case of technology import, are the nature and level commensurate with requirements?

In case of offsets, do they make expenditure affordable through compensatory economic gains?

It is essential to carry out the above check diligently. Every parameter must be analysed objectively. In case of probabilistic factors, a number of assumptions would have to be made. Proclivity for tailor-making them to support own preferences must be curbed, lest the whole exercise degenerates into a farce. Therefore, every assumption must be based on logical, convincing and well-argued deductions. A great deal of effort and forethought would be required for a realistic verification of all aspects. As major defence procurements have long term strategic and financial ramifications, it is in our national interest to study various facets of affordability conscientiously.