Policy on Technology Acquisition by DRDO can Prove Detrimental to Defence Acquisitions

Policy on Technology Acquisition by DRDO can Prove Detrimental to Defence Acquisitions

Major General Mrinal Suman

Ministry of Defence (MoD) deserves credit for undertaking review of policy guidelines pertaining to defence procurements at regular periodicity. Since its promulgation in 2002, the Defence Procurement Procedure (DPP) has undergone five major revisions. DPP-2011 is the latest version and came into effect on 01 January 2011.

With the objective of achieving substantive self-reliance in the design, development and production of defence systems, the Department of Defence Production (DDP) issued Defence Production Policy on 13 Jan 2011. On 17 February 2012, ‘Guidelines for Establishing Joint Venture Companies by Defence Public Sector Undertakings’ were issued to synergise the emerging dynamism of the private sector through partnership with defence public sector undertakings (DPSUs). New Defence Offset Guidelines (DOG) is the latest policy initiative of the MoD and has been made effective from 01 August 2012.

Interestingly, every policy change receives enthusiastic response from the industrial associations and other stake holders. It is only later that the implications of the convoluted provisions couched in the small print are realised. Soon the initial euphoria gives way to despondency and the industry starts complaining of unfair treatment. Response to the DOG has been symptomatic of this unhealthy ritual.

Many observers rue the fact that industrial associations vie with each other to be the first to lavish praise on a policy initiative, only to remain on the right side of the bureaucracy. Undoubtedly, there are a number of provisions in the DOG that must be welcomed, like spelling out of objectives of the defence offset policy and acceptance of technology against offsets. However, ‘the devil lies in the detail’.

Acquisition of technology by the DRDO is a salient aspect of the new offset guidelines. Vendors are allowed to fulfill up to 30 percent of their offset obligations through this avenue. This is a considerable proportion. Disappointingly, the procedure mentioned in the DOG is afflicted with serious infirmities that have the potential of impacting the progress of defence procurements adversely. This has been drafted without adequate application of mind in a highly slapdash manner. It is a matter of serious concern as its disquieting features can become contentious and embroil the whole process in protracted controversies.

Formulation and Appraisal of the Offset Proposal

While submitting his techno-commercial proposal, every vendor is required to submit a written undertaking that he will meet the offset obligations as laid down in the Request for Proposals (RFP). Subsequently, he is required to submit technical and commercial offset offers in separate sealed covers by the date specified in the RFP, which would normally be three months from the date of submission of the main proposals.

In the above mentioned offset offers, a vendor is required to provide details of his proposed plan to fulfill offset obligations. The information required includes avenues for discharge, applicable multipliers, percentage of total offsets, actual value of offsets, Indian offset partners and the time frame. In case a vendor chooses to fulfill part of his offset obligations through offering technology to DRDO, the proposal has to be submitted in a separate envelope marked accordingly.

The Directorate of Industry Interface and Technology Management (DIITM) in the DRDO is the nodal agency for all matters related to technology acquisition by DRDO. Each proposal has to be assessed by a multi-disciplinary Technology Acquisition Committee (TAC), to be constituted by DRDO.

The assessment will cover both technical as well as financial parameters, including valuation of technology. The timeframe and strategy for utilising the technology will also be indicated. The TAC will send its recommendations to the Technical Manager within a period of 4-8 weeks of its constitution, for incorporation in the report of the Technical Offset Evaluation Committee.

If TAC in its assessment feels that the technology so indicated by the vendor is already available and/or is of no further use by DRDO, it may reject the proposal and intimate the same to the Technical Manager.

In case the proposal is considered viable, recommendations of TAC will include merits of the proposal, including time frame for absorption with phasing; value of offset credits to be assigned with detailed justification; time frame, modalities and potential for utilisation of the technology; and suggested multiplier factor. TAC is required to forward its recommendations to the Technical Manager within a period of 4-8 weeks of its constitution.

Such a process suffers from a serious infirmity. Every vendor is required to submit detailed offset proposals (technical and commercial) to the Technical Manager as per the formats given at Annexure II and Annexure III to Appendix ‘D’ of DDP. However, in case a vendor includes transfer of technology to DRDO in his offset offer, his proposal will remain tentative and indefinite till its acceptance.    

Nature and Costing of Technology

Universally, the concept of multipliers is based on the premise that every original equipment manufacturer (OEM) needs irresistible incentive to part with his closely guarded technology. It is a tool that has proved its efficacy in channelising offset programmes in the areas of a buyer’s choice. Many countries offer multipliers of up to the value of 8.

Unfortunately, the Indian policy makers have trashed a highly effective tool by applying multipliers on the basis of freedom of usage – multiplier of 2.0 for use by Indian armed forces, 2.5 for both military and civil applications and 3.0 for unfettered use. If India is not ready to offer multipliers on the basis of the nature and criticality of technology, no OEM can ever be persuaded to offer high-end and exclusive know-how that DRDO needs desperately.

Further, the list provided by DRDO of the technologies that it seeks is highly imprecise with open-ended descriptions of a vast array of different technologies.

It is but natural that every vendor will try to offer low-end technology that India has still not mastered even though it may be close to getting obsolescent in advanced countries. His endeavour will always be to offer technology which is widely available in the world market, is easy to implement and does not require export licence from his government. In other words, he will never part with his exclusive and cutting-edge technology to safeguard his own financial interests. However, to earn a multiplier factor of 3, the vendor may offer the technology for unrestricted use to India.

It is a fact that even if a technology is obtained free of cost against offsets, the buyer has to expend considerable resources in setting up manufacturing facilities. Additionally, the seller invariably tries to charge an exorbitant price for jigs, fixtures, test beds and other facilities. Therefore, technology received for restricted use may not pass the muster of cost-benefit analysis due to a paucity of economies of scale.

The Implications

In case a vendor wishes to offer technology to DRDO in part fulfillment of his offset obligations, he will face a number of imponderables. To start with, he will not be certain as to which technology will be acceptable to DRDO and for what usage.

As stated earlier, the list of technologies provided by DRDO is vague and covers a vast spectrum of sub-technologies. For example, DRDO seeks technologies related to super cavitations technology, molecularly imprinted polymers, technologies for hypersonic flights (propulsion, aerodynamics and structures), low observable technologies, shared and conformal apertures, technologies for generating high power lasers, pulse power network technologies, nano technology based sensors and displays and THZ technologies amongst others.

Further, as costing of technology and assignment of multiplier value are to be carried out by TAC, no vendor can anticipate the quantum of offset credits he would earn through the proposed transfer of technology. If that be so, it is well nigh impossible for him to submit details of his fully-compliant plans to discharge offset obligations. 

In case the technology offer is rejected by TAC or the quantum of offset credits is reduced due to downward revision of technology cost and the multiplier, the vendor will have to prepare his total offset proposal afresh by identifying alternate programmes and routes to cover the shortfall resulting from such rejection/reduction.

 

TAC is allowed to take up to 8 weeks (a very optimistic timeframe) to submit its report to the Technical Manager after obtaining the approval of the Scientific Adviser to the Defence Minister. After the matter is discussed in the Acquisition Wing, the concerned vendor will be asked to submit a fresh set of technical and commercial offset proposals.

It will be a time consuming exercise for the vendor as he will have to select suitable offset programmes afresh and identify competent Indian offset partners. The new proposals will once again be subjected to appraisal for feasibility and compliance. In case the vendor decides to offer alternate technology to DRDO, uncertainty will continue to plague the process.

It is important to recall here that no vendor is allowed to participate in the technical evaluation of the equipment being purchased unless his offset offer is found to be fully compliant. Further, user trials of all competing equipment are carried out concurrently. Hence, MoD will have to give adequate time and opportunity to all vendors whose offer of technology is rejected or amended by DRDO. This implies that the complete acquisition process will get stalled till the revised offset offers are received, evaluated and accepted.

The Way Forward

Apparently, the policy has been framed without basic understanding of the dynamics of offsets. Most disquietingly, it threatens the primacy of the acquisition process as the policy appears to suggest that import of technology should be the key decision making factor. It seems that the provisions relating to technology acquisition have been drafted by DRDO in isolation. 

The current dispensation is fraught with uncertainties. For the submission of definite technical and commercial offset offers for the fulfilment of complete obligations, a vendor has to be confident that the offered technology would be accepted by DRDO. Further, he should know its assessed cost and the applicable multiplier. It is only then that he can calculate offset credits that he would earn.

The policy of technology acquisition must be revised. Multipliers should be technology-based and not usage-based. It is only then that a foreign vendor can be persuaded to offer the needed technology. DRDO must spell out every technology (including sub-technologies) in specific terms, prioritise them, indicate approximate cost that is considered reasonable and assign multiplier values in advance. These aspects must be made known to all vendors well in advance to help them in evolving their offset plans.

It must be remembered that the progress of procurement proposals are intrinsically linked to the progress of the connected offset programmes at every stage of the process. The primary aim of the defence acquisition procedure is expeditious procurement of the required defence systems for the armed forces. Offsets are incidental and must not be allowed to occupy centre-stage. Under no circumstances should India allow the acquisition process to become hostage to offsets.