Stumbling Blocks: Technology transfer under ‘Buy and Make’ is a misnomer

Stumbling Blocks: Technology transfer under ‘Buy and Make’ is a misnomer

Major General Mrinal Suman, AVSM, VSM, PhD

All proposals for the procurement of new equipment are debated in the Defence Acquisition Council (DAC) and categorised as ‘Buy’, ‘Buy and Make’ and ‘Make’ cases. ‘Buy’ implies outright purchase of the complete quantity required. In case the requirement is large, it is considered prudent to adopt ‘Buy and Make’ route. It entails initial purchase of limited quantity in fully built up form, followed by licenced production/ indigenous production of the balance requirement. Finally, ‘Make’ cases refer to indigenous development of the equipment.

India has been exercising ‘Buy’ option in respect of high-tech, high value and urgently required procurements. As in all such cases the quantity required is limited, and it is not considered cost-effective to create infra-structure for subsequent manufacture within the country. Some of the major ‘Buy’ cases finalised in the recent past relate to Weapon Locating Radars, C-130J-30 Super Hercules Transport aircraft, P-8I Boeing Long Range Maritime Reconnaissance aircraft and Smerch Multi Barrel Rocket Launchers. Recently, the Government has issued Request for Proposal (RFP) for outright purchase of 140 155mm/52 calibre Ultra-Light Howitzer guns.

As regards ‘Make’ cases, India has nothing to show for its efforts of over the last five decades. Conversion of the much hyped Trishul missile defence system into a technology demonstration programme once again proved the failure of India’s Defence Research and Development Organisation (DRDO) to develop any high-tech equipment in the promised time-frame and conforming to the accepted parameters. It has been a chronicle of tall claims and abject failures. Therefore, it was decided in 2006 to revise ‘Make’ category and limit the role of DRDO to the development of projects requiring sophisticated technology of strategic, complex and security sensitive nature. Development of high tech equipment has been assigned to Integrated Project Management Teams under the Acquisition Wing of the Ministry of Defence (MoD)

However, it is ‘Buy and Make’ category that is considered the preferred route for most of the large quantity high value contracts. Instead of procuring the complete quantity in fully built up condition, India buys some and manufactures the balance under transfer of technology (ToT). Earlier when the erstwhile USSR was the sole supplier of defence equipment to India, acquisition of all major weapon platforms followed the same route.

The history of production of tanks in India is indicative of India’s continued dependence on licenced production. Manufacture of T-55 tanks in India began in early 1970s under a ‘Buy and Make’ arrangement. T-72 and T-90 have followed the same route. Apparently, India has gained little during the last four decades in terms of technology to be self reliant. Similar course has been followed in the case of fighter aircraft – from old warhorse MiG 21 to current Sukhoi series.

Jaguar aircraft from the UK were also licence manufactured in India. The trend continues with renewed intensity. A contract for Hawk jet trainers was signed with BAE in 2004 for 66 Hawk trainers – 24 to be supplied by BAE in flyaway condition while the remaining 42 are being manufactured in India under technology transfer licence. As per reports appearing in the press, an additional requirement of 57 aircraft is being projected now.

Request for proposals (RFP) issued for 126 Medium Multi-Role Combat Aircraft (MMRCA) for a projected cost of over 10 billion dollars contains the clause that the first 18 aircraft will come in a ‘fly away’ condition, while the remaining 108 will be manufactured under ToT. It is reported that the Government wants to retain an option for an additional quantity of 64 aircraft on the same terms, thereby bringing the total quantity to 190 aircraft.

Indian RFP for 197 light helicopters (133 for the Indian army and 64 for the Air Force) to replace its aging Chetak and Cheetah fleet worth close to 600 million dollars also contains the clause that 60 helicopters would be bought outright, with the remaining 137 being built under license by Hindustan Aeronautics Limited (HAL). Similarly, as per the RFP issued for 155mm 52-calibre towed guns, India wants to buy 400 guns off-the-shelf and produce 1,100 guns in India under licence.

Stated Advantages of ‘Buy and Make’

Once a decision is taken to categorise a procurement proposal as “Buy and Make’, the Department of Defence Production (DDP) is asked to nominate an agency to receive technology for indigenous production. The Production Agency (PA) so nominated is thereafter co-opted in the preparation of RFP to oversee all aspects concerning ToT. As all defence public sector units and the ordnance factories (collectively referred to as the public sector hereto after) come under DDP, it is always one of them that gets nominated as PA. Private sector companies, even if more suitable to receive and absorb technology, are never considered for nomination as PA. At times a public sector entity is nominated as PA only because it does not have adequate work load, its suitability being of little consequence.

As seen above, ‘Buy and Make’ continues to be the preferred route. Four major reasons advanced in its favour are as follows:-

· Gains from Technology Import

Technology received under ‘Buy and Make’ helps raise threshold of indigenous knowledge which acts as a take-off platform for further progression. Instead of reinventing the wheel, India takes a technology jump to catch up with the latest advancements. Imported technology provides an impetus to indigenous research and development in defence systems, thereby reducing dependence on foreign suppliers for future requirements and making India self-reliant.

· Saving of Resources

Indigenous manufacture is considerably more cost-effective than procuring fully manufactured equipment, even though all major assemblies and critical components are supplied by the foreign vendor.

· Assured Life Time Support to Equipment

By establishing production infrastructure in India, life time technical and spare-parts support is ensured for the equipment. Thus, dependence on foreign suppliers gets eliminated. Additionally, indigenisation of critical components goes a long way to ensure serviceability of equipment.

· Social and Economic Benefits

Inflow of assembly work creates considerable number of jobs in the country which would be lost in case India procures complete requirement in assembled condition. Most of the defence public sector units (DPSU) are thriving on assembly work as very little indigenous developmental work has resulted in production orders. In case assembly orders dry up, DPSU would be strapped for work.

Appraisal of ‘Buy and Make’ Policy

India has been adopting ‘Buy and Make’ route for decades now. Enough time has passed and considerable experience has been gained for an objective assessment of various facets of the policy.

Technology transfer under ‘Buy and Make’ is a misnomer. In fact it is the biggest myth that is being perpetuated with total disregard to ground realities. No technology gets transferred to India at all. What the foreign vendors provide are rudimentary drawings to assemble equipment. Indigenous production is nothing except assembling of sub-assemblies and components to deliver fully built units to the services. Therefore, India gains nothing as regards technological know-how from such an arrangement.

Take the case of T-series tanks - India has been producing them since early 1970s, yet our competence to improve upon the imported know-how is pathetic. India procured T-55 tanks along with technology for indigenous manufacture. When T-55 became obsolete and needed replacement, India had to rush abroad for T-72 tanks with ToT. Even after manufacturing hundreds of these tanks, India could not master the technology or improve upon it. It was again Russia that provided T-90 tanks to replace the ageing fleet. Once again India has bought technology for licenced production in India. If every time India has to resort to import of newer versions, technology infusion means little.

Such an arrangement suits the foreign vendors ideally. They do not part with their closely guarded technology as that guarantees them continued business by perpetuating India’s dependence on them. They provide assembly drawings and nothing else. India has to keep importing critical sub-assemblies and components from them, thereby assuring long-term business to them. Citing inflation, they keep raising prices as well. The net result is that instead of importing fully built units, India imports equipment in semi-knocked down or fully knocked down condition for indigenous assembly.

‘Buy and Make’ policy appears custom-made for India’s DPSU. Unlike the private sector, they do not have to strive and compete for business. Their struggle is limited to intense lobbying in the corridors of DDP for nomination as PA. A nomination means assured business for years with no riders of cost, quality and delivery schedule. No mastery of advanced technical knowledge is required to assemble equipment. Therefore, without much sweat, DPSU starts producing equipment.

Although the role of nominated PA is limited to putting together sub-assemblies and pasting its own label on the assembled product, it charges a huge profit for its efforts. At times, the services are hard pressed to accept prices quoted by them. They border on exorbitance. There have been times when it was felt that import of fully built up equipment would have been a cheaper option. Many equate such PA with middlemen and traders who charge hefty commission (fancifully called value addition) for facilitating imports.

India’s defence research and development efforts have also not benefited from ‘Buy and Make’ deals. Every time new equipment is imported, DRDO strips it open to learn through reverse engineering. In the absence of detailed drawings, DRDO’s efforts remain confined to duplication rather than absorption of technology. Not one case can be quoted where DRDO has learnt from imported technology to develop better products indigenously.

Even in the case of essential spares, India has never achieved self-reliance. Every foreign vendor ensures that India remains dependent on him for critical spares. He thus retains effective leverage and exploits it by hefty price increases. Even after decades of manufacturing T-series of tanks and MiG aircraft, India looks up to Russia to keep its fleet functional. It is a sad reflection of futility of current mode of ToT.

India has certainly been able to replicate some imported components under its indigenisation programme, but this process is limited to items like washers, seals and other commonplace components. As no foreign vendor parts with metallurgical know-how, even critical nuts and bolts cannot be manufactured locally and have to be imported.

Absence of genuine transfer of technology can also be gauged from the fact that India cannot even upgrade the equipment manufactured under ToT. In every case, the foreign vendor has to be approached. He develops the kit, upgrades some numbers and thereafter, the balance quantity is upgraded indigenously under the same ‘Buy and Make’ route. The foreign vendor thus not only charges huge fees but also ensures that his business thrives through selling of upgrade kits to India.

Finally, most ToT agreements get embroiled in controversy. It is alleged that foreign vendors tend to renege from their contractual obligations by resorting to skewed and subjective interpretation of various clauses. Recent reports of Russia’s intransigence and non-cooperative attitude in respect of ToT for T-90 tanks amply proves this point. With little leverage, India is always on the receiving end with insincere foreign vendors trying to exploit small print in contracts.

The Way Forward

‘Buy and Make’ policy has the following fallout:-

· As the recipient of technology is always a public sector entity, entry of the private sector in defence production gets effectively blocked. It is a neat stratagem to perpetuate the monopoly of the public sector. The role of the private sector remains restricted to supplying components and sub-assemblies to the public sector. That is one of the reasons why the private sector continues to be a fringe player.

· Due to the availability of assured business opportunities through nomination as PA, the public sector never feels the need to update its technology or improve its skills. It remains smug in the knowledge that it has only to keep the decision makers of DDP in good humour to get orders. In the absence of any competition, the public sector becomes complacent and fails to modernise itself.

· Being part of MoD, every public sector PA treats the services as captive customers. The services have to suffer indifferent quality and delayed deliveries. As seen earlier, the public sector assembles sub-assemblies and puts its own tag and charges hefty profit. Frequent and unwarranted price increases make products unjustly expensive. In other words, the defence budget is made to bear the burden of ensuring survival of the public sector.

· Knowledgeable vendors find ‘Buy and Make’ route to be the most remunerative mode of doing business with India. They make huge profits by piggyback riding on the public sector. They have learnt that the public sector continues to call shots in India. They manage to court it by promising licenced production with ToT. Once a contract is signed continuous flow of business is ensured for decades - initially by supplying fully built units and subsequently by providing sub-assemblies and critical components.

· No real transfer of technology takes place. No expert agency monitors ground implementation. The complete responsibility is assigned to PA. Unfortunately, neither PA nor the foreign vendor is keen to carry it out sincerely. PA is happy as long as it can keep assembling equipment to sell to the services.

The net result is that the Indian defence industry continues to suffer. As no genuine transfer of technology takes place, India remains a laggard. It will not be incorrect to state that India’s ‘Buy and Make’ policy has succeeded only in impeding development of indigenous competence and perpetuating dependence on imports.
Worse, this policy effectively rules out any role for the private sector, thereby denying the country of its prowess.

According to Defence Procurement Procedure – 2008, suitable PA could be selected from any of the public/private sector firms including a joint venture company, based on the inputs from DDP and, if required, from DRDO. Unfortunately, the above provision means little. Inputs and recommendations of DDP are always in favour of the public sector. In a recent case, DDP went to the extent of nominating a public sector company peremptorily as the sole development and production agency in a ‘Make’ case, flouting its own written policy.

India must take three steps urgently to set things right. First, DDP should be abolished. It is an archaic department with biased mindsets. DDP is known for its impedimentary role in the modernisation of the services. It contributes little and delays all proposals till the public sector is accepted as the sole supplier. A new department called Department of Defence Industry should be created to oversee development of Indian defence industry (both the public and the private sectors) in an integrated and synchronised manner.

Secondly, time has come to involve the private sector at the categorisation of proposals stage itself, albeit within the constraints of secrecy requirements. As monopoly breeds complacency, open competition should be encouraged to force the industry to upgrade its technology and skills for survival. The most suitable entity should be selected to receive technology. The country can ill-afford to continue to sustain inefficient public sector companies through unwarranted patronage.

And finally, the complete gamut of technology and its transfer should be administered by a duly constituted Defence Technology Oversight Committee (DTOC). DTOC should identify level and scope of technology needed to be imported, identify suitable recipients and oversee smooth transfer and absorption on ground. It must be appreciated that purchase of technology costs the country dear. Full advantage must be taken of it for the advancement of indigenous industry. It is too serious a matter to be left to the diligence and prudence of nominated defence sector entities.