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.

Culpability for Wastage of Funds by the Army Commanders

Culpability for Wastage of Funds by the Army Commanders 

Major General Mrinal Suman 

Elements inimical to the services are at it once again. Senior army commanders are being accused of wasting crores of rupees through improper purchases made under Special Financial Powers of the Army Commanders. As per the press reports, a post-audit has been carried out of 55 transactions pertaining to financial years 2009-10 and 2010-11 by the Controller of Defence Accounts. The audit report has estimated the total loss to be to the tune of Rupees 103.11 crores. It is a serious indictment and deserves elaboration.

With a view to impart enhanced autonomy in administrative and operational functioning, various financial powers have been delegated to the Army Commanders. As per the recommendations of the Committee on Defence Expenditure, the Ministry of Defence decided in November 1991 that exercise of such delegated financial powers should be with the concurrence of local financial advisors. It implies that such delegated financial powers are neither absolute nor discretionary, and can be exercised by the Army Commanders only with the prior consent of their Integrated Financial Advisor (IFA).  

The system of IFA aims to reduce delays and provide pre-contract expert advice to the executives for ensuring financial prudence and prevent irregularities.  

Role of Financial Advisors

Commanders have to obtain prior financial concurrence of their IFA before incurring any expenditure as there is no provision for ex-post facto acquiescence.

IFAs are tasked to carry out a careful and intelligent scrutiny of all proposals involving expenditure from the public funds to ensure economy, efficiency and propriety in public finance. Before according financial concurrence, it is their duty to seek complete and comprehensive justification for the proposals. They are authorised to even challenge the necessity for incurring projected expenditure for a given purchase.

Unless IFA accords Acceptance of Necessity and approves the quantity to be procured, no proposal can be progressed. He questions the proposed mode of tendering and checks the list of prospective vendors. All tender documents are vetted by IFA prior to their issuance.

Most importantly, IFA is always a member of the Commercial Negotiation Committee and participates in the following functions:-

·   Appraisal of bids as regards commercial terms, delivery schedule, performance warranty, guarantee terms and acceptance criteria.

·     Determination of fair and reasonable price of the product.

• Preparation of a ‘Comparative Statement of Tenders’ to determine lowest bidder.
• Undertaking negotiations with the lowest bidder to obtain best possible terms.
• Diligent drafting of contract to safeguard Government’s interests.
• Post-contract management to monitor adherence to the terms of the deal and timely invocation of penalty provisions in case of default. 

As is obvious, IFA exercises total and all-encompassing oversight over the complete procurement process. He can stall any procurement proposal if not convinced of its financial propriety.

The Question of Culpability

The said audit report faults the Army Commanders for disregarding guideline while buying foreign equipment, procuring equipment from Indian agents, accepting equipment rejected by another army entity and purchase of Chinese products which may have been embedded with malignant software.

As seen above, IFAs guide commanders at every stage of the procurement process and keep a close oversight.  If that be so, onus for rendering faulty financial advice or clearing faulty cases rests on them. They should be asked to explain alleged irregularities and infirmities. How can an Army Commander be blamed for adhering to the advice of his IFA? If that be so, why have IFAs at all?

Most outrageously, the audit report states that the local financial advisors are intimidated by military officers in command. One has not come across a more preposterous and bizarre statement. No IFA ever gets intimidated. On the contrary, they are overbearing, domineering and suffer from an acute ‘rank-equivalence-complex’. They keep comparing their pay scales with those of the service officers to draw equations with different ranks. This complex manifests itself in their condescending attitude as they tend to assume the role of dispenser of favours while according financial concurrence. Therefore, the question of their getting intimidated is all baloney.

Inadequacies of the Current Dispensation

It is incongruous that a duly pre-audited procurement process is found to be flawed in post-audit. Interestingly, both pre-audit and post-audit are carried out by the officials of the Defence Finance and their roles are inter-changeable.

Unfortunately, the prime reason for the current weakness of the system is the failure of the Defence Finance officials to deliver. They are expected to act as defence financial advisors but are ill-equipped for the task.

They know nothing about the armed forces, their equipment and functioning. Worse, most are equally ignorant of financial management tools. During a survey of the educational qualifications of the top 50 Defence Finance officers, it was seen that most of them did not possess even elementary knowledge of finance/economics – only 8 percent had studied economics at the post-graduate level. Most were post-graduates in subjects like Political Science, English, Sociology and Sanskrit. Such officials cannot be expected to grasp minutiae of financial imperatives and perform defence economic advisory functions.  

Finally

  

Let us look at the unenviable position of the Army Commanders. They have been asked to follow the advice of their IFAs while exercising their delegated financial powers. They are justified in assuming that all procurement proposals vetted and cleared by IFAs are in consonance with the Government rules and regulations. Therefore, it is absurd that the Army Commanders be held responsible for any alleged irregularities or omissions.

It should be for IFAs to justify the procedure followed. They and they alone should be held accountable for faulty advice and oversight. Quite appallingly, IFAs disown any responsibility under the plea that decision making is the prerogative of the executives and they cannot be held accountable for the same. It is a most ludicrous excuse.

The fact of the matter is that the armed forces are a soft target. The said audit report is a part of the well-orchestrated campaign to denigrate them through planted selective leaks. (End)