Defence Production Policy: Hopes Belied

Defence Production Policy: Hopes Belied

Major General Mrinal Suman

The Ministry of Defence (MoD) released India’s Defence Production Policy (DPrP) on 13 January 2011 with much fanfare. It was touted to be a path-breaking initiative to kick-start growth of India’s defence industry. It was assertively claimed that DPrP would ‘help achieve substantive self reliance in design, development and production of defence equipment, weapon systems and platforms; create conditions conducive for the private industries to play an active role; and act as a catalyst to enhance potential of small and medium enterprises (SMEs)’. 

As over two years have passed since the promulgation of DPrP, it is time to take a stock of the progress made in the achievement of the stated objectives and carry out a review of the salient aspects of the policy.  

Enhanced Involvement of the Private Sector

Recognising the emerging dynamism of the Indian industry and admitting the fact that self-reliance will remain a pipe dream unless its potential is tapped, DPrP stressed the need to encourage larger involvement of the Indian private sector in a proactive manner. DPrP sought to build a robust indigenous defence industrial base through synergising the strengths of the public and the private sectors.

Unfortunately, no movement in the above intent is discernible. The public sector continues to occupy a predominant position and bag all the orders. The private sector carries on waiting patiently on the periphery for some of the crumbs to come its way. Production agency nominated to receive technology under ‘Buy and Make’ route continues to be a public sector unit, even if a private company is better equipped to receive incremental technology.

Two retrograde steps taken by MoD in the recent past are symptomatic of the stranglehold enjoyed by the public sector. A special category has been created to place orders on public sector shipyards by nomination. The private sector is thus denied an opportunity to participate in bidding. Secondly, MoD has withdrawn the option earlier given to a foreign vendor to choose an Indian partner as the recipient of technology for maintenance. MoD has appropriated the right to nominate the Indian partner – needless to say, it will never be a private company. Therefore, the prevailing skepticism amongst the private sector entities about Government’s true intentions is understandable.

Preference to Indigenous Production

It was declared in DPrP that preference would be given to indigenous design, development and manufacture of defence equipment and imports would always be the last resort. To assist the indigenous industry to plan in advance, it was stated that an unclassified version of the Long Term Integrated Perspective Plan (LTIPP) would be made public. Despite the fact that the Defence Acquisition Council approved LTIPP for the plan period 2012-27 in April 2012, no public version has been released to date.  

It was also claimed that efforts would be made by the Department of Defence Production to progressively identify and address any issue, which impacts, or has the potential of impacting the competitiveness of the Indian defence industry. Not a single measure has been initiated so far. Similarly, the much promised preference to the Indian industry in the upgradation of defence equipment is yet to become evident.

It was promised that policies would be put in place to encourage both the public and the private sector to strengthen their research and development wings to facilitate constant up-gradation and improvement in systems under manufacture. No steps have been taken so far.

Exploration of Multiple Approaches

DPrP advocated exploration of viable approaches like formation of consortia, joint ventures and public private partnerships to synergize and enhance the national competence in producing state of the art defence equipment within the price lines and timelines that are globally competitive. Even the involvement of the academia, research/development institutions and technical/scientific organisations of repute was recommended.

Pursuant to the above, MoD issued ‘Guidelines for Establishing Joint Venture (JV) Companies by Defence Public Sector Undertakings’ on 17 February 2012. Most disappointingly, whereas a public-private sector JV should be formed to complement their mutual strengths, the guidelines provide a conduit to the overloaded public sector units to outsource overflow of orders to their joint ventures. As the public sector unit retains the right to approve key decisions in JV, it will never allow it to bid for a contract in which it is interested. Thus, competition from competent private sector companies will be thwarted very effectively and the inefficient public sector will continue its monopoly.

Simplification of ‘Make’ Procedure

‘Make’ route of the procurement procedure spells out the process of indigenous development of the defence equipment and has been further split into three sub-categories – strategic, complex and security sensitive systems to be managed through the Defence R&D Board; low technology mature systems to be treated as ‘Buy Indian’ with minimum 50 per cent indigenous content; and high technology complex systems to be undertaken by Indian industry, public sector and consortia on a level playing field.

The above procedure has come under severe criticism for its complexity and contradictory provisions. DPrP had promised to simplify the procedure to expedite indigenous design and development of the required equipment. No action has been taken so far. It has turned out to be a false promise.

Setting up of a Separate Fund

With a view to support research and development to enhance cutting edge technology of the defence systems, the Government had promised to set up a separate fund to provide necessary resources to SMEs; public and private sectors; and academic and scientific institutions. Indian industry, especially SMEs, were quite excited at the prospect of getting much-needed financial support from the Government and drew out ambitious plans for the upgradation of their facilities and knowledge. 

Over two years have elapsed but the promised fund is nowhere in sight. It appears that the Government was never serious about it. Interestingly, some elements in MoD have started questioning the need for a dedicated fund. They opine that adequate avenues are already available under existing budget heads. 

Conclusion

As per DPrP, the Defence Minister is required to carry out an annual review of the progress made in self-reliance.  The degree of bureaucratic apathy can be gauged from the fact that not a single meeting has been held over the last two years. In any case, a review meeting is meaningless in the absence of specifics. Neither a time bound road map has been laid down nor major mile-stones identified for guidance and periodic stock-taking. 

A great deal of euphoria was generated when MoD’s press release claimed that DPrP would act as a catalyst to enhance potential of the Indian defence industry, especially the private sector and SMEs. As seen above, the Government has not achieved any of the stated objectives. As a matter of fact, no serious effort has been made towards that end. It appears that MoD issued DPrP only as a paper of intent to silence its critics and was never serious about its implementation. The private sector feels let down as all their hopes have been belied. Optimism has been replaced by a sense of despondency.

If MoD is genuinely sincere in building up India’s defence industry, it must shed its pro-public sector mindset. Equal opportunities must be provided to the private sector in a non-partisan manner. Unfortunately, no encouraging signs are visible as yet. 

New Offset Guidelines Continue to Favour the Public Secto

New Offset Guidelines Continue to Favour the Public Sector

 Major General Mrinal Suman

Germany considers strategic partnership between Bundeswehr and the industry to be indispensable for maintaining modern and efficient armed forces. The underlying philosophy of the German defence acquisition regime, as aptly summarised by the German Defence Minister in March 2010, is based on three questions – ‘What is being required?’, ‘Which are the alternatives?’, ‘Which of the alternatives is economically priced while still providing the required performance?’ It implies that all sources are treated at par and the most cost-effective one is selected.

On the other hand, India has failed to appreciate the need to generate competition by exploiting the potential of the private sector. Penchant for preferential treatment of the public sector has been the bane of the Indian defence procurement regime. Despite repeated assertions to the contrary, Indian bureaucracy continues to treat the private sector unfairly. The policy promulgated in the new Defence Offset Guidelines (DOG) is no exception. Instead of having a single policy for the transfer of technology (ToT) to all Indian entities, MoD has created exclusive provisions for the public sector and the Defence Research and Development Organisation (DRDO).

Paragraph 3.1 of the new guidelines spells out various routes that can be taken by foreign vendors to fulfill their offset obligations. Para 3.1(a) deals with export of eligible goods and services from the Indian enterprises. Policy on foreign investment in India industry has been described in Para 3.1(b) to Para 3.1(d). Para 3.1(e) is exclusively for the government entities. Finally, procedure for the acquisition of high technologies by DRDO has been explained in Para 3.1(f). 

As the subsequent discussion will show, Government’s much touted policy of providing equal opportunities to the private sector is a sham. The public sector continues to retain its privileged place and get special dispensation. 

Investment in Kind in Terms of ToT 

ToT under Para 3.1(c) can be received by private sector companies ‘for  the  manufacture  and/or  maintenance  of eligible  products  and  provision  of  eligible  services’. This  could  be through  joint  ventures  or  through  the  non-equity  route  for  coproduction,  co-development  and  production  or  licensed  production of eligible products and eligible services. It is a very restrictive provision. It implies that the technology must relate to eligible products and services. 

On the other hand, Para 3.1(e) makes government entities and DRDO eligible to receive ToT in case they are engaged in the manufacture and/or maintenance of eligible products and provision of eligible services. In this case, there is no stipulation that the technology has to be for the manufacture of eligible products and provision of eligible services. In other words, any government entity engaged in the production of eligible products and provision of eligible services can receive technology which may be totally unrelated to such products and services.

ToT and Equipment for Augmentation of Capacity

Government institutions/establishments and DRDO that are engaged in the manufacture and/or maintenance of eligible products and provision of eligible services are allowed to receive equipment and/or ToT from foreign vendors for augmenting  capacity  for  research,  design  and development; training; and education. This facility has not been extended to the private sector. It implies that private companies cannot augment their R&D prowess with foreign help under the offset regime.

Buyback Stipulations

As per Para 3.1(c), the offset credit for ToT shall be 10 percent of the value  of  buyback  during  the  period  of  the  offset  contract,  to  the extent of value addition in India. It means that a vendor gets no offset credit unless he buys back products/services. Moreover, credit is limited to 10 percent of the buy-back value, to the extent of value addition in India. Value addition is to be determined by subtracting value of imported components and any fees/royalty paid. However, ToT for government entities under Para 3.1 (e) has no such restrictions. It implies that they can claim offset credits simply by providing contracted technology. Additionally, the methodology of calculating offset credits for transferring technology to government enterprises remains unexplained.

Exhaustiveness of ToT 

Under Para 3.1(c), DOG stipulates that ToT to Indian enterprises must cover all documentation, training and consultancy required. Moreover, ToT has to be provided without licence fee and there can be no restriction on domestic production, sale or export. However, there is no stipulation in the case of receipt of technology by government entities under Para 3.1(e). A foreign vendor can transfer technology to a government entity without providing all required documentation, training and consultancy. Foreign vendor can also charge licence fee and impose restrictions on the usage of technology so transferred.

Interestingly, under Para 3.1(f), the policy allows ToT in high technology areas to DRDO without any mandatory stipulation on its usage. On the contrary, foreign vendors earn multipliers as per the utilisation of the technology – 2.0 for use by the armed forces, 2.5 for use by the whole Indian market and 3.0 for unfettered exploitation (including exports). 

Investment in terms of Equipment 

Under Para 3.1 (d), foreign vendors can fulfill their offset obligations through investment in ‘kind’ in Indian enterprises in terms of provision of equipment through the non-equity route. The said equipment has to be for the manufacture and/or maintenance of eligible products and provision of eligible services. However, under Para 3.1(e), government entities can receive equipment if they are engaged in the manufacture and/or maintenance of eligible products and provision of eligible services. It implies that in the case of government entities, it is not necessary that equipment be for the manufacture and/or maintenance of eligible products and provision of eligible services. Thus, the equipment could be for totally unrelated purposes.  

Incongruously, whereas second-hand equipment cannot be transferred to the Indian enterprises under the above provisions, no such restrictions have been imposed on the government entities.

Finally

All acquisition procedures are guided by three imperatives – equipment should meet performance criteria as specified by the armed forces, it should be delivered within the required timelines and it should cost the country the least. In addition, all nations strive to develop and sustain their indigenous defence industry by generating competition. For that, all sources are tapped, all avenues explored and equal opportunity provided to all the competitors. It is only then that a country can benefit. 

Unfortunately, India is yet to appreciate the fact that both the public and the private sectors are national assets and need support. A prejudices MoD continues to perpetuate the monopoly of an inefficient, insecure and inapt public sector. All efforts are made to thwart attempts of the private sector to get an equal opportunity. The new offset guidelines have belied Government’s claims of providing level playing ground to both the sectors and dented its credibility.  

The objective of achieving self-reliance will remain elusive unless the private sector is duly integrated and its potential fully harnessed to build a viable indigenous defence industrial base. For that, technological prowess of the private sector should be given due recognition. MoD must revisit the offset policy and remove all discriminatory provisions and irksome disparities.