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Article No.: 1203 Date: 26/11/2008
Defence Procurement: Challenges and Policy Options
Harish Thukral


The acquisition of defence equipment is a complex and intricate process, which needs to meet the twin objectives of modernization of the armed forces within reasonable time frame while conforming to the highest standards of transparency, probity and public accountability. Based on the experience and feedback gained in the implementation of the existing acquisition procedure, the government recently brought out the Defence Procurement Procedure (DPP) 2008 aiming to strengthen the procurement framework by making it more transparent, impartial and accountable. With India projected to invest a massive $30-50 billion towards modernisation of its armed forces during the 11th Plan period (2007-2012), DPP 2008 has been welcomed, but the moot question is whether it has addressed the core concerns affecting defence procurement or it has just been the case of filling old wine in a new bottle. To discuss and debate this issue, the Centre for Land Warfare Studies (CLAWS) organised a one-day seminar on “Defence Procurement: Challenges and Policy Options” on Thursday, 23 Oct 2008 at CLAWS seminar hall. The seminar was attended by a large number of serving officers and members of the strategic community.
The seminar was chaired by Lt Gen Vinay Shankar, PVSM, AVSM, VSM (Retd).  The panellists included Maj Gen I S Chaturvedi, Technical Manager (Land Systems), MoD, Wg Cdr VN Srinivas, Research Fellow, Centre for Air Power Studies, Dr Deba Mohanty, Senior Fellow, ORF and Mr Manohar Thyagaraj, Director US-India Business Alliance.
The proceedings of the seminar were conducted with presentations by all the panellists followed by an open house discussion and concluding remarks by the Chairman. The core issues highlighted in the presentations and ensuing discussions are summarised in the subsequent paragraphs.
Highlights of DPP 2008
The objective of the exercise undertaken to review the DPP-2006 was to introduce new measures/refine existing provisions, thereby furthering the prescribed aim of DPP-2006 i.e. transparency, competition, impartiality and expeditious procurement.
Transparency. Vendors will be given advance information before the issue of Request for Proposal (RFP) in all procurement cases excepting those for security sensitive products. This information given on MoD website will provide them a lead time for preparation of their offers in response to the RFP. The result of technical/trial evaluations along with reason(s) for disqualification would also be intimated to vendors after the acceptance of technical/staff evaluation reports. Defence Public Sector Undertakings would be required to sign Integrity Pact with their sub-vendor(s) in all cases where the procurement value exceeds Rs 20 crs. In order to increase the transparency, the trial methodology would also be incorporated in RFP for advance information of the vendors. Another significant feature is enlarging the mandate of the Technical Oversight committee to also oversee whether the trials have been carried out according to the trial methodology given in the RFP as well as trial directive. 
Encourage competition by broadening the Vendor Base. In order to make broad based Service Qualitative Requirements (SQRs) Service Headquarters may obtain inputs by issuing Request for Information (RFI) on MoD website. It would also ensure that vendors get advance information regarding likely procurement schemes. To ensure that SQRs are broad based and that they result in multi-vendor situation, a compliance table of SQRs, vis-à-vis technical parameters of available equipment in as much details as feasible, would be prepared at the stage of formulation/approval of SQRs. If only one vendor is found compliant to the SQR parameters after the technical evaluation stage, a review would be carried out by the Technical Evaluation Committee (TEC) to derive causes of such single vendor situation for recommending suitable corrective measures for review of the acquisition scheme.
Enhancement of Delegation of Financial Powers to the Services.   The Services have been given greater delegation of financial powers for capital acquisition to enhance efficiency and expedite decision-making. Service Headquarters will now approve cases up to Rs 50 cr. Financial power delegated to the Defence Secretary has also been enhanced to Rs 75 cr. Further, the Defence Procurement Board (DPB) would accord AON (Acceptance of Necessity) to cases up to Rs100 cr. Only cases above Rs100 cr are to be brought before the Defence Acquisition Council. To cut delays, the existing provisions for grant of extension of time against RFP have been limited to only eight weeks. In multi-vendor cases, once L-1 vendor is identified, normally there would be no need for any further price negotiations. To check long delays in issuing of RFP after AON and quantity vetting, a provision has been incorporated that the AON would lapse where RFP after approval of quantity is not issued within two years from accord of AON. In such cases, fresh AON will be considered only after re-examination of available technology and operational necessity.
Offsets. Offsets in defence as in civil trade are compensations that a buyer seeks from the seller for the purchase of goods and/or services. The government being seized of the limited success of the offset policy contained in DPP-2006 has included the following fresh features in DPP 2008:-
A list of products that would qualify for the discharge of offset obligations has been included in the procedure.
Private industry need not have industrial license to participate in offset programme unless it is stipulated by the regulations of the Department of Industrial Policy and Promotion.
Offset credit banking has been introduced. Surplus offset credit could be banked and would remain valid for a period of two years after conclusion of the contract.
Acquisitions under ‘fast track’ have been exempted from the offset obligations.
An Offset Monitoring Cell as been created for monitoring the implementation of offset contract.
Points to Ponder
Everyone present including the panellists as well as the audience agreed that operationalisation of DPP 2008 with many fresh provisions is a step in the right direction. However, notwithstanding the above, there was also unanimity in the opinion that the policy by itself could have done more. The issues that emerged during the discussions are summarized along with suggested recommendations in the succeeding paragraphs. 
Proposals for acquisition of capital asset flow out from the defence planning process. Thus of at the strategic level there are strong linkages between procurement and capability accretion. A sound procurement policy on one hand must ensure the best bang for every buck spent and on the other, directly or indirectly stimulate and promote the Indian Defence Industry.
DPP 2008 has rightly addressed the issue of inordinate delays in trials. However, sticking to the old practice of trials at “no cost, no commitment” basis is a dampener or the industry. The importance of development of military technology and its overall multiplier effect on the defence industry is well recognized and towards this end institutionalising the ‘defence technology development fund’ may be considered. Another option available with the government to bear the risk is to go for ‘cost plus’ contracts as is prevalent in USA. It is widely believed that government becoming a stakeholder in the process would not only expedite the process but would also stimulate innovation.
To provide the necessary fillip to the Indian defence industry, there is a strong case for convincing the government to increase the FDI cap for JVs in defence sector to a minimum of 49 percent. This would encourage investment as well as give the necessary confidence to the foreign defence firms that they have greater share in the profits and better say in the management of the entity whose creation would not take place if it is not for them. Existing FIPB guidelines do not exactly encourage this. 
Indian defence industrial base is still at a nascent stage. While DPP 2008 lays down comprehensive guidelines for ‘Transfer of Technology (ToT)’, ToT by itself is not the same as licensed production. What really is needed is joint R&D, joint manufacturing and production, joint marketing and sales and if required, provision for joint upgradation during the life cycle of the equipment.
India is a leading importer of defence equipment with its defence imports totalling a whopping 37,500 Cr during the period 2005-2008. This trend is likely to continue in the foreseeable future and accordingly provides us considerable clout as a buyer which must be pragmatically exploited by our offset policy. But it is equally important to understand that offsets are no free lunches. They are neither freebies. There is an economic cost to offsets, which according to empirical evidence may be to the tune of 20-30% of the contract cost. An analysis of buyer’s perspective on offsets to gain maximum advantages and vendor’s reluctance to give away too much leads to an impression that offset aspirations of buyers and sellers are dichotomous. Offsets work best when they result in a win-win situation for both seller and buyer. Recommendations with regard to India’s offset policy are as follows:-
The stipulated list of defence products for which offsets are permissible is too generic and does not provide a precise direction in which to channelise offsets. Acquisition of offsets should be guided by strategic priorities related to acquiring state of the art technologies, provide opportunities of manufacturing and exporting components of acquired equipment and so on which stimulates indigenous production capacity. In addition critical items for the three services should also be included in the list eligible for discharging offset obligations.   
Offsets should not delay the main acquisition. Towards this end, Offsets may be implemented separately by DOFA without linkages to procurement activity. 
It has been estimated that in the 11th Five Year Pan Period, India expects nearly Rs 47,000 cr to flow into the county through offsets. Thus, there is a strong case for strengthening DOFA by transforming it into a dedicated organisation with economists, financial and technical experts drawn from all relevant fields to steer the offset programme in the right direction.
Banking of offset credits is a very positive feature of DPP 2008 and has been widely welcomed. However, the policy can still be taken further by introducing offset credit trading. The most obvious benefit would be that every prospective firm that is hopeful of bagging any defence contract in India would be assured of return on their investment even if they were unsuccessful in getting the contract they might have hoped for. In the long run, this would motivate firms to shed their fears of investing in the military sector in India.
The seminar provided an appropriate and timely forum for all stakeholders to have free discussion on the important theme of defence procurement. While there was unanimity in the view that the procedures outlined in DPP 2008 were more practicable, transparent and an advancement over earlier procedures, yet in a policy which is as dynamic as this, there is always room for improvement. Towards this end, the seminar raised a number of positive suggestions that can be implemented to make the policy more potent in the coming years.
(Report prepared by Col Harish Thukral Research Fellow CLAWS)
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