Defense procurement changes fail to impress

The announcement on Saturday of the approvals given to the amendments to the Defense Procurement Procedure (DPP) by the Defense Acquisitions Council (DAC) of the defense ministry has left industry leaders snorting. Giving the iteration a thumbs-down, defense industry executives questioned the rationale behind some of the amendments and also expressed pessimism, saying in some cased it would ‘make things worse’.

StratPost spoke to a number of senior executives, representing both Indian and foreign companies, none of whom agreed to be identified for this report, somewhat unsurprisingly, considering the nature of their comments.

Kavi kehna kya chahta hai?

One Indian defense industry official jokingly asked, “Kavi kehna kya chahta hai (What does the poet want to say)?”

The revision to the DPP had been touted as one that would encourage and boost Indian industry participation in the defense sector, especially noting: Preference for indigenous procurement in the Defense Production Policy 2011 has now been made a part of DPP through an amendment that provides for a preferred order of categorization, with global cases being a choice of last resort. The order of preference, in decreasing order, shall be: (1) “Buy (Indian)”; (2) “Buy & Make (Indian)”; (3) “Make”; (4) “Buy & Make with ToT”; and (5) “Buy (Global)”. Any proposal to select a particular category must now state reasons for excluding the higher preferred category/ categories.

[stextbox id=”custom” caption=””]

Incidentally, it seems that the Defense Research and Development Organization (DRDO) wanted to get itself an exclusive piece of the action via the amendments to the DPP. Officials from DRDO were urging the DAC to include additional categories for DRDO, like Buy and Make (DRDO). It does not seem to have worked.

[/stextbox]

The official was unimpressed by the first preference or right of first refusal being accorded to Indian industry, asking, “Does it make any difference if because of lack of capability, it becomes a formality to ask everyone in Indian industry and then just go for ‘Buy (Global)? The point is, without capability, how does it matter if first preference to ‘Buy’ or ‘Make’ is given to an Indian company? It’ll still end up going ‘Buy (Global)’ by default anyway,” he said.

“There appears to be a presumption that Indian companies are sitting around with products. They don’t have their own products,” he added.

This, many of those questioned, said would increase delays in the acquisition process.

“The time-frame from intention to decision will see further delays in case equipment actually, ultimately has to be procured from abroad since it’ll take at least a couple of years before anyone in the ministry will put his signature to a file noting saying Indian industry can’t do it,” said the executive.

Another official agreed, “”It will lead to delays with Service Headquarters (SHQs) struggling to figure out what can be procured from India and what cannot. And they’ll have to give reasons if they want to procure from abroad. That process itself will cause delays.”

“Buy Indian. Great!” he said, and asked, “Where is the technology going to come from? It’ll have to come from overseas, which means an Indian company will have to partner with a foreign OEM (Original Equipment Manufacturer). But there has to be a linkage with FDI (Foreign Direct Investment) limits. If FDI remains limited to 26 percent how is the foreign company going to find a reason for providing that technology? Unless they have some control over their investment, why should they share their technology?”

He also suggested the new rules would create an unnatural equality between Indian companies in the defense sector. “They also seem to be creating parity between the Indian private sector and Public Sector Units (PSU). But how can you compare the existing capability of, say, Tata with HAL (Hindustan Aeronautics Limited)? Is Tata at par with HAL?”

Indian companies sab Mahatma Gandhi hain?

“The premise behind some of these changes is to stop corruption, presuming that foreign companies are the root of all corruption in defense procurement. How does it stop corruption? Indian companies sab Mahatma Gandhi hain (Are Indian companies all Mahatma Gandhi)?” asked another official.

“Instead,” he said, “It’ll actually increase corruption. In any tender with foreign companies competing, there is at least public knowledge of the companies’ actual track record to deliver the equipment. If you simply have a bunch of Indian companies, where is the track record to show they are worthy contenders?”

“This will simply lead them to use political clout to say mera (my) product is good enough. Each acquisition will require an ‘India-made’ political masking,” he predicted and remarked, “In the name of fighting corruption, we’re pissing in the wind.”

I don’t see any encouragement.

“If they really wanted to encourage Indian industry they should have first put together a financial, economic, business policy to overlay these amendments, that would answer the question: how is Indian defense industry going to be made capable of delivering the required products,” he said.

“They should have tied up with other ministries. For instance, increase FDI to 49 percent to get technology and funding. Banks should have been asked to provide preferred sector loans up to a certain amount. There should have been a tax holiday. They should have thought about allotting so much land for a certain amount. They should have tied-up with foreign governments to help implement the idea,” he added.

A head of an Indian company in the defense sector agreed, asking, “Where are the sops and tax holidays? I don’t see any encouragement. There doesn’t seem to be anything that will actually build capability in Indian industry.”

Mostly an eyewash.

He said that the highlights of the amendments released today were ‘mostly an eyewash’, save two, the release of a public version of the Long Term Integrated Perspective Plan (LTIPP) and the notification of the Defense Items List and the exemption given to the license required for the production of dual use items.

In his opinion, the release of a public version of the LTIPP would give industry ideas for the selection of technologies and products on which they could focus. He also welcomed the idea of any improvement in the licensing mechanism that could ease the ability of Indian companies to get into the manufacture of products for the defense sector.

His reaction to the proposals for ‘Prioritization of Various Categories for Capital Acquisitions under Defense Procurement Procedure’ and the preference given to Indian companies, ‘Advance Consultations for “Make” Procedure’ and Efficiency and Transparency in Defense Procurement (which would freeze SQRs): “These are no-brainers. Why weren’t we already doing that? ”

In the case of the proposal that Maintenance ToT (MToT) no longer be through Nomination, he said that this issue is more complicated. “It’s a good idea but there’s no provision for other issues. Service Tax, alone kills the business case for MRO (Maintenance, Repair and Overhaul). They need to get corporate types into the policy-making process. People who know and have suffered the pains of this business. They need to create a consultative forum to discuss these things.”

He called the idea of ‘Consultations on Security Guidelines for Indian Defense Industry’ ‘a joke’, saying, It’s been in circulation for quite a while and they haven’t got anywhere with it.”

He also laughed off the proposal for a clear Definition of Indigenous Content, asking, “Why is there even any ambiguity about what’s indigenous?”

Referring to the last proposal, which lays down that ‘Approval for all deviations from the Defense Procurement Procedure will henceforth be sought from the Defense Acquisition Council instead of the Defense Minister’, he said, “Typical CYA (Cover Your Ass) move. The Defense Minister heads the DAC. And looks like a mere formalization of what they’ve been doing in most cases, recently, anyway. ”

In the end, hypothesizing an example, he said, “Nothing in these amendments would change, for instance, Indian industry’s reluctance to participate in even a program like the Indian Air Force (IAF) acquisition for 56 Avro aircraft. It does nothing for a program like that. It doesn’t address the business case issues.”