October 26, 2016

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How To Get Indian Defence To Leapfrog

- Ram Nivas Kumar, Group VP and General Counsel [ Reliance Defence Limited ]


Less reliance on military hardware purchased from the international market along with allowing the private sector to enter defence manufacture and play a larger role in the defence sector will certainly enable Indian defence to move several notches ahead

The defence of a country is the collective responsibility of all its citizens. The progress, growth and development of a country can only take place in a secure, stable and peaceful environment. In the current age of advanced technology, it is not uncommon to see the territorial integrity of one nation being violated by another even if there is no physical invasion. It is therefore important that every nation adopts ways and means to secure its borders.

We boast of the third largest military in the world. To ensure that it is able to deliver on its charter of responsibilities, it needs to be equipped appropriately so that it stays modern and relevant. Purchasing military hardware from the international market is not only extremely costly but unreliable in times of a crisis. In the national interest, it is important that we achieve self-sufficiency in this field. The sooner we can indigenously manufacture defence equipment to meet the country’s needs, the better it will be.

The Government of India has been reiterating its commitment to achieve the much-publicised target of procuring 70 per cent of its defence requirements from indigenous sources by 2010. Despite its best efforts over the last two decades, India is nowhere near that figure as yet. The Government is well aware of emergence of the private sector as a vibrant and dynamic force, especially in information technology, service sector and manufacturing fields. It has come to realise that self-reliance would remain a pipe dream if it continued to bank on the public sector alone.

One of the objectives mentioned in the new defence procurement procedure is to achieve self-reliance in defence equipment. But till now, the whole procedure was silent about the role of the private sector and no worthwhile initiatives have been proposed to integrate its potential in India’s quest for self-reliance.

Defence Sector Reform, Delivered

The prolonged period for which the country has kept the private sector out has impacted ability of the private sector to get in and start operating at a competitive level with foreign exporters. There is requirement of a minimum gestation period before an industry gets developed suitably. China started developing its indigenous defence industry at the beginning of the 80s and it is only now that it can boast of a reasonable capability. While we may be able to cut down this gestation period by adopting the joint venture route, even then, it may require anything up to 20 years to develop fully.

Promising a “paradigm shift” in defence procurement policy, the Hon’ble Prime Minister and his team have fulfilled the promise and provided a comprehensive framework which will unleash the immense potential of the private sector in establishing the defence sector. Combined with making efforts towards facilitating the private sector, the government is taking the challenge of enabling the private sector to play a greater role in defence production whilst keeping national interest in mind.

Five years back, China had 180 civil helicopters, while India possessed 300. This figure has changed dramatically with China’s number having increased to 500 plus and India’s number having reduced to 260

Role of Private Sector

Stressing the need for greater participation of private industry, the Ministry of Defence appointed committee has rightfully stressed the ‘Make in India’ initiative in the most awaited DPP-2016 to promote indigenous defence production through enhanced private sector involvement. It needs to be noted that DPP is the master manual of capital defence procurements in India.

The committee has rightfully suggested that the MoD accord the private sector ‘strategic partner’ status for varied military programmes in a structured and permanent arrangement, given its agility, efficiency, innovation and modern management practices. This propensity, it states, applies particularly to absorption of technology from overseas original equipment manufacturers via joint ventures, which the committee believes the private, not the public sector, is better equipped to manage.

The committee rightly advised the MoD not to look upon private Indian industry as a ‘competitor,’ but an ‘ally,’ regularly sharing with it information regarding the services’ overall requirements and programmes. Also looking at the prolonged procurement process, the committee has suggested various aspects which will help in compressing the entire military acquisition process into a shorter time frame.

The services, especially the Indian Army, are prone to framing over ambitious QRs for weapons and related systems, which simply do not exist anywhere in the world. According to Parliament’s Standing Committee on defence report in 2012, as many as 41 of the army tenders were withdrawn or terminated in recent years, due to unrealistic QRs. This has left the force in shambles, with regard to even basic equipment like assault rifles and carbines for its nearly 360 infantry units.

According to the committee, the current practice of terminating a tender, simply because there is only one vendor available should be reviewed, as well as the procedure of selecting the lowest bidder or L1 if the country has to focus on building modern defence technology in India. DPP-2016 has considered most of the recommendations made by the committee.

Realising dream of “Make in India in Defence Sector”

In my view, Govt. should emphasise on a few additional aspects while accepting the Committee’s recommendation. This will ensure that DPP brings “complete change” in the defence procurement.

Govt. must consider the provision of selection of private sector companies as Production Agency (PA). In the Avro replacement program, MoD had given freedom of selection of Indian Production Agency to the OEMs. This was very well received by the OEMs.

The policy of allowing indigenous private sector companies to enter into joint ventures with reputed arms manufacturers across the globe to bring in state-of-theart technology in to the country quickly is important. The choice of the Indian partner should be driven entirely by sound commercial considerations. To let this happen, it is important that no criteria or preconditions are laid down that would place restrictions on the foreign vendors’ freedom to choose an Indian Production Partner.

This issue is likely to be more critical in the near future as more and more cases get categorised as ‘Buy and Make’ through the involvement of the Indian private sector. A robust and transparent process will help the domestic industry to demonstrate its ability to absorb and protect the ToT, IPR, Investments in R&D, training and building capacity and capability.

Selection of Strategic Partners is a very important area which needs to be carefully considered to ensure that the Govt. is in sync with the private sector. The introduction of “concept of strategic partner” is a welcome move as it will lead to capability building however, the proposed eligibility conditions seem restrictive and may severely hinder the growth of Defence Industry.

For example, in case of private sector Shipyards, proposed selection criteria should be more broadbased such that eligible shipyards can explore the possibility to work with MoD as its strategic partner. In my view, the infrastructure available with the company should be of paramount consideration and companies undergoing CDR or low credit rating must not be automatically excluded or discouraged.

Another recommendation in this regard which states that once a group company has been nominated as a strategic partner in a particular programme, the same group should not be permitted to participate in other programme types [warships, submarines, tanks, vehicles, missiles, etc]. Again, the focus should be on the infrastructure available rather than blanket exclusion. Selection criteria should be more objective and broadbased to encourage competition.

This restrictive approach is contrary to the PPP Guideline but vital for the growth of defence sector.

Circumspection in blacklisting defence vendors on charges of wrongdoing -- never ever conclusively proven in India for decades -- and legalising defence agents or lobbyists, are part of the committee recommendations. In the Defence Sector, number of vendors in each segment is very limited. The approach of the Government to blacklist a number of International Defence Companies has already resulted in restricting competition and consequent single vendor situation in many cases (M-777, Torpedoes etc.). This not only results in long delays but also charging of premium by the single vendor. Ultra light Howitzers (M-777) contract has been delayed since 2013 for this reason. In one of the recommendations by the Naresh Chandra Committee, it was proposed that the practice of blacklisting firms of suppliers should be discontinued.

In my view, the government should consider benchmarking the process adopted in other countries. For example, the framework adopted in UK pursuant to UK Defcon 520 enables the Contracting Authority to recover the value of the gift/commission by the contractor; or apply the maximum liquidated damages provided under the Contract as if the delivery was delayed up to the maximum time permitted. The United States too has mechanisms in place to deal with such malpractice as defined in the US Foreign Corrupt Practices Act (FCPA) which includes imposition of penalties and does not aim to debar organizations.

Govt. should consider introducing provision for compounding of such violations unless there are direct national security issues involved. This will be consistent with various judgements of Supreme Courts where it has been opined that blacklisting could be ordered “where a person is convicted by a court of law, or if security considerations so warrant”.

Lastly, appointing an ombudsman to monitor defence procurements plagued by corruption is highly recommended. Terminating tenders simply because of anonymous complaints to the MoD is not the right approach to a country whose armed forces are already struggling to get the stateof-the-art defence technologies, ammunitions, etc.

Overall, the procurement process has been hastened. But as they say, the devil lies in the details. We are on right course. Change is visible, just the speed needs to be ensured.

Disclaimer – The views expressed in this article are the personal views of the author and are purely informative in nature

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