Laudable Reforms in Defence Procurement

Transformative Reform

It is a well-established fact that no nation aspiring to great power status can expect to achieve its goal without being substantively self-reliant in defence production. The NDA government led by Prime Minister Narendra Modi has directed the armed forces to increasingly procure their weapons and equipment from indigenous sources. The government is promoting the PM’s drive to “make in India” as a cardinal principle of its economic policy. The government’s aim is to create more jobs by enhancing manufacture in the private sector. In order to give an impetus to indigenous manufacture, the Modi government has undertaken major reform of defence procurement policies and procedures.

Military modernisation has two major facets — the replacement of obsolete and obsolescent weapons and equipment with modern ones, which results in increasing combat effectiveness; and, the qualitative upgradation of combat capabilities through the acquisition and induction of force multipliers. As the defence budget is invariably much smaller than the requirement, military planners face a major dilemma — how to improve operational preparedness while simultaneously making concerted efforts to modernise. Logically, operational preparedness must take precedence over modernisation. The art of leadership lies in finding an optimum balance so that all efforts that are made to enhance operational preparedness also contribute substantively to force modernisation.

Plans for military modernisation must simultaneously lead to a transformative upgradation in the defence technology base and manufacturing prowess, or else, defence procurement will remain mired in disadvantageous buyer-seller, patron-client relationships like that with the erstwhile Soviet Union and now Russia. While India has been manufacturing Russian fighter aircraft, tanks and other equipment under licence for long, the Russians never actually transferred technology to India.

Although the country has now diversified its acquisition sources beyond Russia to the West and Israel, recent deals have also not included transfer of technology (ToT) clauses. The much delayed MMRCA deal with Rafale had also run into rough weather on this account, besides the attempt to bring down the price. If this trend continues, India’s defence technology base will continue to remain low and the country will remain dependent almost solely on imports for major defence acquisitions.

All new weapons acquisitions must be undertaken with a ToT clause being built into the contract even if it means having to pay a higher price. The aim should be to make India a design, development, manufacturing, export and servicing hub for defence equipment in two to three decades.

Strategy for Defence Research and Development

As a policy the NDA government has been encouraging public-private partnerships. However, in practice the government continues to retain its monopoly on research and development and defence production through the DRDO, the ordnance factories and the defence PSUs (DPSUs). Since its inception in 1958, the DRDO has achieved some spectacular successes like the missile development programme (Prithvi, Agni, BrahMos), but also has many projects to its name that have been only partially successful. Programmes like the Light Combat Aircraft (LCA) and the Main Battle Tank (MBT) Arjun have suffered inordinate delays and time and cost overruns.

To its credit, the DRDO worked under extremely restrictive technology denial regimes and with a rather low indigenous technology base. The DRDO is now in the process of implementing the report of the P Rama Rao committee that had asked it to identify eight to 10 critical areas that best fit its existing human resource pool, technological threshold and established capacity to take up new projects. The DRDO must scrupulously stay out of production. Most of the ordnance factories and some of the DPSUs should be privatised on a priority basis. The private sector has shown its readiness and technological proficiency to take up the production of weapons and equipment designed and developed by the DRDO and must be trusted to deliver.

The DRDO must concentrate its efforts on developing critical cutting edge technologies that no strategic partner is likely to be willing to share, such as nuclear warhead and ballistic missile technologies, know-how on building nuclear-powered submarines and ballistic missile defence (BMD) technology. It will remain the responsibility of the DRDO to conduct original R&D into strategic technologies. For the development of hi-tech weapons platforms like fighter-bomber aircraft and sophisticated defence equipment like over-the-horizon (OTH) radars, there should be no need to reinvent the wheel. These should be developed jointly in conjunction with India’s strategic partners by forming joint ventures (JVs) with defence MNCs that are willing to transfer modern technology.

The development of technologies that are not critical should be outsourced completely to the private sector. Also, the armed forces should be given funding support to undertake research geared towards the improvement of in-service equipment with a view to enhancing operational performance and increasing service life. Gradually, the universities and the IITs should be involved in undertaking defence R&D. This approach will help to raise India’s technological threshold over the next two decades by an order of magnitude.

Defence Acquisition Procedures Reviewed by MoD

The Defence Procurement Procedure (DPP) manual was introduced in 2005. Since then it has been revised and modified several times based on the experience gained during its implementation. On May 1, 2015, the Defence Minister, Mr Manohar Parrikar, appointed a 10-member committee headed by former Home Secretary Dhirendra Singh, to review the defence procurement policies and procedures and to recommend fresh guidelines with a view to implementing Prime Minister Modi’s policy to ‘make in India’. The review was utilised to learn from the experience gained in the implementation of the DPP that was then current and many pragmatic recommendations were made by the committee.

The DPP was amended in March 2016 to reflect the new thinking on making and buying Indian. DPP 2016 envisages the production of defence equipment under four categories: ‘Buy (Indian Designed Developed and Manufactured – IDDM)’, ‘Buy and Make (Indian)’, ‘Buy and Make’ and ‘Make’. Except the ‘Make’ category, all others are open to Indian companies as well as JVs with FDI more than 49 per cent. Another innovation is the introduction of the ‘strategic partner’ model for specific projects for licensed production, upgradation, extension of the life of the equipment or for life-time sustenance. Selected Indian companies will be nominated as strategic partners for projects involving ToT from defence MNCs. The criteria for the selection of strategic partners are yet to be finalised.

The Defence Production Policy (DPrP) was unveiled in 2011. Its objectives are: to achieve substantive self-reliance in the design, development and production of equipment, weapons systems and platforms required for defence in as early a time frame as possible; create conditions conducive for the private industry to play an active role in this endeavour; enhance the potential of small and medium enterprises (SMEs) in indigenisation; and, broaden the defence research and development base of the country.

Though many changes have been incorporated in the DPP and DPrP manuals, these are mainly incremental and not far reaching enough. The procurement process still favours the defence PSUs (DPSUs) over the private sector. Many issues remain to be resolved if procedures are to be made less cumbersome and more attractive for the private sector. The DPP document is still too long and needs to be cut down to not more than 12 to 15 pages with perhaps a few appendices.

Up to July 2016, the government had signed contracts for a total amount of Rs. 1,13,995 crore and, in the same time frame, approval of necessity (AON) has been accorded to defence acquisition projects worth approximately Rs. 2,39,000 crore, mostly for make in India projects.

Changes in FDI Norms and Offsets Policy

Foreign Direct Investment (FDI) in the defence sector was permitted to the extent of 26 per cent in 2001. In July 2014, the government permitted FDI in the defence sector up to 49 per cent without prior approval — known as the automatic route — and beyond 49 per cent after prior approval, provided the MNC brought in or agreed to transfer ‘state-of-the-art’ defence technology. The flow of FDI remained insignificant. The total FDI in the defence sector was Rs. 25.48 crore (USD 5.12 million) up to March 2016 (Amit Cowshish, “FDI Reforms in the Defence Sector: A Fresh Round”, India Strategic, July 2016). This shows that much more needs to be done to attract a greater quantum of FDI.

In the third week of June 2016, the government tweaked the norms for FDI further to encourage defence Multi National Companies (MNC) to invest in the production of weapons systems and defence equipment in India through JVs with Indian companies. The requirement of transferring ‘state-of-the-art’ technology has now been relaxed to permit FDI beyond 49 per cent even if ‘modern’ technology is transferred and for ‘other reasons to be recorded’. The government has also brought the manufacture of small arms and ammunition under the rules pertaining to FDI in defence. The government hopes that these policy changes will encourage the manufacture of weapons systems, ammunition and defence equipment in India. The manufacture of ammunition by MNCs in India is expected to gradually reduce the large-scale deficiencies in critical categories of ammunition that were pointed out by the CAG in 2015.

However, though FDI in defence manufacture has been increased from 26 to 49 per cent through the automatic route, this is not considered attractive enough by defence MNCs as FDI up to 74 per cent is permitted for many non-defence sectors. Given the time and effort that goes into locating a JV partner, the risks involved in managing a JV successfully and the fact that they are expected to bring in proprietary technology, the MNCs prefer to have a controlling stake. Just like the government had not defined state-of-the-art technology in specific terms, it has not defined modern technology that would be eligible for FDI beyond 49 per cent with prior approval. Broadly speaking, modern technology would be mature third-generation technology bordering on fourth generation — for example, Hellfire air-to-surface missiles and OTH radars. While exports of defence equipment have been permitted, the procedures for according the approvals that are necessary and the regulatory framework need to be streamlined.

The initial attempts at formulating an ‘offsets’ policy did not work to India’s advantage. The Indian defence industry’s ability to absorb 50 or even 30 per cent hi-tech offsets in defence acquisition projects worth more than Rs. 300 crore is extremely low. For example, the balance of the multi-mission, medium-range combat aircraft (MMRCA) contract (over and above 36 Rafale fighter aircraft), is likely to be worth USD 12-14 billion approximately. This will result in an offset obligation of USD 6-7 billion. This is much more than the Indian defence industry can possibly absorb over 10-12 years. It may be more prudent to consider offsets only in cases where the benefits expected to accrue will outweigh the additional costs and Indian JV partners can absorb the technology that is brought in.

The policy on offsets has also been reviewed and several amendments have been made. In November 2015, the government restored 'services' as eligible offsets for defence contracts, opening up a business potential of over USD 3 billion in immediate projects. The government also added the development of software and engineering design to the list of eligible offsets, but limited it to 20 per cent of the project cost. This will bring some relief to the maintenance, repair and overhaul (MRO) and software industries, as also companies involved in the upgradation of military systems and life extension projects of defence equipment. According to a news report, the government is considering the creation of a Venture Capital Fund (VCF) with a corpus of Rs. 30,000 crore for defence production. Defence MNCs may be permitted to invest part of their offset obligations in the VCF.

In the past, the selective tweaking of the technical requirements during the procurement process sometimes led to one company being favoured over another. All technical requirements must be frozen when a Request for Proposals (RFP) is issued by the MoD. GSQRs must also be frozen when the procurement process begins. Frequent tinkering with GSQRs by the Services is detrimental to the smooth flow of the acquisition process and the indigenous development of weapons systems. It may sound heretical, but the reports of user trials must be made public. This step will not only amount to a huge leap forward in transparency, but also insulate the trials teams of the three Services from being unduly influenced to stage-manage trials in favour of any of the contending parties.

The government should examine the feasibility of establishing Defence Economic Zones (DEZs) to provide incentives for indigenous defence manufacture. There is an inescapable need to establish an Institute of Defence Acquisition under the Chiefs of Staff Committee. The US has a Defence Acquisition University where all officers nominated for posts dealing with defence procurement are trained. The ‘life cycle concept’ of evaluating defence equipment for acquisition was completely alien to the armed forces till very recently.

Speed and Transparency in Decision Making

The defence procurement decision making process must be speeded up. The army is still without towed and self-propelled 155 mm howitzers for the plains and urgently needs to acquire weapons and equipment for counter-insurgency operations. The navy waited for very long for the INS Vikramaditya (Admiral Gorshkov) aircraft carrier, which was refurbished in a Russian shipyard at exorbitant cost. Construction of the indigenous air defence ship is lagging behind schedule.

The plans of the air force to acquire the balance of the 126 MMRCAs in order to maintain its edge over the regional air forces are also stuck in the procurement quagmire. The indigenously designed fighter aircraft LCA Tejas, a replacement for the obsolescent MiG-21, has begun to be inducted only recently – 15 years late. All three Services need a large number of light helicopters. The armed forces do not have a truly integrated C4I2SR system suitable for modern network-centric warfare, which will allow them to optimise their individual capabilities.

All of these high-priority acquisitions will require extensive budgetary support. With the defence budget languishing at 1.74 per cent of India’s GDP it will not be possible for the armed forces to undertake any meaningful modernisation in the foreseeable future. Leave aside genuine military modernisation that will substantially enhance combat capabilities, the funds available on the capital account at present are inadequate to suffice even for the replacement of obsolete weapons systems and equipment that are still in service well beyond their useful life cycles. The central armed police and para-military forces (CAPFs) also need to be modernised as they are facing increasingly more potent threats while being equipped with obsolescent weapons.

While the need for confidentiality in defence matters is understandable, defence acquisition decision making must be made far more transparent than it is at present, so that the temptation for supplier companies to bank on corrupt practices can be minimised. For example, tenders should be opened in front of the representatives of the companies that have bid for the contract. Before a contract is awarded, the file should be reviewed by the Chief Vigilance Commissioner (CVC). If the CVC continues to have reservations about such scrutiny, either his charter should be amended or an eminent persons group should be appointed to vet large purchases. Surely, many such persons with unimpeachable integrity can be found in India.

India is expected to spend approximately USD 100 billion over a ten-year time frame on military modernisation. As 70 to 80 per cent of weapons and equipment are still imported, there is an urgent need to further refine the defence acquisition process and insulate it from the scourge of corruption that has afflicted all other national endeavours, including major development projects, while simultaneously encouraging self-reliance and indigenisation.

(The writer is Visiting Fellow, VIF and Distinguished Fellow, Institute for Defence Studies and Analyses (IDSA), New Delhi)

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Published Date: 9^th March 2017, Image Source: http://defence-blog.com [3]