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The Evolution of Defence Procurement Procedure 2011 - Analysis by Colonel Kuber

Discussion in 'Indian Defence Industry' started by CONNAN, Feb 3, 2011.

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  1. CONNAN

    CONNAN Major ELITE MEMBER

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    The Ministry of Defence, Government of India has been engaged in bringing about a dynamic, transparent and a forward a looking policy for a vibrant and progressive nation. It is indeed befitting that the policy of the Ministry of Defence is truly in sync with the aspirations of the nation.

    There is a huge challenge that the Ministry faces in this effort, i.e., to bring about changes that truly satisfies all stake holders. The constitutional right of the country to be secure from external aggression, demands that our Armed Forces be agile, alert and equipped with the most effective weapon systems. While the Armed Forces are amongst the best trained, highly motivated, robust and strong, this is hitherto the result of the internal motivation that drives them to always outperform even in the most adverse situations. However, in the past, the government has repeatedly and consistently failed to equip our Forces with the state of the art weapon systems. This could be attributable to many reasons, including bureaucratic apathy and lethargy, and a future policy will do well to address this. Thus the Armed Forces of India are the most important of all the stake holders as they represent and hold the key to the nation's desire to be secure from external aggression and internal disorders. Their concerns need to be addressed with all available state machinery.

    The true potential in the Armed Forces of a nation are a reflection of the capabilities present in the indigenous industry, as they and they alone can be relied upon in extreme adversity. The Forces can be equipped with the state of the art weapon systems available anywhere in the world, but that would tantamount to shining under borrowed feathers - show of strength is not sustainable. It is only a vibrant and strong indigenous industry that can provide for back-bone strength. Thus, the Indian industry is the second most important stake holder.

    There is a huge gap between what our indigenous industry can offer, to what is expected of them by the nation's Forces. This gap is addressed by two divergent stakeholders. One is the foreign industry which can temporarily fill-in these gaps with what could quench the the thirst and a DRDO which relentlessly works to fill in the gaps in technology the industry so desperately needs. They are the next two important stakeholders, one works on a fast track with short term gains and the other necessarily needs to be slow and sure to address the medium and long term goals of the nation's industry.

    It will be expected by the taxpayer in this country to voice his concern if the MoD does not address all of the above stake holders' interest while bringing out policy documents that would be the single point of reference for the capital acquisitions that the MoD undertakes, with huge budget allocations each passing year.

    It is quite heartening to note that the MoD strives to address some if not all the concerns of; and some if not all the stake holders; as they have done in the past few years. The strategic shift was visible when the Industrial policy was opened up for private participation, albeit with inclusive licensing when the Defence sector was moved from the reserved category to restricted category. Then we formally instituted the Defence procurement procedures which have matured over a period of time to what we see today in the form of DPP 2011.

    In this context the DPP 2011 is indeed a progressive version of the forward looking DPP 2008. In many respects the DPP 2006 was a comprehensive document encompassing detailed guidelines for offsets in addition to the Make procedure and introduction of a new category "Buy Indian" all of which were introduced for the first time as a policy document. The category Buy Indian was introduced to basically provide a focus for Indian industry. In 2009 the MoD once again made few significant changes by introducing a new category of procurement, viz, "Buy and Make Indian ". Thus the Indian MoD had been constantly engaged in providing a boost to indigenous industry with an increased focus on procurement from indigenous sources.

    The offset policy championed the cause of strengthening the Indian industry by essentially guaranteeing business for the industry; the OEMs were mandated with a modest 30 per cent of all capital acquisitions to be reinvested in the Defence sector in India. The effects are already visible in the form of a greater number of seminars in Defence and aerospace, increased participation in aero shows and Defence exhibitions, exponential increase in Indian companies applying for an industrial license, greater awareness and increased exports, besides a number of joint ventures. The MoD made a departure from the licensing conditions and made it far easier for the vast majority of SMEs and MSMEs to become eligible to forge partnerships with foreign primes directly. Today we have in our country more than 5000 companies interested in participation in offsets programmes, partnerships, technology, etc; they have found necessary motivation to a take the leap. More and more number of Indian companies are making investments in the Defence sector, a very welcome phenomenon.

    The hype created by the offset policy was peaking with every potential deal and the aspirations of the industry were passing through a fine filter, thus preventing even participation. DPP 2008 provided a great relief for the Indian industry by removing the mandated requirement for licensing as a pre-requisite for participation with OEMs as Indian offset partner. Simultaneously banking of offsets credits for creating projects in advance of contract was introduced. This however did not produce the desired results since the MoD did not approve any programme in Banking of offsets and at the same time there was adequate confusion if the need for licensing was indeed removed; the wording of the policy was pretty fuzzy.

    In pursuing this effort towards providing enabling provisions, for the betterment of a developing Defence industry, DPP 2011 can be seen as fiercely progressive in a rapidly developing Indian industry. The concerns of the primary stakeholder, the mighty Armed Forces are however yet to be adequately addressed. Capital procurements are increasingly riddled with huge time over-runs leading to unpardonable cost escalations, who cares, whose country is it anyway?

    The policy addresses quite a few concerns in the capital procurement procedures and with a pragmatic approach expands the scope of discharge of offset obligations, displaying seriousness and genuine intent of strengthening the indigenous industry. A great amount of synergy is also inherent in the policy providing for inclusive growth. The major changes effected in the policy are :-
     
  2. CONNAN

    CONNAN Major ELITE MEMBER

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    Inclusion from DPP 2009 ( amendments to DPP 2008 in 2009 )

    # Introduction of new category for acquisition "Buy & Make Indian". This is indeed a progressive step towards encouraging Indian industry to forge relationships with foreign OEMs and manufacture the product indigenously; the RFP will be issued to Indian companies only.

    # Sharing of information with Indian Industry - The government has entrusted the headquarters Integrated Defence Staff, to share a public version of the long term integrated perspective plan (15 year plan) through wide publicity and by placing the same on the MoD web site.

    # Enhancing role of Independent Monitors - This was done by mandating nomination of adequately senior members into the Technical Oversight Committee ( TOC ) for a more detailed examination of the adherence to the process.

    # Removal of ambiguity regarding EMD (earnest money deposit) in signing the Integrity Pact.

    # Formulation of SQRs including issue of Request for Information (RFI) - mandating broad based SQRs and seeking detailed information with regards to the transfer of technology both in range and in depth, as identified by the DRDO.

    # Offsets requirement in Option Clause will follow the mandated requirement in the original RFP.

    # Cases for a change of offset partner will be justified by the OEM and approval accorded in exceptional cases by MoD.


    Inclusions in DPP 2011

    # The discharge of offset obligations have been expanded to include Commercial aerospace and Internal security due to the similarities and synergies observed.

    # The scope of services have been enhanced to also include Training and related services so very essential for each procurement.

    # There have been a number of RFP related refinements such as extending the validity of AON for RFPs that are retracted, nomination of private industry for absorbing Maintenance ToT, providing grace period for field trials, improving the quality of oversight in procurements, defining timelines for effective monitoring, extension of time in Fast track procurements etc.

    # Extending the exchange rate variations to private industries, reducing risks by halving the performance cum warranty bond, linking the BG to the commercial offer, replacement of the PLR by the base rate of the SBI, renaming the EMD as Integrity pact bank guarantee and allowing letter of credit to be opened from only four nominated banks, etc.
     
  3. CONNAN

    CONNAN Major ELITE MEMBER

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    Analysis

    An analysis of the above will indicate the fast pace with which the MoD is moving ahead to take into account the interests of the stake holders and in this process they have truly enabled the Indian industry to take full benefit of the capital procurements in Defence by exploitation of its offsets clause. From a modest beginning in 2005 to the detailed offset guidelines and the introduction of banking provisions in 2008 and now the expansion of the policy. The banking provisions were introduced by the MoD but they could not progress even in one single case. The euphoria that accompanied the introduction of the banking provisions witnessed a number of OEMs to queue up in South Block and more than 25 proposals were submitted, regrettably the MoD could not clear even a single case, it is understood that one case pertaining to HAL as the Indian partner was cleared albeit after some 11 months; rest of them in a limbo. Such type of lethargy forced the MoD to review and expand the policy, since there is a need to enable the OEMs to discharge offsets.

    Inclusion of Civil Aerospace


    This inclusion is quite logical, since most of the capital procurements are in the IAF. Also an advanced civil aviation industry in the areas identified by the MoD such as airframes, engines, design engineering, raw material and semi finished goods, tech-pubs, flying training institutions etc, is the need of the hour. These will truly complement the requirement of the IAF. We as an industry need to progress in these identified areas, as presently our IAF pilots scout for training institutions around the world for simulator training, we do not have expertise in aviation design engineering services despite our stated strength in IT. We also need to create and sustain expertise in processing raw material and semi-finished goods, airframes etc, for the manufacturing sector. We also need an aircraft engine industry to serve the ever growing requirements of the aviation sector.

    Internal Security

    The government has recognized the thin line of differentiation between the products in the Defence versus the ones in the Internal Security sector. We have witnessed an increased use of the Armed Forces in Internal Security and therefore there is a need for integrated functioning and inter-operability between the two arms of the government, the Armed Forces and the para-military. It is in the right earnest that the government has exhibited a focus on the internal security sector, since the industry could be the same that supply to both.

    Training


    Training and simulators, flying training institutions and associated services are a requirement of the day and the country would do well to exploit the offset provisions to create a vibrant and strong services sector including training.

    The other amendments related to increasing the efficiency within the MoD for improved monitoring, expeditious processing, creating a level playing field in payment terms, nominations of private industry for absorbing the maintenance ToT, provision of grace period for trials and inclusion of a separate chapter for private ship builders through competitive bidding etc go a long way in transparency, accountability and efficiency.
     
  4. CONNAN

    CONNAN Major ELITE MEMBER

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    How the Indian Industry can Benefit

    The manufacturing sector can truly benefit by investing in dual use technologies like airframes, aircraft engines, etc, which demand a huge investment and the IAF by itself may not have commercially satisfactory minimum order quantities to order. By allowing the technologies and products to be usable in the civil aerospace as well, the economics of the venture will become attractive and more investments can be forthcoming in these strategic sectors. The services sector could create teaming arrangements and JVs for maintenance, overhaul, up-gradation, design services, flying training institutions, technical publications, with a view to be able to carryout the entire services from the warranty stage onwards for a better stated efficiency and management of spares and assured support that the Forces will always look forward to. The service sector benefits with excellent expertise creation and the Forces benefit with assured and timely support from indigenous sources. The Force are aware of the difficulties in sourcing services from abroad, the time taken and associated difficulties, besides huge cost penalty.

    Thus the policy provides an even platform both for the manufacturing sector as well as the service sector and the IT sector gets a focus on the design services that they need to concentrate upon. In many ways than one the policy is pragmatic. The policy however has not addressed the concern of one of the important stake holders who are an essential partner in driving the industry to greater heights, viz, the DRDO. Technology is an integral component of the entire process and the industry will get only nuts and bolts to make and a few doors, when a holistic approach is not taken. Thus the MoD will do well to address the concerns of the DRDO and technology infusion while providing the opportunities to the industry. The industry can exploit these opportunities if and only if the right technology flows in as part of the overall effort in strengthening the Indian industry. We need to address technology transfers and regulate their transfer for effective and efficient growth of the industry.

    In conclusion, we see that the MoD has made some progressive changes and will do well to address some of the concerns of the DRDO by providing a dedicated focus on technology. They also need to address the concerns of the primary stake holder the Forces and provide them with the state of the art technology weapon systems in the shortest possible time. It is not enough to make changes in the policy and have a weak mechanism to handle it, else, it would result in a similar situation like the Banking of offsets wherein there has not been a single case of banking approved by the MoD in two years despite a number of enthusiastic OEMs willing to go for it.

    Also all changes must be applicable for all acquisitions that are in various stages of readiness save those that have already been signed. The MoD must be more forthcoming and flexible and act as an enabler to get the policy moving forward rather than that of the attitude of a Thanedar. Towards this, the MoD must have an effective offset authority in place for effective monitoring and implementation of the policy. Today, the OEM runs around the entire South Block, room to room, since there is no single authority, the conflict between DOFA, Acquisition wing, user directorate, etc must be expeditiously resolved. There must exist a single window mechanism, either the acquisition wing or the user directorate or DOFA (offset Authority as part of Acquisition wing) to interface the concerns of OEM (who are an important part of this ecosystem).

    The Evolution of Defence Procurement Procedure 2011 - Analysis by Colonel Kuber | India Defence
     
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