Defence Notes

New Delhi, 18 August 2008

New Defence Procurement Policy

SAYS NO TO MIDDLEMEN, AGENTS 

By Radhakrishna Rao

Six global defence and aircraft manufacturers, who are in the race to win the lucrative bid for supply of 126 medium multi role combat (MMRC) aircraft to the Indian Air Force, have submitted a list of local vendors, from whom they would source components, systems and service in addition to offering an increased investment to revitalize India’s defence and aerospace sectors in the event of winning the order.

This development, not surprisingly was in response to a new investment-friendly weapons’ procurement policy unveiled by Defence Minister A.K. Antony on August 1. The policy specifically mandates that all foreign companies bidding for major Indian defence contracts worth over Rs.3,000-million will have to invest anything between 30 per cent and 50 per cent of the value of the order in the Indian defence and aerospace sectors.

Interestingly, American defence and aerospace majors, Boeing Co and Lockheed Martin have already inked contracts with a number of industrial groups and software and IT services companies to execute the offset clause forming part of the contract, in anticipation of bagging the order. “We are already establishing the ground work that will lead us to success in this large undertaking through early management of Indian industry, both in the public and private sectors” observed Boeing Integrated Defense Systems Vice President (India) Vivek Lall.

On the other hand, the Bangalore-based aeronautical and defence outfit Hindustan Aeronautics Ltd (HAL) is quite bullish about the benefits flowing to it from the offset clause. According to its spokesman, “We will work with the vendors chosen by the winner.” As it is, HAL will license produce 108 of the 126 combat aircraft to be acquired by India, while the 18 jets will be delivered to IAF in a flyway condition.

In the race to grab an estimated US$10-billion order for the supply of 126 combat aircraft: are Boeing’s F/A-18 Super Hornet, Lockheed Martin’s F-16 Falcon, Russia’s Mig-35, Swedish Jas-39 from Grippen, French Dassault Rafale and Eurofighter Typhoon from the British, German, Spanish and Italian firms consortium. As it is, these six defence majors had submitted their bid this April. “We will seriously examine all the bids and shortlist the companies in due course” said a spokesman of the Defence Ministry.

It was an anticipated delay in the induction of India’s home-grown fourth generation, supersonic tactical fighter Light Combat Aircraft (LCA) Tejas that nudged the IAF to scout the global defence market for the procurement of the 126 combat aircraft, that would serve as the frontline fighters by replacing the aging and obsolete Mig-series of fighter jets. As things stand now, LCA Tejas is not expected to be ready for induction till early next decade.

As stated by defence ministry sources, India’s new defence procurement policy (DPP-2008) not only seeks to end the “murky role of middlemen and agents” in defence deals, but also put the procurement of armaments and  fighting  equipment  on a fast track with a clear cut focus on transparency at every stage. As New Delhi-based defence analysts point out, in the backdrop of India’s emergence as a major and lucrative defence market, with plans to spend up to US$50-billion on the import of defence hardware and equipment over the next five years, the need for a comprehensive well-drafted defence purchase policy has become all the more pronounced.

Till recently, India’s defence procurement scenario was under the vicious influence of middlemen, whose questionable role had resulted in the cancellation of a couple of recent military procurement deals. Against this backdrop Antony has made it clear that “we will not allow middlemen in defence deals”. And, according to the Ministry spokesman, “as per the new policy, armament companies will have to sign integrity pacts to ensure that no unethical means will be employed to bag these deals”.

The new policy also lays stress on enhancing the transparency of technical trials in addition to easing licensing conditions for India’s private sector companies to participate in defence production and promoting joint ventures. More importantly, DPP-2008 also facilitates the concept such as “offset banking”. As part of this concept, foreign vendors accumulate offset credits for two years preceding the award of a contract. However, the policy also makes it clear that offsets can be banked after getting due permission from the Government, which will examine all aspects of offset banking proposals to ensure that they are advantageous to our defence sector.

In particular, DPP-2008 promises the defence vendors advance information on procurement before floating tenders. Further, it seeks to enhance the financial powers of the Army, Navy and Air Force headquarters. Similarly, as per this policy foreign companies will be allowed to park funds in banks in anticipation of future contracts so that they need not have to manage money for the offset policy when the deal is finalized. But then this DPP makes it clear that the offset will be direct in that it will be allowed only in the defence arena. “The offset policy will be fine-tuned and allowing indirect offset is unlikely, since the Defence Ministry is extremely keen to build the indigenous sector,” explains its spokesman.

“The new DPP will hasten indigenization by helping defence public sector units, the Defence Research and Development Orgnisation (DRDO0 and private industry to enter into a joint venture with foreign arms’ suppliers,” observes Antony. As he stated, the ultimate aim is to reduce India’s dependence on foreign arms’ supplies and to “ensure that our armed forces will be able to speedily procure world-class equipment from indigenous or foreign sources”.

The Defence Minister also stressed the point that a strong and resurgent domestic defence industry, both in the public and private sector, could contribute to meeting the growing needs of the defence forces in a big way. The current policy encourages private participation in the defence production scenario. It also allows 28 per cent FDI in the Indian defence sector. According to Ministry sources, in the new procurement policy “suitable amendments have been effected to pave the way for speedier procurement of weapons, systems and platforms while enhancing transparency at the same time”.

Importantly, Antony sees a vastly enhanced role for the local private industry in the country’s defence production matrix. “It should be our endeavour to achieve the maximum synergy between defence public and private sectors, in order to create a competitive defence technology edge and strengthen the industry itself.” He also expressed the view that DPP-2008 will promote indigenization and encourage wider representation of the industry on panels doing technical evaluation of indigenously designed military platforms.

Recall, till 2001, entry of private sector into India’s production sector was barred. It was only after the Vijay Kelkar Committee recommended that private firms be allowed to participate in the production of arms and defence equipment that led to the opening up of the sector in a phased manner to private participation. Today, a number of Indian private entities including Tata Power, Larsen and Toubro, Mahindra and Mahindra, Kirloskar Group and Wipro have all unveiled their plans to enter the defence sector in a big way. “The role of private players has largely been at the sub contract level. Now the second step for them is to reach the sub assembly level and that will take time”, says HAL Chairman Ashok.K.Baweja. A beginning has been made. ---INFA

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