The Hindu Business Line : Positives in the new procedures for defence procurement

The foremost positive in the much-awaited Defence Procurement Procedure-2008 is the removal of the mandatory licensing conditions for private sector companies to participate in defence procurement and offset programmes..

MR K. GANESH RAJ, INDUSTRY LEADER - DEFENCE & AEROSPACE, ERNST & YOUNG P LTD.

When speaking at a recent seminar in New Delhi, the Defence Minister, Mr A. K. Antony, spoke of increased transparency in defence deals and tendering process. He highlighted that a major change in DPP-08 (Defence Procurement Procedure-2008) was the inclusion of broad details of the trial methodology forming part of the RFP (request for proposal) so that vendors were aware right at the outset about the modalities for product evaluation.

The much-awaited DPP-08, which supersedes the 2006 policy, carries several key amendments, effective from September 1, 2008, informs Mr K. Ganesh Raj, Industry leader - Defence & Aerospace, Ernst & Young P Ltd.

With an estimated total defence spending by India, on acquisition and purchases, worth nearly $100 billion over the next decade, a vibrant and coherent defence procurement policy was the need of the hour, he adds, during the course of an email interaction with Business Line.

"The revised policy has made some changes including cutting down on procurement delays, enhancing transparency, relaxing licensing requirements for private sector, introduction of new concepts such as banking of offset credits, etc., which will be helpful in transformation of the Indian defence industry," Mr Raj explains.

Excerpts from the interview:

First, on the achievability of the target of procuring 70 per cent of defence requirements from indigenous sources by 2010.

It is definitely an ambitious target set by the Government given that about 70 per cent of the present defence equipment is of foreign origin; and some of them are made under licence production in India, largely by the PSUs (public sector undertakings).

At the same time, certain provisions in DPP-08 - such as offset banking by the foreign OEMs (original equipment manufacturers), rationalisation of licensing conditions for Indian companies, inviting foreign investment in Indian companies, promoting defence joint venture, and strategic alliances - will surely help achieve the long-term goal of indigenisation, though under an extended time period beyond 2010.

Mandatory licensing requirements for private players have been dispensed with. Do you think this would lead to any compromise on quality requirements?

As part of the Government's liberalisation policy to do away with the licence raj across industrial sectors, the mandatory licensing requirement has been dispensed with in the revised DPP.

Relaxation of the licensing requirements should lead to greater private sector participation in defence production. In my view, it would however not lead to any compromise on quality as in the revised policy, stringent measures have been proposed in the technical evaluation procedures to ensure better reliability and quality assurance by the vendors. Further, the defence procurement process in itself is a very comprehensive procedure where a vendor is scrutinised at various levels of approval.

Can you tell the `why' and `how' of the offset obligation in a defence contract?

The aim of offset is to achieve sustainable and deep-rooted economic benefits through the establishment of strategic alliances and joint ventures that lead to transfer of technology and help achieve greater self-reliance in defence production.

The MoD (Ministry of Defence) announced the offset policy as part of the DPP-05 which was further fine-tuned in DPP-06.

In India, offsets are applicable for all contracts above Rs 300 crore and the general limit for offset is 30 per cent of the contract value under `Buy (Global)' and `Buy and Make' capital acquisition proposals.

This means that a foreign vendor would have to plough back at least 30 per cent of the order amount through the purchase of defence products and components manufactured by the Indian defence industry.

Services such as engineering, design, and defence-related software equally qualify for discharging offset obligations. Further, direct foreign investment in Indian defence companies for co-development and co-production of defence products and components qualifies for the said purposes.

On `offset banking'.

The introduction of credit banking in offset policy is one of the significant revisions in DPP-08.

It will allow foreign OEMs to bank credits acquired in relation to a particular contract and claim the same as an offset against defence RFPs which are issued within two financial years of the date of approval of banked offset credits.

Offset banking is an additional incentive to the foreign vendors to continue supporting the Indian defence set-up and help in building up a long-term mutual beneficial relationship.

How has transparency been enhanced in the new procedures?

DPP-08 has adopted certain key measures to enhance transparency in defence procurement procedures. For instance, all procurement schemes except those for security-sensitive products would be given publicity before the issue of RFP for advance information of vendors.

Further, to increase transparency in the evaluation process, qualitative requirement of the equipment and trial methodology would be given in the RFP. Results of the technical trial evaluation would also be intimated to the vendors.

Under the revised policy, the defence PSUs would now be required to sign `pre-contract integrity pact' with their sub-vendors in all cases where the sub-contract value exceeds Rs 20 crore. This will provide further strength to the earlier policy of insisting on integrity pact for all contracts exceeding Rs 100 crore.

On the impetus for private sector participation in the Indian defence industry.

The foremost positive in this direction is that DPP-08 has provided for the removal of the mandatory licensing conditions for private sector companies to participate in defence procurement and offset programmes.

Further, the policy also provides that the offset obligation would not be applicable where the Indian joint venture partner along with foreign vendor is bidding for a defence procurement contract and offers indigenously developed product, to an extent of at least 50 per cent.

This will help set up joint ventures for co-development and co-production of defence equipment and provide a strong direction towards achieving the indigenisation of defence production through private sector participation.

D. MURALI

(Illustration by R. Rajesh)

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