Blunting the cost of defence

FINANCING DEFENCE-II

In the Budget that will be presented in March 2007, Indian annual defence spending could touch the magic figure of Rs 100,000 crore.

To maximise the benefits of this huge expenditure, senior defence ministry and military officials heard presentations from experts from 26 countries at a seminar on Defence Finance and Economics held here from November 13-15.

Earlier this year, the ministry of defence had framed new procurement rules to cut down the time taken to purchase equipment for the military.

Defence ministry officials have been sharply criticised in recent years, including by their own minister George Fernandes in 2004, for being over-cautious and reluctant to process the purchase of military equipment.

But the new procurement framework, it now appears, has done little to diminish the officials' fears of persecution for awarding a major contract to one or other vendor.

Comptroller and Auditor-General MK Kaul became the first high-ranking official to publicly declare that while the new framework makes rules clearer, defence ministry officials still believe that the penalty for delaying a purchase is not as daunting as the risk of finalising a contract.

According to the Kaul: "The updated Defence Procurement Manual 2006 and the Defence Procurement Procedure 2006 are steps in the right direction. However, the emphasis in the current system still seems to be on technical compliance through a multitude of detailed rules and regulations rather than on creating a new organisational culture that focuses on results."

Quick results are vital, say the statistics offered by Katherine Schinasi, managing director, acquisitions, of the US General Accounts Office.

US procurements that take more than five years to materialise overrun initial estimates by 50 per cent; those that take 10 years cost 150 per cent more than originally budgeted.

India's procurement process sees delays of up to two decades, as in the case of the Hawk trainer aircraft, which was proposed in 1984 and bought in 2003.

Little can be done about some of the delays. Denial regimes that date back to India's nuclear test of 1974 require time-consuming permissions in some defence purchases.

India's military reputedly conducts the world's most comprehensive trials on all equipment proposed for purchase "" trials that could go on for years.

Delays also occur because of domestic political reasons, such as the one currently plaguing a multi-billion dollar contract for artillery guns.

After repeated trials over the last four years, the Bofors gun (the company is now owned by the UK's BAE Systems) has proved its superiority over its Israeli rival, Soltam. But the Congress Party, already burnt once by Bofors, shrinks from that very name. And so, linked to inflation, the price will rise each year until a contract is signed.

Discussions also focused on offsets that the defence ministry's new procurement rules now mandate. These are binding arrangements written into all defence deals worth over Rs 300 crore, which oblige the foreign vendor to invest 30 per cent of the contract value into the Indian economy.

These could be technology transfer or an agreement to manufacture in India components of the equipment being bought (for example, navigation computers for all Hawk trainer aircraft sold worldwide).

A series of foreign experts from supplier countries like the US suggested that offsets were a bad idea as the suppliers simply factored offsets into the contract cost or supplied technology that quickly became outdated.

If offsets have to be included in a contract they should be teaming or cooperative agreements that add value to the transaction and are directly related to the supplier's main business.

For example, if Boeing enters into a contract for supplying F-18 fighters to India, the offsets could include a contract with an Indian software company for jointly developing next-generation flight control computers.

Anticipated defence spending in the Eleventh Plan is likely to provide Indian industry with the opportunity to benefit from up to Rs 90,000 crore worth of business from offsets. Coordinating the implementation of offsets will be the defence ministry's recently set up Defence Offset Facilitation Agency.

India, already among the world's biggest buyers of foreign arms, is looking towards international experts for ideas and expertise. To what extent brainstorming benefits policy remains to be seen.