Defence panel seeks pvt firms as partners

After assuming charge last November, one of Defence Minister Manohar Parrikar's first promises was a revised and simplified defence procurement procedure (DPP), which would expeditiously provide the military badly needed equipment, while boosting indigenous defence production.

To this end, a defence ministry committee, under former home secretary Dhirendra Singh, has recommended unusually bold changes. The report will be presented this fortnight to Parrikar. Then, after consultation with other ministries and the military, the defence ministry will incorporate changes into a new DPP-2015 - the eighth version of the DPP first issued in 2002.

Business Standard has accessed a copy of the unclassified, 207-page report, entitled "Committee of Experts for Amendment in DPP-2013".

Key recommendations include: nominating select private defence firms as "strategic partners", to manage complex projects on a par with defence public sector undertakings (DPSUs) and ordnance factories (OFs); raising the required level of indigenisation each year across various procurement categories; and recognising defence procurement as "strategic", and different from routine government purchases. Unusually for such a government report, it provides detailed justification for many of its conclusions, even summaries of discussions with stakeholders.

A path-breaking recommendation is to identify select private sector firms as "strategic partners", which would play central roles in developing "complex and strategic systems" within the country, or receive technology transferred from foreign vendors in large defence contracts. Essentially, this resurrects the notion of "Raksha Udyog Ratnas" (RuRs), or "Industry Champions", which the Kelkar Committee had proposed in 2005-06 to empower large private sector companies as "system integrators". However, the United Progressive Alliance government, fearing resistance from DPSU and OF trade unions, put Kelkar's proposal on the back burner. Now this could be back in contention. The report notes: "There is a need to create a capacity for absorbing technology… in the private sector on account of their agility, innovation and modern management practices… One will therefore have to create an avenue for selection and nurturing of a strategic partner on a long term basis."

Executives from private sector companies with a large exposure to defence, like Larsen & Toubro and Tata Power, tell Business Standard they welcome this. However they sharply criticise the report's recommendation that "cartelization" be nipped in the bud by restricting each strategic partner to a single strategic system. The report also proposes to ban strategic partners from cross holdings in each other's companies, and to require government permission for any material change in their share holding structure.

"We have built up capabilities in multiple sectors over decades. Restricting us to a single strategic system is absurd, especially if there are no other companies with such competences and the alternative is export", says a senior executive from one of India's most respected private sector defence companies.

The report also proposes to raise the mandatory indigenous content in various categories of procurement, with each successive DPP raising it incrementally, as each level stabilises. In DPP-2015, the 30 per cent indigenous component currently mandated in the "Buy (Indian)" category is proposed to be raised to 40 per cent, and to 50 per cent in the DPP after that. The current 50 per cent indigenous norm in the "Buy and Make (Indian)" category is proposed to be raised to 60 per cent in DPP-2015, and 65 per cent in the next revision.

Defence firm CEOs accept the percentages need a relook. Most agree the 30 per cent indigenous norm is absurdly low for the "Buy (Indian)" category, which, as the name suggests, involves the procurement of supposedly Indian products. On the other hand, in the "Buy and Make (Indian)" category, the indigenous stipulation of 60 per cent is considered high since the product would be manufactured with transferred technology, and it would take time to absorb technology and develop local vendors to boost indigenisation levels.

"It would be far better to have a flexible norm, varying between 30-70 per cent, which is laid down by the categorisation committee based on the product and its prospects for indigenisation", suggests a DPSU official.

The report, for the first time, distinguishes between routine government procurement and the special nature of defence procurement. It notes that the General Financial Regulations (GFR), the government's financial rulebook, is intended to guide routine purchases, whereas defence acquisitions are far more complex. For example, current procurement rules ensure that a "single vendor situation" delays procurement by 36 weeks, even though 70 per cent of defence procurements are single vendor based.

The report articulates a clear strategy to promote indigenous defence industry. The first part involves favouring procurement that creates opportunities for Indian industry. DPP-2013 already favours the "Buy (Indian)", "Buy and Make (Indian)" and "Make" categories, which mandate high levels of indigenisation; over the "Buy (Global)" and "Buy and Make" categories, which allow a greater role to foreign production. Taking this further, the committee recommends that "within the Buy (Indian) and Buy and Make (Indian) the indigenous content has to increase steadily and significantly."

Next, the strategy recognises that "Make in India" is useful only if intellectual property (IP) is generated, and systems are designed in India. The report states: "'Make in India' (should) not become 'assemble in India' with no IPR or design controls and thereby perpetuating our dependence on the foreign supplier." Third, the strategy recognises the need to expand the market for vendors by "ballasting of indigenous capacity with a civil component and wherever feasible, an export component".

Finally, the report leverages offsets into indigenisation strategy, recommending that, once Indian defence vendors start functioning more actively, "directed offsets" should be used to obtain critical technologies from foreign vendors.

MINISTRY PROPOSALS: WHAT THE INDUSTRY SAYS

• Pvt firms to be "strategic partners", operate as "prime integrators" in complex projects
• Recognition of "strategic nature" of defence procurement vis-à-vis general govt purchases
• Raise mandatory indigenisation levels every year
• "Make in India" must generate intellectual property and not become "Assemble in India"
• Leverage Indian defence orders with private sector and export orders
• Payment of up to 85 per cent of project cost to pvt firms, based on "project milestones", as done with DPSUs
• Separate "Make" procedure for MSMEs with Rs 500 crore for disbursement

• Restric private firms to one strategic project each. No crossholdings, govt nod needed to change share structure
• No incentives for higher indigenisation levels other than minimum stipulated
• Tighter definition for "Indian company" to prevent fronting for foreign vendors
• No proposal for indexation of prices, for procurement delays by MoD
• No proposal to accept industry demand for interest on delayed MoD payments
• No stipulation that DPSUs must pay sub-vendors up to 85 per cent, as they are paid by MoD