'We can consider 50% foreign share if technology demands it'

Q&A - KP Singh, Secretary for defence production

KP Singh, Secretary for Defence Production, will retire from service on 31st December 2007. His three years in the Ministry of Defence (MoD) have seen major policy changes, flowing from the decision in 2001 to allow the private sector into defence production, subject to licensing and an FDI cap of 26%. There is speculation that Mr KP Singh might go on to head a new regulatory body that is being set up to manage offsets for the MoD. Mr KP Singh spoke exclusively to Business Standard about impending changes in the new offsets policy.

Mr KP Singh, how do you look back on your tenure as Secretary, Defence Production?

The Department of Defence Production, and the companies and organisations that work under its supervision, have done a wonderful job in meeting some of the crying needs of the defence forces. There have been lacunae, there are gaps, and there are areas in which we have not been able to achieve what we should have. But the reasons for that do not lie entirely within this department. Take, for example, providing the army with the155 mm (medium artillery) gun. By now we should have been up and running in meeting the requirements of the Indian armed forces. But unfortunately, because of certain problems with the foreign company which was to have given us the technology (South African company, Denel, which was banned after an investigation was launched in South Africa for corruption in an arms contract to another country), that process of buying 155 mm guns has been stalled. So unfortunately we lost that opportunity and that gap still continues to be felt.

The post-2001 liberalisation in defence production has been likened to the 1991 opening up of the Indian economy. What do you see as the major landmarks of your tenure?

Defence Production must ensure that at least 30-40% of the military's equipment remains at the cutting edge. To do this, we first changed the licensing policy in 2001. The next major reform came when the MoD amended the defence acquisition procedure and laid down a "Make" procedure for defence equipment (in Defence Procurement Procedure - 2006, or DPP-2006). This allows us to select a company, or a consortium of companies, and give them a (defence) programme to develop. This requires an enormous budget, which the private sector could not afford, since there is never a certainty that the military would buy the end product. But now, 80% of the R&D funding for that project can be financed from the defence budget.

But for that, the private companies have to be notified as Raksha Utpadan Ratnas (RuRs), and that announcement has been held up in the MoD.

The policy doesn't say these companies have to be RuRs. But in countries like India, you cannot do these things by pick-and-choose. There has to be a procedure by which you select a band of deep-pocketed companies, whose track records show they are good in R&D, who have the technical manpower for R&D. And that is why a group of RuRs are being selected, which can be entrusted with these vital R&D projects.

But the nomination of RuRs has been stalled. It is believed that Left-backed trade unions of Defence Public Sector Undertakings (DPSUs) have held back the Defence Minister, because they fear competition from the private sector.

In a democratic society, where you have a parliamentary system, ministers always have such compulsions... let me tell you, there is total unanimity in the MoD that these are good decisions, they are good steps and we ought to take them.

When will the RuRs be announced?

Sooner or later they will be... because they are good for the country in the long run. Unions will be made to realize that by suffocating a department, you cannot progress. You have to open it up so that energies of the Indian private sector are also made to play an active role in meeting the requirements of the Indian defence forces. There is space for (the DPSUs, the Ordnance Factories as well as the private sector).

One of the basic conundrums of Indian defence equipment planning is that we are constantly trying to put in place a set of procedures that remove all subjectivity, and make decision-making completely objective. But a lot of defence decisions are inherently subjective; they can never be entirely objective. And since MoD officials are reluctant to make hard subjective judgements, decision-making slows down. (Former Defence Minister) George Fernandes has spoken about bureaucrats' fear of the "Three Cs" (the CVC, the CAG and the CBI).

Subjectivity cannot be scoffed at, or wished away. But subjectivity is of many types. There can be 100% subjectivity, there can be 20% subjectivity, and there can be 5% subjectivity. Any decision that anyone makes - even something as simple as which medicine to take, which antibiotic to take, what quantity to take - is also subjective. So subjectivity will always be there.

But this insistence on procedures that are completely objective, and in accordance with a rulebook, has resulted in decision-making paralysis in the MoD, hasn't it?

Let me tell you, there is no decision-making paralysis. There are genuine fears that if there is a wrong thing done - supposing some company has been caught doing some underhand dealings that are not as per our procedures - obviously there is a big question mark over dealing with that company. But our big quandary is: at what stage should you take the decision not to deal with that company. In some cases, e.g. the recent decision to order re-tendering for the army's light helicopters, there is no problem. Since the order had not been placed, we could simply order re-tendering. But there are cases when you have gone ahead and placed the order, and then you come to know - either through your channels, or through some investigative agencies - that something really objectionable has happened. In that case, the decision to cancel the order sometimes has an impact on the Department of Defence Production, because often technology has to be taken from the vendor in order for production to start. So the whole process gets stalled. These are some of the hiccups, but in a sensitive area like defence, there are no shortcuts to success and we cannot say we need an environment in which whatever we say is right.

There are other democracies. The UK, France, all these countries make the hard decisions of defence.

In those countries also, they sometimes reach a stage where they are bogged down with something or the other. There are concerns.

It has been mooted that we need a completely autonomous Department of Defence Procurement.

No, I don't agree. You don't need an environment that absolves you from all responsibility. It never works. I personally think our systems are very good, decision-makers are decisive, and whatever best is to be done for the defence forces, the minister and secretary and the service chiefs also, they take the right decisions.

The other important policy area that suffers from gridlock is offsets policy. Many prospective vendors, particularly those who will bid in March 2008 for the Medium Multi-role Combat Aircraft (MMRCA) contract, are waiting for changes which, they have been told, are coming soon.

Offsets policy is already in place... and there is no reason why MMRCA vendors have to fear that indecision on the offsets front will bog them down. What they are looking for are policy changes. We have to see whether the policy changes demanded by them are good for us. Those policy changes may be good for Chile, or for Poland, but not good for India. (On the other hand), some of those changes are worth implementing. So we are in the process of making decisions for bringing about changes to the offsets policy, which we think are in the long run good for running this offsets business. These decisions are in the final stages of being taken, and when they are taken, there will be amendments to the offsets procedures.

But there is a March 2008 deadline, when the MMRCA bids must be submitted. For example, if you allow Transfer of Technology (ToT) to be counted as offsets, that will make a substantive difference to the way vendors' bids are structured and submitted. So the vendors' requests for early decisions are not unreasonable.

These are unfounded fears, in my opinion. When we ask for bids, we clearly spell out in the Request for Proposals (RFPs) what is required from the bidder. Sometimes we may ask for a product in "fly-away" condition, i.e. totally built. In such cases, no ToT is required, or sought. In other cases, we may want to build the aircraft, and we want maintenance ToT or production ToT. In that case, our RFP asks for specific technologies, and the vendors put a price on it. Nobody gives technology gratis... it comes with a price. Either you give them barter in offsets, or you pay hard cash for that technology.

Are you saying that the changes in the offsets policy, as and when they are announced, will not be of a nature that will affect the bids and offsets proposals of the bidders.

The type of policy we have made, towards which I am a great contributor, has brought great dividends. The first big thing we have done in the offset policy is that the foreign vendor is not being guided by any authority to select an offsets partner. We've given freedom to the offsets bidder to select his partner. In the field of aeronautics, we have made an exception. In the MMRCA programme, we have said that technology will be given to HAL. That is primarily because there is no other aeronautical capable company in the country today who can produce a fighter jet. There is only HAL. That is why an exception has been made in this case. In other cases (such as the offsets for the Medium Range Radar), you've seen Israeli company (ELTA) select L&T and Astra Microwave as its offsets partner. It is entirely the due diligence of the foreign vendors that has brought them to this choice. It's a great choice: from the whole firmament of Indian public and private industry they can choose their own partners, who can give them (products) at the right price and the right delivery schedules.

Have we considered the laws and regulations on the foreign vendors' side? For example, there are foreign laws and regulations that do not allow the transfer of high technology to a company in which the foreign company holds only 26%, which is the maximum that they are allowed.

Defence is an area in which it is inappropriate to increase foreign holding beyond 26% for various reasons. But, in some exceptions, like for the JV with Russia to manufacture the Multi-Role Transport Aircraft (MRTA), we have gone to the cabinet and obtained dispensations. HAL and French company Snecma were allowed to form a 50-50 partnership for manufacture of aircraft engines. Brahmos missiles are manufactured by a 50-50 Indo-Russian partnership. Similarly, if high technology is offered to India, and if 26% (foreign equity restriction) is an impediment, we can consider increasing the foreign share to 50%, depending upon the importance of that technology. We are willing to take the extra effort of going to our highest policy-making bodies and getting the approval for that.

Currently, offsets are handled by the Defence Offsets Facilitation Agency (DOFA), which is neither equipped, nor staffed, to undertake such a huge job. In just the MMRCA contract, they will be required to evalute $30 billion worth of offsets proposals - six vendors, each submitting $5 billion worth of offsets proposals. How can DOFA, in its current form, handle all of this?

We are already in the process of understanding the ramifications of this whole responsibility. And we are very much in the process of creating a body, which will have the wherewithal to cope with the workload that offsets are going to throw up. A committee has been set up to understand the problems and to sort them out. There is unanimity in the MoD that neither DOFA, nor the Director General (Acquisitions) can handle such a large volume of independent work. So an exercise is going on to identify a suitable structure for this.

What timeframe are you looking at for announcing the new body?

Very shortly. 15-20 days... one month, maximum.

Are you going to require legislation to be passed in parliament for this?

Maybe. But it may not be required.

Will private industry, or foreign vendors, have a place in this body?

This is a purely MoD housekeeping function, keeping track of those (offsets) investments. The projects that are set up will have to produce and export for five or ten years. We have to keep track of how much they have exported, how much they have banked, how much they are carrying forward. This will become a major housekeeping function. And then there will be grey areas sometimes. Policy will need to be interpreted. In addition, there will be certain cases that fall outside existing policy... so decisions may have to be taken about how to deal with such cases. This organisation will play a very important role in advising the government what is in the best interests of the country. But foreign vendors and private companies - they have no role to play in this body.

Another key amendment to the offsets policy, which vendors are waiting for, is the announcement to allow offsets banking. When is the MoD going to announce it?

It will happen. Some of the vendors' suggestions (on offsets policy changes) are worth following, we realise that. There is unanimity in the MoD that we should allow ToT and offsets banking, and we will. These things take time to implement, and there is a desire not to announce changes piecemeal, but to announce them all together. A holistic decision will be taken very soon.

There is a suggestion that grassroots defence industry must be built up by stipulating a percentage of offsets that must go into defence R&D or small and medium enterprises.

No, we have no such stipulation in our offsets policy. Social justice, or the development of industry is not the role of this ministry. We are willing to build up any industry that can play a meaningful role in defence.

Evaluating the technology that we are offered under ToT... that's a problem that the MoD is grappling with.

Evaluating technology is a very important aspect. And you have to select your best people who are capable of assessing technology. The DPP-2006 has laid down that in all such matters, a committee under DRDO will make a recommendation as to what shall be the treatment given to a particular technology item.

Is there a proposal to formalise that in the shape of a Defence Technology Procurement Board?

It is already formalised. The RM has approved this procedure.

What about in a more pre-emptive way, by laying down that these are the technologies that we should be looking for through offsets, when we procure some equipment.

I already mentioned that each RFP, which is the starting point for procuring an item, clearly spells out which are the technologies that India is interested in buying.

Other than the technologies that are related to a contract, there are other critical technologies that India might need, e.g. materials technology, fundamental science, etc. India might want to obtain those through the opportunities that offsets provide.

You cannot ask the vendor to give you what he does not have himself. The vendor who is supplying you, say the MMRCA, does not develop the materials technology. He buys it from some third party. You cannot place on him the obligation to give you that. What we require, we have to search it out ourselves. Nor are such technologies freely available; most countries restrict them. There is a continuous effort to get those technologies. If we are not getting it, there are obviously other factors.

So something like a High Level Technology Steering Committee... you don't envisage something like that.

There is a very high level committee like that under the DRDO. It will become a standing committee when cases like this will come. The committee is there.

There is also a suggestion that the MoD could have an Offsets Fund, which could subsidise high risk R&D and SMEs. Vendors would be permitted to contribute to this fund as a means of discharging a laid down percentage of their offsets obligations.

We have no desire for such an option. We have a separate budget for our own R&D. This must be an idea in the minds of vendors. These are all short-term concepts for discharging offsets obligations. Offsets obligations cannot be discharged through contributions to funds; they will have to be discharged the hard way, through direct investments into defence production.

Finally, the rumour is that, after you retire, your expertise as one of the architects of the offsets policy will be utilised by appointing you to head the new expanded DOFA.

I am very satisfied with what I've achieved in Defence Production. I am not seeking anything more.

Are you saying that you will not head the new offsets organisation? Do you rule it out?

I'm only saying that I have done my job to the best of my abilities.