Indian Defence Procurement: New Guidelines, Old Problems

Discussion in 'Defence & Strategic Issues' started by AVERAGE INDIAN, Jun 28, 2013.



    Sep 22, 2012
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    Detroit MI
    The Indian Ministry of Defence (MoD) recently released its revised Defence Procurement Procedure (DPP-2013) document, outlining procedural guidelines for all stakeholders involved in defence procurement. This is the Ministry’s ninth attempt within a span of eleven years (seven revisions and two sets of addenda were introduced between 2002 and 2013) to adopt and implement new procurement mechanisms.

    Cautious optimism
    New features, explanations and additions in the DPP-2013 include areas such as: prioritised categorisation, with an emphasis on indigenous products; simplification of procedures for collaborative arrangements between Indian and foreign companies; changes in the scope of maintenance transfer of technology (ToTs); streamlining commercial cost assessments and terms on par with international practices, among others.

    The Indian Ministry of Defence (MoD) claims that these changes – along with new guidelines for offsets obligations announced a few months ago – will provide much-needed flexibility, pace and transparency in defence acquisitions and encourage indigenisation efforts. However, major stakeholders in both Indian and foreign defence companies seem to be greeting the new DPP with only cautious optimism.

    India’s recent national defence priorities – as evidenced by interconnected efforts such as the DPP, offsets, defence production policy (DPrP) and reforms in higher defence organisations – reflect the military establishment’s effort to recalibrate India’s position in world affairs. In this context, DPP-2013 must be seen as a small step towards the achievement of larger strategic aspirations.

    In addition, over the past decade, there have also been attempts at reforms in higher defence institutional mechanisms like the Defence Acquisition Council (DAC), the Defence Procurement Board (DPB), the Defence Production Board (DPrB) and the Defence R&D Board (DRDB). Such institutional mechanisms are all the more important when set against the backdrop of rapidly-growing Indian defence capital expenditure. Military spending has grown from USD 2.4 billion in 2002 to USD 17 billion in 2012. This pace is likely to continue, with anticipated year-on-year spending growth of 15 percent for at least the next ten years.

    It is, therefore, apparent that procedural arrangements like DPP must be made efficient enough to accommodate ever-larger procurement volumes. Coupled with changes made in the larger framework of the Indian defence production sector – such as introducing a new production policy emphasising on indigenous production, offsets obligations, transfer of technology and foreign direct investment – it is clear that the DPP has not only come a long way, but will likely need to continuously evolve in the coming years.

    Key Issues

    An analysis of the DPP draws attention to some key issues.

    First, from a largely autarkic system, defence procurement arrangements in India promise to become more transparent, efficient and accountable. This transition is likely to produce more confusion than clarity in the short run, as recent years have demonstrated. Further debate is likely around critical aspects of offsets obligations, institutional mechanisms for management and implementation of offsets and ToTs, as well as technical and administrative oversight mechanisms.

    However, efforts to fine tune procedures have already provided some clarity. An analysis of all DPPs from 2002 to date would show that, except areas like trials and evaluation, all other provisions – from planning, service qualitative requirements (SQRs) and Acceptance of Necessities to post-contract management – have seen varying degrees of tweaks and adjustments in the last ten years, which is a positive sign.

    Second, the introduction of new arrangements like offsets obligations is still in an early stage of evolution. Finally, a clear preferential arrangement toward encouraging indigenous and collaborative methods of procurement seems to be embedded in the DPP.

    Despite such forward progress, the DPP presents some potential problem areas for stakeholders, in particular for vendors. In particular, it is full of vaguely-worded definitions and arrangements, which invariably confuse both Indian and foreign vendors. Such confusion is especially evident in the offsets obligations, ToT, indigenisation and categorisation sections. Further, it seems unable to reduce either the number of stages of evaluation or timelines for adherence, which lead to frequent time delays.

    What lessons should foreign vendors draw from the seemingly chaotic Indian defence sector? First, the Indian defence market is likely to grow even faster in the coming years, which should provide foreign vendors additional incentive to devote resources to their operations in India. Second, complex procurement procedural arrangements are likely to necessitate a ‘muddling through’ approach in the short term, requiring both Indian and foreign vendors to be patient and remain focused on developing a long-term presence in the Indian market. Third, seemingly preferential treatment towards Indian industries may not be as discouraging for the foreign vendors as it appears on first reading.

    Given that neither Indian State-owned nor private vendors are yet in a position to meet even the minimum requirements of the country’s armed forces, there should be ample opportunities for foreign vendors, particularly those involved in high-tech defense applications. In addition, unclear definitions in offsets obligations, ToT and foreign investments will necessitate further clarifications in the coming years, similar to what is currently taking place in the retail sector. Foreign vendors need to be both watchful of, and sensitive to, such impending changes.

    The Indian defence sector does pose enormous challenges as well as opportunities for the private sector. The next few years will continue to challenge all stakeholders, as the sector struggles to ‘refine’ itself further. Vendors that have a long-term interest in the Indian defence sector are those most likely to succeed in the local market: a little patience could go a long way.

    Indian Defence Procurement: New Guidelines, Old Problems |

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