New Defence Procurement Policy To Be Effective From Nov 1

RPK

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New Defence Procurement Policy To Be Effective From Nov 1

New Defence Procurement Policy To Be Effective From Nov 1


The new defence procurement policy will be rolled out by the government on Nov 1. According to the Union Defence Minister A.K. Antony , the DPP will help in promoting Indian defence industry and will make the acquisitions more transparent.

This will also enable to create more opportunities for entering into joint ventures with foreign original equipment manufacturers.

"The current review in the procurement policy aims at promoting and facilitating Indian industry and transparency and integrity in defence acquisitions," Antony said at a seminar on defence acquisition in New Delhi.

"We have reviewed it and are ready to promulgate DPP-2009 with effect from Nov 1," he added.

Under DPP-2008, the tender papers were issued only to foreign vendors, who are required to transfer technology to an Indian defence industry, called Production Agency, under 'Buy and Make' category.

"In order to obviate the above shortcoming, a new category -- Buy and Make (Indian) -- is being introduced, which allows issue of Request for Proposals (RFP) to Indian industries having requisite financial and technical capabilities to absorb technology and undertake indigenous manufacture through transfer of technology and not through research and development," Antony said.
 

ppgj

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IDSA COMMENT

Defence Acquisitions: The Question of Systemic Inefficienices and Effectiveness

Harinder Singh

December 3, 2009

Defence acquisitions in the international context carry enormous political and financial ramifications. The following data reveal the enormity of the ‘acquisition’ problem and hence the need to frame durable and highly tolerant procurement procedures, processes and mechanisms. With an annual budgetary allocation of US $660 billion, which is equivalent of the next 45 highest spending nations in the world, the United States leads in military expenditure, followed by China at $145 billion and Russia spending $85 billion for its defence needs.1 The United Kingdom is placed fourth with an estimated expenditure of $66 billion. More significantly and in terms of defence expenditure as a share of GDP, the United States spent 4.6 per cent, China 3.9 per cent, Russia 5.4 per cent, France 2.4 per cent, Australia 1.5 per cent, Japan 1.0 per cent, Germany 1.3 per cent, Canada 1.1 per cent and United Kingdom 2.3 per cent on acquisitions cum operating costs in 2007. To highlight the percentage share of acquisitions vis-à-vis operating costs (O&M), capital expenditure stood at 26 per cent in case of the United States, 23 per cent for United Kingdom, 21 per cent for France, 17 per cent for Japan, 15 per cent for Germany, 15 per cent for Canada and 18 per cent for Australia for the same period. In terms of number of acquisition proposals in 2007, the United States handled some 95 projects, United Kingdom 39 projects and Australia 16 projects, taking into account only those costing 200 million pounds and above.2 The average cost of acquisitions ranged from 9.5, 1.0 and 0.5 billion dollars respectively for each of these countries for the same period.3 In terms of time and cost overruns, the data is even more revealing. The cost overshoots stood at 8 per cent in case of United Kingdom as compared to 25 per cent for United States. But then United States delivered the planned projects with an average delay of 25 per cent as compared to 32 per cent in case of United Kingdom.

The foregoing raises some important issues. First is the issue of systemic inefficiencies of the acquisition process in terms of time and cost overruns. And two, how these time and cost overshoots affect the operational readiness of the armed forces. The inadequacies highlighted above surely demand serious introspection. Perhaps a similar concern was reflected in recent remarks of the Indian Vice Chief of the Air Staff, which in all its virtuousness questioned the efficacy of the existing acquisition framework, and in turn, the preparedness of the air force. To draw a simple analogy from what the Air Marshal said, the timely construction of infrastructure for Commonwealth Games 2010 at whatever the cost is essential for successful conduct of the event. Not that the proposed infrastructure shall have no use after the event, but its importance clearly lies in timely fructification. Similarly, the fielding of desired military capabilities cannot be made hostage to time overruns and apprehensions about high cost.

A recent seminar on Defence Acquisitions at the Institute for Defence Studies and Analyses, New Delhi, raised several such questions. The seminar focused on complexities of QR formulation and capability definition, impediments to unbiased technical and commercial evaluation, unnecessary publicity surrounding contractual negotiations and inadequacies in project monitoring and implementation. As it often happens, the debate veered onto two divergent and convoluted paths. While the military component comprising the three services, and rightfully so, continued to lament upon huge acquisition delays and equipment deficiencies, the acquisition bureaucracies missed no opportunity in reiterating the impact of `procedure-isation` of procurement processes and several attempts made at `price discoveries` in recent years. There thus seemed to be a clear lack of convergence in arguments put forth by the various stakeholders. The ensuing debate however missed the big picture i.e., the effectiveness of the existing procurement framework and its negative impact on preparedness of the Indian armed forces.

In our continued fixation with first generation reforms (i.e., procedure-isation), the question of ‘effectiveness’ seldom comes up for serious discussion. Can the current acquisition framework deliver desired military capabilities is a question that needs to be asked? To be more precise, the effectiveness of procurement framework needs to be judged from the viewpoint of ‘operational’ and ‘structural’ readiness of the armed forces. Richard K. Betts, the much acclaimed guru on military readiness, emphasizes the importance of an effective and deliverable framework for maintaining battle worthiness of the military force. As Senator Solomon Ortiz, the chairman of the United States House Armed Services Committee’s (HASC) Readiness Subcommittee said, “for militaries to fight effectively – today and in the future – you need to have right people in the right roles with the right equipment and the right training. And how ready we were yesterday determines how well we fight today? And how ready are we today determines how well we fight tomorrow?” The deduction here is plain and simple – an ineffectual procurement mechanism surely impinges upon the operational effectiveness of the armed forces.

But then the interesting part is that India is not the only country caught up in this debate. There are many other modern militaries battling with the complexities of defence procurement. A debate rages in the United States as well. Earlier this year, the House Armed Services Committee responsible for congressional oversight on military matters constituted a panel for review of the defence acquisition processes in the United States.4 The HASC panel is tasked to examine the ‘effectiveness’ of the current acquisition framework in the United States. And the line of inquiry is quite simple and straightforward – How can the existing acquisition framework be reformed to satisfy the twin objectives of providing “best military wherewithal” and “when it is most needed” to the United States Armed Forces while ensuring “best value” for each dollar spent from taxpayers’ money? The operative words here being ‘timeliness of procurement’ and ‘best value for money spent’ and not ‘procedure-isation’ or ‘price discoveries’ as is the case in the Indian context. The recently released Bernard Gray report on defence acquisition reforms in the United Kingdom also focuses on the effectiveness of the existing procurement framework. The report is indeed an exemplar on acquisition related reform. There could be several lessons from the American and British experience in the Indian context.

The HASC panel review is focused on the following key questions:

* Is there a proven methodology available to measure the effectiveness of the defence acquisition system? If not, how could one be created or modelled?
* Is the current system effective enough in meeting the twin objectives of ‘timeliness’ of procurement and ‘good value’ for the money spent? What could be the root causes for systemic inefficiencies? The causatives could be found at these levels:
o How much do the important processes of qualitative requirement (QR) formulation, project validation and budgetary support affect acquisition outcomes? And which one or more of these acts as an impediment to sound decision making?
o Are there enough trained civilian and military managers to process procurement related decisions? Do they have sufficient knowledge, expertise and authority to take procurement decisions? If not, then what could be the other options to process sound procurement decisions?
o Does the defence acquisition system generate sufficient domain knowledge, data and analytics to enable good decision making? Are procurement related decisions ever hampered by lack of technical information, empirical data or well documented procurement precedence/s etc? If so, then what options exist to build requisite domain knowledge?
o Does the defence acquisition system schedule major decision points in a collegiate fashion and bring up issues duly prioritized for review at right times? Is adequate information available to enable informed decision making? If not, then what correctives are required?
o How responsive is the framework in responding to urgency of the military’s needs? Can the system be tailored to match the duration of ‘capability development’ with ‘threat cycle/s’? And are the current procurement processes responsive enough to cope with sharp changes in technology? If not, then what measures need to be taken?
* What are the social and cultural biases that often creep into the acquisition system? How could these lead to bad acquisition outcomes? And how could these then be corrected?
* What measures are being taken worldwide to reform acquisition procedures, processes and mechanisms? How efficient are the acquisition processes in the United Kingdom, France and Australia? What lessons do we need to learn from them?
* What structural changes would be necessary to ensure that the defence acquisition system satisfies the twin objectives of timely acquisitions and good value for taxpayers’ money?

The foregoing framework could be relevant in the Indian context as well. With as many as a few dozen proposals in the pipeline and no major procurements in the offing, the procurement diagnostics clearly needs to shift from ‘procedure-isation’ to ‘effectiveness’. Firstly, there is the important aspect of realistic definition of required military capabilities. And then is the issue of achievable and affordable qualitative requirements; a ‘knowledge cum experience’ driven expertise is difficult to come by in defence bureaucracies. We need to build expertise to enable framing of realistic qualitative requirements, and till such time these proficiencies are actually built technical consultancies could be hired. Institutional advice from accredited trade bodies such as the CII, FICCI, ASSOCHAM and others is yet another avenue. The bottom line here being that identification of cutting edge military technologies, concepts and capability formulation and benchmarking of qualitative requirements becomes an extensive, cross pollinated and inter-disciplinary action in the long term. Another related aspect is that the current procurement procedures and processes are too sequential and therefore highly time consuming. There is a need to break from ‘serial’ and ‘iterative’ procurement processes towards concurrent, smart and timely acquisition actions. The Bernard Gray report offers several suggestions on this score.

Now how does one break out from this ineffective frame? The answer clearly lies in generating new ‘procurement logic and structures’ rather than continuing to reinforce or recalibrate existing procedures, processes and mechanisms. That being a large frame of examination, the emphasis here is only on two issues. One is the question of how do military managers connect with the commercial world to scout and seek out new military technologies and trends. And two, the negative impact of ‘procedure-isation’ of procurement processes on the readiness of the armed forces.

The Indian armed forces today need an institutionalized window to scout and seek military technologies and trends besides enhancing its bureaucratic capacities for defence acquisition. This can perhaps be achieved by constitution of an Armed Forces Strategic Partnership Board. The board, with appropriate representation from the business world, can contextualize the nature of interaction between the customer i.e., the armed forces and countrywide providers of military technology and support services. The key argument here is that the current acquisition system being procedure-oriented does not enable holistic follow up of military technologies and trends on a consistent and professional basis. The research and development establishments have consistently failed to provide need to yield ‘interactive’ space to the armed forces in meeting their legitimate technological needs.

The foregoing suggestion by no means attempts to dilute the relevance of the existing framework for research, development, production and procurement. In fact, the proposed partnership could contribute to the existing framework through ‘value addition’ and offering ‘alternative views’ from the military users. All that is being said here is that ‘window shopping’ as a process has to be different from the process of actual ‘shopping’ for military capabilities. The former could be undertaken by the partnership board, while the latter continues to rest with the acquisition council. To begin with, HQ IDS, with appropriate and due representation from the three services, could be designated as the ‘window shopper’ to follow up technology trends of common interest worldwide.

The partnership board could also become the gateway for scouting and identifying military technologies, feasibilities for development and production, soliciting business advice and technical consultancies and a host of other acquisition related functions. The board in due course could also become the repository of domain information on all acquisition related matters. This mechanism could eventually open up avenues for outsourcing military services for a wide range of non-core and core activities.

There is another major cause of concern i.e., the procedure-isation of the procurement process. If the ‘procedure-isation’ drive is contributing to timely fielding of capabilities then it is fine. But if not, and the process is only aimed at litigation- and hassle-free military acquisitions, then all is not well. Since litigations are often the cause for time and cost overruns, it is time that bureaucracies learnt how to circumvent them. The concerned bureaucracies need to specialize and set aside their ‘generalist’ approach to effecting procurement decisions. Lack of technical expertise coupled with fuzzy understanding of the operational environment complicates procurement related decision making at the apex level. One sure way of correcting the problem is to extensively ‘cross-pollinate’ the departments concerned. This could enable collegiate working and resolve some aspects of the decision making process. The present system may be collegiate in some sense but not truly cross-pollinated. But then to create such an environment there is a need for more than a normal correction in existing civil-military relations.

There is a need to appreciate that an effective acquisition mechanism can only result from a balanced ‘customer-enabler-supplier’ relationship. Amongst other initiatives, it surely calls for changing tack at two levels. One, is the need to create an institutional framework in the form of the Armed Forces Strategic Partnership Board to window-shop futuristic technologies and trends. And two, enable a shift from ‘procedure-isation’ to a more deliverable and effective framework. Herein, the procurement procedures, processes and mechanisms may not be wholly government-owned. Few may have to be ‘out-shored’ or ‘outsourced’ to meet the twin objectives of ‘timely’ delivery of military wherewithal and ensuring ‘value’ for the money spent. Most importantly, the effectiveness of procurement processes need to be viewed in context of the ‘operational’ and ‘structural’ readiness of the armed forces. If the existing acquisition framework proves to be a weak wicket that is unable to deliver required levels of military preparedness, the pitch may have to be re-laid for its ‘effectiveness’ and ‘deliverability’.

--------------------------------------------------------------------------------------------------------

1. 1. The data quoted in this paragraph are from the Bernard Gray report on the review of the defence acquisition process undertaken in October 2009. The figures are for the year 2007. Ministry of Defence | Error | Page not found (Error 404)
2. 2. Only projects costing over 200 million pounds have been taken into account. The number of ongoing projects is however much larger.
3. 3. Only for projects for which data is publicly available: United States 96 projects, Australia 30 projects and Japan 37 projects.
4. 4. The House Armed Services Committee (HASC) oversight plan is filed pursuant to Clause 2 (d) of Rule X of the Rules of the United States House of Representatives which requires that, not later than February 15 of the first session of a Congress, each standing committee of the House shall adopt its oversight plan. http://armedservices.house.gov/pdfs/DARP031809/OrganizationalPlan031809.pdf.
Defence Acquisitions: The Question of Systemic Inefficienices and Effectiveness | Institute for Defence Studies and Analyses
 

nitesh

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Ministry may dilute defence offset policy today

* Permitting technology transfer as an offset. This will only apply to high technology that a vendor provides with full Intellectual Property Rights (IPR), and without restrictions. The DRDO will evaluate technology that is offered as an offset, assessing whether it fits into an overall indigenisation plan. For example, if a vendor offers technology for a missile seeker head, the DRDO will assess how badly that is needed; the feasibility of developing the technology within India quickly; and the cost at which it is offered.

* A system of "multipliers" will be introduced, which would give vendors enhanced credits for investing in priority fields. For example, if the MoD urgently requires metallurgical technology for building jet engines, a multiplier of, say, three could be placed on that technology. That would give a vendor who provides technology worth Rs 200 crore an offset credit of Rs 600 crore.

* Likely to be approved: a multiplier of 1.5 for purchase/manufacture directly related to the contract that generates the offset obligation. Also likely is a multiplier of 1.5 for investment in small and medium enterprises (SMEs). The highest multiplier of 3 is likely for the provision of high technology.

* DOFA, the lightweight section under the Department of Defence Production (DDP), could be beefed up with additional manpower and resources into a "single window agency" that can provide vendors with all reviews and approvals. Alternatively, DOFA could take the form of an entirely new agency, called "Directorate of Defence Offset Management" or "Defence Offset Management Wing."

* Vendors could be permitted to discharge offsets through commercial shipbuilding. This non-defence field will be in addition to civil aviation and homeland security, which were permitted as offsets in DPP-2011

* The requirement of offsets may be substantially increased above 30 per cent, since vendors would benefit from measures like multipliers (a multiplier of 3 effectively brings down a 30 per cent liability to just 10 per cent). It will also be compulsory for vendors to discharge at least 40 per cent of their offset requirement through defence production (i.e. direct offsets) and no more than 60 per cent through the non-defence categories of civil aviation, homeland security and shipbuilding.

* The eligibility period for "offset banking", which allows vendors to accumulate offset credits towards a future contract, could be increased to 7-10 years.

DPP-2006 permitted only direct offsets, i.e. offsets in products that required a defence licence. This was diluted in DPP-2008, which allowed offsets in non-licensed defence fields. Vendors began discharging offsets through low-tech, quasi-military products like field shelters and air-conditioning. DPP-2011 diluted the requirements further, permitting vendors to discharge offsets in the non-defence fields of civil aviation and homeland security. The latest policy will represent the third wave of offset dilution.
 

Mad Indian

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Atleast with the offset there was a semblance of chance, without this we can kiss local manufactuirers goodbye. Guess govt wants all arms to be imported.
Only that will give them more money behind the back ... they have no incentive to help our indigenous economy......
 

Mad Indian

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^^^^

Couldn't get you mate ....
they can make serious cash by importing it from foreigners, unlike the arms purchase from indigenous producers... so why should they even indigenize the industry... they have no incentive for that....
 

SPIEZ

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Country flag
they can make serious cash by importing it from foreigners, unlike the arms purchase from indigenous producers... so why should they even indigenize the industry... they have no incentive for that....
That's why there is this new defense offset policy. Give Technology rights, which ever country or organisation would do that. It's an EPIC FAIL.
 

nitesh

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Expectations: Defence Sector

FICCI has highlighted the following proposals for the Defence Sector in its pre-budget memorandum.

Deemed Export Status for Defence Projects: At present Deemed Export Status is available to various projects with an intention to encourage Indian Industry manufacture the required equipment and to compete with Foreign Supplier in terms of cost and get credit for the taxes and duties paid over the entire value chain. It also saves valuable foreign exchange of the country and supports the growth of Indian Industry. The Defence Projects ordered under "Buy Global category" are decided on L1 basis after removal of terminal taxes and duties (T&D on inputs as part of cost structure) payable by the Indian vendor (system integrator) and comparing their bids with foreigner's bids on CIF basis net of all taxes and duties. The foreign company thus benefits on account of input taxes and duties in home country as no country exports taxes, savings on local transportation and transit insurance in India, receipt of LC payment on Bill of Lading against a minimum of 4 to 6 months of delay faced by Indian companies on account of receipt inspection and Make Good of shortages and pilferages during transit and finally accounting system delays. The Indian companies defence projects currently being not treated as Deemed Export Projects are deprived off from the benefits available to the later projects.

Benefits of Deemed Export project should be extended to all the Defense projects which are awarded through International Competitive Bidding under "Buy Global" category. This will enable Indian Industries to be competitive as the taxes paid in the input value chain can be VATed. It is necessary to create a room for the nascent Indian Defence manufacturers to be able to pay ToT expenses to their foreign partners and yet be cost competitive. Similar benefit should be extended to Indian offset partners as well as to its sub-contractor.


Defence Procurement & Offsets: In the Defence Procurement Policy (DPP) following changes are required to ensure level playing field between Domestic Private Suppliers and foreign suppliers/Defence Public Sector Units (DPSUs):


"¢ As per the DPP, for all Buy Indian, Buy and Make (Indian) and Make procurement, Foreign Exchange Rate Variation (FERV) is allowed to DPSUs for all nominated orders and the same is denied to all Indian companies including DPSUs when they compete with Private industry. Since most of the order book of DPSUs continue to be nominated, their risk profile on account of FERV exposure is minimal at portfolio level. Therefore FERV facility should be available to Domestic Private Suppliers also.

"¢ Payment terms for DPSUs are as agreed in the MOU between Ministry of Defence (MOD) and DPSUs, whereas other domestic suppliers do not enjoy the same terms. This discrimination needs to be corrected.

"¢ Domestic Private Suppliers have to continue to load local taxes and duties like Excise/CST/Octroi through the value chain which is a handicap against foreign suppliers. DPSUs on the other hand are benefiting through use of delegated powers to get these exemptions for their direct and tierised vendors (input material to DPSU). The benefits available to DPSUs for sourcing duty-free inputs and job work under various notifications should be extended to other major suppliers / system integrators.

"¢ Offsets Taxation: DPP 2008 stipulates offsets from Foreign vendors on contracts larger than 300 Cr. Offsets are a minimum 30% of the contract value. Current Taxes and duties treatment of offsets is limiting offsets as "parts and subsystems" sold by Indian industry through Physical exports (being part of Global supply chain) and thus misses out on systems and system of systems integration within the country.

Moreover, offsets at component and subsystem level that are exported as part of global supply chain of foreign OEM do not suffer taxation except CST that can not be VAT'ed. Such a treatment of offsets benefits only SMEs who are manufacturers at component and subsystem level.


The other aspect of offsets could be to build systems (system integration) in India for a foreign OEM by system houses (Defence licensees). This brings in the Domain expertise and need to be facilitated rather than dissuaded by the current taxation treatment of offsets that are "delivered" in India. Following may be looked at to make the offset policy more efficacious for the country by treating indigenous value addition on par with imports since the same as defence imports would have been treated tax free anyway:

i) Offsets could also be supply of indigenous systems supplied as part of system of systems being sold by the foreign OEM, and may directly be supplied to Indian Services (not getting physically exported).

ii) It is also possible that Offsets could be delivered by the foreign OEM in the form of system integration especially where large systems need to be fully integrated and tested in India by the Indian offset partner. This involves passing on the system level know-how that is vital for building industry capability in doing so in India.

"¢ In either of these cases there is no exemption of taxes and duties, on inputs or output (at sale point), when Offset sales are delivered in India. T&D implications at the hand of Indian Offset Partner add up to >30% of price accounting for the T&D on inputs as well as at point of sale. This makes offsets more expensive compared to the supplies by foreign OEM and moreover dissuades them doing domain level value addition in India. It also effectively reduces offsets from 30% to 21-22% if delivered in India.

"¢ To avoid this and facilitate indigenous capability building System Offset sales delivered in India should be treated on par with Physical Exports for the purpose of Excise duty and Sales Tax / VAT on output with use of corporate bonds and not involving physical payment of T&D upfront and get it reimbursed later. Credit of Excise duty and Sales tax, octroi, local levies should also be allowed on inputs required to deliver offset sales.

Alternately all Defence imports need to be "notionally loaded" with customs duty and countervailing duty and procurement from domestic vendors be freed of all duty exemption regimes to remove subjectivity to facilitate higher value addition in India with a partner (defence licensee) of choice of the foreign OEM.


Set up Rs 100 crores technology fund for SMEs in defence production.


Exemption from Central Excise Duty on job work inputs for supplies to defence: Presently specified Defence undertakings like HAL, BEL, BDL, BEML etc procure Job Work Inputs without payment of duty for use in the manufacture of items for supplies to Defence, in terms of Notification No. 70/92 – C.E. dated 17-06-1992 as amended. This affords them a cost advantage by savings of Central Excise duty on their inputs as compared to private sector companies licensed to manufacture Defence equipment. It is suggested that the private sector licensed manufacturers of Defence equipment be afforded a level playing field by amending further the Notification No.70/92 – C.E. dated 17-06-1992. The amendment should provide for procurement of the Job Work inputs by the private sector defence licensed manufacturers against 'Ministry of Defence Orders' without payment of Central Excise duty on the same lines of the procurement of the Job Work inputs by the specified Defence Undertakings.
 

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