Buy one, get one free

Written by Sandeep Verma | Updated: May 29 2014, 09:53am hrs
Over the last decade, India emerged as the worlds leading importer of arms and ammunition, while China moved from being a net defence importer to being an exporter and developer of advanced defence platforms during the same period. Indigenisation, or the lack of it, can impact national defence preparedness in multiple ways: a country exceedingly reliant on foreign imports in defence is no longer able to control the duration, intensity or the cost of its wars, making it extremely vulnerable to arm-twisting and third-party mediation in advancing its own economic and trade interests.

Global experience suggests that enhanced indigenisation and a robust defence industrial base can also lead to better value-for-money in most cases: foreign contracts negotiated or arbitrated out of domestic oversight are more prone to integrity abuses. In this context, it may be useful to examine some features of Indias Defence Procurement Procedure (DPP) for streamlining of the capital acquisition process for defence procurement: the DPP may be the only procurement regulation in the world that discriminates against its own domestic bidders, as demonstrated by a quick comparison of differential domestic content obligations imposed on foreign and Indian vendors participating in Buy (Global) contracts under the DPP.

To begin with, the DPP does not contain provisions enabling transparency in defence procurement that are comparable to major international frameworks. More specifically, the DPP lacks provisions for, inter alia: (1) publishing redacted versions of RFPs after suitable editing for removal of national security-sensitive technical information; (2) publishing a monthly list of RFIs and RFPs issued alongwith categorisation of acquisition cases as Buy (Indian), Buy & Make (Indian, or with ToT) or Buy (Global); (3) publishing details of deviations from standard RFP clauses permitted by the Defence Procurement Board or the Defence Acquisition Council (DAC) either before the issue of an RFP, during finalisation of a contract, or after contract conclusion; and (4) publishing details of contractual disputes and decisions thereon by oversight bodies, either prior to contract award or thereafter.

This lack of transparency in the DPP contrasts sharply with one or more of the following practices: (1) the easy availability of Indias defence procurement-related information in commercial off-the-shelf publications; (2) the fact that white papers have been published in the recent past by the ministry itself, listing out case-specific deviations in acquisition cases that attracted public controversy; and (3) prevailing international best practices such as those in the US where oversight/dispute-handling bodies (the GAO, the COFC and the ASBCA) regularly publish decisions on defence contract disputes after suitable redaction, or practices in vogue in developing countries like Columbia where redacted RFPs have been made available by the government in public domains.

It is time transparency is made a constant feature of the defence acquisition process, instead of being an ad hoc, unpredictable eventuality, so that public confidence in defence contracting is enhanced, while simultaneously de-risking defence contracts for contracting parties without compromising on national security.

Another aspect of particular relevance to proper growth of the Indian defence industry is the much-needed streamlining of Defence Offset Guidelines forming part of the DPP. Over the last eight years or so, these guidelines have seen: (1) a gradual but steady switchover from direct offsets to indirect and third-party offsetsinternational experience suggests that the latter classes of offset contracts can be convenient vehicles of cross-border integrity abuses; and (2) extremely long periods of discharge of offset obligations as compared to the period of equipment supplya regulatory development than can potentially threaten ensuring accountability of acquisition officials as well as vendor interest and commitment to timely discharge of offset obligations. The importance of meaningful offset reformas evidenced in established jurisdictions like Israel, Canada and South Korea, and in emerging defence economies like Malaysia, Turkey and South Africacannot be overemphasised.

Indias offset guidelines may also need revisions in line with international best practices for forging meaningful partnerships between foreign and Indian defence industries, which can help position the Indian industry at its rightful place in global supply chains. In addition, the offset guidelines may need to be necessarily reworked to ensure that abuse of offset contracts for cross-border bribery is minimised. Certain tentative steps were taken in May last year by placing services-based offset transactions in abeyance, and the time may be ripe to permanently disallow such transactions that are difficult to value and, therefore, easily abused.

Certain other amendments to the DPP undertaken last year implicitly recognised categorisation as a key to fostering meaningful technology transfer and indigenising defence production in India; and it may be useful that categorisation decisions for capital acquisitions are publicised once taken, as a means of self-discipline against any embedded tendencies amongst certain stakeholders for outright global purchases in preference to enabling domestic manufacturing of defence equipment.

An emerging economy like Indonesia recently placed a self-imposed ban on outright global purchases, preferring to foster joint ventures instead, invigorating domestic defence manufacturing in the process. Almost all established defence manufacturing countries place a strong reliance on domestic supplierssince April this year, the US will start requiring that new service personnel procure only domestically-manufactured shoes against their allowances, let alone placing strong domestic content and domestic manufacturing requirements for its defence platforms and high-technology equipment. Given this vast body of global experience, there should be no reason for an equally strong economy like India, with adequate resources and skilled workforce, to take a similar leap of confidence in her indigenous defence industry, coupling it with smarter leveraging of its acquisition volumes and defence cooperation pacts with partner countries. Sustained indigenisation is important for India for her to become a strong global player capable of fully protecting its growing economic interests; and streamlining the DPP can be an important element for the overall reforms strategy for economic revitalisation capable of yielding multiple cascading benefits to other related sectors of the Indian economy.

The author is a civil servant and holds an LLM with highest honours, having specialised in Government Procurement Law from the George Washington University Law School. Views are personal