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IDSA COMMENT

Reforming Defence Contracting Procedures

May 28, 2014

Over the last decade, India emerged as the world’s 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.

International 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 can obviously be much more prone to integrity abuses. In this context, it may perhaps be useful to examine some features of India’s Defence Procurement Procedure (DPP) for streamlining of the capital acquisition process for defence procurement. After all, the DPP may well be the only procurement regulation in the world that discriminates against its own domestic bidders1, 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: (i) publishing redacted versions of RFPs after suitable editing for removal of national security-sensitive technical information; (ii) 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)”; (iii) 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 (iv) 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: (i) the easy availability of India’s defence procurement-related information in commercial off-the-shelf publications; (ii) 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 controversy2; and (iii) 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 therefore perhaps time that 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 can be enhanced, while simultaneously de-risking defence contracts for both 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: (i) a gradual but steady switchover from “direct” offsets to “indirect” and “third-party” offsets—international experience suggests that the latter classes of offset contracts can be convenient vehicles of cross-border integrity abuses3; and (ii) extremely long periods of discharge of offset obligations as compared to the period of equipment supply—a regulatory development than can potentially threaten ensuring accountability of acquisition officials as well as vendor interest and commitment to timely discharge of offset obligations.4 The importance of meaningful offset reform—as evidenced in established jurisdictions like Israel, Canada and South Korea, as well as in emerging defence economies like Malaysia, Turkey and South Africa—cannot therefore be overemphasised. India’s 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, particularly 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. In fact, almost all established defence manufacturing countries place a strong reliance on domestic suppliers—since 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 for many decades. Given this vast body of international experience, there should therefore really 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 as well.

Views expressed are of the author and do not necessarily reflect the views of the IDSA or of the Government of India.