Making Defence Procurement Competitive: DPP 2015 must promote private sector participation, else the efforts could go waste yet again
(Source: Financial Express; published Sept 11, 2015)

By: Deba R. Mohanty
The eighth revised (including the 2010 addendum) Defence Procurement Procedure (hereafter, DPP 2015), an official procedural document for capital purchases by Indian armed forces, was expected to be ready by now. Given the complexities associated with almost every aspect of defence procurement in India, successive revised DPPs (2002, 2003, 2005, 2006, 2008, 2010 and 2013) have largely failed to provide an accepted framework for defence business, despite the so-called best efforts from the government. Given the Centre’s avowed intent is to transform the Indian defence sector, it is hoped that the DPP 2015 would address most of the complexities.

In order to make the procedure dynamic, the ministry of defence (MoD) set up an experts’ committee under the chairmanship of Dhirendra Singh in early May 2015. Singh Committee’s primary mandate was two-fold: a) to recommend new or suggest changes to existing provisions of DPP-2013 and b) to provide guidance on embedding Make-in-India goals into the DPP-2015.

Although a few committees (like Kelkar Committee, Probir Sengupta Committee) were constituted earlier by the MoD to look into specifics of defence sector—or for that matter, there had been committees like Ravindra Gupta (constituted by National Security Council Secretariat) or Vinod Mishra (on reforms related to defence finance)—the Singh Committee’s scope practically covers the whole universe of defence procurement—a gigantic task. The Singh Committee submitted its report sometime in late July 2015.

As is usual, such recommendations are further deliberated upon by almost every organ of the MoD before some or all recommendations, based on consensus, are added to the new DPP and announced thereafter. Both the report and subsequent deliberations are kept confidential as a standard norm. Interestingly, this time, the process has taken a new turn. Although excerpts and analyses of some of the Singh Committee recommendations appeared in the media, the entire report—whose recommendations are yet to be considered by the MoD—is now available to the public!

This new development could have been because of two possible reasons: a) the report may have been deliberately put in public domain (‘by design’) to get feedback from public policy intellectuals (which would help the mandarins to sharpen their focus on relevant issues), or b) it could be ‘by default’ (the idea may have been suggested by MoD itself, backed by individual or collective wisdom).

Be that as it may, the Singh Committee report necessitates a full autopsy now. Its analysis and recommendations, based on standard methodologies, range far and wide; therefore, they are prone to all kinds of (mis)interpretations. Amid at least a dozen of concerns of the Indian defence sector, the primary one is the role of the private sector.

The Singh Committee has extensively dealt with the role of Indian private sector in defence production and made a list of recommendations, ranging from protecting Indian interests, encouraging increase in indigenous content (IC) to encouraging all types—large, medium and small—of defence industries (anywhere between 8,000 and 10,000 in number). For the large ones, (large Indian private companies engaged in defence number not more than a dozen at best), the committee recommends a ‘partnership model’ for nurturing a vibrant Indian defence industrial complex.

It recommends selection of ‘strategic partners’ from the existing pool of industries, those that could be involved in complex system manufacturing as well as system integration along with public sector defence companies. Strategic partners, possibly two each in six identified domains (aircraft, warships, armoured fighting vehicles, complex weapons, network-centric solutions and strategic materials), could be identified and supported with all help by the state.

The concept of strategic partners appears to have been repackaged from a recommendation (Rakhshya Udyog Ratna, or RUR) proposed by the Probit Sengupta Committee; this has been gathering dust in MoD. While the basic criteria of identifying strategic partners have been worked out, by tweaking provisions in the existing DPP 2013, what Singh Committee has proposed further is a set of conditions, which could make the proposal more complicated.

For example, it proposes that a prospective strategic partner must have a healthy financial capability (in terms of turnover, net worth, profitability, risk appetite, etc.), financial prudence (good credit rating, no CDR (corporate debt restructuring) status, domain specific technical capabilities, healthy R&D track record, quality infrastructure, good delivery track record and Indian controlled management structure.

It must be argued here that all of large Indian private companies are neither defence-dependent (military sales being less than 2% of the total sales in their balance-sheets) nor system integrators. Bulk of their military business is confined to component or sub-system supplies although, of late, there is an attempt by the MoD to award a few low-to-medium technology projects like rocket launchers, military transport aircraft, warships construction, etc.

Although most of these companies have ‘rudimentary to moderate’ defence industrial experience, stringent criteria like ratings, domain expertise, no CDR or investment in R&D could hinder prospects for most aspirants—both experienced entities like Tata, M&M or L&T, and new players like Punj, Reliance or Bharat Forge. Restricting strategic partners to one domain is another dampener for the industry as the bulk of major Indian companies are interested in more than one domain area, which is a prudent strategy in defence business. There is no doubt that such recommendations would face stiff resistance from the industry in time to come.

The very purpose of a vibrant competitive national defence industry must accommodate aspirations of private industries. Hopefully, DPP 2015 would become a pragmatic policy locomotive by taking industry along.

The author is a New Delhi-based defence analyst and heads a defence research firm.


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