India to rework defence purchase procedures


New Delhi : Responding to suggestions from defence manufacturers, India is to rework its procedures for purchasing military hardware to bring them in line with international best practices, an official said.

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“We are considering a number of suggestions we have received. At the same time, we don’t want to take piecemeal measures. We hope to have the new Defence Procurement Procedure (DPP) by the beginning of the (2008-09) fiscal in April,” a defence ministry official told IANS.

A committee headed by former finance secretary N.S. Sisodia is currently studying the suggestions received, while a team of officials has also visited Britain to study the system in place there.

“A comprehensive report is likely to be submitted to the defence ministry by early next year on the basis of which a final decision will be taken on revising the DPP,” the official told IANS, speaking on condition of anonymity.

Sisodia, who now heads the think tank Institute of Defence Studies and Analyses (IDSA), has also served as secretary (defence production).

The then defence minister, Pranab Mukherjee, had released the DPP in 2006. For the first time, it laid down in detail the measures to be followed in future for purchasing military hardware.

The DPP-2006 contained three critical elements: an offsets clause, no single-vendor purchases, and compulsory transfer of technology (ToT) in all big-ticket deals.

Of these, the offsets clause has become a matter of major concern.

Under the offsets clause, 30 percent of all defence deals worth over Rs.3 billion have to be reinvested in India’s defence industry.

A number of foreign defence manufacturers say this clause is restrictive as it narrows down their options. They say they would like the scope widened to enable them to invest in other sectors as well.

They also point out that the clause is subjective, as in the case of an Indian Air Force (IAF) tender for 126 combat jets floated last month the offsets provision has been arbitrarily raised to 50 percent.

“This is rather illogical. If you selectively raise the offsets in one case, it could go even higher in another case, or it could go even lower than 30 percent,” said the representative of one foreign vendor.

“It’s not that we are opposed to offsets. They are in operation worldwide and we are only too happy to comply. But the government has to get its act together and formulate a consistent policy,” he added.

As a former US official put it, the offsets clause poses a “challenge” for America’s defence vendors.

“It will be a challenge to put together a comprehensive and acceptable offsets plan within the defence procurement procedure,” Lt. Gen. Jeffrey Kohler, who has just retired as director of the US Defence Security Cooperation Agency, said during his farewell visit here.

According to Kohler, the issue was not so much the percentages but whether this also included the ToT element.

“We estimate the offsets requirement (in the IAF order) to be around $3 million. We suppose this includes the ToT element. If it doesn’t, we’ll have to figure out how to deal with this,” he maintained.

Every defence deal has two elements: the actual manufacture and the creation of infrastructure and ancillary industries for this manufacture. In the case of the IAF order, the total deal is worth $9 million but the offsets clause would relate only to the $6 billion manufacturing element.

Kohler also indicated US manufacturers would have been happier if an indirect offsets clause enabling reinvestment in areas other than the defence sector had been in place rather than the existing direct offsets requirement.

“In one case, a (defence) manufacturer exported an entire automobile plant as an indirect offset. That helped to create huge numbers of jobs and contributed to economic growth,” Kohler pointed out.

Speaking to reporters at the Aero India international air show at Bangalore in February, US ambassador David Mulford had described the offsets clause as “restrictive”, saying he felt it would, at some time, need to be modified.

There is also the question of bankable offsets, which means that the reinvestment is not directly linked to a deal but can be made at a later stage.

“It is these and other issues that are now being addressed,” the defence ministry official pointed out.