A revolution at snail’s pace

by Ajai Shukla
Business Standard, 5th June 07

Tomorrow, the Defence Minister will know the names of the private companies that will challenge, in the field of defence production, India’s leaden-footed defence public sector undertakings (DPSUs) and ordnance factories (OFs). After a full year of deliberations, the Prabir Sengupta Committee will place before Mr AK Antony its recommendations on companies which should be granted the honorific of Raksha Utpadan Ratnas (RuRs) or Champions. This classification will entitle its holder to be treated equally with DPSUs and OFs, which have long dominated the lucrative defence market because of their direct links with the MoD. The good news doesn’t end there. The RuRs/Champions will also be entitled to MoD funds for R&D in projects specified by the services.

Change has come slowly since private industry was allowed into defence production in 2001. Little happened in the years following that watershed, but in 2005 a report prepared by the redoubtable Vijay Kelkar lit the path for transforming the relationship between the military, the ministry, and industry. The Prabir Sengupta Committee was born from Kelkar’s recommendations. In 2005, the MoD came up with a newer and friendlier Defence Procurement Policy, DPP-2005; a year later that was updated into a more comprehensive DPP-2006, which included a Defence Offset Policy. The offset policy, hoped the MoD, would kick-start India’s defence economy, particularly small private companies as component and sub-system feeders into the larger system integrators.

The euphoria amongst global arms majors, evident during the Aero India 2007 show in Bangalore in February, holds the promise of success. Biggies like Lockheed Martin, Northrop Grumman, Boeing, EADS and BAE systems have been pursuing offset tie-ups with Indian companies, especially the small and medium sized component manufacturers and software engineers that are cogs in the larger defence production wheel. The US-India Business Council (USIBC) has submitted, for the MoD’s consideration, a wish list of offset-related suggestions, presented in the garb of “Global Best Practices in Offsets”. The MoD’s new Defence Offsets Facilitation Agency (DOFA) is deluged with requests for clarifications and meetings from foreign defence corporations who want to structure their offset options before bidding for a contract.

But from the MoD, the response has been one step forward and one step back. Over several months, the MoD has broadly hinted that it is favourably considering the suggestions concerning offsets that have been offered by foreign companies: banking of offsets, waiving offsets in “fast-track” procurements, and permitting technology transfers to be counted as offsets in a deal. But none of these changes have been officially implemented. The only unambiguous MoD announcements relate to offset suggestions that it has rejected: the request for “indirect offsets” (investment into non-defence sectors), and the suggestion to implement “credit multipliers”, or giving higher credit to offsets into sectors where the MoD wants foreign investment.

The MoD’s logic for not officially promulgating the offset policy changes is a quintessentially bureaucratic one. Having amended the Defence Procurement Procedure twice in the last two years --- through DPP-2005 and DPP-2006 --- there is concern in South Block that too many changes too soon are not desirable. A senior MoD official says, “We don’t want to give the impression that we are changing the policy all the time.”

Also holding back any announcement of policy change is the MoD’s concern that foreign defence suppliers, even those with deals already signed, are playing for time, postponing offset proposals to benefit later from more relaxed offset procedures. The MoD, however, wants offset liabilities that have arisen since the implementation of the offset policy in September 2006 to be implemented on the initial terms. But at the same time, paradoxically, DOFA is granting extensions to foreign vendors who are pleading for more time to implement their offset liabilities.

While no global arms vendor will speak on record, there is uncertainty and concern about the direction of offset policy. The offset policy stipulates that each foreign bid for an Indian defence contract must be accompanied by an offset proposal relating to that contract. Since the offset proposals must amount to 30% of the contract value, and typically the bids are spread within 10% of each other, creating an offset proposal without increasing the overall bid could be a foreign vendor’s key to winning a contract. So, for now, a tentative dialogue continues between foreign majors and Indian private and public sector companies about outsourcing production and R&D to India.

The MoD has publicly assured the global defence industry that India’s offset policy would evolve continually and quickly. Speaking to an audience from European giant EADS, a senior MoD official explained that change would be easy because it would be done within the MoD itself. Instead of going to the Union Cabinet for a brand new policy each time changes were required, said the official, “We just have to take approval from the Defence Procurement Board and from there, with their recommendations and their views, it’ll go to the Raksha Mantri… and the amendments will be effective.”

For now, the wait continues. The history of warfare is replete with generals, so surprised at their own success, that they sacrificed initial gains by deliberately slowing their tempo. It would be ironic if this took place with the MoD’s offset policy.