Procurement
Strategy – And Modernisation of Defence Forces
Introduction
The aim of defence procurements –
like all procurements – is to obtain the right quality, in the right time, and
at the right price. These aims become absolutely imperative in the specific
case of defence procurements, which consist of weapon systems and defence
equipment for the Armed Forces. The right quality of equipment, which should be
evidently superior or at least comparable to those with our adversaries, is
necessary to respond effectively in war against our potential foes, to combat
internal threats and to deter war. ‘Right time’ implies ‘timeliness’ of the
weapon system at the frontline, as the procurement process – whether through
direct purchase or indigenous production – takes a fair amount of time for
identification, acquisition, induction, training and the logistics support
before deployment in the field. The paramount importance of timely procurement cannot
be stressed enough. If this is ignored, we shall again be faced with a Kargil-like
situation where our tactical options were restricted due to lack of critical
equipment. The ‘Right price’ obviously must be factored in, as high quality
systems have high costs, and the defence budget has many takers. Procurements
primarily based on lowest bid criteria (L1) are not workable since due
importance needs to be given to quality, performance reliability, life-cycle
and spares management.
The necessity of an appropriate
procurement system as part of an integral defence strategy has never been as
vital as it is today. There is little doubt that we need a streamlined
procurement system, and an efficient production base supported by frontline Research
and Development (R&D) capability, if we have to be militarily strong to
deter threats to the security of the country. The paper examines the essentials
of such a procurement system, primarily viewed through the experience of my
long and active service in the Indian Army, and my specific expertise on the
larger issues relating to planning a defence strategy that I dealt with as part
of my responsibilities when I was the VCOAS. Later, during my active
association with the USI for the research leading up to the publication of my
book Arming the Defence Forces –
Procurement and Production Policies, I was able to investigate aspects of
this subject in even more detail. This paper draws on all of the above to review
the status on ground and the major reforms carried out, analyse the efforts
towards self-reliance and technology induction, discuss the budgetary support,
and finally suggest a few recommendations for a future strategy.
Review of Current
Procurement Strategy: Status on Ground[i]
The fact that India’s defence
needs are largely met by imports and only
thirty per cent of our total defence requirements are provided by
indigenous industry suggests that our defence procurement strategy needs a re-look.
Whereas countries like China, South Korea, Brazil and Israel have become arms
exporters, we remain one of the biggest arms importers, despite a similar
take-off time. Although we have developed a large defence infrastructure through
the establishment of forty Ordnance Factories, nine Defence Public Sector Units
(DPSUs), and fifty-one Defence Research and Development Organisation (DRDO) Laboratories,
there has been an obvious imbalance in the expectations and actual performance.
The DRDO and DPSUs do have to their credit a few world-class weapon systems,
for instance the Integrated Missiles Systems, EW systems and the recent Brahmos
cruise missiles. However, there have been serious cost and time over-runs in
the case of Main Battle Tank (MBT) Arjun, Weapon Locating Radar (WLR), Nag,
Advance Jet Trainer (AJT) and Pinaka Multi Barrel Rocket Launcher (MBRL), to
name a few.
The main cause for this has been
our over-reliance on direct purchases, setting-up licence production facilities
and the lack of investment in technology development, besides faulty procurement
policies pursued by officials who are not trained or equipped to manage the
contracts. Instead of acquiring technology for the future, we generally
purchase weapon systems with the current technology, which become obsolete by
the time it reaches us and have to be phased out too soon. Neither have we been
able to adapt the technologies by reverse engineering, or adopt the joint-production
route being followed by countries such as China, Israel, South Africa, and
Brazil. These countries maintain linkages with the leading arms producing
countries for assured investments and technology transfer, so that arms
exporters have a long-term stake and an incentive for successful transfer of technology
and production facility. For instance, the Chinese were able to develop
upgrades from the old Soviet designs for their F-7 aircrafts and T-60 tanks.
We need to examine the reasons
for this gap between the expectations and the performance in our procurement
strategy. The first handicap in our procurement apparatus is a lack of
continuity. Handling of high-tech contracts is left to ad-hoc assembled teams,
who are not experts in contract management. Contrary to such a system or such a
lack of system, the U.K. for example, has a dedicated Procurement Executive
with the Defence Minister, consisting of Integrated Project teams with experts
from various disciplines, for each procurement project. They are entrusted the
tasks of development, production, induction into the Service, and maintenance
and upgradation of the equipment till it is phased-out. Do we have – or do we
even plan to have - such an integrated policy planning staff, consisting of
professional experts in our system like the one in the UK or France? The answer
is a big NO. We seem to be happy with the status-quo and obtain whatever is on
offer, often saddled with items which are redundant and accept liberal scales
of spares of little use.
Therefore, in our system there is diffused
responsibility, a lack of accountability, and a resultant lack of trust on the officials,
besides over-centralisation with the Ministry. They lack an integrated approach
and are not focussed on speedy procurement. Procurement process, approvals,
trials and the contract finalisation are at present cumbersome and slow,
causing long delays. The role of arms agents, intermediaries and the media in
the arms deals, is inevitable in such a scenario. To prevent or at least limit
such a situation, we have to follow a multi-pronged strategy. First, remove the need for intermediaries by clearly defining roles,
responsibilities and qualifications of the officials entrusted with
procurement. Second, whenever
malpractices of corrupt officials/media-persons/ arms-dealers/intermediaries,
are revealed, take strict action against
the guilty. Merely scuttling the deal by blacklisting of the firms and delaying
the entire procurement process indefinitely, as has happened in the import of
155 mm Medium Artillery Guns and aviation helicopters, without taking any
action against the faulty people and the faulty process, will not help at all. Third, while drawing the contracts, other considerations of joint ventures,
technology transfers, and long term partnerships, including exports of surplus production capacity should necessarily be
built-in. I recall the case of the Infantry Combat Vehicle BMP factory at
Medak in 1999, where the installed capacity was not being utilised as the indigenous
demands were inadequate, but the BMPs could not be exported as the export
clause was not built into the contract deal. We need to, therefore, re-examine
our new procurement structure and the entire procurement process which was
adopted in 2001 after the Kargil Committee Report and further updated in 2005, and
revised more recently in 2011.
Essential
Attributes of Planning Parameters of an Appropriate Procurement Strategy:
The procurement strategy flows
out from the National Security Strategy and is the function of the higher
defence management organisation. It is a collaborative effort between the
Raksha Mantri (RM), the National Security Adviser (NSA), the Armed Forces, the
DRDO, Defence Production Agencies, Defence Secretary and the Defence Finance.
Success lies in the professional management and synergy between all the stake
holders. The essential parameters and the ground realities must be factored in while
formulating a realistic procurement strategy, as explained below.
1.
The security
environment today, is constantly changing and a wider range of tasks have to be
performed warranting acquisition and
deployment of new technology more quickly than before.
2.
Sources of assured
military supplies have dwindled. Thus, alternate
sources for technology induction have to be identified by strategic partnership
or through indigenous capability, and modernisation
and systems upgradation have to be undertaken periodically to maintain operational
readiness.
3.
Technology denial
regimes have become operative, necessitating transfer of technology (ToT) by
direct purchase or joint-ventures and development of indigenous technology. R&D
effort and investments in critical technology need greater focus. Self-reliance effort needs to be enhanced
significantly by private sector participation and modernisation of the
DPSUs.
4.
Over optimistic
claims by the DRDO, often lead to inordinate delays. To give one example,
American Weapon Locating Radar (WLR) selected in 1990-91 was finally bought in
2005-6 after a failed enterprise of the DRDO. This affected the operational capability
during the Kargil conflict in 1999 adversely. The DRDO needs to work more closely with the Defence Forces and DPSUs to
develop or obtain relevant technology.
5.
Financial powers remain
highly centralised with the Ministry. Some liberalisation and delegation has
taken place in the case of revenue expenditure; however capital purchases are
stringently controlled by the Ministry of Defence (MoD). There is insufficient
delegation to the users i.e. the Armed Forces, DRDO, DPSUs, DRDO, and the Atomic
Energy Commission (AEC), to develop, innovate or procure even the low technology
products. It is in the purchase of
capital equipment (aircraft, ships, tanks, guns and weapon systems) that the
real problem arises and needs detailed examination.
6.
Capital
purchases up to 100 crores should thus be delegated to the users leaving only
the big projects with the Ministry. This will enable the Services to procure
urgent items and avoid situations where critical shortages, such as tank
ammunition or night vision devices do not persist, as was revealed recently and
debated in the media and in the Parliament. While handling equipment purchases the cardinal principles of financial
management of equity, integrity, economy and efficiency, apply equally.
7.
In our present
procurement structure, we have an ad-hoc team entrusted with the responsibility
of managing high-tech contracts without
any permanency, continuity, accountability, and post-contract monitoring. Most
high-tech contracts are high value items like aircrafts, ships, tanks and have
to meet stringent specifications and performance guarantees, besides providing
long-term life cycle spares backup. It is therefore extremely important that
contracts are drawn out with care, stating performance parameters, installation
details, Transfer of Technology (ToT) incentives for the seller, utilisation of
excess capacity and the maintenance support. All this requires expertise, technical, financial and managerial
competence, evaluation and monitoring, by a team of professionals.
8.
While the money
allocation for the Services has always been substantially less than their
legitimate needs, there is a paradox of huge surrender of funds due to slow
decision making. All sub-systems need not be produced exclusively for the
defence sector; where possible they should be for dual-use, and purchased
commercially off the shelf (COTS). It is cheaper to outsource spares and
ancillaries to the private sector rather than manufacture the entire range of
products in the Ordnance Factories. The DRDO should concentrate on the critical
technologies rather than spread its wings too wide and fritter away its
resources in low-tech activities. We
therefore need optimum utilisation of funds and resources.
9.
A family concept of weapons and equipment should be
evolved rather than importing from diverse sources. The problem in doing so can be illustrated by the
fact that Milan, Concourse, Malutka anti-tank missiles of the same generation
were imported from different countries and had to be phased out together
without any possibility of upgrades. Similarly, wasteful deals were concluded
in purchase of drones i.e. pilot-less aircraft, of the same design at different
prices by the three Services due to lack of coordination at the Ministry.
Major Policy Reforms
The new industrial policy of 1991 enabled the Indian
private industry to grow and participate in defence production to some extent. After
the Kargil Committee Report on 26 February 2001 highlighted the requirement of
reforms in higher defence management, the Government also implemented a few
institutional changes. In May 2001, the private sector was permitted to fully
participate in the defence industry with 26 per cent Foreign Direct Investment
(FDI).[ii] Integrated defence staff
(IDS) was created for direct interaction between the MoD and the Defence Forces.
However, the envisaged integration of the Service HQs with the MoD, and the essential
appointment of the CDS as the coordinator for resolving inter-service priorities,
have not been implemented so far.
A new acquisition set-up was created in October 2001,
to make the procurements more efficient, timely and transparent. A revised
Defence Procurement Procedure (DPP-2002) was introduced from 30 December 2002.
This was updated again in June 2003 and July 2005, to make procurements more expeditious
and competitive. DPP has again been revised twice, but the effective implementation of the policies formulated, has been lacking
by the officials in the MoD and other functionaries.
New Procurement Structure
A new high level council was constituted with the
following members: Defence Acquisition Cell (DAC) with Defence Minister as its
chairman, the three Service Chiefs, Defence Secretary, Secretary (DP&S), Secretary
(DR&D) and Secretary Defence Finance. The planning process for defence
procurements are under the overall guidance of this cell. HQ IDS, in
consultation with the Service HQ formulates the 15 years Long Term Integrated
Perspective Plan and 5 years Services Capital Acquisition Plan, for approval of
the DAC. However, the absence of the CDS in this structure, limits integration
to mere compilation of the Services plans, as HQ IDS do not have the authority
to alter the priority laid by the Service HQ. Implementation of the DACs
decisions on procurement are undertaken by the Defence Procurement Board (DPB),
Defence Production Board and Defence R&D Board respectively. The DAC is not
able to meet regularly and depends on the IDS and the DPB for their inputs
rather than giving them strategic directions and long term perspective.
The DAC met recently twice within a month when
faced with criticism, but what about the follow-up action, thereafter, in the
absence of a dedicated body? The acquisition wing lacks the resources or the
authority to monitor the induction of equipment’s. The DPB handles all the ‘buy’
and ‘buy & make’ decisions, as also monitors all activities related to
capital acquisitions of the three services based on the five years acquisition
plans approved by DAC. The procedure for identification and approvals of the
weapon systems to be inducted being slow, results in creating a bottleneck in
the processing exercise. There is a case
to make separate procurement boards for each service for speedier processing of
the procurements.
A Special
Secretary has been appointed for all matters concerning capital acquisitions.
It has four Divisions namely: Land, Maritime, Air Force, and Systems. Each Division has an acquisition manager, a
joint secretary level officer, and technical manager, a service officer of two-star
rank. The Finance Adviser (acquisition) advises the Special Secretary on all
finance matters.
Highlights of the DPP-2005 [iii]
As per the DPP-2005, the
following are the key features.
Up to 30 per cent direct offsets
purchase, for procurement values of over 300 crores from the Indian defence
industry, has been made mandatory for the overseas defence firms making the
sale. Joint Services Qualitative Requirements (JSQR) are to be formulated for
the equipment common to the three Services to avoid duplication. The QRs by the
Services are to be made more realistic and broad based to facilitate indigenous
development and avoid single vendor situations. Open tendering has been allowed
for items bought through COTS. An integrity pact clause for capital acquisitions
costing more than 100 crores has been introduced to ensure fair play and for
refraining to engage a broker or an arms agent (which apparently has made
little difference). Importantly, CCS is authorised to override lowest bid
criteria on strategic considerations to meet operational needs. However, this
needs to be backed up by more realistic checks, since it is impractical to
refer such cases to the CCS easily.
Kelkar Committee on Self- Reliance in Defence
Preparedness[iv]
In 2004, the Kelkar Committee was set-up to
recommend changes in the acquisition process and for enabling a greater
participation by the private-sector in defence production towards self-reliance
in defence preparedness. The first part of the report submitted in April 2005,
focuses on the review of defence procurement procedure and on integration of
the users, MoD, and the industry for enhancing indigenous production; pursuing offsets
policy to bring in technology and investment; exploring synergies between the
private and public sectors; and promoting exports. The majority of recommendations have been
accepted by the Ministry for implementation.
The second part of the Report was submitted to the
Ministry in November 2005, where the Committee recommended that there should be
greater freedom to the PSUs and the Ordnance Factories (OFs) to form joint
ventures and consortiums. This has not happened fully as an environment of
faith and mutual trust has to be created by all the players, and a greater
devolution of authority made to the production agencies, with focus on
performance and accountability. DGOF and the DPSUs should also be permitted to
export surplus capacity.
Recommendations for Technology Induction
An impetus needs to be given to the DRDO and the
industry to develop futuristic and core technologies by a collaborative
approach with infusion of funds, incentives, and on risk sharing basis,
followed up with joint production. The academic institutions and the private
industry engaged in defence-oriented technology should be provided incentives
and financial support. An approach on the lines of Defence Advanced Research
Projects Agency (DARPA) of the USA is recommended to be followed.
Technology Development Groups (TDG) consisting of
best brains from the DRDO, academic institutions, Defence Services, and the private
industry should be formed to develop identified high-tech systems till its
induction in the concerned service. Each TDG should be made to concentrate on
one discipline and the concerned wing of the Defence Forces should fully
identify with the TDG and encourage induction of the indigenous product by
according preference to it over an imported system.
The
integrated approach adopted by the Indian Navy in the design, fabrication,
trials, construction of naval warships and their subsequent up-gradations, is a
fine example of synergy and partnership between the Navy, the dockyards and the
DRDO. Restructuring and joint partnership model has made HAL a leading aircraft
facility in the country for MIG, JAGUAR, the Cheetah and the ALH, but the
locations of ancillary factories at Korapet, Amethi and at Lucknow on political
considerations makes little sense. We need to create hubs for ancillaries close
to the main factory rather than distribute them all over to satisfy political
demands.
Budgetary Support
The future direction and pace of defence
modernisation would largely be dictated by the availability of funds.[v] Presently the budget is at
very modest level of 2.1 per cent of the GDP. This has to be seen in view of
increased defence budgets of China and Pakistan (4.5 per cent and 3.5 per cent
respectively). Our defence budget is planned at 1.9 per cent of the projected
GDP( $39 billion) for 2012-13, as against over $100 billion being spent by China.
The revenue budget for housekeeping needs, takes away nearly 60 per cent or
more of this allocated amount; the remainder amount for capital procurements
has to be shared between fixed repayment liabilities of already contracted
weapon systems and the modernisation demands of new acquisitions.
The cost of the recently concluded 126 Multi Role
Combat Aircraft for the IAF is likely to be over $20 billion, and the 145 Howitzer
Guns for the Army $ 650 million. Even this allocation is not fully spent due to
slow decision making process or lack of accountability in decision making thus
eroding our combat preparedness. During the current year a sum of Rs 3065 crores,
being the unspent amount from the capital funds, was surrendered by the MoD. Enhanced
funds have to be provided regularly as the weapon systems are highly expensive
and procurements cannot be made in quick time, once the hostilities commence.
To deter both China and Pakistan, and to maintain readiness to meet
contingencies all the time, over a wide spectrum and a large physical area of
operations on the land, sea and air space, the defence budget needs to be
increased to 3 per cent of the GDP.
The Way Ahead
The first criterion is improving
the procurement process and capability. Modern wars are fought on the
technological superiority of the Armed Forces. The capability to defend the
borders and provide safety and security to the country depends to a large
extent on the provisioning of arms and equipment to the Armed Forces. The
serious deficiencies in surveillance equipment and other weapon systems were
evident during Kargil War and later in 2008 Mumbai terrorist attack. The
objective of a good procurement strategy should thus be to deliver quality
equipment faster, better and cheaper. Some of the steps for creating a dynamic procurement
system are summarised in the succeeding paragraphs.
1.
Procedural changes
and restructuring by themselves will not achieve the results, unless the
decision making time is speeded and there is greater coordination between the Service
HQ, the MoD, DRDO and the procurement agencies.
2.
The MoD remains the
key player in the procurement process and tends to shirk accountability, as the
responsibility is shared by too many agencies. Contrastingly, the PE in the UK has officers
from the three Services, the technocrats, and civilian officers to work in
close coordination to plan and execute the entire procurement process.
3.
We need to create an
integrated procurement agency, consisting of, Defence Forces, Scientists, management
experts and the administrators to plan defence policy, budget and weapon projects,
and authorise a CDS, reporting directly to the RM. The existing IDS neither have
the requisite authority, expertise nor the structure to plan long term
perspective. What matters finally is the
will to reform and change. The new procurement structure still operates in old
environment.
4.
In any set-up, the
enforcing authority is the political leadership; otherwise the inter-service
representatives and the civilian administrators would project only their respective
viewpoints. The political leadership
needs to display the will to enforce with firmness the provisions of DPP 2005
and the other recommendations of the various studies. Restructuring of DRDO, DGOF
and DPSUs to integrate technology development and product manufacturing under
one management is long overdue, besides modernising their functions. These
institutions lack professional management and must become efficient,
accountable and competitive.
5.
Technology is the basic
requirement for development of high tech weapon systems. This requires joint collaboration
with strategic partners to induct state of the art technology and need for
encouraging exports for sustaining investments, besides larger allocation of
funds for the indigenous R&D.
6.
Development of long term partnership with defence
industry is essential for self-reliance. Partnership is a two way activity built on ‘trust’ and the users have to
accommodate the aspirations of the industry for profits, just as the industry has
to meet the stringent QRs of the Defence Forces in the manufacture of weapon
systems. However, partnership must be viewed much beyond procurements and
profits in a larger perspective, as a shared vision and a goal to create a self-reliant
defence industrial base for the country. Defence procurement involves maintaining
a judicious balance, in selecting the best equipment, at the lowest quoted prices,
while promoting indigenous product and ensuring modernisation of the armed
forces to combat the threats to national security.
Lieutenant General Chandra Shekhar, PVSM, AVSM
(Retd) was commissioned into the 2/4 GR of the Indian Army in December 1959.
He retired as the Vice Chief of the Army Staff in September 2000. He held the
Field Marshal K.M. Cariappa Chair in 2003-04 at the USI and researched on
procurement and production policies for the defence forces.
