Frustrated by the Ministry of Defence’s (MoD’s) cold-shouldering of suggestions and requests from overseas arms companies, a large chunk of the international defence industry — usually fiercely competitive — has joined hands to demand from Defence Minister A K Antony a better structured and more supplier-friendly defence procurement policy. The demands include an enhanced FDI (foreign direct investment) ceiling of 74 per cent, allowing dual-use technologies as offsets and creating an offsets authority to bring in predictability and transparency.
The letter to Antony, which Business Standard has reviewed, was signed on 25 by the heads of six defence and aerospace bodies that represent almost every major US, British, German, French and Canadian arms corporation. They point out in unusually frank terms that “the current offset polices have effectively hindered our member companies’ ability to play a full role” in selling India defence equipment, as a result of which “the (Indian) MoD may not be able to benefit” from the best defence systems on offer. The letter urges that, “processes must be open, fair and transparent, and time is of the essence”.
This approach comes as the MoD revises procedures for procuring an expected $100 billion worth of foreign military equipment over the next decade. The new Defence Procurement Procedure of 2010 (DPP-2010) is anticipated this month. It will supersede the currently valid DPP-2008.
The letter — which is also copied to Antony’s deputy, M M Pallam Raju, and the MoD’s top two civil servants, Pradeep Kumar and R K Singh — bears the letterheads of the USIBC; the US AIA (Aerospace Industries Association); the British ADS (Aerospace, Defence and Security); French aerospace body GIFAS; German aerospace body BDLI; and Canadian aerospace body AIAC. Israeli and Russian companies are conspicuously absent from this initiative.
The letter urges the following specific policy reforms:
Enhancing the current 26 per cent ceiling on FDI in defence. The letter states that accepting the Ministry of Commerce’s proposal to enhance FDI to 74 per cent would “bolster confidence” and enable “robust investment in… technology transfer”.
It suggests allowing dual-use technologies and high-tech civilian projects to be counted as defence offsets. This, the letter argues, would create a high-tech, civilian industry, that would build dual-use products to feed the defence industry. The current offset policy mandates only direct offsets, i.e. products that are directly used in defence systems.
The MoD should offer multipliers for offsets in key sectors where it most wants technology transfers. For example, if the MoD wants radar technology, it could specify an offset multiplier of 2. A company that transferred radar technology worth $1 million would get $2 million in offset credits. The current policy treats all offsets equally.
The creation within the MoD of an empowered and adequately staffed permanent “offset authority”. Currently, “there is still ambiguity in how offset contracts will be approved, validated, discharged and measured”.
Capping financial penalties in defence cooperation, in order to “not deter competition for defence contracts”. The letter points out that “(u)nlimited financial liability inhibits industrial defence cooperation.”
MoD sources say the ministry is deliberating its response to this letter, but it does not take kindly to suggestions from foreign vendors. In 2007, the US India Business Council (USIBC) — also an influential signatory to this letter — had sent the MoD a letter suggesting the adoption of “international best practices” in offsets. The MoD did not respond. MoD officials told Business Standard, off the record, that best practices elsewhere did not necessarily suit India.
The MoD’s current offset policy mandates that foreign vendors that are awarded defence contracts above Rs 300 crore must plough back at least 30 per cent of the value of the contract into Indian defence production or research and development.