Mohd. Rameez Raza & Raj Shekhar
The article analyses the changed provisions in the new Defence Acquisition Procedure, 2020 and the potential impact on the future of defence deals in India. To that end, it discusses the pitfalls with the current policy and suggests changes to address the same better.
Recently, the Ministry of Defence (MoD) has implemented the newly formulated Defence Acquisition Procedure 2020 (‘DAP 2020’ hereinafter) and has projected it as the harbinger of an “Atmanirbhar Bharat” in the field of defence production. The DAP 2020 replaces the previous Defence Procurement Procedure, 2016, thereby laying down a framework of procedural guidelines for carrying out defence deals. The government has dubbed it as ‘magnum opus’ and sees it as a game-changer for future defence deals. However, experts across sectors have reasoned and opined otherwise, concerning the decision to remove offset clauses in certain defence deals, which has, in particular, garnered great criticism.
In light of this ongoing debate, the article tries to analyse the changes introduced by DAP 2020 and their potential impact on future defence deals. Further, the existing pitfalls such as delayed promulgation of National Security Strategy, absence of dedicated acquisition cadre, lack of accountability in the acquisition process, etc. have been extensively discussed and an attempt has been made to suggest changes for streamlining the overall policy without affecting the core idea of ‘atma nirbharata’.
Offset Clauses: Understanding the significance
The entire idea behind an offset-contract in the defence sector is to make the purchase of technology and weapons from a foreign supplier more cost-effective. This generally involves providing additional benefits and aids to the buyer in various forms. It could range from the basic ones such as helping in the development and advancement of domestic industries, providing additional work contracts, to the more advanced ones such as transfer of complicated technology, R&D data, etc. It needs to be understood that the defence procurements involve a substantial amount of public money, and the existence of offset clauses ensures that part of this money is invested in the local economy.
A brief historical analysis of the evolution of offset clauses would show that countries, especially the developing ones, have always had some provisions of offset in their procurement
process. India, being the world’s biggest importer of defence goods, itself has resorted to including offset clauses, with the only exception being the Defence Ministry’s DAP 2020 which changes this 15-year-old policy. DAP 2020 removes the clause for offsets in case of equipment being bought either through deals or agreements between two countries or through an ab initio single-vendor deal.
India and Offset Contracts: A Brief History
The Defence Procurement Procedure, 2005 (‘DPP 2005’ hereinafter) introduced the concept of offset contracts in India and since then, it has been amended time and again to incorporate the changing paradigms. In furtherance of the same, India’s first offset contract was signed in 2007 and since then, in the last three years alone, 21 defence offset contracts worth USD 5.67 billion have been sealed. In the words of the government itself, the objective for implementing the defence offsets was to leverage capital acquisitions to develop the Indian defence industry by fostering the development of internationally competitive enterprises, augmenting capacity for research, design, and development related to defence products and services, and encouraging the development of synergistic sectors like civil aerospace, and internal security. Thus, the introduction of offset clauses in defence procurements was envisioned as a game-changer.
Offset Regime and the Challenges: Cautious Foreign OEMs, Lost Opportunities
The major drawback of the Indian Offset Policy has been the regulatory and compliance deficiencies that plague it. Not just this but foreign original equipment manufacturers (‘OEMs’ hereinafter) have also time and again complained about operational challenges which deter them from fulfilling their offset obligations. Due to this, even though offset clauses exist, the quantum of loss of opportunity for the Indian defence industry prevents it from bolstering the country’s goals of achieving self-reliance or becoming Atma-nirbhar.
It is a well-known business strategy that OEMs make deals that help them earn revenue. However, in the case of India the prospects of making a profit are a distant dream owing to the operational challenges, and to make matters worse, many times fines are slapped on OEMs due to delay in discharging their offset obligation. Further, the entire responsibility of discharging the offset obligations falls solely on the foreign OEMs and not on the Indian Offset Partner (‘IOP’ hereinafter) that they choose. This means that in case an IOP fails to comply with any provisions, it will be the foreign OEMs that will have to bear the brunt. Adding to the dismay, the bureaucracy tries to keep these foreign OEMs bound up for a long time for additional benefits. All these factors act as a huge deterrent for the foreign OEMs doing business with India and this eventually hurts the prospects and development of the nation in the long run.
The Defence Acquisition Procedure,2020 : Towards Self Reliant India?
The introduction of DAP 2020 has been dubbed as a beaconing move towards the existing government’s plan of Atma-nirbhar Bharat. The changes made to the procedures have been aimed towards strengthening the field of defence equipment production. It replaces the Defence Procurement Procedure, 2016, and the change of name suggests a deeper change of policy from the previous one of ‘procuring’ to the new model of ‘acquisition’. However, the question that still looms large is – whether a change of name would lead to a change of prospects?
The newly introduced procedure seems to be a fine blend of concepts and ideas, with many of them being taken as direct inspirations from the pre-existing terms. Though the DAP 2020 seems to be promising, the issue lies in the subjective interpretation it offers. It tries to please too many players at once, failing in its basic intent of bringing about a change. The explicit exemption provided to government-to-government agreements (‘G2G’ hereinafter) or ab initio single vendor contracts or inter-governmental agreements (‘IGA’ hereinafter), can be seen as falling on the same lines as Defence Procurement Procedure, 2013. In 2013, G2G deals that account for the most defence deals, including acquisitions from the US under its Foreign Military Sales (‘FMS’) scheme, were excluded from the offsets’ purview. Thus, even though an appreciable attempt has been made towards streamlining the defence procurement, by providing an incentive in form of exemptions, the model seems to be largely flawed and needs further deliberations.
More Refined Approach: Suggestion to Streamline the DAP 2020
While a lot has been envisioned, the new procedure needs to be amended towards promoting a faster defence acquisition mechanism, which is not only cheaper but also more pro-domestic in its approach. Even though the DAP 2020 refers to the “National Security Strategy/Guidelines (‘NSS’ hereinafter), as and when promulgated; the delay in its promulgation is seen as a major setback. The NSS serves as an acquisition strategy and thus it becomes pertinent for the government to promulgate it at the earliest. Once the NSS is promulgated, the next step should be to ensure the availability of adequate resources to achieve the acquisition. This balance is of utmost importance as in the last four years the Ministry of Defence has lagged in as much as 15-20% of the required procurement costs. This imbalance exists as most of the procurement contracts are stalled. A high-level authorization should be made mandatory for the proposed 10-year and 5-year plans.
The last few procurement deals have remained shrouded in controversy owing to the lack of accountability and the prevalent corruption. As per the CAG report, any such procurement deal must go through 55 points of approval before the deal is closed. This process is not only unnecessarily long and tedious but also leads to dilution of accountability on people involved, eventually giving in to corruption. The DAP 2020 needs to streamline this by bringing it under a central authority that shall hold the accountability. While the DAP 2020 presses on the training of personnel involved, the scale of such training remains minuscule in front of its western counterparts like the USA, Canada, etc. Given the fact that personnel involved, owing to lack of exposure, refrain from taking key decisions to dodge liability need to be trained. The better way out could be the creation of an ‘Acquisition Cadre’ comprising of personnel trained in contracting, finance, national, and international export control laws to further streamline the process.
The DAP 2020 in a bid to simplify the overall process has created procurement categories, with them introducing five prioritised procurement categories, apart from three others – Leasing, SPM, and OCPP. Further, adding the ‘make’, ‘innovation’, and ‘design and development’ procedures has only complicated the process even more by creating dozens of categories and sub-categories. Thus, an immediate reconsideration of this categorization is need of the hour.
Conclusion: DAP 2020 needs an Overhaul
DAP 2020 has indeed revolutionized the entire idea of defence procurement by trying to indigenize the defence deals in contrast to the previous hybrid model of cooperation. However, experts have divided opinion on the same with critics emphasizing the possibility that the increase in indigenization may fall short to ensure the much-needed efficiency in defence procurement, as shifting to indigenous production is a drastic step that needs strong finances and time to fully materialize. Further, the policy has received harsh criticism from industry leaders who have seen exempting the Inter-Governmental Agreements from offset obligations as a major setback to the development of India as it directly reduces the number of foreign vendors who will have to abide by the offset obligations.
As these offset contracts are generally related to high-end equipment or technology transfer, the reduced obligations would impact the transfer of advanced technology to India and would be contradictory to the envisioned goal of self-reliance. Thus, the need of the hour is to reconsider the stance given the suggestive pointers indicated above and streamline the existing policy. While it is true that DAP 2020 has provided the much-needed impetus to the indigenization of the defence sector, it also cannot be denied that lacunae exist and they need to be dealt with.
Mohd. Rameez is a law student at the Integral University, India; he is also a Research Analyst for the Centre for New Economics Studies, O.P. Jindal Global University, India.
Raj is a student at the National University of Study and Research in Law (NUSRL), Ranchi, and a Fellow with Facts and Norms International Research Institute, USA. He also serves as an Archivist (India) for the Earth Refuge, International Legal Think Tank, New York, USA.