New defence purchase policy soon

Defence Minister A K Antony has sprung a surprise by revealing that the Ministry of Defence (MoD) would implement a new procurement policy this year. Of late, he has been facing mounting criticism by global arms majors and India's private sector for his ministry's poor policymaking and slow procurement procedures.

Addressing an industry gathering in New Delhi on Wednesday, after releasing a CII-sponsored report that slammed MoD procedures, Antony said the new Defence Procurement Policy 2010 (DPP-2010) would be more effective and faster than the current DPP-2008.

Defending his ministry's procedures, he said: "Our procurement policy is an evolving policy. We are learning from our experiences. I'm sure DPP-2010 will address your complaints. How to avoid delay in the procurement process; how to speed up the process...When we come out with DPP-2010, you will appreciate that the government is going step-by-step."

Denying that the MoD policies were biased against private sector participation in defence production, Antony observed that there was enough business for both public and private sectors to co-exist. He said: "Over many years, we have built up strong defence PSUs. I urge the private and public sectors to work together."

The CII-KPMG report, titled 'Opportunities in the Indian defence sector' predicts that by 2022 India will purchase Rs 4,50,000 crore ($100 billion) worth of military equipment. Another Rs 44,000 crore ($9.7 billion) will be spent by 2016 on India's homeland security.

The report highlights that India's resurgent private sector gets just 14 per cent of this business. Foreign arms corporations service 70 per cent of the annual shopping list of the Ministry of Defence; the rest goes, usually without competition, to MoD's business empire of eight defence public sector undertakings (DPSUs) and 40 ordnance factories (OFs).

The report also points to serious drawbacks in the FDI policy for the defence industry. In the decade leading up to February 2009, total foreign investment into the defence industry added up to a paltry Rs 70 lakh. In May 2001 (vide DIPP Press Note 4 of 2001), the private sector was permitted entry into the defence sector, subject to an FDI cap of 26 per cent. Licences are required both for entry and for FDI.

Such disinterest among foreign arms companies, the report says, stems from the conviction that a 26 per cent holding does not give the foreign company control over the secret and expensive technologies, which they would like to bring in. Further, 26 per cent of the profits is hardly an attractive return.

The government, in its Economic Survey 2009, had indicated that the FDI cap could be increased to 49 per cent. But that has not been implemented, and the CII-KPMG report states that foreign companies would not be satisfied with anything less than a controlling interest of 51 per cent.

Foreign arms companies, the report says, reject the argument of "national control concerns", citing examples of many countries (including the US) which allow 100 per cent FDI in defence, maintaining control and secrecy by allowing only security-cleared nationals to work in defence companies; restricting the number of foreigners on the board; stipulating that the company facilities be located in-country; and effectively ensuring that "except for foreign ownership and investment, the company is essentially a domestic entity".

The report calls for urgent reforms in defence procurement, pointing out that the MoD does not provide even established private vendors with its long-term equipment procurement plan, thereby denying the private industry the lead-time to develop the equipment needed in the future.

The MoD's Long Term Integrated Perspective Plan (LTIPP), which was to forecast equipment requirements for a 15-year period from 2007 to 2022, is still not finalised, two years into its tenure. The CII-KPMG report urges that the LTIPP, once finalised, be shared with the private sector.

There is also a clear perception within the private sector that the government is biased towards the public sector. A KPMG survey states that 85 per cent of the member-companies of CII's defence and aerospace division believe that "the playing field is loaded in favour of the DPSUs".

Finally, the report recommends that the private sector be extended the same tax benefits that DPSUs enjoy.