Defence Sector must fix gaps in Procurement & R&D policies to ensure "Make in India"
Defence Sector must fix gaps in Procurement & R&D Policies to ensure "Make in India"By:
Vijay SARDANA
IIMA Alumni, Techno-Legal & IPR Expert
Advocate, Supreme Court of India and NGT
The Honourable Prime Minister is keen to make India self-reliant on critical technologies. This is the most critical decision to ensure the sovereignty of the largest democracy in the world.
The Make-in-India program was initiated to push this agenda. Like any other scheme, many companies took this initiative seriously and many started playing with the scheme and trying to project their imported products as “Make in India” by projecting incorrect information.
It is high time that the ‘Make-in-India’ evaluation process must be calibrated so that good companies really committed to India must get due recognition for their efforts and defence forces must also support this effort seriously.
Unfortunately, many trading companies have started claiming that they are doing indigenous manufacturing, but the fact is many are importing many parts, assembling them in India, and claiming priority under ‘Make in India’. This is a misleading and dangerous trend because, in case of any disruption in supplies, the national defence preparedness will be compromised and can be in danger. These important critical components can be bugged as well and may become a security risk.
The Ministry of Defence and DRDO must have dynamic and multi-stage plans for Make-in-India: this may include 10 years long-term, 5 years medium term and annual plans for indigenisation. This should be reviewed twice a year to ensure the latest developments are captured in the plan.
To ensure indigenisation, there must be compulsory verification of the indigenous designs and Make-in-India content in terms of technology, sub-systems, spares and software. Caution: Indigenisation based on Cost in the overall contract is misleading and dangerous for the 'Make-in-India' agenda.
Saving in foreign currency due to indigenisation must be the key criterion to ensure measurable indigenisation.
Development of critical technologies and IPR with Indian companies
The design of domestic performance parameters must not follow the criteria or features sold and promoted by the seller but must be based on domestic user needs for proper evaluation of the conditions.
Reducing dependency on foreign suppliers for all types of parts.
Concern-1: The most sensible and objective criteria for measuring indigenization in any defence project and supplies should be saving in foreign exchange outgo. Every other parameter can be managed and manipulated.
According to trade information, most companies in India who claim indigenization of defence parts import parts from outside India and just do the local assembly in the name of indigenization. This is a misleading and dangerous trend.
This is very risky for the country as well because this gives fake assurance about indigenization and promotes corruption and manipulation in the approval process.
Another significant risk is, if these foreign vendors are acquired by any foreign company or by any hostile nation, Indian defence preparedness will be at risk. This we have seen in the speciality chemicals and pharmaceuticals sectors.
The Ministry of Defence must ensure that this fake indigenization is stopped. There must be an objective and transparent system in this regard.
Caution: Based on my experience of buying critical equipment for high-end applications, Indian defence spending is an excessively big commercial attraction. Foreign sellers will use every trick in the book to manipulate the inspection system, and approval process by using misleading data and parameters, to influence purchase decisions in India.
Concern 2: Technical specifications must be based on domestic needs and requirements, not the ones projected by the seller to influence the tenders in their favour.
It is common to create a tender to favour any specific vendor. This is a common trick to manipulate trends. In many tenders, some parameters are deliberately inserted to eliminate the competition so that the buyer selects only preferred vendors.
Very often, demand for specific parameters is pushed by certain selected people close to the seller. Typically, these parameters, which are unique to one seller, must be cross-verified by a committee of experts based on the needs of the evaluation process to prevent a conflict of interest.
Because it is a matter of defence preparedness, very often even very minor and insignificant parameters are projected as vital and risk perception is used to tilt the tender in favour of a particular buyer. This is a common trick in every tender where risk is high.
Every parameter should be evaluated by a committee of experts which may include retired army officers with a good record of accomplishment which is independent of the tender processing team to prevent conflict of interest. My experience says the operators of high-risk equipment in the field can give more credible insights. If possible, take feedback from the field teams, not just purchase or technical evaluation teams in head offices or based in other countries due to various climatic factors.
Caution: Foreign sellers will try every opportunity to influence the decision in their favour by using all unfair practices. This is common because margins in defence equipment businesses are extremely high.
Concern 3: Blockchain-based traceability must be established for every critical part where indigenization is required.
It means the following options must be audited by the auditing teams of the defence services.
Costing
Country of origin
Supply chain audit
Who owns the IPR?
Agreement between the parties
Foreign exchange utilisation certificate
There cannot be any confidentiality with Indian security interests at stake. Those who are not willing to adhere to these terms and conditions should be asked to refrain from applying for the indigenization program.
Concern 4: Dummy traders/buyers are planted to issue bills from a local address to project as if these imported products are 'Made in India'.
Very often a dummy seller is planted who imports into India and then sells to actual users as domestic products to claim indigenization in supplies. Unless the foreign current outflow is not reduced, this is not indigenization.
Based on my experience, I can say that the suppliers and vendors can manipulate costs and parts and their costs. The most sensible and objective criterion is how much foreign exchange is used in supplying the system to the Indian defence services.
The cost-plus model is misleading and hides many facts. Many vendors do manipulate their cost sheets to qualify for government tenders. This is common manipulation in many industries. This chain must be audited.
Therefore, there must be auditing of foreign exchange used in the value chains. If there are sub-vendors of domestic suppliers, they should also be audited to cross-verify indigenization.
A traceability system should be developed to prevent the dummy vendors or port shopping to create bills as domestic parts by the domestic military suppliers. When this can be done for the food and pharma industry, why can't defence purchases do it?
As part of digital India, the Defence ministry must introduce blockchain-based supply chains for all vendors. This also ensures the securing of supply lines for critical parts.
All vendors must share their foreign exchange utilisation reports quarterly in every system, and this must be audited by the accounts department.
Therefore, the action points for indigenization are as follows:
Need to create a “Technology Advisory and Evaluation Committee” under Hon’ble Defence Minister to re-evaluate critical parameters, and innovation, and to promote indigenization. This may include many experts from credible institutions or from related fields.
DRDO should create an inventory of critical technologies where indigenization is planned. The fact is no country will ever give state-of-the-art critical technology because they all know India can become competitive in the world market.
Industry R&D must be promoted but payment must be based on a milestone basis with a clear mention that failures in research are part of the game.
DRO should establish local design units to reduce the dependency on foreign designers.
Due diligence and monitoring: R&D partner companies must have all MIS online for real-time monitoring by DRDO experts and auditors to minimise financial fraud. Losses in research failures are different from financial frauds.
DRDO should create mentors to guide small companies on technology optimization to build domestic capabilities. This will help them in meeting timelines and quality norms.
Traders are projected as manufacturers. Import value minimization in terms of foreign currency as well as technology components should be the target.
Audit the supply chain from raw material sourcing to imports to know how much foreign currency is used. This should be digitised and blockchain should be made mandatory to secure supply lines to ensure transparency and traceability.
Audit the design parameters for every item in the tender, especially those parameters which are eliminating competition from the tender process. Very often these parameters are of little or no significance but projected as critical. A committee under the defence minister should be created to prevent conflict of interest between various departments.
Defence manufacturing PSUs should be benchmarked against productivity per person.
Innovation-based rating for PSU should be introduced.
DRDO can do many wonders with the Indian private sector in defence production if the evaluation criteria are Import value minimization in terms of foreign currency as well as technology components. Some people will insist on importing items by showing threat perceptions by amplifying risks.
The indigenization defence sector is extremely critical for ensuring independent foreign and economic policy in an uncertain global situation
Hope all policymakers will relook at policies to address these issues in the national interest and support critical sectors like defence equipment manufacturing under Make in India.
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