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Defence procurement: Need to shrink the procurement cycle

Goutam Das     January 9, 2015

Senior Associate Editor Goutam Das
Most industry-government interface, when it comes to defence production , is replete with talk of "level-playing field" these days. It is not difficult to imagine why. For decades, most defence manufacturing orders only went to the defence public sector units (DPSUs) even though some of these companies were understaffed, had huge cost over runs and delays.

No less than 10 current projects led by the Defence Research and Development Organization (DRDO), a Ministry of Defence organisation, are behind schedule, the Parliament was told recently.

And at a recent ASSOCHAM meet, industry representatives pointed to a stark difference in the value of orders - since 2001, when the BJP-led NDA government first opened up defence manufacturing to private companies, private companies secured shipbuilding orders worth Rs 8,976 crore. DPSUs, in contrast, secured orders worth Rs 1,46,564 crore.

All indications are that the present Modi government wants to set things right - everybody from the Defence Minister to the bureaucracy is singing the same tune. What has the government done thus far? The cap on FDI has been raised to 49 per cent; the defence products list for industrial licensing has been revised and many components dropped from the purview of industrial licensing. A defence exports strategy has been formulated where going ahead, countries to export will be identified and Indian Missions abroad will be associated in promoting export of Indian defence products.

All this is encouraging news but more needs to be done. Advisory firm PwC, in association with ASSOCHAM, released a paper called "The unfinished Agenda". To achieve self reliance in domestic defence production, the government needs to re-do its procurement policy, the firm states. Procedures have to be simplified and the idea of selecting 'navaratnas' in the private sector, as recommended by the Kelkar Committee, needs to be revisited. Services should be accepted as an offset avenue and the cap on FDI needs to be raised to 74 per cent to attract global technology into the domestic sector.

Other suggestions included rationalisation of the tax structure as well as special support to medium and small enterprises - small companies, unlike the larger ones, have much less cash cushion to see through the long procurement cycle. In the current process, the Ministry of Defence first calls for a request for information (RFI) where vendors submit capability. The MOD then shortlists five-ten vendors who are given a Request for Proposal (RFP) along with a price bid. Selected vendors are next asked to develop a prototype, which is then tested. The period of testing can take 18-36 months. Once bidders clear trails, price bids are open and L1 companies, or the lowest bidder, are selected. The whole process can take 3.5 to five years.

The Modi government has to find ways of shrinking this cycle.


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