Story ID: 769 MathewsIndia-Offsets Procurement-is.doc
India Procurement Policy Too Slow
By: Neelam Mathews
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Word Count: 907
As vendors await the announcement of belated contracts, India continues to grapple with its ever-changing defense procurement policy, with the latest–DPP 2013–announced and effective from June 1. The focus of DPP 2013 is on buying Indian defense products, even though these can fill only a fraction of the country’s requirements. It is being viewed as a kneejerk reaction to bribery allegations surrounding the procurement of AgustaWestland AW101 VVIP helicopters.

“The new procedures will give further impetus and a new momentum to indigenization,” Defense Minister A.K. Antony said recently. “We also [want] to aggressively pursue indigenization, especially after our many experiences,” he confirmed. A “Buy Global” approach is now seen as the last resort, although DPP 2013 leaves ample scope for single-vendor and Foreign Military Sales (FMS) contracts if the requirement is urgent. By dollar value, most U.S. sales to India have been through the government-to-government (that is, the FMS) route.

India’s defense manufacturing has a long way to go before it starts to deliver fully-fledged aircraft. A move toward this is a request for proposal for 56 transport aircraft, which, for the first time, keeps government public sector undertakings out of an RFP. This leaves foreign OEMs freedom to choose their Indian private partners. “If the government had confidence in its industry, it should have released the RFP to Indian companies and let them be responsible for the final product,” one OEM executive told AIN.

Under the “Buy and Make” category of the DPP, foreign sellers are required to facilitate in-country manufacture, which will need a relaxed procurement regime with an increase in foreign direct investment (FDI), presently capped at 26 percent for foreign companies (assuming they are unwilling to step in to transfer technology relating to high-technology products. Usually this is because of intellectual property rights concerns and an absence of board control). The DPP 2013 does not address this vital issue: “If a foreign defense firm can have 74-percent ownership over a joint venture (JV) in India, it could leverage Indian engineering capabilities at lower costs, invest capital in areas such as technical training universities and ancillary infrastructure, and in manufacturing,” conjectured another OEM. “Thousands of engineers could receive training in manufacturing high-end defense platforms; and millions of dollars of technology would be transferred to the JV, delivering a capable product to meet an RFP for a certain capability.”

The MoD, however, continues to resist the commerce ministry’s interest in raising the FDI cap. Last month the defense minister’s scientific advisor V.K. Saraswat expressed concern: “Though [foreign] participation is welcome…If we increase FDI, we have a fear our indigenous capabilities will be controlled.” Saraswat suggested that a “case-by-case basis” approach could be taken with a cap of up to 45 percent.

While new ventures in India are seen as difficult, given bureaucratic hurdles, some OEMs, such as Sikorsky) have turned it to their advantage. A JV with Tata Advanced Systems Ltd. to manufacture cabins for S-92 helicopters in Hyderabad in south India has resulted in the facility becoming the sole global supplier, with production now being increased to four a month. “The project has created a record in India. We worked with precision timing. It took the company 181 days from the time we signed the greenfield project until manufacture. It’s a great success story,” AJS Walia, a Sikorsky regional executive, told AIN. It is likely the company will apply for offset credits if it wins some of the helicopter deals that are currently in the offing.

With more than 5,000 components going into the manufacture of each cabin, sources suggest that Sikorsky may enter into a JV to manufacture precision components in India, a JV that could also be used for fixed-wing aircraft components.

Offsets are big business, as OEMs have to plow back at least 30 percent of the contract value into India. However, the approximately $5 billion of investment that has been attracted through “offsets” since 2007 has failed to establish a significant defense industrial base in the country. Once the 126 Medium Multi-Role Combat Aircraft (MMRCA) and other pending purchases are factored in, total offset commitments to India will exceed $11 billion. “It is clear that the latest policy announcement is directed to support the local development of Indian industry…International companies have [previously] had to depend on a handful of large companies to satisfy offset obligations. Now the policy opens up the market for small and medium enterprises (SME) as it provides offset incentives to the OEMs to work with them…OEMs are likely to get value for money–with multipliers–making the project more commercially viable,” said Bimal Sareen, CEO of Avaana and a director at OIS.

There are other bright spots as well. For example, transfer of technology in aviation maintenance, which in the past has been reserved primarily for government bodies, has now been thrown open to private bidders. This is “…expected to have a positive impact on private sector participation in MRO,” said a recent Ernest & Young report. Dual-use items will not require licensing, bringing added clarity to the licensing process, the report adds.

“Critical technologies required by the country should be identified and clearly defined before a contract is signed. Unfortunately there is a mismatch and the military, MoD and public sector undertakings will have to work in unison,” a senior official at an Indian OEM told AIN.