The news coming out is that the proposed defence procurement policy will be loaded against small and medium manufacturers of defence material. This will be a setback to SMEs in the sector, writes ASHOK DIXIT
The new Defence Procurement Policy-2015 is expected to be announced on or around December 15. A careful reading of the Dhirender Singh Committee’s recommendations on which it will be based, suggests targeting only chosen top-notch Indian companies for strategic partnerships. The past concept of a level-playing field and of awarding contracts to the lowest bidder is being given a miss, thus blocking smaller private defence manufacturers.
The basic expenditure tenet of a Government is to offer fair price through fair competition. Private defence manufacturers want a level-playing field, but it seems giving firm monopolistic commitments to select conglomerates or OEMs through a sophisticated nomination process, is in the offing.
Small manufacturers further claim the task force led by Mr VK Atre, former chief of the Defence Research and Development Organisation, has only amplified the Singh Committee’s recommendations by suggesting methodology for implementation.
The proposed selection process has seven fundamental parameters and it has identified six areas for strategic partnership, namely aircraft, warships, submarines, armoured fighting vehicles, complex weapons that rely on guidance system, C4ISTR and critical materials.
Mr Atre’s task force has reportedly further divided these six areas into 15 sub-segments, with each sub-segment having one strategic partner. It says an evaluation committee and an on-site committee will evaluate the eligibility of private companies. The evaluation will be 50 per cent on technical criteria; 30 per cent on financial criteria; and 20 per cent on platform-specific criteria. The conclusion is that only big companies with large capital bases can deliver on big contracts. Most small defence manufacturers declared ineligible have begun saying the Defence Ministry is using the Dhirender Singh Committee and the Atre -led task force’s recommendations to find alternatives to the existing and established PSU model. The financial criteria is the most contentious, as it recommends that foreign holding for listed companies should be less than five per cent, while unlisted companies have no foreign holding.
listed companies should have annual assets worth at least Rs 750 crore and an annual turnover of Rs 4,000 crore for three consecutive years to qualify for a strategic partnership. Unlisted companies must have assets worth Rs 250 crore to Rs 500 crore and an annual turnover of Rs 1,000 crore for the same period. The financial criteria, small players claim, is biased. Their demand is for the bidding process to be opened up. Private firms, observers and experts have suggested a number of steps that the authorities can take to tackle this issue. Observers say elimination on the basis of size holds no water and believe smaller companies can create a consortium or a credible joint venture to execute a procurement project cost-effectively.
They point out that listing subjective standards like competence in system engineering; supply chain management to manage life-cycle support and looking for assured revenue streams can easily be addressed by any small or medium size industry. Imagining that these competencies are non-existent in small companies is a fallacy that will invite debate, criticism, and be declared anti-SME — a key focus area of the Government. Wisdom suggests transparent open competition based on relevant parameters. The winner can be called a ‘strategic partner’ and be assured of a return on investment.
The two advantages are (a) Fair price determination in any contracts/procurement on the basis of competition. By having evolved strategic partners, decision makers will not need to make adverse comments or go for judicial intervention; and (b) Most segments have over two OEMs, and competing and completing in all cases is possible. The selection of a strategic partner should be based on the party’s ability to bring in technology not available domestically. This should carry the most weight (50 per cent).
The second enabling criterion should be the past record in forging relationships with SMEs having core competencies in the field for which they are applying, and the ability to absorb or create relevant leading-edge technologies and their own IPRs (25 per cent) The ability to provide adequate financial guarantees/warranties, EMD, security deposits and authentic funding program etc (20 per cent)
Executive cadre should have experience of and competence in their chosen segment (five per cent). The proposed DPP-2015 must avoid scandals, legal challenges regarding violation of monopolistic practices, or cartelisation in any direct and indirect form. The selection of strategic partners must be done only on competitive bids.
Simultaneously, all technology deals should be done on a G2G basis. The rest should be open and competitive to industry. The proposed DPP-2015 should not be decided by sector or on the basis of multiple overlaps into other defence industry sectors.