Procurement panel for lifting defence FDI cap

The committee on public procurement has criticised defence sector PSUs and ordnance factories for their role in inefficient defence purchases that leads to high costs and outdated technologies.

The committee also advocated lifting the 26 per cent cap on foreign direct investment (FDI) in private companies meeting the requirements of the defence sector because it acts as a barrier to set up hi-tech production.

The panel’s observations were, however, strongly opposed by the defence ministry. The ministry argued that raising the FDI cap on defence production is not the panacea for all ills because issues like export-control laws and political and strategic considerations would still govern transfer of high-end technologies.

The panel, headed by former bureaucrat Vinod Dhall, said defence public sector enterprises (DPSEs) and ordnance factories (OFs) produce low-technology components and are operating primarily as aggregators and assembly plants, sourcing most of their components from private producers.

“Over 70 per cent of the cost of the product supplied by DPSEs and OFs is expended on external procurement,” the report, being considered by a group of ministers (GoM), said.

The ministry of defence in its argument said there was no authentic data to suggest ordnance factories and defence public sector enterprises source large part of their components from outside. “Both in India and abroad, single-source procurement is inherent to defence procurement, because vendor base for major weapon systems and platforms is restricted due to high design, development costs, long gestation lags and lumpy capital investment along with uncertain flow of orders.”

The ministry has instead suggested that rigorous and independent cost audits should be done of DPSEs and OFs while negotiating prices. The report, which has been finalised with dissenting notes from three members, said the government should consider progressive corporatisation of selected ordnance factories to bring in greater transparency in their operations.

The committee also called for expanding the vendor base for defence procurement by encouraging private producers to participate in domestic defence procurement.

The Dhall committee has also been critical of the existing off-set policy in defence procurement for foreign vendors, wherein the vendor has to invest 30 per cent of their value of procurement order or Rs 300 crore or more in defence procurement units in India or purchase goods worth the same value from the Indian defence industry.

“As foreign companies are not allowed to invest more than 26 per cent in domestic private companies in the form of equity and as most of the local defence sector is in the hands of DPSEs and OFs, many foreign companies might not be interested in selling to India,” the committee observed.

The defence ministry contended that the offset policy introduced in 2005 has, in fact, helped in increasing sourcing of defence products and services from Indian companies.