Competition in defence

Govt must find ways to implement this in reality

Through successive versions of the defence procurement policy, most recently DPP-2016, the defence ministry is gradually abandoning its practice of bestowing orders for indigenous military equipment without competition on its 41 ordnance factories (OFs) and nine defence public sector undertakings (DPSUs). Today it embraces, at least in name, the notion that India’s vibrant and technologically capable private firms must be permitted to compete for defence orders on a level playing field with the public sector. Yet, hurdles prevent this concept’s full implementation. These include the belief amongst some defence ministry bureaucrats, particularly those whose annual assessment reports depend upon how much profit the DPSUs under them generate, that private firms should receive orders only after the manufacturing capacity of the DPSUs and OFs is fully availed. This perception overlooks the fact that the DPP does not provide for “nominating” DPSUs for production contracts, except in shipbuilding. All other contracts require competitive tendering in which the private sector can participate.

 
In contrast, the OFs, which are a department under the defence ministry rather than independent entities like the DPSUs, enjoy more regulatory protection. The Defence Procurement Manual, which regulates procurement carried out from the revenue budget, lays down that whatever is in the production range of the OFs must be procured from them rather than through competitive tendering. Now the defence ministry is seeking to dilute that protection by dividing the OFs’ production range into “core” and “non-core” items. Core items, which include explosives, ammunition and guns that are not yet manufactured by the private sector, will continue to remain reserved for OFs while private firms will be permitted to supply non-core items. This dilution stems from a growing realisation within the defence ministry that private sector efficiencies will yield more bang for the buck.

 
Additionally, the defence ministry is attempting to create structures to govern competition between private defence companies. For over two years, it has struggled with the concept of “strategic partners”, private firms selected on the basis of financial and technical criteria, which will be the government’s designated nominees for foreign vendors to tie up production joint ventures. Since chosen strategic partners will benefit from overseas tie-ups and defence ministry orders for some 10-15 years, there is heated debate over the modalities for selecting them. Understandably, bureaucrats worry that, as with the spectrum and coal block allocation processes, the grant of such financially remunerative benefits might place decision-makers in the cross-hairs of vigilance inquiries later.

 
The defence ministry has scheduled a key meeting next week to take a final view on the so-called “strategic partner policy”. There is danger that the policy might be adversely shaped by the bureaucrats’ wish to play it safe and eliminate the danger of charges of favouritism later. This could give birth to a policy that anoints several strategic partners for each technology realm — aircraft, warships and tanks — based on the calculation that competition for future contracts will keep all players straight and eliminate allegations of undue favour in choosing strategic partners. The danger, however, is that too much competition for too few orders will result in unviable business volumes. Even worse, loose criteria might open the floodgates, allowing in undesirable or unqualified companies without the required experience in high-tech defence manufacturing.