Seminar on 'DPP 2006 & Make Procedure - Creating New Public-Private Partnerships in Defence Procurement'
October 24, 2006, New Delhi

Address by Mr. Pranab Mukharjee, Hon'ble Minister of Defence

It is indeed a matter of great pleasure to be here this morning to deliver the inaugural address and share my thoughts on "Defence Procurement Procedure 2006 & Make Procedure-Creating new Public-Private Partnerships in Defence Procurements". At the very outset, let me congratulate FICCI for having taken the initative to organize this seminar.

This interactive session would give the Indian Industry the much-needed opportunity to understand the policy of the Govt. and what it seeks to achieve through the new Defence Procurement Procedure that the Government has announced this year. Most importantly, it would give the champions of the Indian Industry an insight into what role it can perform to make a more secure India.

From FICCI's point of view, this seminar attains greater significance for the light it would throw on the vistas that the new procedure has opened for the Indian Industry. From the nation's point of view, it would encourage greater participation of the private industry in the defence sector and enhance the security of our nation. For, there can be no real security until we develop a strong and vibrant military-industrial complex that can provide our armed forced with their needs. The vision is the resting of the security of the nation on the bedrock of such an indigenous capability. The mission is the creation of the right atmosphere and conducive environment to achieve it.

This vision and mission are dictated by the recognition of the reality that defence acquisition is by its very nature a complex and intricate process. It is influenced and limited by several factors. Some of them are tangible and others defy easy quantification of the degree of their influence.

The armed forces of every nation, nurse the desire to induct the most sophisticated defence equipment that they can.

But, more often than not, this remains the unfulfilled dream of every force. Finances may be an obvious constraint, but unlimited finance is also no guarantee to the fulfillment of this objective.

The availability of high-end technology is made difficult by technology denial regimes. May foreign Governments deny export licenses for Defence equipment and their policies are influenced by their political and strategic considerations. Further, every nation that relies on imported weapons and systems is vulnerable to a sudden cessation of supplies during wars; ironically, when they are most needed. India has in the past also been adversely impacted by such policies of supplier nations.

In light of the dangers inherent in reliance on foreign sources for our defence needs, the efforts of our Govt have been to evolve procurement procedures to encourage the indigenous industry to play a larger role in the defence needs of the country. Let me make a rather immodest claim that the Ministry of Defence has today achieved credible success in this direction. The Defence procurement procedure, that has its genesis in the 1987 report of the Pubic Accounts Committee, gave rise to the 1992 procedure. Thereafter the 2002 regulations were enunciated and it was modified in 2003.

With this goal in view, we have in the last two years revised the defence procurement procedure as many times.

Each was a remarkable improvement over the other. In 2005, we drew up an elaborate procedure and put in place good practices and systems that seek to achieve high levels of probity, transparency and integrity in the procurement of Defence equipment without compromising efficiency and the expeditious procurement of defence equipment.

The year 2006 represents a watershed in the formulation of defence procurement procedures. We promulgated the Defence Procurement procedure (DPR) 2006 and Defence Procurement Manual (DPM) on 1st Sep 2006 articulating several recommendation of various bodies including that of the Kelkar Committee.

Significantly, in DPP-2006, we have for the first time introduced the Make procedure. This introduction is the most important change that we have made in DPP-2006. It is aimed at harnessing the inherent capability of the fast- growing technical and managerial prowess of the domestic industry for the security interests of the nation. What we seek to achieve is synergy between Govt. bodies and private industry to strengthen the defence base of out nation.

The long pending request of the Indian Industry for a level playing field has also been addressed and now forms part of these documents. With these measures, we have effectively opened the doors for the Indian Industry to participate in defence research, development and production. The changes brought by the procedure have opened up immense opportunities for the Indian Industry at a time when our economy is growing from strength to strength.

The Indian economy is poised to achieve unprecedented economic growth. In the last financial year, we have achieved annual economic growth of around 8 %. According to the latest projections, India is expected to achieve 10% growth during the 11th plan period. As our Prime Minister had said initiating the discussions on the approach paper to the 11th Plan, this rate of growth is "feasible". This had implications for the defence industry.

Defence expenditure of a country is largely guided by its economic growth and threat perception. With the growth in the economic strength of the nation, its security responsibilities also increase. This would be reflected in the inevitable increase in the defence budget of a nation. Therein lies new opportunities and challenge which the Indian industry should gear up to seize. The growth in Defence expenditure should provide the Indian industry the impetus to actively participate in the Defence sector.

Currently, the defence expenditure stands at 2.25 % of the GDP. Allocation of funds for the modernisation of Armed Forces has been increasing in order to acquire state of the art weaponry and keep abreast with the pace of technology.

Budgetary trends over the last 5 years show that the share of Capital expenditure in Defence Budget has grown significantly. While the expenditure on capital expenditure for the year 2000-01 was Rs.12,384 Crores, it was over Rs. 33,075 Crores in 2005-06. This is now expected to increase to Rs. 37,458 Crores in 2006-07 and would represent a growth of around 202 % since 2000-01.

As the defence expenditure is growing, it is our earnest desire to see the Indian industry and the society, benefit from the spin offs such a growth would engender. The Government is convinced that the requisite levels of skill and expertise are available in the Indian industry to undertake the production of sophisticated defence equipment. If the expertise is not available, we believe that it can be developed or absorbed effectively.

Some of the Indian firms have earned world-wide recognition for their technical competence, competitive strategies and capacity to adapt to dynamic market conditions. If the private industry can compete successfully in the other sectors internationally, I personally believe that there is no reason for Indian industry not being able to herald a new era in the filed of indigenous Defence production.

It is to provide the Indian private industry the required impetus and opportunity to actively involve in the production of defence equipment, that we have introduced several provisions in the new Defence Procurement Procedure-2006. An entire chapter has been dedicated for the 'Make' procedure. It has been made as elaborate as possible, including in it several incentives to the private sector.

'Make' procedure has been divided into three distinct categories under the heads: "Strategic, Complex and Security Sensitive Systems"; "Low, Technology Mature System" and "High Technology Complex System". While the items that fall under the first category would for the time being be within the domain of DRDO, Opportunities abound in the area of Low Technology Mature System and High Technology Complex Systems.

The Low Technology Mature Systems have been categorized as 'Buy Indian and would have a minimum of 50% indigenous content. This would provide great opportunities to the Indian Industry to even use the existing level of technology to achieve the mandatory 50% indigenous content.

The category "High Technology Complex Systems" is significant because it would provide vast opportunities for public-private participation and also room for individual initiative of the private Industry. The procedure aims at harnessing indigenous research, design and development of capabilities required for our armed forces. Several steps have also been outlined to give expression to this objective. They include 14 steps that have been formulated to ensure that the procedure is rational, transparent and encourages indigenous production of defence equipment.

Indigenous development and production would be undertaken by organizations that would be categorized as Raksha Udyog Ratnas (RURs), Indian industries, Defence Public Sector Undertakings, Ordinance Factory Boards and or consortia which would be provided level playing field. The Indian Industry would be happy to know that the Govt has incorporated the provision in DPP-2006 that the RURs would be treated at par with Defence Public Sector Undertakings for receiving technology and undertaking licence production with Transfer of Technology from foreign collaborators.

In brief, the Integrated Defence Staff Hqrs or the HAIDS would formulate the defence planning guidelines which would encompass the plans of the three Services. This plan would also cover the span of 15 years envisaged under the Defence Capability Plan. Thereafter the Long Term Integrated Perspective plan or the LTIPP would be formulated taking into account inputs from the three services.

The Integrated Defence Staff HQrs would carry out the feasibility of the projects categorized as 'Make', under the Defence Capability Plan and undertake feasibility studies for each project. Thereafter, it would go through several steps including that of the preparation of the Project Definition Document that would be prepared by the Integrated Project Management Teams (IPMTs) constituted for the purpose.

The IPMTs would invite expressions of interests from all the domestic industries both private and public with proven capability to participate in the programme. As a matter of rule, at least two production agencies would be short listed for the development of a system and the final selection would be done by the Defence Production Board. DRDO would also provide necessary assistance to the industry by providing back-to-back arrangements for conducting research, design or development.

In a departure from the past and to encourage Defence private industry, under the 'Make' procedure, the Government would also make available funds for the project upto 80% of the development cost. The IPMTs would identify important milestones during the development of prototypes Funds would be released by the Ministry to the industry on the recommendation of this body. After the prototype has been developed, IPMTs would carry out the user trial readiness of the prototype before offering it for user trials.

We have also taken care to ensure that we do not penalize a domestic firm that comes forward to meet the challenge of producing state-of-art defence equipment. In case the project does not proceed according to the predetermined milestones and is suffering from time and cost overruns the project may be foreclosed as per the exit criteria given in the DPR.

Another incentive is the policy regarding the placement of a minimum order for the equipment being developed. This would ensure that it would be worth the while of the private industry to undertake development and manufacturing of defence equipment for the three services.

In yet another step that the Indian Industry would appreciate, the Govt. has also incorporated a provision to amend the Staff Requirements where a designated agency is unable to meet the technology requirements. We understand and appreciate that it would not be possible for each product to be developed exactly as what was envisaged. Therefore, when the equipment does not meet the Staff requirement, it would not be the automatic termination of the project. In such circumstances, discussions would even be held with the Service Headquarters to assess if the SQRs could be changed. But I must also hasten to add here that this provision should not encourage complacency in the private industry.

The Govt. has also introduced the concept of offsets. 30% direct offset is now required to be given by foreign vendors for defence contracts above Rs. 300 crore. It is estimated that 10 billion USD is likely to flow back into India during the 11th Plan Period, 2007-2012, through offsets in defence deals.

This provision of offset would invariably result in strengthening the domestic defence industrial base through foreign investments and technology transfers. Foreign manufacturers of defence equipment would have to associate with Indian industry to implement the offset arrangement. This is an opportunity that the Indian private industry should seize.

The involvement of foreign original equipment manufacturers defence offset arrangements would ensure that they become stake holders in India for the continued availability of spares/services required to ensure optimum performance of these equipment without disruptions.

Defence offset arrangement would therefore provide Indian private sector access to defence technology.

Though not directly connected with the Make procedure, DPP-2006 also contains provisions that would enable greater participation by the Indian private industry in the defence sector. Transfer to Technology is envisaged in 'BUY' category cases for the establishment of maintenance Infrastructure. In these cases, the foreign vendor would have to collaborate with an Indian firm, either public or private for providing base or third line repairs and the production of certain requisite spares for the entire life cycle of the equipment. This provision would make it necessary for the foreign vendor to transfer certain technology to the Indian vendor. It would also result in the induction of new technology and the upgradation of the technological base of the Indian vendor. Consequently this may also pave the way for further collaboration between the foreign vendor and the identified Indian firm.

What I have now outlined, I am sure, would encourage the private sector to actively involve in the Defence sector. I may even venture to suggest that the risk element involved in the participation in the Defence production would in many ways be lesser than for other commodities with 80% development cost being borne by the Ministry of Defence. With DRDO's vast technical know-how and research experience available to the domestic industry, I believe it is a win-win situation for the Indian private sector. But I will consider it a duty to remind you all that along with the vast incentives that have been announced by the Govt., there should also be a corresponding sense of duty that the private Industry has to display.

The challenge is now before you and I hope that you will strengthen your sinews to face them. I assure you on behalf of the Government that the Ministry would not be found wanting in assisting wherever necessary. For every step you take we would take two and together, through this public-private partnership, herald a new era in the Defence strategic capabilities of India.