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Western Defence Companies Lobby for Reforms in Defence Procurement Process

2010-09-08 Business Standard reveals that major defense companies from U.S., U.K., Germany, France and Canada have jointly written to Defence Minister A.K. Anthony seeking a number of reforms in the Defence Procurement Procedure for making it "supplier friendly". However it seems, Russian and Israeli defence companies - which account for a vast majority of Indian deals - aren't part of this group seeking reforms.

The major demands include an enhanced FDI (foreign direct investment) ceiling of 74 per cent, allowing dual-use technologies as offsets and creating an offsets authority to bring in predictability and transparency.

The letter, reviewed by Business Standard, points out frankly that "the current offset polices have effectively hindered our member companies' ability to play a full role" in selling equipment and that "the (Indian) MoD may not be able to benefit" from the best defence systems on offer. The letter urges that, "(p)rocesses must be open, fair and transparent, and time is of the essence".

This approach comes as the MoD revises procedures for procuring an expected $100 billion worth of foreign military equipment over the next decade. The new Defence Procurement Procedure of 2010 (DPP-2010) is anticipated to be released later this month. It will supersede the currently valid DPP-2008.

The letter - which is also copied to Antony's deputy, M M Pallam Raju, and the MoD's top two civil servants, Pradeep Kumar and R K Singh bears the letterheads of the USIBC; the US AIA (Aerospace Industries Association); the British ADS (Aerospace, Defence and Security); French aerospace body GIFAS; German aerospace body BDLI; and Canadian aerospace body AIAC.

The letter urges the following specific policy reforms:

-- Enhancing the current 26 per cent ceiling on FDI in defence. The letter states that accepting the Ministry of Commerce's proposal to enhance FDI to 74 per cent would "bolster confidence" and enable "robust investment in technology transfer".

-- It suggests allowing dual-use technologies and high-tech civilian projects to be counted as defence offsets. This, the letter argues, would create a high-tech, civilian industry, that would build dual-use products to feed the defence industry. The current offset policy mandates only direct offsets, i.e. products that are directly used in defence systems.

-- The MoD should offer multipliers for offsets in key sectors where it most wants technology transfers. For example, if the MoD wants radar technology, it could specify an offset multiplier of 2. A company that transferred radar technology worth $1 million would get $2 million in offset credits. The current policy treats all offsets equally.

-- The creation within the MoD of an empowered and adequately staffed permanent "offset authority". Currently, "there is still ambiguity in how offset contracts will be approved, validated, discharged and measured".

-- Capping financial penalties in defence cooperation, in order to "not deter competition for defence contracts". The letter points out that "(u)nlimited financial liability inhibits industrial defence cooperation."

Business Standard anonymously quotes Minister of Defence sources saying the ministry is deliberating its response to this letter. In 2007, the US India Business Council (USIBC) also an influential signatory to this letter had sent the MoD a letter suggesting the adoption of "international best practices" in offsets. The MoD's current offset policy mandates that foreign vendors that are awarded defence contracts above Rs 300 crore must plough back at least 30 per cent of the value of the contract into Indian defence production or research and development.

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