This article is written by Eshan M Saha. Eshan is an advocate and holds experience in Infrastructure (Projects) & Litigation (Arbitration) and currently advice on Policy & Regulatory aspects of Defence & Aerospace Sector.

It is indeed commendable to have a MAKE IN INDIA Policy in the DEFENCE SECTOR. India’s current requirements on Defence, seem to be dependent on imports. Therefore, private sector participation is being encouraged. This is to build STRATEGIC PARTNERSHIPS, with Original Equipment Manufacturers. Indeed an excellent proposition to build local capabilities, and also help exports. There is a broad, macro and generic objective, in the long term. It is to build a holistic network of local suppliers. This is to match the supply with the demand. Demand can go up manifold during war.

It is not too ambitious, to make India into a defence sourcing hub, through initiatives like MAKE IN INDIA.  The IDDM (Indigenously Designed Developed and Manufactured) is supposedly a game changer. Whether apparently or not, only time will tell. The questions which are being raised are:

The Original Equipment Manufacturers (“OEM”) and Vendors face issues on achieving the indigenous content of a certain percentage in India and this is owing to the percentage of indigenous content to be achieved as per “Buy Indian” vis-a-vis “Buy IDDM” category.  

• As per DPP (Defence Procurement Procedure) 2016, did the OEMs and Vendors found the process of categorisation complicated?
• Were the OEMs and Vendors apprehensive about issues with regard to local customisation?
• What are the benchmarks for the Vendor to show that Equipment Design is indigenous?
• What were the apprehensions on the percentage of Indigenous content vis-a-vis the total value of the contract?
• What were the issues faced by Vendors to modify equipment to achieve compliance as per Essential Parameters ?
• How can the costing of indigenisation be balanced?
• What are the parameters of the Contract Negotiation Committees to work out a Reasonable Rate vis-a-vis Last Procurement Price?

The above queries are not new. Queries to gain further clarity, with regards Defence procurement, have cropped up earlier as well. Let us take a general view of the above problems. Now let us compare the same, with manufacturing in other sectors as well. OEMs from abroad have mostly relied on the concept of “LOCAL BUILD” in terms of STRATEGIC PARTNERSHIPS with domestic players.

MAKE IN INDIA = LOCAL BUILD

This concept of LOCAL BUILD is applicable across the board, in other industries and sectors. Therefore, IS MAKE IN INDIA a new “nomenclature” for LOCAL BUILD? Let us find out. A comparative study of any foreign OEM manufacturing in India or elsewhere, may reveal certain valuable insights. The same are on Terms & Conditions of partnership with local players. The Terms & Conditions could have been for a variety of issues. It could have been for achieving backward integration, creating supply chains; cheap skilled labour, Research & Development facilities, subsidies from local government etc.   

According to the current status, what is the most important condition we need to factor in for local manufacture? Needless to mention, it is a technical clause. After all the entire STRATEGIC PARTNERSHIP is for Technology Transfer. However, is Technology Transfer self sufficient? How is this so called Technology transferred? Through drawings of course. Is there any guarantee that we can execute manufacturing a finished product, if we have drawings in place?

Usually the most, if not one of the most important clauses in a Contract/Agreement is the EXIT CLAUSE. This may or may not be part of the TERMINATION CLAUSE. However, what takes precedence in Agreements for such Technology Transfer and Strategic Partnerships, is  a clause wherein foreign OEMs and concerns which provide technology, shall send respective experts for quality control and manufacturing in India. This clause should be made mandatory as part of DPP 2016 and other initiatives for global strategic tie ups, where manufacturing is involved in India. The same is to safeguard, not just interests of the industry, but also of National Security. Therefore in case of Technology Transfer from abroad, specially in the DEFENCE SECTOR for STRATEGIC PARTNERSHIPS, technical experts also need to be brought in from abroad, to implement the technology borrowed, as there is no certainty, that the same can be executed and implemented through drawings alone.  

SOLUTION – WAY FORWARD

In case, this clause is absent from the contracts/agreements with foreign players. What can be done to mitigate the risk factor arising due to the absence of the exit clause in an agreement?  All the Contracts/Agreements with the Government of India have to be renegotiated. Section 62 of the Contract Act has to be applied for the same. The Attorney General, or Solicitor general or any of the Additional Solicitor Generals need to ratify the same ideally. If the Opposition parties have any issue, then they should escalate it to the relevant High Court and further, so that any doubt on legality is clarified. This will pave the way for smooth transition of such remedial measures. After all, nothing is as important as National Security in such matters. The rest of the issues are secondary. Therefore, now it is incumbent upon the Industry as well as the Central Government to take a relook on the same. Then follow up and make necessary changes.

Let us take a look at probable earlier precedents

Has Air India successfully reneged and renegotiated contracts with Aircraft Lessors and Engine Makers?

Have contracts for Public Partnership Projects been renegotiated to make the Model Concession Agreements flexible? Have RESOLUTIONS in respect of SPECIFIC PROJECTS been renegotiated?

Have Public Sector Units like Gas Authority of India been successful in trying to renegotiate contracts with foreign suppliers ?

In order to reduce investor risk can renegotiation of contracts with Government entities have an adverse effect on credibility?

Therefore what is the way forward?

YES, WE DO NEED A CENTRAL TASK FORCE, TO RENEGOTIATE GOVERNMENT CONTRACTS ON A WIN WIN BASIS, FOR BOTH PARTIES. THIS WILL CLEAR A LOT OF ROADBLOCKS, FOR PENDING INFRASTRUCTURE PROJECTS. IT WILL ALSO EXPEDITE A LOT OF PENDING LITIGATION, WHICH IS PROVING TO BE A CRUNCH ON THE JUDICIAL INFRASTRUCTURE AND DEPLETING STATE FUNDS, WHICH CAN BE USED IN OTHER DEVELOPMENT PROJECTS.