Laws related to defence procurement in India

In this blog post, Rituraj Singh Bhati, pursuing M.A. in business law from NUJS, Kolkata, talks about the laws and regulation related to defence procurement in India.

India being a country at constant internal and external risk from its neighbours in some or the other fashion needs and has a very strong defence mechanism. Sharing its borders with seven neighbouring countries India faces threats from two of them endlessly. Keeping this fact in mind, having the third largest armed forces seems just and reasonable.

Although the world’s third largest armed force’s maintenance is a very tedious task as it requires ample of daily requirements ranging from purchasing food for soldiers to acquiring arms and ammunition for the corps etc. Hence, Defence Ministry is a very elemental and a well-supplied organ of the country at large, which in turn has to maintain three services of Indian Armed Forces respectively Army, Air Force and Navy.

Ministry of Defence is headed by Defence Minister who overall regulates the armed forces of the country; whereas the Supreme Command of the Armed Forces vests in The President. The second-to-none task of ministry of defence is to secure the directions on all the securities and defence related matters from the government and forward them for proper implementation to its respective organisations.

Ministry of Defence also has to keep a keen eye upon the policies obtained by government and its implementation by the books, that too within the allocated resources.

Ministry of defence is constituted out of four departments viz.

  1. Defence Research and Development Organisation (DRDO)
  2. Department of Defence Production (DDP)
  3. Department of Defence (DOD)
  4. Department of Ex-Serviceman Welfare (DESW)

The departments of the Ministry of Defence also comprise of a Finance Division to act as an ombudsman upon all the four departments. Procurement related to defence procurement falls under the Department of Defence Production (DDP); as acutely defined by the Government itself.

The Department of Defence Production is headed by a Secretary and deals with matters pertaining to defence production, indigenisation of imported stores, equipment and spares, planning and control of departmental production units of the Ordnance Factory Board and Defence Public Sector Undertakings (DPSUs)”.1

Department of Defence Production came to existence post 1962 War with China in November 1962 to cope with research-analysis, development and manufacturing of equipment’s related to defence, which was followed by the Department of Defence Supplies (DDS) in November 1965 for strategic planning and administration of schemes to find self-substitutes of requirements for defence supplies.

These two departments were later consolidated and in 2004 were renamed and reformed as Department of Defence Production as we see and understand it today. At present the Minister of Defence is assisted by the Defence Research and Development Organisation’s (DRDO’s) new Chief as his scientific advisor to get a better hold of the topics generally  misconceived by a novice in the specific technological field.

Defence procurement widely speaks of the procedure through which the officers in service acquire all manners of equipments, goods, services and works they require to counterbalance their duties and charge. Defence Procurement Procedure in essence is a set of guidelines sanctioned by Defence Acquisition Council (DAC) in order to procure defence[1] equipment and technologies.

Though, defence procurement is a convoluted strategic process involving many factors, it only provides us with the structure and criteria for allocation of defence contracts to private dealers. After 2013 the DPP has recently been revised on 28th of March 2016 based on the recommendations of Dhirendra Singh Committee that consisted of 9 members who have served the armed forces or administrative services and have a good future insights towards the procurement policy were assigned the work of assessment and enhancement of the Defence Procurement Policy of 2013. It majorly emphasizes on “Buy Indian-IDDM”.

IDDM is a newly integrated procurement class with IDDM denoting “Indian (designed, developed and manufactured)”. DPP-2016 is created around a policy framework to promote and facilitate “Make in India” in Defence Manufacturing. It focuses on simplifying, centralising and standardizing Defence Procurement Procedure to backup ‘Make in India’ initiative of Government of India by advocating original and un-acquired designing, developing and manufacturing of defence paraphernalia.

Defence acquisition isn’t a regular open market industrial mode of procurement. It is rigidly bound by nonpareil features like-

  • Technological complexity
  • Foreign suppliers
  • Steep prices
  • Foreign exchange associations
  • Geo-political ramifications

Enhancing the role of MSME’s in defence procuration sector is one of the determining feature of DPP. Defence procurement is a non-negotiable and in-flexible aspect as the needs of the armed forces cannot be sub-sided. Therefore, transparency and adaptability is a must. Thus, DPP endorses rapid decision making, power delegation to the appropriate authorities to ensure accurate and adequate implementation of the Procedure.

Acquisition Categories of Equipment Procurement

Categories are placed in decreasing order of priority:

  1. Buy (Indian-IDDM)
  2. Buy (Indian)
  3. Buy and Make (Indian)
  4. Buy and Make
  5. Buy (Global)
  6. Make

Definitions of the above-mentioned categories follow:

Buy (Indian-IDDM):

‘Buy (Indian-IDDM)’ category refers to the procurement of products indigenously designed, developed and manufactured with a minimum of 40% Indigenous Content (IC) on cost basis of total contract value; or products having 60% Indigenous Content (IC) on the cost basis of the total contract value, which may not have been designed and developed indigenously.2

Buy (Indian):

‘Buy (Indian)’ category covers the procurement of products from an Indian player having a minimum of 40% Indigenous Content (IC) on cost basis of the gross contract value.3

Buy & Make (Indian):

‘Buy & Make (Indian)’ category introduces to an initiative procurement of equipment in fully formed state in quantities as necessary, from an Indian vendor engaged in a tie up with a foreign OEM, followed by indigenous production involving Transfer of Technology (ToT) in a phased manner of the critical technologies as per specified range, depth and scope from foreign OEM. The acquisition under this category requires a minimum of 50% of Indigenous content (IC) on cost basis of the making portion of the contract. Acquisition under this category can also be carried out without any procurement of equipment in fully formed state.4

Buy & Make:

‘Buy & Make’ category cites to an initial procurement of equipment in fully formed state from a foreign vendor, in [2] quantities as considered mandatory, followed by indigenous production through an Indian Production Agency (IPA), in a phased manner involving Transfer of Technology (ToT) of critical technologies as per scientific depth, range and scope, to the IPA.

With a view to maximise indigenous production in each procurement case, the AoN according authority would approve either an appropriate ratio of Fully Formed (FF), Completely Knocked Down kits (CKD), Semi Knocked Down kits (SKD) and Indigenous Manufacture (IM) kits; or a minimum percentage of IC on cost basis for the Make portion of acquisitions under Buy and Make category. Acquisition under this category can also be carried out without any initial procurement of equipment in FF state.5

Buy (Global):

‘Buy (Global)’ category refers to outright purchase of equipments from foreign or Indian vendors. When procuring from foreign vendors, Govt. to Govt. route shall be adopted for strategic and long term requirements of equipments.6

Make:

‘Make’ category refers to the acquisitions of “equipment/ system/ sub-system/ assembly/ platform/ sub-assembly, major components, or upgrades thereof to be designed, developed and manufactured by an Indian vendor, as per procedure and norms detailed in Defence Procurement Procedure (DPP).7

*(Definitions are obtained from DPP-16; as it is.’)

Aim of Defence Procurement Procedure

The prime aim of DPP is to facilitate the armed forces with military equipments, systems and other needful platforms with an assurance of never fading quality standards, performance capabilities through matchless utilization of budget allocation.

DPP also emphasizes upon transparency and simplicity in the procedure to procure defence mechanism and equipments to food and daily usable used by the forces around the country. It also aims towards increasing the designing, drafting, producing and manufacturing capacities of the enterprises associated to MSME (Ministry of Micro Small and Medium Enterprise).

Another fundamental aim of DPP is to timely procure the products as the delay or the buffer period between procuring and procurement of goods, equipments can be a big differential gap if any troublesome situation emerges or if any help is requested by any country worldwide. Therefore, DPP-16’ is revised to promote domestic manufacturing which can help immensely to the problem of timely procurement. It also aims to include government funding for research and development process to be conducted within India for faster, cost-effective and local analysis oriented results.

Scope of Defence Procurement Procedure

The scope of DPP is to cover all kinds of capital acquisitions whether undertaken by Ministry of Defence (MoD), Defence Services and Indian Coast Guard from both the heads i.e. indigenous sources as well as ex-import parties except for medical equipments.

Medical equipments will still be procured by the same procedure as they were procured before 28th of March 2016. While various other organisations like Defence Research and Development Organisation (DRDO), Ordinance Factory Board (OFB) and Defence Public Sector Undertakings (DPSUs) will, however, continue to follow their own procedure for procurement.

DPP-16 has also raised the offset clause to Rs. 2000 cr.  from Rs. 300 cr. which was set previously for Buy (Global) category, which means that if a foreign player sells arms and ammunitions to India, it’ll be mandatory to invest 30% of procurement cost into Indian firms directly or in-directly.

The scope of DPP has been drastically enhanced by the DPP-16, where Government will assure 90% of the funds for acquisition of equipment, components or upgrades thereof, to be designed, developed and manufactured by India for the projects under ‘Make’ category; previously the funds provided for “Make” category projects carried out in India was 80%.

A subtle 10% of growth in the funds provided by Govt. has given a boost to the category, “Make in India” campaign is responsible for the hike in funding as the government emphasizes upon creating goods of own and investing as much as possible in India itself.

India being the largest importer of arms with a share of 15% share of international arms imports; importing 70% arms from Russia, 12% from United States of America and 7% from Israel.9 DPP-16 takes a step towards transforming the Indian defence system to a self-reliant system which can curtail its imports and fulfill its own needs.

DPP-16 also states 100% refund from the government, in case of delay of procurement from vendor. The government will be [4]bound to pay the base cost plus Research & Development (R&D) cost to the vendor if the procurement gets delayed for more than 24 months. This step takes a step further transparency, simplicity and convenience in procurement which enlarges the scope of procurement for Indian vendors. Also, with the new policy, government has also given utmost priority to design and development which will in furtherance push the private players to invest more into Research & Development (R&D).

The scope has also been duly amplified for small vendors who can now supply indigenous parts to the foreign vendors. The increase in offset from Rs. 300cr. to Rs. 2000cr. has been applied because the contracts signed above the limits don’t have the indigenous requirements.

Earlier, the foreign vendors easily used to inflate the contracts above the lower limit of Rs. 300cr. to escape the 30% of the product deal that was mandatory to be done with Indian dealers and firms because of offset clause. With the new scenario, any dealer contracting below Rs. 2000cr. will have to invest 30% of the procurement deal in Indian firms and players, boosting the inbred suppliers and researchers.

With this increased scope we can now buy more form India; companies would have to establish manufacturing plants in India to meet the defence requisites.

With present prescribed procedure the companies rather than bribing the officials can lower the quotes of the contract, helping India with another darkened corner of our system.

Rules and regulations

There is no ad hoc codified law for Defence Procurement. Procurement under the head of defence is controlled and regulated solely by Defence Procurement Policy (DPP). DPP defines the heads under which the acquisitions are to be done and provides guidelines regarding the procurement of those acquisitions. DPP principally conveys the manner through which procurement by the defence will be done.

The process of procurement starts from the ground level or the base of the need where the demand arises. A certain demand for a certain product is considered by the superior committee which further sees to the viability and genuine requirement of the demand. If the committee thinks the demand to be fit for purpose it further sends the demand to the superior in charge and various procedures are followed by him too.

The demand of a product travels from:

The point of inception of demand- Level 1
To
The superior authorities- Level 2
To
The supreme authority- Level 3

(The chart is just an impression of how the demand travels, it in reality would have to travel and get passed at further extended levels)

The budget for procurement is sanctioned in advance for the year. All the three armed forces are sanctioned their budget beforehand and the Heads have to distribute the respective budget to the subordinate authorities and so on. Procurer of the lowest denomination has a budget in hand which he is bound to spend on the products sanctioned to him within a period prescribed by the presiding officer and so on.

A scrutiny committee is also set up if any part of the budget is left unused. Defence works of the opinion that no matter how big the budget is, it has to spend it all within time and limits. Defence personal related to procurement is under an obligation to clear the budget provided to him for procurement of products. Unlike the general state or central hierarchy where the demands are born at the highest level of the hierarchy and are then passed on to subordinate authorities.

Under state or central hierarchy a budget is first passed for procurement by the ministers and then the budget flows down the line with many subtractions, curtailing the final usable budget to a great extent. Government scrutinizes its employees and authorities if any expenditure is made out of the limit prescribed dissimilar to the working criteria of Defence Procurement.

Procurement Stage Differentiation

Procurement Stage Differentiation
Defence is such an organ of the country which cannot be left exposed wide open. The working style and the rules and regulations to which the defence wing operates are covert and confidential for the reasons of security of the nation.

Defence wing maintains proper solitude as it is necessary for an organisation made for the sole purpose of saving the country at large from seen and unseen jeopardy. Defence follows its own procedure and rules which are only to be governed and revised by Ministry of Defence (MoD).

Ministry of Defence also keeps its limits to the enactments of procedures and doesn’t interfere in the internal matters of the armed forces. Any rules and regulations regarding defence procurement are extensively confidential and are rightly kept out of the reach of a common man to save it from misuse and premature opening of cards before the opponent.

Corruption in Defence Procurement

India being the largest importer (rather than a manufacturer) of defence equipments in the world has certain potholes due to its non-transparent policies. Indian military spending has added up 147% in its expenditure. With no designated body or Inspector General to act upon ethics and corruption under Ministry of Defence (MoD) such great numbers in defence expenditure pose a greater threat of corruption and laundering of the money collected from the public through tax.

Various controller committees like CAG (Comptroller and Auditor General of India) and Public Accounts Committee have already accused armed forces for the issue of corruption under its governance.

The root of all causes can also be concentrated as “Low public-accountability of defence institutions”. The defence deals and procurements are well propagated by the ruling government to portray a tough face of governance but these deals and acquisitions are well excluded from public accountability on the name of secrecy related to Defence matters.

The Armed force’s officials come out with various allegations on procedures and other country running authorities after their retirement (after they’ve secured their part). We will not see any present officer of armed forces speaking against their Institution. On the contrary number of such officers keeps extending who accuse their own institution after retirement.

Public at large is cut out of will from the expenditures and accounting of their hard earned money in regards to defence. A common man is never allowed to ask questions about the spending by the Defence Ministry. Every such attempt of questioning is tagged as convulsion and the person so asking is deemed as an ‘Anti-national’ by the politicians involved in such malpractices.

Defence also maintains an absolute hush-hush on its financial matters and condemns anything which can expose its officials under the offences of demanding and accepting bribe as ‘confidential for the sake of country’s security’. Different court and laws for personal of armed forces also constitute to the fact that such matters of corruption and malpractices in defence wing never gets exposed before the country.

Corruption is destroying the trust of public from the military institutions and armed forces. Defence sector by the virtue of its nature warrants secrecy but certain areas such as defence budget, defence policy and defence procurement to curtail the corruption.

“India is the only democracy with no provisions for legislative oversight of its intelligence agencies and there is virtually no parliamentary scrutiny of “secret” spending (i.e. spending related to intelligence agencies and national security),”10[5] the reports of the survey explains in brief that how India lack in the principles of democracy by not keeping the transparency in the process.

Scams in Indian Defence Sector

Lack of transparency of procedure and accounts lies throughout the line. Defence is the sector which has been a host of the largest and the most humiliating scams and scandals in Indian history. An estimated US$ 20 billion is lost to corruption only in this particular sector per annum. 

DPP is a gimmick of politicians and top notch officials of Indian Armed Forces for earning personal benefits and profits out of the budget meant for defence procurement. After excluding benefits earned from the deals, the officials and politicians are also widely accused and proved for demanding and accepting bribes from the vendors or dealers.

Legislators sitting on the top edge of the ministry and officials on the top edge of the military keep the relation very secretive and out of conflict to save them from letting the cat out of the bag.

In very short span of 69 years from Independence India has witnessed countless scandals only in defence sectors.

Some of the major scams are cited below:

  1. Bofors scandal
  2. 2013 Indian helicopter bribery scandal
  3. Barak missile scandal
  4. Jeep scandal
  5. Kargil coffin scam
  6. Scorpene deal scam

The vast varieties of scandals prove that corruption in India can be formulated under any sphere.

Though being a very corrupt process and a tool for corruption and bribery, defence procurement is an essential organ of defence ministry. Without the present Defence Procurement Procedure the situation of defence wing would have been deteriorated even to a greater extent.

A codified law is strictly needed which can regulate the defence procurement and be a watch dog for the matters related to defence procurement. Through the codified laws of Ministry of Defence would also be bound by some authority which at present point is unaccounted by any means. It’ll also help in making defence public accountable, as the money it uses is acquired from the taxes collected. Transparency in procurements is a necessity to penalize corrupt policies as well as people.

A codified act would also help in strengthening the defence mechanism of the country at a reasonably lower cost and better quality. It would also enhance the scope of Indian manufacturing.

If the country gets a codified act, further research can be conducted in various areas which remain untouched because of the ‘Clause of Confidentiality and secrecy’.

What are your views on this? Feel free to comment below & share the article.

 

Reference-

[1] http://www.mod.nic.in/

2 Defence Procurement Policy-2016.

3 Defence Procurement Policy-2016.

4 Defence Procurement Policy-2016.

5 Defence Procurement Policy-2016.

6 Defence Procurement Policy-2016.

7 Defence Procurement Policy-2016.

9 SIPRI

10 transparency in defense procurement

Did you find this blog post helpful? Subscribe so that you never miss another post! Just complete this form…

LEAVE A REPLY