ACQUISITIONS AND PROSPECTS _ INDIAN NAVY AND COAST GUARD.
PROGRAMMES AND RULES DPP 06

The allocation for India's defence in the year 2007-08 which came in to effect from 1st April, is Rs 96,000 crores which equates to $ 23 bill as the Indian rupee has strengthened. Defence allocations are broken in to two broad major heads; Revenue for the day to day peace time and operational running of the Armed Forces and salaries, and Capital for infrastructure and purchases of hardware. Almost 32% of the budget amounting to $10 bill (Rs 41,922 crores) has been set aside for the current year's capital expenditure and purchases, and it is estimated that some $ 5 bill will be utilised for payments for foreign equipment already on order, modernisation and new orders and purchases from abroad, making India one of the largest importers of defence wares in the world. India's foreign exchange reserves have risen sharply to $ 260 bill, and the Government is consciously attempting to deplete it.

The pursuit of Defence Business is generally regarded to be more challenging and unpredictable than others. Gestation periods can be long, but profits margins are high, and once a weapon system is supplied, follow on business in upgrades and spares is assured. At present Russia, Israel, UK( 66 Hawks) and France( Scorpene) are the main suppliers but USA is pushing for inroads. Other nations have small orders and the scope is vast. Defence budgets of nations range between 2 to 5% of GNP and India has been allocating only 2.5% of its GNP for defence which does not include nuclear, space and some strategic aspects and pensions. The 2007-8 budget stands at $ 22 bill with an import quantum of almost $ 5.5 bill. In India the budget runs from 1st April to the next 31st March and the revised estimates are tabled in December when Parliament approves additional sanctions, if required by MOD, but in the recent few years the MOD had surrendered unspent funds. PM Manmohan however a the Commander's Conference stated funds for the Indian Navy will not be constrained and the expansion acquisition plan envisages a order book of 38 ships listed below. Coast Guard has 3X 3000 ton Oil Pollution Vessels getting ready at ABG Yard at Surat 4 OPVs , 5 IPVs and 10 Interceptor boats at Goa shipyard and elsewhere.

• Aircraft Carriers Gorshkov and ADS at Cochin(Commission 2010/12) ------ 2
• Type 17 Shivalik Class at MDL Mumbai ( Commission 2008 onwards)---------- 3
• Type 15A Modifies Delhi Class at MDL ------ 3
• Scorpene Submarines at MDL(2012) ------ 6
• Type 28 ASW Corvette at GRSE keel to be laid ------- 4
• OPV 3000 ton Indian Design at GSL Goa(2008) ----- 3
• Fast Attack Craft at GRSE -------- 10
• Landing Ships Large at GRSE ---------- 1/2
• Survey Craft Austal Design at Alcock Ashdown ---------- 3
• Krivack Class Frigates at Kalingrad Russia ---------- 3

This is an ambitious Naval programme for ships on order, and orders are awaited for Maritime Aircraft, Helicopters and media reports one nuclear Akula submarine is due to come in 2008 on a lease of some $ 520 mill for five years, and ATV nuclear submarine is being completed at Vishakapatnam Ship Building Centre. Larsen and Toubro is hopeful of submarine orders and could be Amurs. The Armed Forces are beginning to experience short age of manpower as salaries in India have suddenly risen with a spurt in the economy and employment.( See Article on AV Singh Report). With the gallop in technology, defence equipment is becoming more costly but will remain essential and defence budgets will always find a place in a nation's priority list, especially in these times of uncertain threats, and a world dominated by Adam Smith's economic philosophy out lined in the Wealth of Nations.

The methodology of doing defence business in India has hitherto been secretive, serpentine and undefined, but there are changes taking place for more transparency. India's defence slowly opening up to the world, and US Military Industrial giants have recently entered the fray, to give traditional Russian and other suppliers a run for their money. The Official Secrets Act in India is of 1923 vintage. It is an impediment as it is very rigid in not sharing even the minutest of defence details or QRs with suppliers, but is being treated with a Nelsonic eye by officials and Armed Forces, as it is definitely out dated in this day and age. The requests for information ie RFIs, from foreign and Indian suppliers, meeting with visiting prospective suppliers and communications through India's Defence attaches abroad in connection with defence purchases is now more open. The Navy has gone ahead and appointed a Rear Admiral (Foreign Cooperation and Transformation) who has under him three Directorates of Foreign Cooperation, Liaison and Concepts to deal with foreign agencies and Governments. Hence opportunities exist in India as the Naval Budget is $ 3.6 and some $ 1.2 bill is slated for imports.

In India till recently only the eight Government Public Sector Units called defence DPSUs, like HAL, BEL, Bharat Dynamics, Mazagon Docks etc and the 39 Ordnance factories were tasked to supply all major defence equipment on comfortable "cost plus" basis, but the scene is fast changing with private players gaining market share, and offering supplies at competitive rates and even large projects like ships, submarines and systems with foreign collaboration. In cases of soft ware solutions and commercial of the shelf COTs purchases the Armed Forces have little choice but to lean on civil suppliers.

The Coast Guard took the first step by ordering three large 3000 ton Pollution Control Ships and smaller vessels on private yards against competition from Government yards, and if the deliveries and quality match, it will be a trend setter. The Government has permitted 26% foreign direct investment in defence firms opening up what it earlier called the 'restricted strategic industries'. A list of civil defence suppliers are due to be given a status called Rajya Rakshya Utapadans RRUs which will equate them with PSUs to get orders and names like Tata Strategic/Power , Larsen and Toubro, Mahindras are in the list.

To force the pace and to usher transparency the Ministry of Defence has recently issued a some what long and complicated but explicit set of Procurement Rules for defence business in India. The rules have been framed separately under the head Revenue for items below $ 75 million, and Capital for all larger outlays including details of how ships are to be ordered on yards and the mode of inspection, trials and payments including performance bonds and associated bank guarantees. For imports from abroad above $ 75 million there is now a very significant clause that stipulates that 30% of the value of the contract has to be in offsets, and is inked in to the rules, besides the multi tender system, to avoid single vendor purchases except in emergency requiring higher sanctions. To avoid charges of favoritism and corruption, which every large deal in India (Bofors, HDW etc) has been smudged with, leading to legal actions but with no results, a very stringent Integrity clause is also stipulated, and firms are now being very careful not to dole out money to lobbyists and facilitators. Appointing of Defence Agents has also been made legal, but the rules are very restrictive, so most foreign companies have been obliged to open offices in India and recently even Northrop Grumman and Lockheed have followed Raytheon and Nexter( GIAT).

India's Defence Expenditure: In Crores (Rs) 4.5 Crores = $ 1 mill

 

Year	BudgetEstimates			Revised Estimates			Actual Estimates
	Rev	Cap	Total	Rev	Cap	Total	Rev	Cap	Total
2000-01	40,861	17,826	58,587	39,682	14,779	55,461	37,238	12,384	49, 622
2001-02	42,041	19,959	62,000	40,043	16,957	57,000	38,059	16,207	54, 266
2002-03	43,589	21,411	65,000	41,088	14,912	56,000	40,709	14,953	55, 662
2003-04	44, 47	20,953	65,300	43,394	16,906	60,300	43,203	16,863	60, 066
2004-5	43,517	33,483	77,000	44,852	32,148	77,000	-	-	-
2005-6	48,625	34,375	83,000
2006-7

Navy Payments: Navy has progressive payments to yards for 21 ships on order, Scorpene submarines, Gorshkov and 16 MiG 29Ks. Also navy will import ASW Helicopters, deep submerged submarine rescue vehicles, mine hunting vessels, advanced offshore patrol vessels, and 3 more IL 38s from Russia and TU 142 M upgrades. USA has supplied 17,.800 ton INS Jalshawa ( USS Trenton) with 6 SH-3 Sirkosky Seaking Helicopters. Israel has orders for Derby and Barak missiles. The Navy will also short list MR, MMR and look to spares from USA's Harriers and will soon order a Tanker on Fincanteiri of Italy which has consultancy contracts for the Air Defence Ship at Cochin Shipyard which is delayed because of delay in supply of Bulbars. the Navy plan envisages ships from Indian yards and abroad.

Mode Of Annual Budgeting. Theoretically the rules stipulate that the HQ Integrated Defence Staff IDS will work out the annual requirement of funds for capital acquisitions taking into account the schemes listed, the services demands and those proposed for the year ahead, carryovers, operational exigencies and proposed changes in priorities recommended by the respective Service Headquarters, by 31 December of each year. The details of these requirements would be scrutinized in the Acquisition Wing of MOD and then forwarded to Defence (Finance) for budgetary projections and allocations. Based on the budgetary projections and allocations the annual projection will be formulated by the respective SHQs and approved by the DPB by 15 April of the relevant Financial Year. The Annual Acquisition Plan is to be based on a two years acquisition cycle and is to cater for adequate cushion to safeguard against surrender of funds.

Induction Process and Trials. For induction, the manual states it will require trials and alludes to transfer of technology in cases. The manual states it will involve the Services Qualitative Requirements (SQRs), Acceptance of Necessity (AoN), Solicitation of offers, Evaluation of Technical offers by Technical Evaluation Committee (TEC), Field Evaluation, Staff Evaluation, and Oversight by Technical Oversight Committee (TOC) for all acquisitions above Rs 300 Crores ( $ 75 mill). These will be followed by commercial negotiations by the Contract Negotiation Committee (CNC), approval by the Competent Financial Authority (CFA), award of contract / Supply Order (SO) and contract Administration and post-contract management.

Solicitation of Offers/. Single Stage Two Bid System. Solicitation of offers will be as Per Two Bid System. It will imply that a 'Request for Proposal' would be issued soliciting the technical and commercial offers together, but in two separate sealed envelopes. This system safeguards against the possibility of the vendor increasing his commercial offer consequent to development of a single vendor situation after evaluation. At this stage, the vendor will give a written undertaking to meet the offset obligations laid down in the RFP, as part of the technical offer. This undertaking will be binding and failure to discharge offsets at any stage of the acquisition process will disqualify the vendor from any further participation and his offer will be treated as null and void. The vendor will under no circumstances delay the execution of the main contract on the plea of failure of Indian Industry in executing various offset contracts. Once the SQRs have been finalised, the sources of procurement of the weapon system/stores shall be ascertained and short-listing of the prospective manufacturers/suppliers carried out by the Service HQ. The short-listed vendors will be the Original Equipment Manufacturers (OEMs)/ Authorised Vendors/ Govt Sponsored Export Agencies (applicable in the case of countries where domestic laws do not permit direct export by OEMs). This clause refers to USA where many items are exported by the Foreign Military Sales FMS. In cases involving TOT, the short-listing of the vendors would take into account their ability to transfer requisite technology for license production. The list of short-listed vendors may be supplemented by the Technical Managers in Acquisition Wing for which a data bank will be maintained by them. Wherever possible, keeping the security and other relevant aspects in view, appropriate publicity may be given to the proposed procurement with a view to generate maximum competition.

Request for Proposal (RFP) and Offsets. The RFP applicable to all acquisitions is to be a self-contained document with a number of details that can enable vendors to make their offer after consideration of full requirements and parameters of the acquisition and includes the offsets stipulation. This subject is still to be refined as to whether the off set will be confined to defence industry, or open ended for Indian industry. The 314 Bofor FH 77 Howitzer contract signed as early as 1987 had off set clauses, but the contract was never fully implemented due to corruption charges and is likely to be revived if the future contract for 155mm Howitzers goes to Bofors who have performed well in trials. The RFP in selected cases would spell out the requirements of transfer of technology TOT depending upon the depth of the technology which is required, and whose range could cover technology for repair and overhaul; production from CKD/SKD kits and production from raw material and components level. Aspects which are to be included in the RFP in case production is from CKD/SKD/IM kits are specified and the rules require care should be taken to spell out the selection criteria clearly. The nominated Production Agency (PA) for the receipt of technology is to be closely associated in the preparation of RFPs. A standardised RFP document is given in the manual. At this first stage itself, the vendor is obliged in reply, to give a written undertaking to meet the offset obligations laid down in the RFP, as part of the technical offer. This undertaking will be binding and failure to discharge it at any stage of the acquisition process will disqualify the vendor from any further participation and his offer will be treated as null and void. Thereafter the Acquisition Wing will ask from those vendors, whose equipment has been short listed, to submit detailed offset offers in a sealed envelop within six weeks. These offers shall be evaluated by the CNC prior to the opening of the commercial offers already submitted by the vendors. Commercial offers of only those vendors whose offset offers are found to be in order, will be opened. The vendor has to undertake offset contracts amounting to 30 % of the commercial proposal. The technical offer is to include a compliance statement to this effect.

Technical Oversight Committee (TOC). TOC provides expert oversight over the technical evaluation process. Defence Secretary will constitute TOCs for selected acquisition proposals in excess of Rs 300 Crores ($ 75 mill) and any other case recommended by the Defence Procurement Board. The TOC will comprise of 3 members, one Service Officer, one DRDO scientist and one representative of DPSU preferably not involved with that acquisition. The TOC will be tasked to see whether the trials, trial evaluations, and other parameters have been met.

Standard CNC Composition Above $ 5 mill. The CNC will comprise the Acquisition Manager as Chairman, and the members of the committee will be the Technical Manager, Finance Manager, Advisor Cost, DG Quality Assurance representative, Procurement Agency representative, User representative, representative of Contract Management Branch at SHQ, Repair Agency Representative, Under Secretary concerned and Member Secretary to be nominated by the Chairman. If transfer of technology is involved then additional reps of Department of Defence Production, DRDO and Production Agency are to be included.

Integrity Clause/Pact IP. Further the rules stipulate that signing of an 'Integrity Pact' would be considered between government department and the bidder for schemes exceeding Rs 300 Crs( $ 75 mill). The Integrity Pact is a binding agreement between the agency and bidders for specific contracts in which the agency promises that it will not accept bribes during the procurement process and bidders promise that they will not offer bribes. Under the IP the bidders for specific services or contracts agree with the procurement agency or office to carry out the procurement in a specified manner. The essential elements of the IP are given in detail.