24 July 2014

Avro-replacement Programme – Out of Turbulence?

July 23, 2014

One of the landmark decisions taken by the Defence Acquisition Council (DAC) in its first meeting held on 19th July 2014 under the stewardship of the new Defence Minister was to put the troubled Avro-replacement programme of the Indian Air Force back on the tarmac.

The Indian Air Force must be rueing the day it agreed to tweak the proposed categorization of the proposal from Buy (Global) to Buy and Make. Since then the programme has been through a lot of turbulence.

Buy and Make cases require the Indian Production Agency (IPA) to be approved by DAC. Though the IPA can be from the public or the private sector, in practice DAC somehow normally always ends up nominating one defence public sector undertaking (DPSU) or the other as the IPA.

The Avro-replacement programme was to be different in that perhaps for the first time the private sector was to be permitted to enter the aircraft manufacturing sector. But the Ministry of Defence (MoD) found it difficult to recommend a private sector IPA to DAC for approval. This is when it was decided that the foreign original equipment manufacturer (OEM) will be permitted to select the IPA. 

After several ups and downs and examination of the proposal by two committees, the programme was cleared by DAC. The turbulent journey of the proposal from the time it was initiated to the time DAC accorded the AoN (approval of necessity) was by no means a cakewalk but what happened thereafter takes the cake.

First, the Indian companies, who stand to gain the most, started having doubts about the viability of the proposal and then a missive from a senior minister almost put paid to the dream by questioning his own government’s decision to keep the state-owned Hindustan Aeronautics Limited (HAL) out of the race.

The significance of the decision taken in DAC’s meeting of 19th July meeting lies in the fact that it has revived that dream by allowing the process to resume from where it was suspended in October last year following the missive. The last date for submission of bids is reported to have been now extended to August 28, 2014. Hopefully, the programme will have a smooth voyage from here onward.

While the vicissitude of this programme could largely be on account of its being the first of its kind in terms of the procedure to be followed for selection of the IPA, there are many lessons to be learnt from its history.

First, it is quite clear that innovative ways will have to be found if we have to hasten the process of strengthening the domestic defence industrial base. The decision to let the Avro-replacement programme go to the private sector and the IPA be selected by the OEM were two innovative features of this programme. Suitable provision needs to be made in the Defence Procurement Procedure (DPP) for such innovative steps being taken without these being seen as ‘deviations’ from the prescribed procedure.

This will also require greater boldness on the part of the officials in their individual capacity and as members of various committees through which the procurement proposals are routed before they reach the DAC in taking decision on programme-specific requirements which will obviously not be run-of-the-mill procedural issues.

Two, unless it is decided to do away with the Buy and Make category altogether, situations will arise in future when the MoD will be called upon to select an IPA. If the domestic private industry is to be encouraged, MoD will have to step out of the comfort zone of nominating a DPSU as the IPA. This is possible only if MoD lays down under what circumstances only a DPSU will be nominated as the IPA and, conversely, when will a programme be open to the private sector also. 

This implies that guidelines will also need to be laid down for selection of an IPA from the private sector. This is going to be difficult, especially if there is no pre-existing Indian company, or if there is just one company, making the equipment/platform which MoD intends to buy. Selection of an IPA from the private sector could also make MoD vulnerable to pressures and nasty allegations of favouritism in selection of IPAs.

The solution lies in formalizing the procedure adopted in the Avro-replacement programme. The OEM could be permitted to tie up with any IPA of his choice from the private or the public sector. Prescribing stringent criteria for selection of IPA, as has been done in the Avro-replacement programme, makes little sense. MoD needs to rely on the business sense of the OEM in selecting the IPA without imposing any criteria. There is nothing to be lost in the process as the contract in such cases will always be between MoD and the OEM, with the latter being fully responsible for its successful execution.

Three, due care must be taken to customise the Request for Proposal (RFP) to ensure the viability of the programme/project. In Avro-replacement programme, one of the two committees that had been set up to examine whether OEM should be permitted to select the IPA had recommended that to make the programme viable MoD should permit higher FDI for the project and also permit export of the aircraft.

One of the issues that the industry raised after the RFP was issued was about the viability of the programme keeping in view the limited number of aircraft (40) to be built in India. This issue would not have come up had it been mentioned in the RFP that the IPA will be permitted to export the aircraft after meeting the domestic requirement, subject to the export not being to a country on the negative list.

Four, there is a need to institutionalize a system of interacting with the Indian industry associations and the prospective foreign OEMs to ascertain if there are any requirements that could be taken care of by MoD to make the programme viable. Those issues could also be addressed in the RFP.

In the Avro-replacement programme, several doubts were raised by the industry about certification of the aircraft, non-availability of airfields for carrying out trials, etc. These issues could have been addressed in the RFP had they been raised when the Air HQ interacted with the industry associations.

Five, the issues concerning the cost of ToT, ownership of IPR, subsequent upgrades/life-extension and the life-cycle support also need to be addressed. The cost of ToT in particular is an important issue. In the Avro-replacement programme MoD will be paying for the ToT that will go to an IPA in the private sector. The possibility of working out some formula whereby MoD would get returns in future programmes on such investment is worth exploring.

Six, as of now our offset policy is entirely vendor-driven. Unless its orientation is changed in the upcoming revision of the policy, putting MoD in the driver’s seat, Buy and Make programmes would probably be best suited to offsets being demanded in an area to be specified by MoD in the RFP.

Lastly, such programmes also need to be seen as creating more opportunities for the small and medium enterprises (SMEs). This can be achieved by stipulating a higher percentage of indigenization to be achieved in the product manufactured in India. This will compel the OEMs to involve larger number of SMEs. But the percentage should not be so unrealistically high as to make the programme unviable. This may well be a long shot but exploring this possibility while interacting with the domestic industry associations (including the SMEs) and the foreign OEMs will be worth the effort.

Views expressed are of the author and do not necessarily reflect the views of the IDSA or of the Government of India

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