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Nurturing Capital Acquisitions

Amit Cowshish is a former Financial Advisor (Acquisition), Ministry of Defence and former Consultant, Manohar Parrikar Institute for Defence Studies and Analyses, New Delhi. Click here for Detailed Profile
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  • February 25, 2016

    The Defence Acquisition Council (DAC) is the highest forum in the Ministry of Defence (MoD) which, among other things, accords Acceptance of Necessity (AoN) for capital acquisition proposals estimated to cost upward of INR 300 crore. For the uninitiated, AoN is simply an approval-in-principle that paves the way for the tendering process to begin.

    Press reports about the last meeting of the council held on March 23 indicate that this time around the focus was on taking stock of the approvals accorded since the present government came to power in May 2014 and the acquisition proposals currently in the pipeline.1

    Going by these reports, as many as 81 acquisitions, involving INR 1.5 lakh crore, have culminated in contracts and most of these are under the ‘Make in India’ category. Another 86 proposals are apparently in the final stages, whatever that might mean. The Defence Minister has directed that these proposals should be cleared in the next couple of months.

    Over the past two years, DAC has accorded AoN for 66 schemes, entailing an estimated outlay of approximately INR 2 lakh crore. But, on the flip side, as many as 314 acquisition proposals have lost relevance because of the advancement in technology or other reasons, prompting the DAC to ask the services to review and cancel all pending proposals that have lost ‘contemporary relevance’.

    While taking stock of the acquisition proposals and projects is critical for bringing in efficiency in defence procurements, the focus on statistics dissembles some important issues.

    First, not every AoN accorded by the DAC necessarily gets translated into a contract. The AoN lapses if the Request for Proposal (RFP) is not issued within a year of the AoN, strange as it might seem considering that the Defence Procurement Procedure (DPP) permits only eight weeks to complete this stage. Be that as it may, what is equally, if not more, important than according AoN is to ensure that these approvals do not lapse on account of failure to issue the RFP.

    Review of the cases in which RFPs should have been, but were not, issued within the permissible period must be a permanent item on the agenda of the DAC’s monthly meetings. But even this may not be enough as it will be too late for the DAC to retrieve the situation by the time it takes stock of about-to lapse or already-lapsed approvals. What is needed is a proactive approach to ensure that the RFPs actually get issued in all cases without fail.

    Two steps can be taken to ensure that. One, no AoN should be accorded by the DAC or, for that matter, the lower competent authorities, unless the RFP is ready to be issued. Two, the Defence Procurement Board (DPB), headed by the Defence Secretary, should start tracking the case immediately after the AoN and resolve any issues that might be holding up RFPs in respect of the DAC-approved proposals.

    In fact, the DPB should also review in its monthly meetings the progress of each, or at least every major, procurement case as it moves through the various post-AoN stages – tendering; technical, field and staff evaluations; and, commercial negotiations – till the signing of the contract.

    Several issues crop up at these stages that cause delay, largely because of the inability of the officials concerned to take quick and bold decisions. The painfully slow pace at which the Airbus-Tata bid, which entails the manufacture of a transport helicopter by a private sector entity in India for the first time, is moving is a burning example of indecisiveness in decision-making, which has been the biggest bane of all defence acquisitions in India.

    Considering the composition of the DPB, it is ideally placed to quickly resolve all contentious issues that crop up during the long drawn out procurement process either on its own or by referring the matter to the DAC.

    Second, while the news that 81 procurement cases are in the final stages is heartening, there is no saying how much time it might take for them to fructify into contracts. It often takes a long time to conclude the negotiations – the ongoing G2G negotiations for the acquisition of 36 Rafale aircraft from France being a case in point.

    Even after the conclusion of the contract negotiations, it often takes a long time to sign the contract. One of the reasons for that is that all cases with negotiated cost of INR 500 to 1,000 crore require the approval of the Finance Minister and that of the Cabinet Committee on Security (CCS) beyond that limit.

    The sequential processing of such cases, first within the Ministry of Defence (MoD) and then in the Ministry of Finance (MoF) before they reach the competent financial authority (Finance Minister or the CCS), is extremely time consuming. Some steps can be taken easily to remedy this situation.

    Higher delegation of financial powers is an obvious measure. The financial powers are presently exercised by: the Deputy Chief of Air Staff, Vice Chiefs of the other two services and the Director General of the Coast Guard up to INR 150 crore; by the Defence Secretary up to INR 300 crore; and by the Defence Minister up to INR 500 crore. These limits could be enhanced substantially, subject to the system of internal checks and balances being strengthened.

    A joint mechanism of the officials of the two ministries could be set up to process the proposals that require the Finance Minister’s approval rather than such cases being sequentially examined in both the ministries.

    The cases beyond the Finance Minister’s powers could go directly to the CCS after being examined by the same joint mechanism, Secretary Defence Finance/Financial Advisor Defence Services (who is also of the rank of a Secretary), Defence Secretary and the Defence Minister. This will not preclude the MoF from being in the loop as the Finance Minister will anyway get an opportunity to participate in the final decision-making in his/her capacity as a member of the CCS.

    Third, it is queer that 314 acquisition proposals have lost relevance because of technological changes. Apart from being a reflection on the existing systems and procedures, it raises questions about the formulation of both the qualitative requirements (QRs), which are supposed to be made keeping in view likely future technological advancements, and the existing system of preparing the Annual Acquisition Plans (AAPs).

    The AAPs are, in fact, two-year roll-on plans, which are reviewed and recast every year. That being the case, it is inexplicable how 314 outdated proposals still figured in the AAPs. The annual review should have worked as an automatic filter to weed out such cases.

    Certification by the services, at the time of projecting the Annual Acquisition Plans for approval of the DPB, that none of the proposals included in the Plan are affected by technological changes should be made mandatory.

    Third, there is a need for creating a new review paradigm that does not look at the outcomes only through the prism of numbers and figures. The fact that AoN has been accorded for a staggering INR 2 lakh crore or that contracts have been signed for INR 1.5 lakh crore does not necessarily ensure desired outcomes.

    Between 2002-03 and 2014-15, the total expenditure on capital acquisition has been close to INR 5 lakh crore. Yet, critical gaps in military capabilities persist, be it in regard to artillery guns, naval vessels, aircraft, protective gear, personal weapons, night vision devices, or even ammunition.

    The need, therefore, is to review the progress of acquisition programmes with reference to the outcomes. This will require each such acquisition programme to be reflected as a separate line item in the defence budget.

    Lastly, one of the press reports talks about most of the 81 contracts signed by the MoD being under the ‘Make in India’ category. Such a category does not exist in the DPP. It is difficult to understand why no press notes are issued by the MoD after every DAC meeting, as indeed on other occasions, giving a candid account of the decisions taken. If nothing else, it will at least prevent confusion arising out of sundry statements.

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

    • 1. “Parrikar for cancelling non-¬relevant acquisition,” The Tribune, 24 February 2016; “Parrikar: Get 314 deals cleared in 3-4 months,” The Times of India, 24 February 2016. The figures given in these two reports are somewhat confusing.