India Mulls More Changes To Defense Acquisition Rules

 - April 5, 2013, 12:35 PM

The AgustaWestland deal in India for AW101 helicopters that is being investigated after bribery allegations has prompted the Indian government to re-examine its already delayed defense procurement procedure 2013 (DPP). This is now focusing on “indigenization,” which defense minister A.K. Antony described recently as the “ultimate solution to the scourge of corruption.”

In the interim, until the DPP 2013 is released, amendments on revised offset guidelines will include preference for Indian suppliers for bids. The clause on application-based software for enterprise resource planning (ERP), for which Indian companies already have the skills, will be removed. To encourage system-based software development in civil and defense aerospace, high-end avionics, flight controls, flight control laws and Cat A critical software will be included as offsets, a senior MoD official told AIN.

India’s DPP calls for a minimum of 30-percent offsets, but OEMs are finding it difficult to meet this requirement as the industry has yet to mature. “We found printers and computers being bought under the name of offsets. Besides, OEMs were implementing systems applications and products [SAP] and ERP at the premises of the Indian offset providers, not charging for it and claiming that as offsets,” said the official.

Limiting software as an offset has direct ramifications on many OEMs’ ability to transfer technology, and some are describing the move as shortsighted. “With software becoming the central theme of integrated defense warfare, this could be detrimental for the large IT and system integration capabilities we built in this country…The challenges are lack of critical technologies, integration of large systems, supply chain and logistics,” said Karthikeyan Natarajan, senior vice president and global head of integrated engineering solutions for Mahindra Satyam.

The DPP amendment, expected to provide the first opportunity in all contracts to Indian companies, including the private sector, has raised concerns that lack of investment or knowledge base will prevent projects from maturing (India has a small aerospace manufacturing base and only 26 percent foreign direct investment by foreign partners is allowed). For example, none of the major contracts including the Battlefield Management System and Tactical Communication System, under the Make (India) category, in which India’s private sector and public sector have equal opportunity, has progressed much beyond the preliminary stage.

“When will we understand that indigenization and build-out of the defense industrial base can happen with responsible [foreign direct investment] allowance? If a company is able to control majority ownership of a [joint venture] on India’s soil, this will bring sensitive technology and manufacturing know-how to the Indian private and public sector,” a foreign OEM told AIN. “Restricting [foreign direct investment] yields slower and less impressive technology to be transferred and more basic manufacturing rather than higher-order system integration and component or platform manufacturing,” said the official on condition of anonymity.

“The need of the hour is to develop a common forum of different agencies [potential suppliers, R&D labs, industries and users] for a specific purpose of ‘indigenization’ with clear goals, ” said Ramaseshan Satagopan, vice president and head of aerospace engineering practice, integrated engineering solutions, Mahindra Satyam.