Reinventing India’s “Make” Procedures for Defence Acquisitions

Of the five principal categories of capital acquisitions permitted under India’s Defence Procurement Procedure (DPP), two prominently outshine others as regards their potential to implement the “Make In India” mantra invoked by the Prime Minister recently1.: (i) “Buy and Make (Indian)”, where RFPs are issued to Indian entities for supply and manufacture of defence equipment with higher-than-normal indigenous content requirements, leveraging technology partnerships with domestic and foreign entities in the process; and (ii) “Make”, being a hybrid R&D-cum-productionisation procurement process akin to traditional defence procurement in the US2. and the EU while also being conceptually similar to “pre-commercial procurement”3. and “innovation partnerships”4. rapidly evolving under EU regulations in a non-defence context.

Given historical buyer preferences world-wide for supplies over indigenisation, it is not surprising that both these categories have hitherto remained empirically the most under-utilised: a situation that is fast expected to reverse under India’s new executive leadership with a much stronger vision for rapid growth of the Indian manufacturing. While procedures for “Buy and Make (India)” were considerably streamlined and simplified in the last DPP revisions in 2013, the existing “Make” provisions may need more fundamental modifications and improvements, so as to align them with practical business realities as well as with international best practices on the subject.

For instance, the DPP presently mandates that IPRs for technologies developed as part of “Make” programs need to fully vest with MoD, with no clarity at all on the rights of the development agency who are also investors in such programmes. In contrast, both under the US DFARS (Defence Federal Acquisition Regulation Supplement)5. and Australian Government IP Manual6., as well as under “pre-commercial procurement” in the EU for procurement of innovation and R&D7., the governments usually retain for themselves only a fully-paid, perpetual, irrevocable, world-wide and non-exclusive license as a default position, with the private contracting party holding ownership rights in IPRs. This internationally-prevalent system of IPR-allocation rests on sound business logic: it is development agencies rather than the government that often have a stronger business case to undertake commercialisation of defence technologies, and it is also they who have the requisite commercial flexibility to undertake both incremental and disruptive improvements and quickly redirect R&D investments in a fast-changing global marketplace. For obvious reasons, this shift of ownership-licensee relationship in India may require a stronger system of oversight, control and management of IPRs on part of the government, both within India’s own domestic boundaries, and perhaps also stronger restrictions on IPR transfers outside of India in case of publicly-funded defence technologies, quite similar to the legal frameworks prevalent in other defence manufacturing countries.

Another area in need of urgent reforms is laying down the cost accounting standards to be used for cost-apportionment between MoD and development agencies, as also alignment of sub-project costs to agreed milestones under approved project reports. In addition, the frequency of financial reimbursement to private partners, and the ability of both contracting parties to walk away from unsuccessful projects without incurring future liabilities, may also need to be explicitly defined under the new contractual framework. DPP in its present form is silent on these important aspects, and in absence of clear and practical guidance, a traditionally risk-averse defence acquisition workforce may well ask the Indian defence industry to bear its share of the entire project costs upfront instead of adopting a stage- and milestone-linked approach, or could even end up requiring reimbursement of past MoD expenditure in case of industry’s failure to achieve a particular milestone. Such moves would not only go against the international best practices in procurement of R&D and innovation, but may also run contrary to the attitudinal changes that the new “Make In India” mantra requires, namely, treating industry as a true business partner rather than seeing government and industry in a traditional master-slave relationship.

Last, but not the least, the Indian defence industry needs procedural clarity and simplification to be ingrained in the “Make” procedures, as the rules are presently silent on a number of important operational aspects such as: (i) guidelines and eligibility conditions for formation of consortia by distinct business entities; (ii) competent authorities for approval and changes to PSQRs and SQRs; and (iii) formats and content requirements for internal MoD planning and detailed project reports to be submitted by development agencies and by potential contracting partners.

These suggested reforms could go a long way in revitalising the presently defunct “Make” procedures, transforming “Make” under the DPP into an important vehicle for carrying out the “Make In India” vision for the Indian defence industry. On MoD’s part, it may be important to recognise that “Make” is essentially about procurement of R&D and innovation, thereby carrying inherent and real risks of failure once in a while, or in some cases, only partial attainment of original programme objectives at best. Internationally applicable frameworks in the US and the EU therefore treat “Make” type of acquisitions as different from normal supply contracts, avoiding any/ excessive use of traditional contractual provisions for risk and cost procurement, recoveries, liquidated damages and penalties while undertaking procurement of R&D and innovation.

The case and opportunities for building a strong and capable Indian defence industry are here and now, and far-sighted policy-making in the case of “Make” procedures could fundamentally alter India’s rather unenviable position of being the world’s largest arms importer into a dynamic and strong Indian defence industry successfully competing in global supply chains both as subs and as primes.

The author is currently Deputy Director General Unique Identification Authority of India. Views expressed herein are personal and academic; and do not reflect the official position or policy of the Government of India or any of her departments or agencies.

(The views expressed are solely those of the author)

Courtesy: IDSA

References

1. PMO (2014), Text of PM’s Address at the Launch of Make In India Initiative, 25 September 2014, available online http://pmindia.gov.in/en/news_updates/text-of-pms-address-at-the-launch-of-make-in-india-global-initiative/.

2. For more details of defence acquisition procedures in the United States; see, DoD Directives No. 5000.01 and 5000.02.

3. For a general overview and more details on pre-commercial procurement under EU guidance; see, CORDIS, Pre-Commercial Procurement, available online http://cordis.europa.eu/fp7/ict/pcp/overview_en.html.

4. ¶¶47-51, Directive 2014/24/EU of 26 February 2014.

5. See, generally, DAU ACQuipedia, Intellectual Property and Data Rights, available online https://dap.dau.mil/acquipedia/Pages/ArticleDetails.aspx?aid=7bfcfeee-b24b-4fdd-ad7b-046437729519.

6. ¶8-Intellectual Property Principles for Australian Government Agencies, Australian Government Intellectual Property Manual, pp.4-5.

7. CORDIS, FAQ 3(1)(a)-Policy related Frequently Asked Questions on Pre-Commercial Procurement (PCP) and the link with Public Procurement of Innovative Solutions (PPI), available online http://cordis.europa.eu/fp7/ict/pcp/docs/faq-v9.pdf.

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