Featured

Processes Slowing Down Defence Capital Acquisition

Policy Iteration

India’s diversified culture seamlessly unfolds few hundred miles where uniformity lies in non-conformity. Similarly the Indian growth story is unique deep rooted in Indian characteristics that thrives in confusion. Gerrymandering policy to leverage power by the executive characterises protracted decision making adding to more confusion in the garb of providing fair competition.

Sedated decision making in defence procurement, a monopsony market where the buyer also sets the rules for business comes at a cost of building capabilities on previous generation and obsolete platform rather than on future generation platforms.

‘Borgen’, a political Danish TV show on Netflix defined ‘Policy’ as a combination of ‘Reality’; ‘Idealism’; and ‘Emerging Desire’. In India, the soul of Atmanirbhayata is rooted in false sense of idealism casting shadow on both reality and desire; hence, policy iteration is poetry re-written on undeliverable promises and unaccountable statements.

Despite contradictions India continues to grow, fight the pandemic like no other country and challenge the mightiest on the high grounds of eastern Ladakh. Nothing else can justify brilliant outcomes despite irrational behaviour in iterating policies other than being blessed by million gods and goddesses.

Across Spectrum Capability

India resides in a critical fault line surrounded with hostile adversaries and thus across spectrum capabilities should be built on reality and desire to arm India with present and future generation platforms.

While the eastern neighbour developed home-grown air, ground and naval platforms to counter America as its adversary, India until the first decade of this century was building capabilities to counter the western neighbour – Strategic Blunder.

However despite innumerable past blunders the Service Head Quarters (SHQs) continue to embrace blunders by wanting to build capability on unscientific concepts where suitability of products available to meet their operational requirements are apparently explored based on Request for Information (RFI); a rather time consuming vestigial process listed in Defence Acquisition Procedure 2020 (DAP 2020 Chapter II para 2).

Vestigial process

RFIs do not have the wherewithal to create a capability matrix. This function should be outsourced to the more efficient consulting services which have the bandwidth to examine types of equipments available in the market and then build a capability matrix. These inputs are accurate, reliable and provide dependable information for formulation of Services Qualitative Requirements (SQRs). But to expect SHQs or Ministry of Defence (MoD) to collate thousand or more RFIs floated each year in silos and, then utilise these paper documents to formulate Integrated Capability Development Plan (ICDP) is rather far-fetched and, hence should be deleted from the acquisition process listed in Ch II of DAP 2020.

In a recent seminar organised by Confederation of Indian Industries (CII) the Defence Minister was upbeat about policy guiding India’s defence economy. He however expressed his desire to hasten capital acquisition and reduce the average time taken for procurement from (according to him) current four years to two years. His brave narrative that current policy outlined in Budget for Financial Year (FY22) was forward looking with a healthy mix of promise, potential and progress was good poetry.

However if Rajnath Singh is serious about turbo charging defence acquisition process, he must direct his Defence Secretary to delete Para1 (a) of Ch II in DAP 2020. By doing so, he would have partially fulfilled his desire and accelerated the process by a year. (Refer Table 1)

Table 1 (Reference DAP 2020 Ch II)

PROCEDURECOMMENTSTIME LINEPROCESSACTION
RFIInternal comments6 weeks  (Para 6)Vestigial & UnaccountedDelete & Outsource
RFI uploadedVendor Interaction and responseMin 8 weeks plus extensions (Para7)Vestigial & UnaccountedOutsource
SQRs fielded for approval of SEPCAfter Vendor responseMin 24 weeks (Para 18)Protracted & UnaccountedBusiness Process Reengineering (BPR)
AON based on SQR/JSQRApproval by SEPC/ISEPC54 weeks (Para 21)Protracted & UnaccountedBPR
Click to access DAP2030new.pdf

RFIs are not commitment for procurement but just open source information on the basis of which SHQs are expected to create a capability matrix to formulate SQRs. The timeline for procurement actually should start from the moment a thought germinates in SHQ. However, time from RFI to the minutes of the meeting of DAC for grant of AON is unaccounted and could take in excess of two years in the 118 week acquisition process listed in the proposed timeline for procurement (Appendix L to Ch II of DAP 2020).

Are we asking the right questions?

Discussing India’s defence economy has become a cottage industry and living room conversation for all. It’s cliché to talk about inadequate resources, budgetary allocations and role of private sector in building capability for the armed forces. While these could have been challenges at the turn of the century when India opened its defence economy; however, none are real challenges today. So, what are the right questions?

Why was RFI included in the acquisition process; a question which should be thrown to all stakeholders. Can a country with critical fault lines afford gerrymandering to build critical capabilities for its armed forces?

Are we scarce on resources? Well yes, resources will forever be scarce to buy commodities in any economy. But, is scarcity of resources the reason for building less than across spectrum capabilities for the armed forces?

Indian armed forces spend on an average $10 billion a year on capital procurement against a larger budgetary allocation, most of which is utilised for committed liabilities. In essence allocation under Demand Note 20 is an amount to service committed liabilities for capabilities which were built in the previous Financial Years (FY).

The 15th Finance Commission (2021-26) is recommending a dedicated non-lapsable corpus of INR 2.4lakh crore ($34 billion) over five years (2021-26) called the Modernisation Fund for Defence and Internal Security (MFDIS), largely to bridge the gap between budgetary requirements and allocation of capital outlay.

While resources have been scarce, the government must be applauded for making efforts to find alternate solutions. Allocations under Demand Note 20 though not a healthy mix of promise, potential and progress but cannot be the sole criteria to assess government’s intentions.

So what’s ailing India’s defence capital procurement? Why has private sector not been able to assert itself despite several announcements on procurements favouring domestic contractors? These are real issues which must be addressed; however, are conveniently ignored.

Core Issues

The private contractors have built significant capabilities by investing in high cost of capital to build infrastructure and create capacity without orders. The Defence Public Sector Units (DPSUs) on the other hand have enjoyed the luxury of being funded and supported by the government. Under these conditions how can a reasonable process expect private contractors to compete with DPSUs on same terms which result in unreasonable price points?

Delayed contracts and retracted Request for Proposals (RFPs) also add to the cost of executing programs which are not compensated.

At the same time all isn’t also well with the private contractors. An assessment shows that large contractors with robust leadership in the defence vertical have excelled while others despite strong leadership at the group level having created capabilities ahead of demand have suffered because of weak leadership at the strategic business unit.

MSMEs, robust in technology and dependant on the DPSUs are prospering and contractors who have de-risked business on exports have been able to sustain the protracted procurement process. But mom & pop shops with unhealthy balance sheets and business models not pivoted have felt the burden of the sector.

The government hasn’t been able to galvanise the defence economy with efficient and scientific processes where technology becomes elixir. It isn’t availability of resources but poor decision making and lack of a coherent strategic vision that’s slowing down the entire process. An honest assessment indicates that private contractors will never be able to compete with the DPSUs funded by the government and, over a period of time be reduced to Tier 2 and Tier 3 contractors rather than transforming into Original Equipment Manufacturers (OEMs).

Finally it’s not about who builds capability but how across spectrum capabilities are created over a period of time utilising resources available with all possible stakeholders. False sense of idealism rooted in Atmanirbhayata will fail to drive the sector. And, finally a message for all contractors who passionately participate in this process that getting orders in this business is no longer a function of finding access into the corridors of defence bureaucracy but a function of strong leadership, technology and capacity to build capabilities.

Vishal Nigam    Author    Dragon in the Air Transformation of Aviation Industry and the Airforce   

Email vishalnigam@hotmail.com +917428239955

Featured

Request For Information an Irrelevant Concept in 2020

Budget 2021-22

Budget speeches are constrained by time and hence sectors missed out from the speech do not necessarily imply that they are less important. At a time when the world is devastated by Covid, the Finance Minister had clarity in highlighting relevant sectors. On Feb, 01 2021 defence economy was skipped from the speech and many pundits concluded that defence wasn’t her focus area despite having steered the ministry prior to being appointed as the Finance Minister.

The year 2020 has been unprecedented in many ways. While Covid impacted both the demand and supply side of the economy resulting in contraction like never seen before, the aggressive posture adopted by the Chinese across the Line of Actual Control (LAC) created high levels of uncertainty. Nirmala had an arduous task of balancing the criticality caused by the spread of pandemic with the criticality of the fault lines in which the Indian state resides.

She decided to direct her budget speech on health and infrastructure sectors to send a pointed message that her government was committed to both reducing the death trajectory caused by the pandemic and generate employment by building infrastructure and future assets. At the same time aware of the complexities in India’s defence capital acquisition procedure, she committed in her many post budget interactions that funds will be made available to the armed forces as and when required.

Capital Acquisition

On an average the armed forces spend $10 billion every year on capital acquisition. Taking a clue from the average spend, she allocated approximately $19 billion for FY22, benchmarked with RE for FY21; knowing very well that a large percentage of the allocation under Demand Number 20 will go towards meeting committed liabilities of previous years and not towards acquisition for FY22.

DEMAND NO 20

FY20 (Actuals)FY21(BE)FY21 (RE)FY22 (BE)
INR 111092 CrINR113734 CrINR134510 CrINR135060 Cr

However during the year funds up to INR 2000 crores (almost $300 million) can be made available under the enhancement of financial powers for sanction of capital acquisition proposals, which came into effect in 2017. The 15th Finance Commission (2021-26) has also recommended a dedicated non-lapsable fund called the Modernisation Fund for Defence and Internal Security (MFDIS) to bridge the gap between budgetary requirements and allocation of capital outlay with an estimated corpus of INR 2.4lakh crore ($34 billion) over the period of five years (2021-26). While INR 1.5lakh crores ($20 billion) will be transferred to the Consolidated Funds of India, the rest will be generated from measures such as disinvestment of Public Sector Enterprises (PSEs) and monetisation of defence land.

Problem Area

If the recommendation of the 15th Finance Commission (2021-26) is agreed to, then the problem area for capital acquisition will not be as much availability of funds but the unscientific and protracted procedure laid down in Chapter II of Defence Acquisition Procedure (DAP 2020). While Chapter II of DAP 2020 is considered the soul of capital procurement, it has become its Achilles’ heel; year on year adversely impacting speed of acquisition resulting in armed forces acquiring older generation platforms.

Chapter II of DAP 2020 is flawed from Para 1 sub para (a), by committing the cardinal  sin of giving license to line directorates of Service Head Quarters (SHQs) to seek Request for Information (RFI) from vendors to explore suitability of products available to meet their operational requirements.

It is incomprehensible that SHQs have to depend on the vendors to provide them data for acquisition to build across spectrum capability, a process extremely time consuming when the same information is freely available in ether.

RFIs aren’t a commitment for procurement and, timeline to process is neither indicated in Appendix L to Chapter II of DAP 2020. The entire process from sub para (a) to (c) is unaccounted and, the time from generating Statement of Case (SOC) to grant of Acceptance of Necessity (AON) could take as long as two years if not more. However, the proposed timeline for procurement which is 74 weeks to 106 weeks commences from the date of issue of the minutes of the meeting of Defence Acquisition Council (DAC) for issuance of AON and not from the time of floating the RFI.

Hence on a good day, the time line for capital procurement could at the very least be four years, which rarely happens and, by then the equipment being bid for has already become a few generations older.

Flags:

  1. What is the efficacy of RFI when information is available on fingertips and SHQs have the liberty of subscribing to data bases as well as utilising consulting services?
  2. How can SHQs justify the requirement of RFI to formulate ICDP, Request for Proposal (RFP) and Services Qualitative Requirements (SQRs)?
  3. Database and benchmarking price should be the responsibility of the directorates under IDS and SHQs and, relying on RFIs to benchmark pricing cannot be a valid justification.

Build capability on future generation platforms

Can any country trying to build across spectrum capability for its armed forces justify the protracted and unaccounted timelines to process RFIs? Certainly developing capability is not a function of whether the Finance Minister highlighted defence outlay in her budget speech but it is a function of resources available, efficient procedures and spends on Research and Development (R&D); all of which are critical areas today. While the 15th Finance Commission has recommended MFDIS, which to some extent will offset the issue of resources, spend on R&D by both government and the private sector remains a weak area. India’s Gross Expenditure on Research and Development (GERD) remains a paltry 0.7% of GDP and, spend on defence R&D is only a small fraction of GERD. Unless both the private and public sectors step-up spending on R&D and, Chapter II of DAP 2020 is amended to add efficiency in acquisition procedure, India would continue to build capability on older generation platforms rather than acquiring future generation platforms, which should be the stated aim of an emerging power.

Vishal Nigam   Author    ‘Dragon in the Air Transformation of Aviation Industry and the Airforce‘      

Email: vishalnigam@hotmail.com +91742823995

Featured

Requirement of RFI in Defence Capital Acquisition Procedure

Flag

What’s the efficacy of RFI when information of equipments and systems are available on fingertips. SHQs have the liberty of subscribing to data bases as well as utilising consulting services.

Flag

DPP 2020 doesn’t specify timeline between RFI to issue of AON, which at times can be infinite resulting in protracted acquisition process and hence procurement of older generation platforms. Is it then justified to depend on RFI merely to formulate the SQR required to obtain AON? The timeline for acquisition process starts from issue of AON and not from the time RFI is published on MOD web page. (Appx L to Ch II)

Flag

Can objective of RFI be formulation of Integrated Capability Development Plan (ICDP)? Ch II para 2

Flag

Can the objective of RFI be formulation of SQRs in the 21st century?

Flag

And can the objective of RFI be to decide the acquisition category or for that matter structuring the RFP as mentioned in the DPP 2020?

Database and benchmarking price should be the responsibility of directorates under IDS, SHQ and MoD. Data must be continuously collated and made available rather than depending on RFIs which at times results in many months at times years before formulating SQRs required for AON.

Can India afford such protracted timelines for capital acquisitions and are RFIs justified as part of the acquisition process mentioned in Ch II para 1 of DPP 2020.

#defence

#defence procurement process

#defence economy

#defence acquisition

Featured

2020 LITMUS TEST FOR MSMEs

In a country as diverse as India, contribution of Micro, Small and Medium Enterprises (MSMEs) to domestic production is unique. MSMEs enjoy inbuilt operational flexibility, low investments with sufficient capacity to develop and manage indigenous technology. MSMEs are turbochargers not only to large industries but to the economy as a whole which contribute approximately 30% to India’s Gross Domestic Product (GDP), 45% to manufacturing output and exports. With under 65 million units located across length and breadth; MSMEs generate employment to approximately 60 million thus providing livelihood for many more millions.

India is the third largest economy in the world (in PPP terms), second largest in Asia accounting for a third of Asia’s potential workforce and one fifth of GDP. The impact of Covid-19 on Indian industries has been as much as it has in the global arena. Hence budget priorities, policies and strategy focus of India’s MSMEs would require a shift.

In May 2020; government reclassified MSMEs under ‘Atmanirbhar Bharat Abhiyan’ and made provision for collateral-free automatic loans, now extended until March 2021 to augment additional working capital. MSMEs were reclassified with effect from 01 July 2020 based on plant, machinery investment and turnover. Micro enterprises with plant and machinery investment of less than one crore rupees and five crore rupees turnover; small capped at five crore rupees and turnover up to fifty crore rupees and medium at fifty crore rupees with turnover at two hundred and fifty crore rupees.

At a global scale 95% of total companies are MSMEs. Like elsewhere in India too MSMEs are the real engine for growth where 80% of commerce is carried out between themselves generating over a million jobs. Hence, MSMEs remaining viable during the current onslaught of the pandemic will have a direct impact on economic growth. 

The long tail of MSMEs are the micro entrepreneurs which broadly operate in both sub-optimal space and scale. These mom & pop shops follow antiquated methods with three quarters of value created from partnership. However, these micro entrepreneurs are facing strain in resource mobility due to fractured trade relations and liquidity challenges.

MSMEs also play a major role in Make in India – the flagship program of the current government. While the establishment has taken several steps to ensure MSMEs remain afloat however, it is beyond the bandwidth of any government to guarantee successful navigation of the sector during the pandemic. Therefore, in their own interest, MSMEs must look outward to diversify supply chain risks; occupy space vacated by competitors by moving further up in the value chain and hence convert present challenges into opportunities.

While the pandemic has caused disruption creating situation of uncertainty across the entire spectrum of economic activity but worst affected are the best innovators, life, and root of the supply chain – the MSMEs with unhealthy balance sheets and business models not pivoted. For MSMEs in high technology and Aerospace and Defence (A&D) sector, natural pivot are R&D, Innovation, De-risking and Diversification.

At the policy level, Defence Acquisition Procedure 2020 (DAP-2020) and ‘Atma Nirbhar’ Bharat – economic stimulus package focused on MSMEs could mitigate some devastating social and economic impact and, vision to make India the ‘Global Nerve Centre’ of global multinational supply chain in post Covid-19 world might inspire MSMEs.

Resilient Indian MSMEs which have in the past developed capabilities will be able to position as alternate to China in the global supply chain when major Foreign Original Equipment Manufacturers (FOEMs) and large companies exit China post-Covid. Large number of US companies could diversify manufacturing away from China and, Japan has already incentivised its manufacturing to position in Asia.

To assist MSMEs pivot business models in A&D sector, Government of India must re-think and transform protracted processes by taking advantage of capabilities like Business Process Reengineering. This would assist MSMEs in Ease of Doing Business with the government. Faster decision-making using technology and clearing payments will increase cash flows thus working capital which in turn could be utilized by the cash starved MSMES in A&D sector to work on R&D, innovation and gradually move up in the value chain.

Business volumes in defence sector between India and US have witnessed exponential rise from $100 million at the turn of the century to approximately $20 billion today. However, space exists for both governments to create far greater enabling environment to energise business and successfully sail through the pandemic.

Beyond doubt humans are far too resilient to be deeply impacted however, the current pandemic has laid down a new normal for both individuals as well as people involved in business. Like households have started pivoting income the micro enterprises in the MSME sector too would have to fight survival anxiety by embracing efficiency and moving away from the antiquated methods of doing business. Almost three quarter of the value created in MSMEs comes from partnerships deeply impacted by both demand and supply side constraints; hence MSMEs which had diversified and restructured business models before pandemic continue to register positive EBITDA margins.

MSME sector is in pain inflicted by the pandemic. Demand and supply side and liquidity constraints along with labour migration have adversely impacted performance in the sector. Livelihood of millions depend squarely on the performance of the MSMEs which holds huge strategic importance in the overall industrialization and employment generation.

While the government on the one hand needs to think out of the box to create enabling eco-system for MSMEs; on the other hand, MSMEs through their natural ingenuity can convert current challenges into opportunities by diversifying, de-risking and re-modelling business plans.

https://defence.capital/

https://www.aviation-defence-universe.com/

https://defence.capital/2020/12/03/india-msmes-in-aerospace-defence-sector-need-more-than-stimulus-reclassification/

https://www.aviation-defence-universe.com/india-of-2020-a-litmus-test-for-msmes/

Roadmap for MSMEs’ survival amid Covid 2.0: What govt must immediately do to tackle impending setback – The Financial Express

Clipped from: https://www.financialexpress.com/industry/sme/cafe-sme/roadmap-for-msmes-survival-amid-covid-2-0-what-govt-must-immediately-do-to-…

Roadmap for MSMEs’ survival amid Covid 2.0: What govt must immediately do to tackle impending setback – The Financial Express