MOD BRIEFS ON 2006 DEFENSE PROCUREMENT PROCEDURES

UNCLAS SECTION 01 OF 04 NEW DELHI 007408

SIPDIS

SIPDIS

STATE PASS TO USTR

E.O. 12958: N/A
TAGS: PREL PGOV MARR ETRD IN
SUBJECT: MOD BRIEFS ON 2006 DEFENSE PROCUREMENT PROCEDURES


1. (U) Summary. In an October 24 briefing for the diplomatic
corps and business community, officials from the Ministry of
Defense, including then-Defense Minister Pranab Mukherjee,
Defense Secretary Shekhar Dutt, Director General Shilabhadra
Bannerjee, and Major General H. S. Sehgal explained the
implications of India's new Defense Procurement Policy (DPP),
released on August 30, 2006. Minister Mukherjee described
the opportunity India has with strong economic growth
coinciding with the need to modernize the military, and sees
the new defense policy as the chance for India's private
sector to become a stakeholder in ensuring the nation's
security. Defense Secretary Dutt believes India can take
advantage of its "monopoly as a purchaser" and leverage its
offset policy to enhance domestic production capabilities.
Director General for Acquisitions Bannerjee stressed DPP 2006
was just beginning its implementation phase, and admitted
details had not been worked out, but offered government
flexibility in interpreting the new rules. Sehgal, the
technical expert on the DPP, provided details on it,
describing bidding procedures, attempts to improve
transparency, the new role of private industry in offset
programs, and the different categories for acquisitions,
including the new "make" procedures. The briefing answered
many questions, but even the GOI admits a lot is yet to be
determined in terms of the DPP's implementation. End Summary.

Minister Mukerjee - The Big Picture
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2. (U) Defense Minister Mukerjee (Note: Later in the day,
Mukerjee was named Foreign Minister. End Note.) explained
the broader goal of India's DPP as an effort to enhance the
nation's security. Referring to the "right atmosphere and
conducive environment," he said the objective was to create a
public-private partnerships in the defense sector. By "right
atmosphere," Mukerjee noted that defense expenditures have
risen by nearly 200 percent since 2000-2001, while economic
growth is expected to be in the 9-10 percent range over the
next 5-7 years. In terms of "conducive environment,"
Mukerjee said policymakers have come to realize that India's
military could be adversely affected if it comes to rely too
heavily on foreign suppliers, and he expects allocation of
funds for modernization of India's armed forces to keep pace
with the robust economic growth. The new policy, he
explained, is designed to "herald a new era in domestic
defense production." Under DPP 2006, private industry will
be put on an equal footing with defense public sectr
undertakings (DPSUs),which, he expects, will facilitate
foreign investment. With India's defense industry standing
to receive up to $10 billion in offsets between 2007-2012,
according to Mukerjee, private industry will become a
stakeholder in India's defense. Mukerjee challenged India's
private sector to "have a sense of duty" and "live up to the
expectations of the nation."

Secretary Dutt - Leveraging Purchasing Power

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3. (U) Defense Secretary Shekhar Dutt, referring to India's
plan to upgrade nearly all its defense systems in the next 15
years, suggested India had a "monopoly as a purchaser" and
would leverage its purchasing power to acquire a domestic
production capability. India's 30 percent offset policy was
the result of studying offset policies of over 30 countries
worldwide, he said, and is aimed at acquiring production
know-how. He noted that some countries have 100 percent-plus
offsets, and that India chose 30 percent with the goal of
having quality inputs to enhance domestic industry,
suggesting that Indian industry would struggle to absorb a
higher percentage. DPSUs had been set up in the past as a
kind of insurance for limited domestic production, but the
GOI now realizes DPSUs can't meet India's production needs,
and he called for greater cooperation between DPSUs and
private industry.

DG Bannerjee - Implementation Just Beginning
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4. (U) MoD Director General for Acquisitions Shilabhadra
Bannerjee stated that DPP 2006 was essentially DPP 2005 with
adjustments based on feedback received from the 2005 model.
He emphasized that the new procedures were just beginning to
be implemented, and that the government would review
implementation as time went on. The 2006 version merely
included detailed guidelines on offsets, he said. The only
significant change was the introduction of the "make
procedure" category, an addition to the previous "buy"
(merely purchasing products and technology) and "buy/make"
(purchase from a foreign vendor followed by licensed
production/indigenous manufacture) systems; "make" will
require certain classes of high tech products, to be
determined by MoD, to be designed, developed and produced
indigenously. The 2006 revision also included a revision for
fast-tracking urgent procurements within six months.

Sehgal - The Details
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5. (U) Major General H. S. Sehgal, Technical Manager (Land
Systems) and one of the primary architects of the DPP and the
offset policy, gave a detailed powerpoint presentation and
said changes to procurement policy (including DPP 2005) were
designed to reduce decision-making time, seek multi-vendor
procurements whenever possible, enhance transparency and
competition, increase the role of Indian industry, and
leverage through offsets the high cost of acquiring
technology. Under the new procedures, there will be no
negotiations on price with the lowest (L1) bidder once the
bids are opened, and because bidders now are only required to
meet minimal essential parameters -- and not concrete
technical requirements, although there will also be
"desirable parameters" -- there are no longer provisions for
a company's score on the technical trials. The lowest bidder
who meets the minimal essential parameters will necessarily
be the winning bid. To facilitate bidding, the GOI will
introduce a public pre-bid meeting with vendors, and will

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debrief vendors after trials are performed. Foreign vendors
will have to provide details on "technical consultants"
(read: middlemen/lobbyists) being employed, and all bidders
for contracts above 100 crore (approximately $222 million)
will be required to sign an integrity pact. Additionally,
bidders will have to guarantee that they are not providing
the product at a lower price to another GOI
ministry/department.


6. (U) Sehgal clarified that transfers of technology, which
had been solely for DPSUs in the past, could now be done via
India's private defense industry, elaborating that interested
Indian companies would have to apply with the MoD to become a
licensed entity. Nearly 20 companies have already qualified,
he noted.


7. (U) The 30 percent offset requirement -- 30 percent is the
minimum, he stated -- applied only to procurements of over
300 crore (approximately $667 million). The Defense
Acquisition Council, chaired by the Defense Minister, is the
body who will decide when offsets will exceed 30 percent. If
a country voluntarily offers greater than 30 percent in
offsets, it will not receive any additional favorable
considerations in its bid per se, however, if the offer
supports development of indigenous technology, that case will
be weighted heavier than those which do not. India will
examine life cycle costs when determining offset values. An
offset plan will be required before a Letter of Acceptance
(LOA) is signed. Offsets can be directed toward products,
components, services or research and development, but must be
within India's defense industry. The DPP requires that
offsets must be completely discharged before the term of the
contract ends. Failure to fulfill offset obligations would
result in a company being blacklisted from any future
contracts.


8. (U) The "make" category of procurements will ensure
indigenous production capabilities of certain high
technology, complex systems, Sehgal said. It is aimed at
leveraging India's comparative IT advantage in high-tech
goods. The "make" category will protect Indian companies
from back door entry by a foreign company, Sehgal said.
Headquarters of the Integrated Defense Staff will be
responsible for determining which projects will be
categorized as "make" based on the capability of Indian
industry and the desire to achieve self reliance in the
equipment in question. The GOI would support up to 80
percent of the Indian entity's development costs, if needed.
"Make" will have a minimum order prescribed to assure the
original producer of a given revenue.

Comment: Still Not Clear
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9. (SBU) Comment: The DPP 2006 is a 253 page document, and
while the four-hour session clarified some of the major
items, the devil appears lodged in the details. DG Bannerjee
himself admitted that DPP 2006 is a work in progress, and one

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where the progress had just begun. MoD expects problems as
the new policy gets implemented, but Bannerjee promised his
office -- and the various related boards which are being
created to oversee the procedures -- will vigilantly monitor
the situation and be prepared to react to the policy's
shortcomings. While the policy is now set, he said, the GOI
will be flexible in its implementation, and he encouraged
industry reps in the audience to bring forward complaints as
they come up. Judging by the questions from the audience,
the specifics of the new policy remain murky to the industry
-- which will be required to operate under DPP 2006.
PYATT