Defense Opportunities: at takeoff or crossroads? · 2001: India opened its defence industry sector...

ROGERS JOSEPH O’DONNELL

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Defense Opportunities:Defense Opportunities:at takeoff or crossroads?at takeoff or crossroads?

Robert S. MetzgerRobert S. MetzgerRogers Joseph O'DonnellRogers Joseph O'DonnellWashington, D.C.Washington, D.C.+1.202.777.8951 direct+1.202.777.8951 direct+1.213.880.4224 mobile+1.213.880.4224 [email protected]@rjo.com

January 21, 2012American Bar AssociationAmerican Bar AssociationSection of International LawSection of International Law““Key Aspects of Cross Border BusinessKey Aspects of Cross Border Business””TajTaj Lands End | Mumbai, IndiaLands End | Mumbai, India


©© Robert S. Metzger 2012Robert S. Metzger 2012 22

IndiaIndia’’s National Objectivess National Objectives

India seeks to establish itself as a regional India seeks to establish itself as a regional power with global influence.power with global influence.

The 2011 The 2011 DefenceDefence Production Policy (DPP) Production Policy (DPP) asserts objectives of selfasserts objectives of self--reliance. reliance.

Preference is to be given to indigenous design, Preference is to be given to indigenous design, development and manufacture of development and manufacture of defencedefenceequipment.equipment.

Government is to promote larger involvement of Government is to promote larger involvement of the Indian private sectorthe Indian private sector

21 January 2012



IndiaIndia’’s s DefenceDefence RequirementsRequirements

A rising power, IndiaA rising power, India’’s regional role will grows regional role will grow Defense spending has risen from $11B ($4B capital) in 2002 to $3Defense spending has risen from $11B ($4B capital) in 2002 to $35B 5B

in 2012 in 2012 –– 42% ($15B) for capital items42% ($15B) for capital items India signed India signed $35.6B$35.6B in defense contracts from 2007 in defense contracts from 2007 –– 20112011 India ranked 9India ranked 9thth worldwide in military expenditures in 2010 (SIPRI)worldwide in military expenditures in 2010 (SIPRI)

Forecasts indicate $100B in military purchases over next 10 yrsForecasts indicate $100B in military purchases over next 10 yrs

21 January 2012

“The Government is expected to spend approximately $54 billion on defense procurement from foreign vendors during 2011-2015. As a part of a 30 percent offset, winning vendors are anticipated to source components and/or services worth $18 billion from the Indian aircraft component manufacturing and services industry.”

Frost & Sullivan, “Strategic Analysis of Indian Aircraft Component Manufacturing and Services Industry,” 19 January 2012

~ 70% of India~ 70% of India’’s defense equipment s defense equipment have come from foreign sourceshave come from foreign sources Signed Defence Offset

Contracts Now Amount to $3.3B – and Deals Worth $10B Are In The Pipeline



U.S. Participation To DateU.S. Participation To Date

U.S. is now the largest defense supplier to IndiaU.S. is now the largest defense supplier to India India has awarded American companies ~$12B in defense contracts India has awarded American companies ~$12B in defense contracts

since 2007 (34% share)since 2007 (34% share) Notable U.S. successes include CNotable U.S. successes include C--17, P17, P--8I, C8I, C--130, Sensor 130, Sensor FuzedFuzed

Weapon; UltraWeapon; Ultra--Light Howitzer; prospects include Jaguar ReLight Howitzer; prospects include Jaguar Re--engineengine Disappointments include MMRCA, RAW Air Surveillance, MHDisappointments include MMRCA, RAW Air Surveillance, MH--6060 India has shown it respects U.S. military hardware, India has shown it respects U.S. military hardware, butbut

Most sales (by $) are platforms (PMost sales (by $) are platforms (P--8, C8, C--17, C17, C--130)130) Most sales (by $) are through FMS (CMost sales (by $) are through FMS (C--17, C17, C--130, SFW)130, SFW) Boeing dominates, followed by Lockheed Martin, GEBoeing dominates, followed by Lockheed Martin, GE Broad representation of U.S. industry is not presentBroad representation of U.S. industry is not present Few U.S. firms have secured DCS award under the DPPFew U.S. firms have secured DCS award under the DPP

21 January 2012

India now is the third largest purchaser of US arms. The U.S. Defense Security Cooperation Agency reported sales contracts worth $4.5 billion in FY 2011.



The View of U.S. Firms on India DefenseThe View of U.S. Firms on India Defense

Few firms have succeeded (and mostly by FMS)Few firms have succeeded (and mostly by FMS) Those who have concluded sales worry about offsets Those who have concluded sales worry about offsets

There are real questions about There are real questions about ““absorptionabsorption”” of capacityof capacity Offset rules do not allow gestation of new partnersOffset rules do not allow gestation of new partners New ventures face challenges of quality and supply assuranceNew ventures face challenges of quality and supply assurance FDI limits impair confidence of U.S. firms in partner output FDI limits impair confidence of U.S. firms in partner output

The DPP is seen as unwieldy and unpredictableThe DPP is seen as unwieldy and unpredictable ““Rule boundRule bound”” with little with little ““play in the jointsplay in the joints”” for sound discretionfor sound discretion Risk of being gamed by endRisk of being gamed by end--game withdrawal, artificial pricesgame withdrawal, artificial prices ““NCNCNCNC”” trials are expensive but without outcome assurance trials are expensive but without outcome assurance Actual awards seen as few, process cost & duration highActual awards seen as few, process cost & duration high

There is fatigue with the processThere is fatigue with the process There are concerns about reputation exposureThere are concerns about reputation exposure Questions are asked about riskQuestions are asked about risk--adjusted return adjusted return

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IndiaIndia’’s s DefenceDefence Procurement ProcedureProcurement Procedure

TextText TextText

TextText TextText

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2001:2001: India opened its India opened its defencedefence industry sector to 100% Indian private sector industry sector to 100% Indian private sector participation, with Foreign Direct Investment (FDI) allowed to 2participation, with Foreign Direct Investment (FDI) allowed to 26%.6%.

2005: 2005: DPP released to increase accountability and transparency and toDPP released to increase accountability and transparency and to promote promote free competition and impartiality.free competition and impartiality.

2006:2006: DPP establishes formal guidelines for capital procurement and DPP establishes formal guidelines for capital procurement and sets offset sets offset guidelines including 30% offset requirement.guidelines including 30% offset requirement.

2008:2008: DPP introduced three principal categories of DPP introduced three principal categories of defencedefence acquisition: acquisition:

““MakeMake”” –– high technology systems designed, developed and produced indigehigh technology systems designed, developed and produced indigenouslynously

““BuyBuy”” –– outright purchase including outright purchase including ““Buy (Indian)Buy (Indian)”” ((30% Indian) & 30% Indian) & ““Buy (Global)Buy (Global)””

““Buy and MakeBuy and Make”” –– purchase from a foreign vendor followed by licensedpurchase from a foreign vendor followed by licensedproduction and/or indigenous manufacture in Indiaproduction and/or indigenous manufacture in India

20092009: : ““Buy and Make (India)Buy and Make (India)”” added added –– RFP issued only to Indian industry RFP issued only to Indian industry ---- . . may be issued to both may be issued to both DPSUsDPSUs and private sector companies; requires 50% and private sector companies; requires 50% indigenous content on a cost basis.indigenous content on a cost basis.

DPSUsDPSUs are not subject to the D.P.P.are not subject to the D.P.P. D.P.P. not used for system developmentD.P.P. not used for system development



Key Features of the DPPKey Features of the DPP

PrinciplesPrinciples: Self reliance : Self reliance –– Transparency Transparency ––Expeditious Expeditious ––Fair competition Fair competition Types of ProcurementsTypes of Procurements: : ““Normal,Normal,”” ““FastFast--TrackTrack”” and and ““IGAsIGAs”” Categories: Categories: BuyBuy (Global | Indian); (Global | Indian); Buy & MakeBuy & Make (B&M| B&M (Indian); (B&M| B&M (Indian); MakeMake RFP is key event: includes specifications and requirements, contRFP is key event: includes specifications and requirements, contractual ractual

obligations, price and delivery terms, offset requirementsobligations, price and delivery terms, offset requirements ““SingleSingle--stage, Two Bidstage, Two Bid”” System: requires two fully compliant tendersSystem: requires two fully compliant tenders Three evaluation stages (technical, field, staff) precede the Three evaluation stages (technical, field, staff) precede the CommercialCommercial

phase. Only the lowest bidder (L1) proceeds to Contract Negotiaphase. Only the lowest bidder (L1) proceeds to Contract Negotiationstions OffsetsOffsets::

Commitment to Offset compliance Commitment to Offset compliance –– due at RFP responsedue at RFP response Separate Technical Offset and Commercial Offset ProposalsSeparate Technical Offset and Commercial Offset Proposals Offset Offer evaluate in two stages: Technical Offset Offer firsOffset Offer evaluate in two stages: Technical Offset Offer first, to t, to

assure compliance, then Commercial Offer Offset Proposal, openedassure compliance, then Commercial Offer Offset Proposal, openedalong with main offer, can be revised at this stagealong with main offer, can be revised at this stage

Commercial Offset Offer has no bearing on L1 selectionCommercial Offset Offer has no bearing on L1 selection

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Key Questions as to the DPPKey Questions as to the DPP

What explains the “rule-based” approach of the DPP? Has the DPP succeeded? Where has it fallen short? Is the DPP constrained by the size and training of the

“acquisition work force”? Versus “L1,” should the DPP permit “best value”

acquisition? Can the DPP recognize (and evaluate) life cycle costs? What barriers frustrate evaluation of FMS offers under

the DPP? What solutions? Can the DPP accommodate sole-source awards? How could the DPP evolve for application to design and

development projects?

21 January 2012



The DPP: Recommendations (I)The DPP: Recommendations (I)

Adjust the DPP for Better Alignment with FMS ProceduresAdjust the DPP for Better Alignment with FMS Procedures Objective is Objective is ““fairfair”” competition for competition for ““comparablecomparable”” requirementsrequirements

India could state India could state ““life cyclelife cycle”” requirements to align with sustainability costs requirements to align with sustainability costs and commitments in FMS and commitments in FMS LOAsLOAs –– but India need not buy but India need not buy ““total packagetotal package””

The L1 determination could compare hardware The L1 determination could compare hardware andand sustainability costssustainability costs

Securing Securing ““Best ValueBest Value”” in Direct Commercial Sales under the DPPin Direct Commercial Sales under the DPP Premise is that lowest L1 bid is not exclusive measure of best vPremise is that lowest L1 bid is not exclusive measure of best valuealue

Qualitative factors such as superior performance, lower risk andQualitative factors such as superior performance, lower risk and lifelife--cycle cycle support have realsupport have real--life consequences for cost and mission satisfactionlife consequences for cost and mission satisfaction

The SQR could identify qualitative discriminators (positive, negThe SQR could identify qualitative discriminators (positive, negative)ative)

The Tender Document could describe qualitative factors and preseThe Tender Document could describe qualitative factors and present a nt a numerical evaluation scheme weighted by prioritynumerical evaluation scheme weighted by priority

A stage could be added for A stage could be added for ““discussionsdiscussions”” after the Technical Evaluation to after the Technical Evaluation to vet qualitative factors and assure vendors of opportunity for vet qualitative factors and assure vendors of opportunity for ““best offerbest offer””

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The DPP: Recommendations (II)The DPP: Recommendations (II)

Revise the Selection to weigh reflect Price and Qualitative FactRevise the Selection to weigh reflect Price and Qualitative Factors ors (including Risk)(including Risk) Selection of a higher price offer would require justification ofSelection of a higher price offer would require justification of the the ““costcost--

technicaltechnical”” tradeoff and ratification by high level MOD officialstradeoff and ratification by high level MOD officials

Gaming of the L1 selection (by artificial price) will be discourGaming of the L1 selection (by artificial price) will be discouraged aged

Transparency can be assured by documentation of selection decisiTransparency can be assured by documentation of selection decisionsons

Disappointed bidders can be extended MOD or judicial review if sDisappointed bidders can be extended MOD or judicial review if selection election decision is decision is ““unreasonableunreasonable”” or a or a ““violation of law or regulationviolation of law or regulation””

The MOD should enhance its acquisition workforceThe MOD should enhance its acquisition workforce Seek additional fundingSeek additional funding

Provide additional training and professional developmentProvide additional training and professional development

Encourage Armed Forces to treat procurement as a favored specialEncourage Armed Forces to treat procurement as a favored specialtyty

Document policies, priorities, process and Document policies, priorities, process and ““best practicesbest practices””

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Integrity Considerations: RequirementsIntegrity Considerations: Requirements

PrePre--Contract Integrity PactContract Integrity Pact A binding agreement for all proposals above Rs 100 Cr (~$22M) to

ensure procurement process and that there is accountability. Both parties promise that neither they nor any of their officials will offer

or accept any kind of illegal gratuity during the procurement process. Earnest money deposit is Rs 1 Cr ($220,000) in cases where estimated

cost is between Rs 100 - 300 Cr ($22M - $66M) and Rs 3 Cr ($660,000) if above Rs 300 Cr.

Violation may lead to legal and other actions that include: Termination of negotiations Cancellation of contract if signed Call on Bank Guarantees Debarment

Independent monitors are appointed in in consultation with the C.V.C (an independent statutory body mandated to look into complaints about violation of the Integrity Pact)

21 January 2012



IndiaIndia’’s Antis Anti--Corruption RegimeCorruption Regime

Prevention of Corruption ActPrevention of Corruption Act Prohibits and penalizes corruption of public servants

No exception for “facilitating payments” (as in FCPA)

Applies to the maker and recipient of a bribe; abetment also an offense Public servants may neither accept nor retain any “gratification” as a

motive or reward from taking/forbearing from an official act Private persons may not accept or obtain any gratification as motive or

reward for “inducing” any public servant, “by corrupt or illegal means”to take or forbear from an official act

Offenses are punishable by imprisonment and/or fine

However: as evident from the “Anna Hazare” movement – and the Jan Lokpal bill – the widespread public

perception is that corruption remains endemic21 January 2012



Integrity Considerations: Requirements (III)Integrity Considerations: Requirements (III) U.S. Foreign Corrupt Practices Act (FCPA)U.S. Foreign Corrupt Practices Act (FCPA)

Anti-bribery provisions prohibit bribes (or offers to bribe) made to foreign officials, political parties, etc., “whether made directly or through a third party for the purpose of obtaining or retaining business or securing a business advantage.”

Accounting provisions require accurate books and records and adequate accounting and financial controls – no allegations of bribery are required

Sanctions include criminal and/or civil penalties, loss of export licenses, debarment or suspension

U.K. AntiU.K. Anti--Bribery Act (UK)Bribery Act (UK) Three offenses (bribery, taking a bribe, bribing a foreign officThree offenses (bribery, taking a bribe, bribing a foreign official) apply to UK nationals or ial) apply to UK nationals or

residents, entities incorporated in the UK, or foreign persons aresidents, entities incorporated in the UK, or foreign persons acting in the UKcting in the UK A strict liability offense (failure on the part of a corporationA strict liability offense (failure on the part of a corporation to prevent bribery) applies to UK to prevent bribery) applies to UK

entities entities andand to entities to entities ““carrying on businesscarrying on business”” in the UK, even if incorporated elsewherein the UK, even if incorporated elsewhere

Comparing the FCPA and the AntiComparing the FCPA and the Anti--Bribery ActBribery Act The Bribery Act applies to bribes offered or given to The Bribery Act applies to bribes offered or given to any personany person; the FCPA applies only to ; the FCPA applies only to

corruption involving foreign officials; no exception for corruption involving foreign officials; no exception for ““facilitating paymentsfacilitating payments”” No No ““corrupt intentcorrupt intent”” is required for the offense of bribery of a foreign officialis required for the offense of bribery of a foreign official Subject to the defense of Subject to the defense of ““adequate procedures,adequate procedures,”” an offence is present under the Bribery an offence is present under the Bribery

Act for failure to prevent briberyAct for failure to prevent bribery

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Integrity: Practical ConsequencesIntegrity: Practical Consequences

Fear of accusation produces riskFear of accusation produces risk--adverse official conduct if not (near) adverse official conduct if not (near) paralysis paralysis

““WebWeb”” of Overlapping Requirements Presents Challengesof Overlapping Requirements Presents Challenges IndiaIndia’’s acquisition rules are complex; objective of Armed Forces may bs acquisition rules are complex; objective of Armed Forces may be e

uncertain, but risks are present in the use of outside expertsuncertain, but risks are present in the use of outside experts

Corruption consequences constrain engagement by US & UK OEMsCorruption consequences constrain engagement by US & UK OEMs Conduct which may be Conduct which may be ““ordinaryordinary”” by local mores can violate the FCPA by local mores can violate the FCPA

and/or the UK Bribery actand/or the UK Bribery act 26% FDI limit raises questions of 26% FDI limit raises questions of ““disciplinediscipline”” or control over JV actsor control over JV acts FCPA applies both to FCPA applies both to ““controlledcontrolled”” and and ““affiliatedaffiliated”” entities entities –– and agentsand agents

Public and media attention deter some from defense sector work Public and media attention deter some from defense sector work Losing bidders have initiated CVC investigations Losing bidders have initiated CVC investigations –– e.g., e.g., ScorpeneScorpene PrePre--award award ““clearanceclearance”” has been sought from CVC (single source)has been sought from CVC (single source) Reward of MOD contracts may not justify reputational risk Reward of MOD contracts may not justify reputational risk

21 January 2012



Integrity Considerations: QuestionsIntegrity Considerations: Questions

How do public corruption scandals affect private sector participation in defense?

What are the biggest risks to U.S. and Indian companies?

What risk assessment and management techniques suffice?

Is the DPP “rule bound” by integrity considerations? In the present environment, can acquisition proceed on

where exercise of discretion are required? Would more rigorous enforcement restore trust and

confidence? If not the Lokpal bill (Ombudsman), then what?

21 January 2012



Integrity: RecommendationsIntegrity: Recommendations

Private SectorPrivate Sector ““Best practicesBest practices”” exist to manage risk exist to manage risk –– but require rigor emphasize but require rigor emphasize

the importance of the importance of ““knowing your partnerknowing your partner”” Documentation of Policies, Practices & ProhibitionsDocumentation of Policies, Practices & Prohibitions Thorough due diligence of prospective partners/repsThorough due diligence of prospective partners/reps Contractual protection, e.g., Reps & Warranties, terminate on viContractual protection, e.g., Reps & Warranties, terminate on violationolation Disciplined recordDisciplined record--keeping, financial controls and auditskeeping, financial controls and audits Periodic compliance reviews; Internal reporting mechanismPeriodic compliance reviews; Internal reporting mechanism Training; Certifications internally and of outside supportTraining; Certifications internally and of outside support

Public SectorPublic Sector Enactment of Enactment of LokpalLokpal bill and creation of Ombudsman?bill and creation of Ombudsman? Assuring independence of Central Bureau of Investigation?Assuring independence of Central Bureau of Investigation? Enforcement of existing laws, e.g., PCA, Integrity Pacts?Enforcement of existing laws, e.g., PCA, Integrity Pacts? Debarment of Companies found in violation?Debarment of Companies found in violation?

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©© Robert S. Metzger 2012Robert S. Metzger 2012

Offset Requirements Offset Requirements -- IntroductionIntroduction

21 January 2012

Since 2005 the DPP has required offsets for Since 2005 the DPP has required offsets for major defense contracts.major defense contracts.

The requirement applies to all The requirement applies to all ““Capital Capital AcquisitionsAcquisitions”” in the in the ““Buy (Global)Buy (Global)”” and and ““Buy Buy and Make (Global)and Make (Global)”” for acquisitions > for acquisitions > RsRs. . 300 300 crorescrores (~$60M).(~$60M).

Uniform offset of 30% of acquisition cost Uniform offset of 30% of acquisition cost (for (for ““Buy GlobalBuy Global””) and 30% of foreign ) and 30% of foreign exchange component (for exchange component (for ““Buy and Buy and MakeMake””).).

DefenceDefence Acquisition Council (DAC) has Acquisition Council (DAC) has power to waive or vary. power to waive or vary.

2011 Amendments 2011 Amendments 11-- expanded eligible products to include civil expanded eligible products to include civil

aviation and homeland securityaviation and homeland security 2 2 –– allows Tierallows Tier--1 sub1 sub--vendors to discharge vendors to discharge

offset obligations for their offset obligations for their workshareworkshare

Role of Defense Offset Facilitation Agency (DOFA)

Facilitate implementation

Assist vendor interface

Monitor offset provisions

Interact, consult with Indian Armed Forces, DRDO and MOD

Revisions reportedlyRevisions reportedlyWill be released soonWill be released soon



Offset Requirements Offset Requirements –– Basic MechanicsBasic Mechanics

How are offset requirements satisfied?How are offset requirements satisfied? Direct purchase/execution of export orders for Direct purchase/execution of export orders for eligible productseligible products Purchase of Purchase of eligible serviceseligible services provided from Indian industryprovided from Indian industry Investment for infrastructure for service, coInvestment for infrastructure for service, co--development, JVs development, JVs

and coand co--production of eligible products and services production of eligible products and services

What are eligible What are eligible productsproducts?? DefenseDefense products, products for internal security, civil aeroproducts, products for internal security, civil aero

What are eligible What are eligible servicesservices?? Maintenance, overhaul, upgrades, lifeMaintenance, overhaul, upgrades, life--extension, engineering, extension, engineering,

design, testing services, QA and trainingdesign, testing services, QA and training

Other key featuresOther key features CoCo--terminus with main contractterminus with main contract Surplus credits can be banked for 2 years (but not transferred)Surplus credits can be banked for 2 years (but not transferred) Penalties of 5% of unperformed annual obligationPenalties of 5% of unperformed annual obligation

21 January 2012



Offsets: QuestionsOffsets: Questions

How well has India’s offset policy worked? What are the principal restraints on success? Is India’s capability to partner or satisfy offsets already absorbed? How much will it help to include sub-tier supplier? Should multipliers be granted for ToT? For SME participation? Should the “credit sphere” be expanded outside A&D and homeland

security? Do current FDI limits operate against achievement of offset goals?

Why exclude offset credit if 100% U.S. owned firms are: in India, licensed, using Indian employees and operating under Indian laws?

As to FDI, should not the Government distinguish between companies in India which do civil aeronautics and those key for national defense?

Are offsets worth their price? What could India learn from “best practices” of other countries?

21 January 2012



Offsets: RecommendationsOffsets: Recommendations

PolicyPolicy Expand Eligible Purchases & Services to other national objectiveExpand Eligible Purchases & Services to other national objectivess Increase allowable FDI < 26% for new venturesIncrease allowable FDI < 26% for new ventures Grant credit to U.S. firms using existing India aerospace subsidGrant credit to U.S. firms using existing India aerospace subsidiariesiaries Incentivize Incentivize ToTToT by using multipliers earned by technology deliveryby using multipliers earned by technology delivery Encourage use S/Encourage use S/MEsMEs w/ multipliers and allow banking for w/ multipliers and allow banking for ““gestationgestation””

AdministrationAdministration Increase staffing and increase authority of DOFAIncrease staffing and increase authority of DOFA Establish Establish ““cycle timescycle times”” for bureaucratic actionfor bureaucratic action Confirm vendors may rely on DOFA rulings (certainty of actions)Confirm vendors may rely on DOFA rulings (certainty of actions) Assure transparency through disclosure and regular reportingAssure transparency through disclosure and regular reporting

ImplementationImplementation Cap offset contractual liability with reasonable max penaltiesCap offset contractual liability with reasonable max penalties Enable DOFA to grant relief for changed circumstancesEnable DOFA to grant relief for changed circumstances Extend period of performance for offsets to 7Extend period of performance for offsets to 7--10 years 10 years

21 January 2012



Private Sector Opportunities: QuestionsPrivate Sector Opportunities: Questions

Why has India not engaged its private sector? Where are real opportunities for India’s private sector? What restrains the private sector from participation? What is the proper relationship between PSUs and private concerns? Should the national government take a more proactive role? Is the private sector “frozen out” of design/development by the

PSUs? Would an increase to the 26% FDI limit benefit India companies? How best to involve India’s vibrant S/ME community?

21 January 2012



Private Sector OpportunitiesPrivate Sector Opportunities

On January 1, 2011, the Indian Government released a new On January 1, 2011, the Indian Government released a new document, the document, the ““DefenceDefence Production Policy.Production Policy.””

It points towards increased opportunity for the private sector, It points towards increased opportunity for the private sector, in in contrast to reliance upon the contrast to reliance upon the DPSUsDPSUs and Ordinance Factories. and Ordinance Factories.

Also envisioned is greater use of Also envisioned is greater use of ““public private partnershipspublic private partnerships”” Evidence to date is that this policy is more Evidence to date is that this policy is more ““aspirationaspiration”” than realthan real

Design and development are exclusively the domain of the Design and development are exclusively the domain of the DPSUsDPSUs Indian private companies today cannot satisfy defense system neeIndian private companies today cannot satisfy defense system needsds

21 January 2012

The objectives of the Policy are to achieve substantive self reliance in the design, development and production of equipment/ weapon systems/platforms required for defence in as early a time frame as possible; to create conditions conductive for the private industry to take an active role in this endeavour; to enhance potential of SMEs in indigenization and to broaden the defence R&D base of the country.



How well is it working? One perspectiveHow well is it working? One perspective

Commerce Ministry Commerce Ministry ““Discussion PaperDiscussion Paper”” of May 2010of May 2010 India one of the worldIndia one of the world’’s largest importers of s largest importers of defencedefence equipmentequipment Cumulative Cumulative defencedefence budget grew at 13.4% CAGR from 2006budget grew at 13.4% CAGR from 2006--2009 (40% 2009 (40%

capital)capital) Ratio of Ratio of defencedefence article import to indigenous production: 70:30 (article import to indigenous production: 70:30 (vsvs 30:70 30:70

goal)goal) Ratio of Ratio of defencedefence import to export: 194:1 ( vs. 1.3:1 (Israel), 9:1 (So Korea))import to export: 194:1 ( vs. 1.3:1 (Israel), 9:1 (So Korea)) 15% of India15% of India’’s s defencedefence equipment is equipment is ““state of the artstate of the art”” while 50% is while 50% is

obsolescentobsolescent ““Buy and MakeBuy and Make”” RFPsRFPs yet to achieve yet to achieve ““fructifiedfructified”” results in productionresults in production Protection of Protection of DPSUsDPSUs and and OFsOFs deters both foreign investment and new deters both foreign investment and new

domestic private sector market commitmentdomestic private sector market commitment Indigenous R&D (to Indigenous R&D (to ““MakeMake””) has not kept pace with goals ) has not kept pace with goals –– ToTToT to to DPSUsDPSUs

has proven has proven ““ineffective and slowineffective and slow”” Less FDI received less than sought Less FDI received less than sought ––about 130 private sector companies about 130 private sector companies

have been issued letters of intent or manufacturing licenses buthave been issued letters of intent or manufacturing licenses but ““on groundon ground””accomplishment reportedly is limitedaccomplishment reportedly is limited

21 January 2012



Export Control OverviewExport Control Overview

License Jurisdiction:License Jurisdiction: DualDual--use items: Department of Commerce (BIS)use items: Department of Commerce (BIS) Munitions: Department of State (DDTC)Munitions: Department of State (DDTC)---- DTSA authorizes foreign access to U.S. military technologies DTSA authorizes foreign access to U.S. military technologies

Export controls apply both to FMS and Direct Commercial Sales (DExport controls apply both to FMS and Direct Commercial Sales (DCS) CS) Current Licensing Policy towards IndiaCurrent Licensing Policy towards India

No sanctions in placeNo sanctions in place India no longer cited on India no longer cited on ““Entities ListEntities List”” India subject to same license rules/policies as other countriesIndia subject to same license rules/policies as other countries

Key U.S. Objectives in Export ControlKey U.S. Objectives in Export Control National security concernsNational security concerns U.S. Foreign policy initiativesU.S. Foreign policy initiatives Economic concernsEconomic concerns International agreements and regimes (e.g., NPT, MTCR)International agreements and regimes (e.g., NPT, MTCR)

Special Sensitivities Special Sensitivities –– Technology Release (e.g., LO/CLO, Technology Release (e.g., LO/CLO, UAVsUAVs))

21 January 2012



Export Control ConcernsExport Control Concerns

Key Issues from India PerspectiveKey Issues from India Perspective Reliability of U.S. as a supplierReliability of U.S. as a supplier Time and process requiredTime and process required Access to especiallyAccess to especially--sought technologiessought technologies Perceived Perceived ““AffrontsAffronts”” to sovereigntyto sovereignty View that FMS adds unnecessary expenseView that FMS adds unnecessary expense

Key Issues from U.S. PerspectiveKey Issues from U.S. Perspective Bilateral issues to be resolved (next slide)Bilateral issues to be resolved (next slide) Adherence to traditional objectives of U.S. Security AssistanceAdherence to traditional objectives of U.S. Security Assistance Assurance of technology securityAssurance of technology security Reservations about impact on domestic industrial base Reservations about impact on domestic industrial base

Key Issues from Contractor PerspectiveKey Issues from Contractor Perspective Faster processing of licensing and greater certaintyFaster processing of licensing and greater certainty Means for license aggregation, e.g., on a Means for license aggregation, e.g., on a ““project basisproject basis””

21 January 2012



Key U.S.Key U.S.--India Bilateral IssuesIndia Bilateral Issues

21 January 2012

““New Framework in the IndiaNew Framework in the India--US US DefenceDefenceRelationshipRelationship”” –– signed in June, 2005 signed in June, 2005 between India Minister of between India Minister of DefenceDefence and US and US Secretary of Defense.Secretary of Defense. DefenceDefence Joint Working Group and Joint Working Group and

DefenceDefence Procurement and Production Procurement and Production Group (DPPG) formedGroup (DPPG) formed

IndiaIndia--US Joint Declaration of March 2006 US Joint Declaration of March 2006 (President Bush and PM Singh).(President Bush and PM Singh).

Concluded Agreements:Concluded Agreements: Agreement for Security Measures for Agreement for Security Measures for

Protection of Classified Military Protection of Classified Military Information (GSOMIA) Information (GSOMIA) –– signed signed January 2002.January 2002.

Master Information Exchanges Master Information Exchanges Agreement (MIEA) (to facilitate Agreement (MIEA) (to facilitate exchange of exchange of defencedefence R&D and R&D and information) information) –– signed February 2004.signed February 2004.

RDT&E Agreement RDT&E Agreement –– signed January signed January 2006.2006.

EndEnd--User Monitoring Agreement (EUM) User Monitoring Agreement (EUM) ––agreed to in 2009.agreed to in 2009.

Issues to Be ResolvedIssues to Be Resolved

Logistics Support Agreement (LSA)Logistics Support Agreement (LSA) Communications Interoperability and Communications Interoperability and

Security MOA (Security MOA (CISMoACISMoA)) Basic Exchange and Cooperation Basic Exchange and Cooperation

Agreement for GeoAgreement for Geo--Spatial Spatial Cooperation (BECA)Cooperation (BECA)

India not a member of the MTCR India not a member of the MTCR ––though a professed though a professed ““unilateral unilateral adherenceadherence””



Final QuestionsFinal Questions

Are U.S. export controls a continuing barrier to U.S.-India industrial cooperation?

As the U.S.-India strategic relationship evolves, how will it affect export controls?

How important are bilateral agreements (e.g., CISMOA) to export control outcomes?

How can the U.S. and India accommodate each other’s perspective on CISMOA, MTCR, etc.?

Is FMS the vehicle to improve export control outcomes? Can FMS be aligned with development scope?

What might India seek for “exceptional” treatment vis-à-vis export controls? What can the U.S. do?

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Enhancing the Bilateral U.S.Enhancing the Bilateral U.S.--India RelationshipIndia Relationship

AssumptionsAssumptions India and the U.S. Share Key Security ObjectivesIndia and the U.S. Share Key Security Objectives Shared Characteristics and Values Encourage Growth in the RelatiShared Characteristics and Values Encourage Growth in the Relationshiponship The Bilateral Relationship Ultimately Will Drive Industrial OppoThe Bilateral Relationship Ultimately Will Drive Industrial Opportunityrtunity

PremisesPremises FMS goes part way but cannot satisfy IndiaFMS goes part way but cannot satisfy India’’s unique requirementss unique requirements India wants U.S. to assist in design and development India wants U.S. to assist in design and development forfor India India The U.S. can assist India in certain of its goals for selfThe U.S. can assist India in certain of its goals for self--sufficiencysufficiency

ExecutionExecution The U.S. and India should identify a Project important to IndiaThe U.S. and India should identify a Project important to India’’s national s national

objectives and consistent with U.S. military and security objectobjectives and consistent with U.S. military and security objectivesives To secure To secure ToTToT of necessary military technologies, India must find a of necessary military technologies, India must find a

common ground with the U.S. for technical bilateral agreements common ground with the U.S. for technical bilateral agreements India must create a means to award to a capable private sector cIndia must create a means to award to a capable private sector companyompany The U.S. must deliver on export control and technology releaseThe U.S. must deliver on export control and technology release Successful execution of the Project should be a relationship cenSuccessful execution of the Project should be a relationship centerpieceterpiece

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ConclusionsConclusions

India’s regional role and global importance points to increasing investment in defense capabilities.

The U.S. is a natural partner to assist India in its security needs and in achievement of national economic aims.

For its own sake, India needs to take certain steps, including containment of PSU roles and to encourage its private sector and to facilitate the partnerships with foreign firms for technology transfer.

The DPP can evolve to be more flexible and to produce better acquisition outcomes while remaining fair and transparent.

Offset requirements create opportunity to create and sustain an Indian aerospace design and manufacturing sector – but only with changes to increase the sphere of work eligible for offset credit and with improvements to offset administration.

Increasing FDI limits is the single most important change for India to make to secure ToT and build a domestic aerospace industry.

21 January 2012

Defense Opportunities: at takeoff or crossroads? · 2001: India opened its defence industry sector...

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Transcript of Defense Opportunities: at takeoff or crossroads? · 2001: India opened its defence industry sector...