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Strategic Defence

Affordability In Defence Procurements
By Major General Mrinal Suman, September 2011 [[email protected]]

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First published  April 2009

Affordability is one of the prime  considerations in all purchase decisions. In day to day deals, its application  is limited to cost factors. It becomes a measure of financial ability to bear  the anticipated expenditure. Whereas detailed affordability studies should form  the basis of decision making in all defence procurements, affordability has  come to mean availability of budgetary support to finance acquisitions in  India. The complete exercise is limited to prioritising procurement proposals  and then progressing them as per the funds available for capital procurements.

The concept of affordability has a much wider  application in defence procurements. As per the US Department  of Defence (DoD), affordability can be defined as the degree to which the lifecycle  cost of an acquisition programme is in consonance with the long-range plans  relating to modernisation, force structure and manpower requirements. For that,  both the individual DoD components as well as the DoD as a whole have to  considered. Details are obtained by affordability assessors from the projection  of resources (funding, manpower and forces) included in Future Years Defence  Programme.
   
Unlike the US, India imports 70 percent  of its defence equipment. Almost all major weapon platforms and systems which  have long service life are imported. Therefore, affordability studies acquire  additional dimensions and criticality. Sadly, inadequate attention is paid to this  crucial aspect. It will not be incorrect to say that affordability studies are  alien to Indian defence procurement regime.

Affordability is  a Function of Multiple Variables in Defence Procurements
Although  cost is central to all financial decisions, there are a number of other equally  vital factors that determine affordability. Defence equipment is expensive and  has a long service life. Every major deal results in long term contractual  commitments which restrict buyer country’s economic, strategic and foreign policy  maneuverability. Therefore, every arms deal should be judged for objectivity, rationality,  judiciousness and long-term fall-out. A nation can ill afford to make its  future decision-making freedom captive to poorly conceived deals.

Cost and Budget
Fiscal  constraints demand budgetary planning. Demand for new acquisitions far exceeds  availability of funds. Therefore,  prioritisation of proposals becomes necessary. Financial affordability thus  becomes the initial criterion in  decision making. Outlay has to include both acquisition costs and sustenance  costs. Whereas acquisition costs impact available budgetary support, sustenance  costs have to take into account likely budgetary allocations in the long term. Price  escalation and inflation have also to be factored in. As sustenance costs  become confirmed liabilities, they reduce availability of funds for future  acquisitions. This aspect needs special attention as procurement of any equipment  saddles the exchequer with fiscal burden during its entire life span.

Manpower Planning
Every defence system needs  manpower for its operation. Therefore, it is essential that every acquisition  proposal examines manpower requirements in detail as availability of manpower  is always at a premium. It is not enough to state that manpower would be found  from within the existing resources. Milking of manpower from existing employments  would invariably have an adverse effect on the functioning of affected components.  Therefore, manpower planning must factor this aspect in. In case additional  manpower is sought from the Government, proposal must include manpower costs as  well, both initial and recurring.

Fitment into Overall Equipment Profile
Modernisation of armed  forces must take place in an integrated, planned and unified manner. As all  constituents of a force are inter-dependent for optimum utilisation, equipment  profile should always be orchestrated and developed in a synergised and  mutually complementary manner. There is no point in having excessive potential  with one constituent without other constituents possessing matching capability.  Affordability mandates that all components should be in consonance with each  other as per long term modernisation roadmaps. In India’s case, all  procurements must be as per 15-year Long Term Integrated Perspective Plan and  5-year Services Acquisition Plan.

Usable Capability
Another important aspect of  affordability relates to own ability to exploit full potential of the equipment  sought. Seeking an artillery gun with range well beyond own target acquisition  capability militates against the concept of affordability. Similarly, if own  divers are trained and tasked to dive to a maximum depth of 10 meters,  demanding equipment meant for 40 meters depth is imprudent. In other words,  military can ill afford to purchase equipment whose full capability cannot be  utilised. It is a wasteful practice and must be avoided.

Formulation of Qualitative  Requirements
It is natural that militaries should  seek the latest equipment available in the world market with optimum  performance parameters. However, such an urge must be tempered with  affordability. Cost-benefit analysis facilitates determining performance  parameters with respect to affordable cost. At times minor dilution of  parameters can reduce costs considerably, thereby bringing the deal within  realms of affordability.  

Long Term Reliability of Foreign  Vendor
While  dealing with a foreign vendor, it is essential to consider whether the buyer  country can afford to enter into a long term partnership with him. Reliability  and credibility of a foreign supplier depends on his strict compliance with  contractual obligations. India has suffered often due to its neglect of this  crucial aspect. Recently, Russia has reneged from its duly negotiated terms for  the supply of aircraft carrier Gorshkov, both as regards price and delivery  schedule. If Russian assessors defaulted in estimating actual cost of refit, it  is Russia which should bear the penalty and not India. It is quite possible  that India would not have opted for the deal had the total cost of refit been  indicated upfront.

Additionally,  as defence systems have long in-service lives, they need regular support to  remain functional. Assured and uninterrupted supply of spares becomes vital. Russia  has been holding India to ransom with its uncooperative attitude. Earlier, the  US denied essential components quoting compulsions of domestic laws. Russia has  been most unresponsive in transferring technology after having contracted to do  so. Britain’s failure to provide spares for Westland helicopters shows that  India cannot afford to buy major systems from Britain without additional  safeguards. It took time for Britain to convince India of its credibility as a  supplier before it landed contract for Hawk trainers.

Likely Future Fiscal and Policy  Constraints 
Purchase  of every major defence system ties the country down to long term dependence on  the supplier nation for debt repayment and other contractual obligations. Many  call it ‘enslavement of future’. Undoubtedly, some developing nations have  found to their chagrin that systems procured on seemingly attractive deferred  payment basis have in fact landed them in unaffordable long term financial  liabilities.

Another  aspect which is generally overlooked relates to strings attached to many  high-tech deals. For example, the US insists on End Use Monitoring of its exported  equipment under which it reserves the right of periodic inspections. Many  consider it to be an anathema to free trade. If a buyer country pays for  equipment, it must exercise unbridled right over its usage. Therefore, before  signing deals India must examine whether it can afford to have such restrictive  provisions.  

Costing of Technology
Affordability  of technology as a part of the overall purchase contract depends primarily on the  following factors:-
•Its criticality as regards operational requirements.
•Degree of own inability to master it in the acceptable time frame.
•Cost of acquisition vis-à-vis anticipated cost of indigenous development.
•Capability to absorb technology.
•Multiple usage of technology for economies of scale.    

Many  countries have rued purchase of technology which resulted in infructuous  facilities and proved economically unviable. Purchase of technology has to be  commensurate with own needs and affordability, lest it results in the wastage  of precious economic resources.

Affordability with Respect to Offsets
One of the reasons for the introduction  of offsets in defence deals was to counter opposition to defence expenditure  after the end of the cold war. Public in many European countries questioned the  need for huge defence outlays and procurements. The governments justified the  expenditure by citing compensatory inflows for economic betterment of the  country. The Government of South Africa countered public criticism of its  massive defence deal of 1999 similarly. It quoted figures of expected offset  inflows with resultant economic benefits and employment opportunities in  support of its assertions, thereby making defence expenditure affordable.

Over a period of time, many countries  have found to their dismay that the benefits flowing from offsets are suspect.  Offsets carry a cost penalty and result in increased outflows. Promotion of economic  activities remains illusory. Most figures quoted are speculative in nature as  no detailed follow-up studies are undertaken to compute them. Worse, offsets  are difficult to monitor and lend themselves to corrupt practices. Therefore,  many economists are of the view that offsets do not make defence expenditure  affordable. They feel that it is a myth perpetuated by governments to divert  national resources from social sector to defence procurements.

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