India looks to acquire military equipment on lease amidst budget squeeze

India is looking at lease contracting as a new methodology for acquiring military equipment amidst a budget squeeze at a time of rising expectations from its armed forces, with the Government on August 17 announcing a review of its Defence Procurement Procedure (DPP).

A 12-member committee led by Director General Defence Acquisitions will review the DPP 2016 and the Defence Procurement Manual 2009 and submit its recommendations in six months. Of the total budgetary allocation of 3,18,931.22 Crore ($46.5 Billion) for the armed forces made in July, only about a third – 1,08,248.80 Crore ($15.2 Billion) – has been provisioned for procurements under the Capital Expenditure head for military modernisation. For two of the three Defence services, their share of this allocation falls short of even the committed liabilities for purchases already made.

Incorporation of lease contracting, life cycle costing and performance based logistics in the DPP are among the terms of reference for the review committee.

Of the total budgetary allocation of 3,18,931.22 Crore ($46.5 Billion) for the armed forces made in July, only about a third – 1,08,248.80 Crore ($15.2 Billion) – has been provisioned for procurements under the Capital Expenditure head for military modernisation. For two of the three Defence services, their share of this allocation falls short of even the committed liabilities for purchases already made.

Analysts reckon that a 6.87 per cent hike in Defence spending recorded in this Budget falls way short of the real requirements for ensuring India’s military readiness. This resource crunch appears even more stark after capability gaps were exposed in the recent aerial confrontation with Pakistan post the Balakot airstrike in February.

The terms of reference for the DPP review committee make it clear that the Government is looking for ways to manoeuvre around the fund crunch to ensure adequate military readiness through availability of assets at a fraction of the cost of ownership.

The terms of reference for the DPP review committee make it clear that the Government is looking for ways to manoeuvre around the fund crunch to ensure adequate military readiness through availability of assets at a fraction of the cost of ownership.

Lease contracting is an arrangement to use a military asset without owning it. Leading western militaries including the UK’s use leased equipment, including mid-air refuellers. The contractor, who is the owner of the equipment, has to ensure a minimum level of availability of these assets, which also brings in the concept of performance-based logistics. This also provides flexibility to the user to replace the equipment at desired intervals without incurring the burden and costs of ownership-acquisition.

While militaries want ownership over core platforms and weapon systems, taking support equipment on lease to save costs is a concept which many leading forces are now increasingly open to examining. The flip side of this arrangement is that this leaves a user more dependent on the contractor, and thus vulnerable, in times of conflict.

In the past, India has used the lease route only to acquire nuclear-powered submarines (SSNs) from Russia. But in this case, there was no other way to acquire the capability. The incorporation of lease contracting as a regular element in the DPP could enable, for instance, the Indian Navy to acquire the Japanese ShinMaywa US-2 amphibious aircraft, for which there’s a long-standing requirement which is unrequited due to lack of funds. The IAF could look at acquiring some transport aircraft, and perhaps even mid-air refuellers down this route, experts reckon.

While acquiring military assets on lease is a new – and perhaps tricky – issue on account of national security concerns, it is a routine feature in sectors like civil aviation, the viability of which is based on wet and dry lease of aircraft.

In the past, India has used the lease route only to acquire nuclear-powered submarines (SSNs) from Russia. But in this case, there was no other way to acquire the capability which is of a strategic nature. The incorporation of lease contracting as a regular element in the DPP could enable, for instance, the Indian Navy to acquire the Japanese ShinMaywa US-2 amphibious aircraft, for which there’s a long-standing requirement which is unrequited due to lack of funds

The DPP was last revised in 2016 under the Defence Ministership of Manohar Parrikar, putting the Make in India agenda at the centre of India’s military procurements. A new category of Indian Designed Developed and Manufactured (IDDM) was added to the procurement methodology. Chapter 7 of DPP 2016 also made a provision for the Strategic Partnership Model to stimulate the emergence of a private sector Defence Industrial Complex.

A review of DPP 2016 has been overdue. “The Committee will revise and align the procedures with the aim of ensuring seamless flow from asset acquisition to life cycle support,” the Ministry of Defence stated.

The terms of reference for the review committee include “wherever applicable, (to) examine and incorporate new concepts, such as life cycle costing, life cycle support, performance based logistics, ICT, lease contracting, codification & standardisation”.

The review committee has also been tasked with simplifying procedure, removal of bottlenecks to enable quick acquisition, greater participation of Industry and promotion of start-ups and research and development, with the overall mandate of advancing the Make in India agenda.

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