Reasons Non Participation Of The Private Sector

Published Date: 02 Nov 2017

Introduction

India "imports 70% of its defence requirements, the indigenous content is only 30%, of which is about 40% (12 % of the total) is contributed by Small and Medium Enterprise (SME) of the private sector" [1] . Heavy reliance on imports poses uncertainty in the defence capability and the country will be liable to the political machinations by the arms supplying nations. Defence Minister has also said that "over-dependence on foreign suppliers is not conducive to national security" [2] . Defence planners have to identify ways and means to harness private sector to achieve self reliance and enhance our defence capability.

Reasons for Non Participation of the Private Sector

"Our defence industry is now open to 100 % for private sector participation and the procurement procedures have been reviewed to usher in transparency and speed in acquisition" [3] . Given decades of insulation and prejudices, old mindsets, complexity of procurement procedures and clout wielded by the public sector have been acting as major deterrents to any meaningful participation of the private sector. Reasons for non participation of private sector are covered under various heads in the subsequent paragraphs.

Policy Issues

Few policy issues which prevent the entry of private sector are given below:-

(a) The private defence industry is in the infant stages of growth and requires support from government which is not available to them.

(b) "Applications from 49 top private companies for Industrial Licence (IL) have been kept pending since 2008 by Department of Defence Production" [4] . It takes four to six months to obtain an IL and there is no certainty that the approval will be given even after delay.

(c) Decisions taken to categorise a proposal as ‘Buy’ or ‘Buy and Make’ or ‘Make’ are based on the advice given by DRDO and the public sector and not from the private sector.

(d) In all deals where transfer of technology is negotiated, the nominated recipient is always a DPSU, even if a private sector company is better placed to absorb the technology.

(e) Imports by the DPSUs are duty free and get "Excise Duty exemptions" [5] but no incentives for the private sector.

(f) The cap of 26 percent FDI has deterred the flow of investors. OEMs are not keen to invest and share technology where they have no significant control.

Procedural Issues

Government agencies associated with defence and other stake holders in the defence sector are responsible for the existing state of defence production. Few procedural issues are given below:-

(a) "Armed forces over specify the qualifying requirements" [6] and they also modify the requirements midway through product development.

(b) The requirements of the armed forces are not made known to the private sector sufficiently in advance, with the result that it does not get adequate time to scout for foreign tie ups or to establish the necessary facilities.

(c) Complicated procedures, involvement of large number of agencies in finalising the deal and long path of procurements deter private entrepreneurs.

(d) Uncertainty in receiving orders for sufficient quantity deters private players.

(e) Industries opine that the procedures are conditioned to welcome outside technology. "The mindset that foreign products will be good must be removed if India targets self reliance" [7] .

(f) OEMs are not keen to invest and share "critical technologies in a Joint Venture where they have only 26% stake with no significant control over their intellectual property, strict product constraints and a perceived unfair advantage to the public sector" [8] .

Functional Issues

Defence equipment has to meet highly exacting standards. Indian vendors have not fully grasped the importance of this requirement. The issues are as under:-

(a) Every producer seeks economies of scale and assured continuous orders. Unfortunately, Indian procurement regime precludes both.

(b) Quantities that are slated for ordering by services are very small and economically not viable for a private player to set up a production line for defence needs.

(c) RFPs are issued for piecemeal quantities without indicating the total requirement. This deters companies from committing resources for production as the venture can prove both expensive and risky.

(d) RFPs once issued are withdrawn number of times and issued again after incorporating many changes. This affects the timelines for completion.

(e) Technology and production costs are very high. "The biggest road block to private sector participation is the exorbitant cost of of R&D for a product that may never be accepted in service" [9] .

(f) The existing responsibility of the "Department of Defence Production (DDP) overseeing the interests of both public and private sector needs a re-look as there is a bias to protect the interests of the DPSUs/OFs to ensure their capacity utilization" [10] .

ANALYSIS OF FOREIGN MODELS

The present system of DRDO laboratories carrying out research and DPSUs manufacturing, results in excessive delays and production of outdated equipment at an extremely high cost. The defence production models in some of the selected countries of the world namely USA, France, Israel and South Africa have been analysed to draw out important lessons.

The key takeaways from US model are as under:-

(a) Once the defence services requirements are given, the private firms carry out extensive research which helps in getting the state of the art technology.

(b) Defence sector firms were reduced to only five. This trend indicated an industrial polarization towards pooling of resources, corporate consolidation, special advantages of economies of scale and a sustainable defence production industry.

(c) Each project has a project monitor who looks after the project till its completion and any delay is the responsibility of the firm who pays for the default.

(d) Entire defence production as well as procurement is through an open and transparent competitive bidding, thus making entire process transparent.

(e) DARPA acts an interface between the latest technology being invented in the civil domain and the defence forces. It recruits project managers, scientists for doing research and implement them in defence production.

The positive aspects of the French model which can be imbibed in the Indian industry are as under:-

(a) The French Government strongly supports the defence sector and encourages private participation.

(b) The DGA acts as a professional acquisition corps, provides adequate checks and balances between Government and industrial power, accountability to the legislature and the public.

(c) DGA still remains the vital link between the private and public sector and ensures that national aims, defence requirements and timelines are adhered by the private players.

(d) France has diversified its defence industry into commercial markets, promoting the integration of civil and military production by eschewing regulatory barriers and placing greater reliance on dual-use technologies.

(e) They have been successful in pursuing diversified strategic alliances and other forms of international collaboration in defence R&D and procurement.

The key issues from Israel’s public - private model are:-

(a) The Israel Government promotes and facilitates a very high degree of foreign investment in defence production.

(b) Government ensures a strict control on the defence production sector which helps in proliferation.

(c) The technology development by the Government owned R&D activities had progressive effect in the non-military sector by directing towards the technological advancement of civil industry.

(d) Government allows foreign military sales and its profit is used for further R&D as well as to reduce cost for own defence procurement.

The key take away from the South African model are as under:-

(a) Core products like the G-8 artillery systems and vehicles were identified for production and others such as shipbuilding were discontinued.

(b) Shifted its focus from high technology items to second tier products which were more easy and profitable to produce.

(c) International Collaborations and tie up of South African defence industries with leading defence product manufacturing giants of the world has provided it access to latest technology.

(d) Resorted to recruiting foreign technicians to design, develop and manufacture weapons. It provided technical help to monitor deceptive practices, outright smuggling and piracy to meet its defence needs. Dual use technology and equipment like communications, computers, industrial equipment and manufacturing techniques were not subjected to restrictions.

POLICY SUPPORT TO ENHANCE PRIVATE SECTOR PARTICIPATION

Defence Procurement Policy DPP-2011. It incorporates measures aimed at simplifying procedures, speeding up procurement and enhancing benefits for the Indian defence industry. The Offsets Policy aims at boosting the Indian industry by ensuring business; directs the OEMs to reinvest 30 percent of all capital acquisitions in the Indian defence sector. To provide enabling provisions and to improve private participation, DPP 2011 is highly progressive for developing indigenous industry. The concerns of the Armed Forces have not been adequately addressed. Capital procurements have resulted in time delay and thereby cost escalations. This policy has addressed few issues in the capital procurement procedures and with a practical approach widens the scope of discharge of offset obligations to boost private industry.

Defence Production Policy (DPrP) MoD unveiled in Jan 2011, the first ever DPrP to provide direction to industry. The vision stated is to "achieve self-reliance in production of weapon platforms, arms, ammunition and other materials required for the defence of our nation" [11] . The policy aims at making up of short term operational voids and with the long term goal of self reliance. "A beginning has been made in "Make" category where two major programmes, the Fighting Infantry Combat Vehicle (FICV) and the Tactical Communication System (TCS) have been opened to private and public sectors to compete for development and trials" [12] . The policy ensures that the the country will resort to purchase from foreign sources, stated as "Buy Global" and "Buy and Make with Transfer of technology", when the equipment cannot be produced within the stated time.

RECOMMENDED MEASURES TO HARNESS THE POTENTIAL OF PRIVATE SECTOR

The defence sector of India has gradually started moving towards increased private sector participation. "Out of the three services, only Indian Navy has outsourced majority of its requirements to private sector, so as ISRO and HAL" [13] . Positive steps have been initiated in this regard; however the policies have not been implemented properly. The broad recommendations for developing a sustainable defence base with the private industry as a key are listed under the following heads:-

(a) Optimised R&D – DRDO and private industry.

(b) Measures to enhance interface between armed forces and private industry.

(c) Recommendations based on Indigenisation Approach.

(d) Recommendations for Collaborative Approach.

(e) Policy framework.

(f) Technology management.

(g) Production.

(h) Public private partnerships.

Optimised R&D – DRDO and Private Industry

Defence spending on R&D, besides maintaining a high standard of technology, is a key to maintaining a high standard of economy. The salient recommendations in this regards are as follows:-

(a) There is a need to synergise private sector for supporting defence oriented R&D.

(b) Encourage CII /FICCI to set up a consortium of leading manufacturers to undertake defence related R&D projects so as to initiate R&D culture in the private sector.

(c) There is a need to provide a congenial R&D environment and exploit the creative mind of young talent available in our universities.

(d) Technology Development Bank with involvement of private industry needs to be established to foster progress in R&D.

(e) High Technology Espionage. We have our elite students and scientists community working in leading international institutions including NASA. It would be a boon if such ‘sons of the motherland’ be exploited to contribute for the national interests.

(f) Kelkar Committee recommended "selected funding of defence related projects to enable the entry of private sectorin 2005" [14] . R&D costs are very high and the government must subsidise R&D costs.

(k) Develop institution like DARPA within MOD / IDS for sponsoring cutting edge development projects in India with private sector.

(l) Introduce the concept of concurrent engineering where the production team from selected private sector, design team and the users (armed forces) work simultaneously and not in a sequential order.

Measures to Enhance Interface between Armed Forces and Private Industry

The DDP, DRDO, the armed forces, DPSUs and private sector need to be institutionally brought under an organization. A Military Industrial Commission may be formed with experts from all fields to monitor progress, performance and standards. This should function under Cabinet Committee on Security and play a facilitation role for smooth functioning of key players. It is essential to create areas where such interaction can be made to take place so as to derive the maximum benefit from each other. A radical change in the attitudes of both, the armed forces and the civil industry is a must. Recognise that as defence looks for quality products, industry expects reasonable returns on its investments. A joint effort to identify the strengths and lacunae / shortfalls in the two sectors is essential, so that strengths can be fully exploited and lacunae can be strengthened up with mutual co-operation

Recommendations Based on ‘Indigenisation Approach’

Major thrust of the changes in policies as well as participation of the defence industry is based on indigenous manufacture of the product. In this context, the recommendations are as given below:-

Procurement Procedures. Open tendering be resorted to, instead of selective to broaden the base of supply and inculcate competitiveness.Treat Ordnance Factories and DPSUs as tenders and allow them to compete with the civil industry. Arrive at qualitative requirements in consultation with the industry representatives as well as the services. Order for complete assemblies as far as possible and insist on continued supply of spares and service backup from private industries. Publish a detailed list of the items required and their specifications along with the quantity for the next 15 years. Prepare a centralized pool of private vendors who wish to participate in the defence procurement process to make the system more transparent.

Reaching Out to the Industry.

(a) Structural Reforms. A representative of the designated industry association should be a permanent invitee to the DAC. Similarly, selected agenda points of Defence Procurement Board, Defence Production Board and Defence Development Board should be circulated to the industry associations for advice.

(b) Early Interaction with Industry on Acquisition Proposals. The acquisition wing should indicate broad parameters of equipment under procurement to the industry associations six months prior to the issuance of RFP. Equipment Directorates of the Service Headquarters should seek advice of the industry before finalising parameters.

(c) Interactions through seminars, workshops and demonstrations (as done in case of OFs and DPSUs) with private industry must be frequent and also more locations across the country.

(d) Establish offices of the defence procurement authorities at all major cities and industrial centres.

(e) Exclusive economic zones to be set up along dedicated freight corridors (Delhi – Mumbai or Delhi – Kolkata) for defence related industries.

(f) New entrants or start-ups must be given some extent of initiation and hand holding by the government.

(h) Government should encourage and fund the industries in their research of future weapons and critical technologies.

(j) A directory of credible defence manufacturers should be compiled and should be made available to all the defence procurement agencies for issuance of tenders.

Incentives for Production. The industry works on returns / profits. Various types of incentives can be proposed for industries commensurate with their participation in production for the armed forces. A scheme of National Award for excellence in indigenisation and a parallel award for highest participation in defence production could be instituted. Private firms may be considered for tax holidays for the teething years of their endeavours. Government must provide assistance in exporting the hardware of indigenous companies. Vast markets exist in East and West Asia and Africa for the hardware. Liberal licensing with a stricter control on the quality and legal contractual obligations on the part of the private sector should be the guiding principle behind the licensing policy. Government should fund 80 % of the development costs and balance 20 % may come from the industry. "This is the same model followed for the country’s first Make India Project for Tactical Communication System awarded to L&T, Tata Power and HCL" [15] .

It would be appropriate if the developmental orders are placed on the private industry for dual-use technology so that the benefits of its development could be used for the civil sector as well as the defence sector. This will also increase profits, foster willing participation and the equipment of the armed forces will remain in the contemporary technology.

The American approach of establishing ‘Government Owned Civilian Operated (GOCO)’ firms for production of strategic items may be introduced. The government retains strategic control, but the running of the establishment is entrusted entirely to civil experts who could form their policies and abide by the strategic guidelines. The proposal appears a step above the concept of DPSUs in India, but with due incentives, the establishments are likely to flourish.

Recommendations Based on ‘Collaborative Approach’

Allowing up to 49% FDI, it is now possible to set up plants under collaboration with a foreign partner and manufacture the product. The overseas suppliers of defence products and systems should be instructed to tie up with an Indian partner who would provide sizeable indigenous value addition.

An arrangement to trade off the information technology talent available in the country to bargain for defence oriented projects for collaboration could be an avenue for exploration.

Policy Framework

Policy sets the aim clearly and spells out the methodology to be followed to implement the organisational aim. Recommendations based on the study carried out in respect of policy are listed under:-

(a) Bureaucratic control has to be loosened to become a facilitator from a controller.

(b) Establish a coordinating agency at the apex between industry, defence and ministries on the lines of Bureau of Industry and Security on priority.

(c) Re-engineer and reform government structures, public sector and government research institutions to pave way for private industries inclusion and thus ensure timely and qualitative results.

(d) Ensure greater transparency and sharing of information by government departments, public sector and exploit private industry to fill up the existing voids.

(e) Prioritise Indian private firms in defence acquisitions to launch a drive to identify and match procurement and import requirements with capabilities available in world and internal market.

(f) Indian companies should also get payment like the foreign vendors on submission of proof of dispatch. The time frame for according an approval or rejection to private sectors must be fixed and not open ended

(g) Reform the Defence Offsets/FDI/TOT policy, guidelines and implementing agencies to give priority to indigenisation and kick start a defence led industrialisation drive encouraging a holistic (dual-use) high technology manufacturing base established by the private industry.

(h) Expand and extend defence offset obligations by removing the minimum threshold, levying 100 percent offset obligations and extending it to all major purchase orders.

(j) Formulate a model National Offsets Policy and set up a National Offsets Agency to ensure development of a dual-use, high technology manufacturing base which can support the defence production sector.

Technology Management

The absorption of imported technology has been very limited and concerted efforts with involvement of private sector are must for futuristic technology management. Appoint a central coordinating agency for defence technology management to include representatives of three services, government and private production agencies. The technologies which are difficult to obtain should be leveraged through multi channels on a case to case basis. An annual review on progress of participation by private sector and reasons for delay must be included in the annual report of ministry of defence.

Production

The major recommendations to enhance production are given below:-

(a) Introduce the concept of competition wherever possible among the units in government sector also.

(b) Encourage private sector by providing level playing field and through suitable mechanisms like development order for ‘Make’ category of items.

(c) Focus of production has to shift to constantly upgrade technology and thus more avenues need to be explored with exploitation of private databases.

(d) Private industry models should be incorporated into Government organizations’ systems to sharpen production mechanisms.

Public Private Partnerships(PPPs)

The public sector possesses excellent infrastructure, manufacturing facilities and a highly experienced task force. The private sector, on the other hand, can bring in latest technology, managerial practices, marketing skills and financial management. Therefore, a well-blended fusion of both will result in synergising of their strengths and prove mutually beneficial. There has been considerable growth of PPPs in the last 10 years. Sivathanu Pillai, Managing Director, BrahMos Aerospace says "partnership between DPSUs and private sector is the best way forward for indigenisation" [16] . BrahMos missile manufacturing involved more than 200 private industries which helped in reducing the production cost as well. Core competency of public and private sector could be optimally utilised if worked together. Department of Defence Production should be made responsible for defence industry and not for DPSUs. "Presently the department is linked on ownership syndrome with DPSUs" [17] . Shielding of DPSUs should take a backseat and a level playing field for private industries must be provided. This may generate a good mix of collaboration and competition between the two and initiate the steps for value based partnerships.

CONCLUSION

During the last five years, a serious and concerted effort has been made by the government to streamline the production process. The government has come to appreciate the potential of the private sector and wants it to complement the efforts of

the public sector. "Government is likely to make a list of 150-180 ‘Make’ procedure projects with MoD funding 80 % of the cost of development to encourage private sector and build defence base" [18] . The present process of interaction and integration should be continued, albeit with renewed vigour and purpose. Technological prowess of the private sector should be given due recognition and considered a national asset. The objective of achieving self reliance will remain elusive unless the private sector is duly integrated and its potential fully harnessed to build a viable indigenous defence industrial base. The government has to create an environment where in the private sector feels assured of just business opportunities, level playing ground and fair play.