Money Over Matter | Dynamic Move

Strategic partnership in defence production has the potential to spawn an indigenous defence industry

Maj. Gen. Mrinal Suman (retd)

In a policy initiative of monumental proportions, the Defence Acquisition Council (DAC), the overarching decision-making body in the ministry of defence (MoD), approved the adoption of strategic partnership (SP) scheme on 20 May 2016. It is by far the most dynamic reform in the field of defence production and has the potential to kick-start indigenous defence industry, if implemented judiciously and sincerely.

Despite repeated protestations of striving to achieve self-reliance in defence production, India continues to import 70 per cent of its requirements and has acquired the shameful distinction of being the largest importer of conventional weapons in the world, accounting for 14 per cent of the world share.

Maximum blame for the current pitiable state of India’s defence industry can be apportioned to MoD. It is responsible for perpetuating the monopoly of an inefficient, unproductive and inept public sector. With 39 ordnance factories and nine undertakings, the public sector possesses enormous infrastructure and manufacturing facilities. However, due to assured flow of orders from a captive customer base, a culture of complacency has set in. Its track record is abysmal.

Similarly, the Defence Research and Development Organisation (DRDO) has acquired the dubious distinction of never developing any equipment in the required time-frame and conforming to the operational parameters. Performance of DRDO has become synonymous with wasteful expenditure, prolonged delays and cost overruns. The only success DRDO has to its credit relates to the replication of some imported low-tech products (euphemistically called ‘reverse engineering’ and ‘indigenisation’).

Fully aware of its weaknesses, the public sector is wary of competing against a far more efficient private sector. Although the defence sector was thrown open to the private industry in 2002, the public sector has been assiduously employing all stratagems to retain its monopoly. Resultantly, the private sector continues to be a peripheral player. Only a handful of India’s top companies are involved in small value defence contracts.

Realising that self-reliance would remain a pipe dream if India continued to bank solely on the public sector, the Kelkar Committee, constituted in 2004, recommended that select private sector industry leaders be identified as Raksha Utpadan Ratna (RUR) and treated at par with the public sector for all defence acquisition purposes, including design and development of high technology complex systems under the ‘Make’ procedure and receipt of funds for developmental projects.

MoD accepted the above recommendation and the first selection committee was constituted in May 2006. Reportedly, 12 companies were shortlisted. MoD received the report in June 2007 but developed cold feet in the face of stiff resistance put up by an insecure public sector. The time-tested ploy of playing up likely risks to the national security was cleverly resorted to. In addition, intense opposition was orchestrated through the affiliated trade unions by projecting RUR as a threat to the very survival of the public sector entities. As a result, the leadership considered it prudent to abandon the scheme.

VP & country director for India, Thales, Emmanuel de Roquefeuil exchanging MoU with director-technical, BDL, K Divakar
VP & country director for India, Thales, Emmanuel de Roquefeuil exchanging MoU with director-technical, BDL, K Divakar

Genesis of Strategic Partnership Scheme
An expert committee under Dhirendra Singh was constituted in May 2015. It was tasked to evolve a policy framework to facilitate ‘Make in India’ in defence manufacturing and align the policy evolved with the defence procurement procedure; suggest amendments to remove bottlenecks in the procurement process; and simplify/rationalise various aspects of defence procurement.

The committee rightly averred that ‘vibrant defence industrial base must necessarily include the private industry’ and suggested forging of long-term partnership with the private sector. It went on to stress that fostering a constructive, long-term partnership was not just an economic option but a strategic imperative to minimise dependence on foreign vendors.

To harness maximum potential of the private industry, the committee advocated adoption of three types of well-defined partnership models – strategic, development and competitive – the key criteria being strategic needs, quality criticality and cost competitiveness. For strategic partnership (SP), it identified six segments – aircraft (fighter, transport and helicopters); warships of stated displacements, submarines and their major systems; armoured fighting vehicles; complex weapons which rely on guidance systems to achieve precision hits; command-control-intelligence systems; and critical materials.

As is apparent, SP model is of key importance as it seeks to create capacity in the private sector in respect of platforms of strategic importance to support sustainability and incremental improvements in capability of platforms through technology insertions over their lifetimes. The government accepted the recommendation and a task force was constituted under VK Aatre to evolve selection criteria.

Under the current government’s ‘Make in India’ mission, the government is insisting on indigenous production of maximum weapon systems. In case technology is required from a foreign source, ‘Buy and Make’ becomes the preferred route, wherein a limited quantity is imported in fully built-up condition while the bulk is produced in India with transfer of technology.

India has been following this route for decades. Most major systems, including armoured vehicles, aircraft, helicopters, missiles and ships are contracted under this route. As all such deals (including purchase of technology) are always negotiated by MoD, a public sector undertaking is invariably nominated to receive technology for indigenous production, even if a private sector company is better equipped.

As the current capacities available in the public sector have many constraints, SP scheme aims at creating additional capacity in the private sector. Take the case of the Indian aerospace sector. Hindustan Aeronautics Limited (HAL) is the only Indian company that manufactures aircraft but is unable to meet the requirements of the air force. Creation of additional aerospace facilities in the private sector will certainly expedite production. In addition, the private sector will provide much needed competition to the public sector entities, thereby shaking them out of their proverbial lethargy, smug complacency and gross inefficiency.

IAI’s president and CEO, Joseph Weiss and Kalyani Group chairman, Baba Kalyani signing and MoU
IAI’s president and CEO, Joseph Weiss and Kalyani Group chairman, Baba Kalyani signing and MoU

Under the proposed SP scheme, selection of production agency will be carried out in an open and transparent environment on the basis of inherent capacity and ability of the entity to absorb technology. Depending on key competence in system engineering, supply chain management for life cycle support, and interest in long term partnerships; selection of a strategic partner will be carried out for each segment. Major qualifying parameters would include financial capability and prudence; technical and R&D competence; capacity and infrastructure; track record; and ownership structure.

The success of the scheme lies in meticulous and credible selection of SP. For that, an expert committee will need to be constituted to shortlist companies. At present, only one private sector firm is allowed in each segment, ensuring sustainability and incentivising the firm that decides to invest in the development of infrastructure and technology. A private sector entity cannot be selected as SP in more than one segment.

The process of short listing of potential SPs will be done simultaneously with the process of identifying original equipment manufacturers (OEMs), primarily on the basis of the range and depth of the transfer of technology they are willing to offer. The selected SP will be co-opted for negotiations with foreign OEMs for production in India. Partnerships or tie-ups between SP and OEM may take the form of joint ventures, equity partnership, technology-sharing, royalty or any other mutually acceptable arrangement between the companies concerned subject to the ownership conditions laid down by the MoD.

Inevitable Impediments
Indian governance functions through consensus. Efforts are made to get every stake holder on board through circulation of draft policy. As is natural, clauses are inserted in the draft policy by all parties to safeguard their respective interests. Consequently, the final policy hardly resembles the original draft; and in most cases, the very purpose of the initiative gets defeated. Sadly, SP policy is no exception.

The primary aim of the concept, as spelt out by the Dhirendra Singh Committee, was to harness the potential of the private sector in the manufacture of high-tech defence equipment indigenously by creating additional capacity over and above the capacity and infrastructure that exists in the public sector. Most disappointingly, under pressure from the public sector, the government has negated the very objective of the policy by deciding not to restrict itself to the private sector alone.

To start with, the government has decided to have SP in four segments – submarines, single-engine fighter aircraft, helicopters and armoured carriers/main battle tanks. Other segments will be added later on. Manufacture of submarines and armoured vehicles has been opened to both the public and the private sectors. It defies logic. In case a public sector entity is selected as SP, the purpose of involving the private sector will be totally defeated. However, in the case of aircraft and helicopter manufacturing, only private sector can participate.

Another issue of major concern is that the concept of SP entails a long-term relationship during the development, production and marketing stages. As returns on investment will take time to materialise, the selected industrial entity has to have perseverance and staying power. Selection of a wrong SP can impact the perspective plans adversely. To guard against such an eventuality, it may be prudent to have more than one SP in some critical segments.

Debarring SP from bidding in more than one segments may be considered to be an unreasonable restriction by some major players. Selection for SP should be purely merit/competence based. Having mastered technologies that have applications in multiple inter-related segments; defence manufacturing giants in the developed countries straddle across a vast array of diverse defence, space and security sectors. India should also encourage its companies to grow to similar proportions.

Nomination of SP will certainly be a challenge. As was experienced by the RUR selection committee, accusations of bias and favouritism vitiate the atmosphere. Some unsuccessful companies may decide to appeal to the courts to undo the ‘perceived injustice’ done to them and legal tangles can stall the process for years.

The Way Forward
The idea of co-opting well-established private sector companies as SP to boost indigenous defence production cannot be faulted on any account. However, as seen in the aborted case of RUR, the scheme has the potential of pitching the private sector against the public sector and a confrontationist scenario will prove highly detrimental.

Therefore, it is essential for MoD to promote fruitful partnership between the public and the private sectors. 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 technologies, managerial practices, marketing skills and financial management. A well-blended fusion of both will result in synergising their strengths through economies of scale and prove beneficial for the nation, without wasteful duplication of facilities.

For that, as suggested in the illustration, MoD should categorise all defence manufacturing fields into four groups for optimum benefits. Maximum fields should be in the open competitive group. The categorisation should be dynamic in nature and reviewed periodically.

Once assured of a secure future through continuous flow of orders in its exclusive group, the public sector will not perceive the private sector as a threat to its primacy and existence, thereby becoming more accommodative. At the same time, the private sector will understand unambiguously that its role is to supplement the public sector and not replace it.

Optimising Potential of Public and Private Sectors
Finally, no country can achieve long-term national security objectives unless it is supported by a well-developed, dynamic and responsive defence industry. In addition to the economic factors, defence industry is generally considered to be an instrument of national sovereignty and pride. Moreover, a vibrant and thriving defence industry acts as a catalyst for the upgradation of technologies and skills in the engineering, manufacturing and production sectors.

India is expected to spend close to USD 250 billion over the next decade. As envisaged in ‘Make in India’ mission, if India manages to restrict imports to 30 per cent of the total requirements, the indigenous industry will have to produce defence equipment worth USD 175 billion. It is a tall order and the public sector by itself cannot meet it. The private sector has to be co-opted and the pie is large enough to be shared by all. Both public and private sectors are national assets and harnessing of their potential is essential if India wants to achieve self-reliance in defence production.