DPSUs Have Products to Offer for Exports While the Private Sector Has the Requisite Agility and Speed to Clinch Export Orders. There is Thus a Case for PPP on a Win-Win Basis
With defence minister, Rajnath Singh calling K9 Vajra the best example of ‘Make in India’, tell us about the road travelled by L&T after signing the agreement for 100 K-9 Vajra with Hanwa Techwin of South Korea in April 2017?
Vajra tracked SP gun programme was tendered under Buy Global category, however L&T and Hanwha teams decided to bid with L&T to be the lead bidder. This called for us to achieve more than 50 per cent indigenous content in the programme. Rather than looking for softer options we decided to maximise indigenous content as a matter of our ethos and well exceeded the policy stipulation. It is noteworthy that 18 subsystems of the Gun system were indigenously developed for the trial prototype including Fire Controls, desertisation related units and autoloader.
On contract negotiations, in keeping with the government’s push for ‘Make in India’, we established a new green-field manufacturing – integration – testing complex at Hazira in the state of Gujarat named Armoured Systems Complex (ASC), this state-of-the-art facility can manufacture and integrate advanced armoured platforms such as Self-Propelled Artillery Howitzers, Future Infantry Combat Vehicles (FICV), Future Ready Combat Vehicles (FRCV) or Future Main Battle Tanks. Spread over 40 acres within L&T’s sprawling 755-acre Hazira Manufacturing Complex, the ASC comprises high-end machinery industry 4.0 processes, feeder shops, and a full-fledged mobility Test Tracks for acceptance and qualification of tracked Howitzers and armoured vehicles. The complex is fed by an ecosystem/ supply chain of five L&T defence units as Hubs, about 500 Tier 1 (100 of them MSMEs) and 1400 Tier 2 partners as spokes.
L&T’s strong partnership with Hanwha of South Korea continued with training of a team of L&T engineers and integration specialists at Hanwha facilities. Subsequently, this team trained our supply chain partners as well as our own extended teams. Overcoming the humongous challenges, the eco-system enabled L&T to progressively indigenise 80 per cent of work packages by 51st Gun involving local production of over 13,000 components per gun.
Setting up of ASC and execution of K9 VAJRA contract has been acknowledged and commended at the highest echelons, with the Prime Minister dedicating the ASC to the nation in January 2019 and just after one year, the defence minister flagging-off the 51st K9 VAJRA-T Gun from ASC in January 2020. Maintaining the track record of ahead-of-time deliveries of all 51 Guns is a testimony to the technical capability, complex system integration skills, planning prowess, execution efficiency and sheer hard work and commitment of L&T defence team.
How has the experience been with your JV with MBDA? What programmes is the JV participating in at the moment? Do you envisage the JV getting into exports at some point?
L&T’s relationship with MBDA evolved and progressed from co-operation, collaboration to partnership of mutual trust over the last decade. We established a joint venture (JV) company named ‘L&T MBDA Missile Systems Limited’ (LTMMSL) during 2017 and announced it on the eve of Aero India 2017.
We have invested the last couple of years primarily in capability and capacity development. As part of that we have been producing and delivering missile subsystems to MBDA units in Europe for past few years. LTMMSL is building a green-field cold integration facility at Coimbatore and the same should begin operations next quarter. This facility will immediately address the export orders of missile subsystems and Launchers for which orders are at hand. LTMMSL also has been granted necessary defence production licenses.
LTMMSL has already offered a Short Range Air-defence Missile System to enhance point and area defence maritime capabilities of the Indian Navy’s Request for Proposal (RFP) for in-service warships. The JV has also responded to an Indian Navy Request for Information (RFI) for Medium Range Anti-ship Missile systems with state-of-the-art Exocet missile system on offer. LTMMSL has offered the only of its kind in the world, 5th Generation Anti-tank Guided Missile (ATGM 5) with cutting edge force multiplier technology to the Indian Army as well as to Special Forces.
Speaking recently at the Army Defence Bureau (ADB) seminar, you said, ‘only large companies (private sector) cannot take defence ecosystem forward.’ Since you emphasise upon the need for public-private partnership, what, according to you is the way forward to accomplish what defence minister Rajnath Singh called, ‘USD26 billion turnover target in aerospace and defence by 2025?
The public sector production in defence has been growing at an approximate CAGR of 8.5 per cent over the last four years in spite of a very large order book. Extrapolating the historic growth rate, the defence production by public sector would hover around USD 15-16 billion. As the government has resolved not to nominate future contracts and award them on competitive basis by enabling level playing field, the private sector would have to fill-in to reach a national target of USD26 billion and in the process grow much faster, given the smaller size that would enable faster growth. When this is combined with ease of doing business and licensing, more private sector companies would participate in defence manufacturing and make new investments and create employment.
The Indian private sector revenues currently hover at about USD2.5-3 billion while Defence Public Sector Undertakings (DPSUs) and Ordnance Factory Board (OFB) total up to USD10 billion. Given the track record of production in India, DPSUs have products to offer for exports while the private sector has the requisite agility and speed to clinch export orders. There is thus a case for Public-Private-Partnership (PPP) on a win-win basis. Such teaming could leverage DPSUs to enhance output by teaming with private enterprise leveraging their unused capacities and in the process enhance capital efficiency to reverse the current economic slowdown. Working in partnership mode in trust-based relationships with the Indian industry would not just meet but exceed export targets, especially with the government ready to chip in with active assistance.
At the Army Design Bureau (ADB) talk, you indicated that MoD should not only focus on DRDO for R&D and begin funding the private industry for R&D too for successful ‘Make in India’. In this regard, what measures should the government take?
R&D investments have led to success stories across industry sectors through proven capability of industrial R&D centres to undertake frugal innovation. The government of India (GoI)- ministry of defence-commits a significant quantum of the defence budget, currently almost Rs 20,000 crore annually to Defence Research and Development Organisation (DRDO). Of that just about Rs 100 crore is allocated annually to fund technology development programmes through the DRDO. As yet there has been no direct funding of R&D in the private sector by the MoD and that is the cause of no ‘Make’ programme taking off from the paper after a clear decade. It is worth to recall that one and a half decade back, the Kelkar Committee recommended categorisation of RURs to develop platform capability in the private sector through ‘Make’ programmes to build Product Capability that did not happen in the public sector given country’s dependence on transfer of technology (ToTs).
This recommendation was implemented by incorporating ‘Make’ programmes in the Defence Procurement Policy 2006, to develop complex, multidisciplinary indigenous defence solutions through maturing the Indian industry supported by the government. While the RUR scheme was dropped by the previous regime, three ‘Make’ programmes were promulgated between the years 2010-12. These were the FICV, TCS and BMS for which the MoD would fund 80 per cent of cost of development with the private sector pitching with the balance 20 per cent. The Kelkar Committee argued that defence R&D is funded by the government globally and if India was to be freed of repetitive ToT regimes, the way out is part funding the ‘Make’ programmes.
On the other hand, it is well known that R&D in defence is capital intensive and the projects targeting development of significant capability are complex and fraught with long development cycles. Identifying the need to promote industrial R&D, post-Liberalisation of Indian economy, the ministry of finance (MoF) had provided income tax benefits on R&D spend. Unfortunately, while articulating the ‘Make in India’ vision, the current government created a cliché with announcement of a sunset clause for R&D spend by 2016/17, which was later extended to March 2020. With this the industry must choose to invest in R&D for targeted development for a Monopsony and carry all the uncertainty.
Realising the contradiction between ‘Make in India’ and withdrawal of tax incentives, late Manohar Parrikar, the then Raksha Mantri, enhanced the MoD’s commitment to increase the government funding of ‘Make’ programmes to 90 per cent with 10 per cent coming from the industry. With no development contracts under ‘Make’ Process having been awarded till date as also withdrawal of tax incentives for R&D, there is an urgent requirement to fund/ part fund R&D in industry in addition to DRDO. It is also in line with policies stipulating that DRDO focusses on complex, high-tech and strategic programmes while the rest can be developed through the Indian industry.
There is an urgent need that the government of India kick-starts the (now) ‘Make-I’ projects and fund R&D in the private sector to initiate definite steps to attain self-reliance in defence platforms through vibrant participation of the private sector.
Can you talk about the R&D efforts at L&T? Most global companies are incorporating autonomy and Artificial Intelligence (AI) in their future programmes. How is L&T imbibing these practices in its programmes?
Currently, L&T has 12 recognised R&D centres across India which are accredited by the Department of Scientific and Industrial Research (DSIR). This stems in the L&T ethos of ‘Make in India’ starting with the company’s foundation by two Danes who could not import anything or go back as World War II began after 15 months of getting into the business. Only way to survive and grow was through Made in India in spite of war-time profits being taxed at 97 per cent.
Our presence in every industrial sector today leverages our ability to design and build philosophy, an effect of L&T being the silent and very major business incubator with innovation at their core. That does not limit us being ready to collaborate with good partners with long-term relationships. This ability of L&T was best exploited by the strategic sectors of India for indigenous technology development since past six decades.
Of late, L&T has identified Next-Gen technologies including AI and autonomous (unmanned) systems. L&T-NxT leverages the group’s deep industry domain expertise, cutting edge information technology capabilities and the invaluable learning from the digital transformation of our own diverse businesses, to deliver disruptive digital outcomes including AI solutions for our global customers. L&T defence with its rich experience in development of technologies and products to systems to platform and solutions to the armed forces is now focusing their R&D efforts on developing unmanned systems in underwater, sea surface, land and air domains.
Some of these have been displayed by us in the earlier DefExpos while some are under development including swarms technologies for collaborative autonomous operation. For example our AUV ‘Adamya’ can perform range of tasks based on payload and move on pre-programmed path with GPS navigation. We worked on DRDO development programme to drive a BMP-2 remotely. This needed entire range of Drive by Wire technologies that we had developed inhouse for our indigenous FICV programme. Our DRDO partnership realised a range of UGVs. Our UAV, being developed by collaborating with an IIT, is under flight trials and our USV (Sea Surface) is under inhouse development.
You made an interesting point that 25 per cent of what constitutes private industry involvement in defence ecosystem had invested Rs 25,000 crore, despite fewer returns. How can this be remedied?
We have witnessed continued nominated ordering on government-owned/ controlled PSUs in conformance with old decisions, given the slow pace of acquisition given multiplicity of checks and balances. This is visible from >90 per cent magnitude of orders (by Value) nominated across naval segment and nearly entire orders in air segment having been ordered on PSUs over past two decades since opening of the sector for the private industry. There is a need for decision makers to recognise private investments on par with investments in public sector as national assets and trust the private industry as nation-builders and provide them level playing field.
While much progress towards this has happened, further fine tuning will enable productive use of idling capacities in the private sector to harness their nimble footedness and ability to innovate in favour of indigenous value creation through providing opportunities to private sector by stopping nomination. On the other hand the government urgently needs to grant complete level playing field to the private sector through long-term relationships so as to cut imports and enable them to be served as additional resources to PSUs within the country and enable creation of jobs on our land.
Given your experience, what do you view as the limitations of the Indian defence procurement procedure? What needs to be done to create a sustainable defence industrial base in the country?
In order to give a push to the programmes cleared for acquisition, energise the defence economy, and make up for the slow pace of procurement in the past, a sustained increase in the defence capital budget allocation is an imperative. It is well known that the taxation regime changes over past three years (taxing of imports to grant level playing field to domestic players and introduction of GST) and inclusion of these in vendor pay-outs within the budget has meant that defence budgets have shrunk in real terms even without providing for inflation. Besides increasing the capital budget allocation and improving the Capital to Revenue ratio, the government may also judiciously look at extending Line of Credit to friendly nations to boost export of Indian designed and developed defence systems.
Multiplier effect to the economy and thus, tax buoyancy from defence production, hitherto import dominated, makes a case in itself for enhancing defence Capex. Multiplicity of approvals slow-down the acquisition. There is certainly a case for involving all stakeholders but cutting down repeated referrals to some of the agencies to accelerate acquisition process.
Formal announcement of Defence Production Policy defining clear time bound targets of growth and what imports to be stopped will create single pointed focus and evolve imperatives to create a dynamic, robust and competitive defence and aerospace industry towards realisation of ‘Make in India’ vision.
Strategic Partnership model was conceived with the vision to achieve platform building capability in private sector industries in addition to the public sector and enhance indigenisation. These programmes have potential to galvanise the industry in to action through tierisation as was proven by L&T’s K-9 Vajra programme.
The government needs to accelerate the programmes already progressed under the Strategic Partnership model viz. Conventional AIP Submarines and Naval Utility Helicopters, as well as initiate the FRCV and Fighter Aircrafts.
There are a large number of AONs granted by the MoD for programmes that will be placed on the Indian industry. These have totalled up to more than Rs 4 lakh crore over last five years, however not many RFPs have been issued. With the typical procurement cycle from RFPs to contract signing in defence taking anywhere between three-seven years, there is a need to speed up the acquisition cycle to see these ‘Make in India’ programmes materialise.
Also, the government should move away from L1 evaluation and look at implementing L1-T1 evaluation as enshrined in DPP 2016 and evolve it further for all the large acquisition programmes which can yield differentiated force multipliers to the armed forces.
In the long run ‘Make in India’ would not turn in to Made in India unless Make-1 programmes are actively pursued and awarded. Platforms developed under such programmes will last four decades and serve to indigenise not only initial production but the entire life cycle from womb to tomb.
The DAC has finally made its decision, and as expected, L&T is the strategic partner for submarines. What are the next steps? How will the programme unfold now?
The government taking the decision to shortlist Indian Strategic Partners for the P75(I) programme is a huge step towards realising ‘Make in India’ and long-term indigenisation goals of the nation. It is good to see announcement of two yards with decades of proven track record and capabilities have been shortlisted. The next step would be formal communication of the decision to the potential SPs from the MoD.
We look forward to the RFP over the next three months considering multiple levels of consultations have already been carried out with FOEMs and Indian SPs over past couple of years. The final requirements defined in the RFP would govern the final configuration, techno-commercial aspects including the execution strategy to be evolved in partnership with the selected foreign partner. We expect certain simulations/ model trials/ parametric validation before final bid submission followed by final technical evaluation, price bid opening and contract placement.
What are your thoughts on the two defence corridors in Tamil Nadu and UP?
It is a great initiative by government to target cluster development approach with an eye towards indigenisation of defence. The success of the investments and output would have to await visibility of contracts for major investments to be realised on ground.