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Private Sector in Defence: A Ray of Hope?

Government's aim to enhance domestic manufacturing through private sector participation is not backed up with orders. Therefore, an ATTITUDINAL CHANGE is a need of the hour. The Author discusses number of issues which are peculiar to defence industrial sector and pose challenge to the growth of private industry.

Indigenous defence production or Defence Industrial Base (DIB) is the essential components of long term strategic planning of any country. The goal of self-reliance mandates the sustenance and expansion of an indigenous defence industry, backed by robust R&D. To promote indigenous design, development and manufacturing of defence equipment within the country, the Government has undertaken a series of policy and process reforms; the opening of the defence sector for private sector participation in 2001 being the first major initiative/policy, however, its commitment to a level-playing field falls flat in the absence of orders to private sector. Thereby there is heavy dependence on imports to meet the requirements of the Armed Forces which is not only alarming from the perspective of strategic reason, but also a matter of concern from the economic point of view in terms of the potential for growth and employment generation.

Private Sector in Defence Manufacturing: India Vs Advanced Countries

To have a robust DIB, it is essential for any country to have a strong and active private sector in defence manufacturing as well as R&D. To be noted, that world over it is the mostly the private sector which is the mainstay of the defence production. In countries such as US, Israel, China, defence production is dominated by private companies backed by a plethora of SMEs/MSMEs, having continuing affiliation with their Governments in Research & Development (R&D) as well as production/manufacturing. This is one of the reasons these countries have been able to develop a strong and capable DIB and consequently able to manufacture sophisticated world class military hardware. Further, these countries have also been able to productively harness the potential of the private sector for R&D. One such example is that of the United States' Defence Advanced Research Projects Agency (DARPA) which has been successfully being able to create a transformative and innovative ecosystem in partnership with the private sector with regulatory control over Intellectual Property Rights (IPR) and export.

In India, however, this has not been the case which has always prioritized the Public Sector - OFBs/Defence Public Sector Undertakings (DPSUs) and DRDO & its Laboratories despite it being under performing most of the times, due to so called deep set security concerns. It needs no underlining that the these government financed and protected production agencies both in terms of global standards of technology and performance has been unable to meet the military needs. Even when defence products are manufactured domestically by them, there is a large import component in them. Consequently, the persisting disappointments in developing cutting edge technologies and high end quality products by them has resulted in strategic vulnerabilities affecting the modernization of the Armed Forces which are in dire need of new advanced equipment. This situation can only be averted if the Government put more impetus on involving the private sector to compete in future defence programmes rather than being biased towards the Public Sector entities.

Emergence of Competent Private Sector

Undoubtedly, the private sector companies, seems to have potential and have started giving a tough competition to the Government sector entities. These companies have proved their mettle in the complete product life cycle for advanced systems such as missile launchers, rocket launchers, land-based as well as naval engineering systems, sensors such as radars and sonars, avionics, secure communication, and aircraft sub-systems. And even in the sphere of defence exports the share of these entities is witnessing a growth every year. As on date, exports from private sector stand at around Rs 7819.92 Crores as compared to Rs 404.44 Crores from DPSUs/OFB. Taking into account the last few years, the Indian private sector is considered to have matured sufficiently both in terms of size and scale of operations as well as in technology development through partnership, adaptation and assimilation capabilities, making it more capable than ever before. This is evident from the fact that certain private companies have demonstrated capability such as Pinaka development by Tata Power SED and successful manufacturing of Artillery Guns K-9 Vajra and M-777 ULH by Larsen & Tourbo (L&T) and Mahindra respectively through partnership with OEMs South Korea's Hanwha and US BAE Systems. Now, what is required is that the Government should provide much required ample support so that such competent private sector companies remain functional with their order books remaining firms. For example, L&T which bagged the order in 2017 for producing 100 K-9 Vajra 155mm Howitzer will be able to complete all its delivering within next six months, ahead of the slated time window However, saddening part is that the production line for the K9 Vajra artillery guns may now run dry within six months as the order book exhausts, forcing a possible mothballing of the facility. Such situations needs to be averted by the Government by taking fast paced supportive steps towards private sector.

However, one cannot also overlook the fact that till date not even one private company has been able to come out with a complete indigenously produced weapon/technology. Lately, with certain private sector companies claiming that they have the capabilities to develop major weaponries such as ATGMs, Howitzers on their own makes one think that are the private sector companies soon to join the Public Sector bandwagon of tall claims. This is because of the fact that developing of defence hardware by these companies on their own at this juncture seems relatively impossible since they are still on learning trajectory and most of them do not possess requisite experience, technological advancements and even capital/infrastructure to develop a complete world class defence hardware on their own. As of now, the Indian private sector is capable of building 'system of systems' say, for instance a complete communication solution for a submarine or a whole variety of weapon turrets for FICV. So rather than focusing on developing the entire defence hardware these companies should focus on these area as they should keep in mind that as of now they on now do not have the capital or infrastructure to waste.

Roadblocks for Private Sector

It will be worthwhile to point out that most of the private manufacturers lack the incentive to enter and invest into the defence sector considering the risk on returns, the creation of a manufacturing base being highly capital and technology intensive coupled with having long gestation period, irregular flow of orders, lack of resources and infrastructure, rigorous policies/tax systems together with lack of economies of scale in production. Noteworthy, the Indian defence industry output is approx worth Rs 80000 Crores, of which the private sector production is merely approx Rs 17350 Crores while the public sector produced equipment is worth Rs 62650 Crores.

Given the fact that the Indian Domestic defence manufacturing has to survive in a monopsony and a monopoly environment, as at the same time the Government is the single largest manufacturer as well as the only buyer; this necessitates specialization and long-term commitment from Government's end to invest in product development and maintenance. Defence production and R&D will not make the desired leap unless the Government proactively supports the private sector in manufacturing and R&D which unfortunately has not been the case. Though undeniably, the Government came out with certain measures/policies to boost private sector participation during the last few years such as Make-I, Make-II, Strategic Partnership, Indigenous Design and Development and Manufacturing (IDDM), however, the matter of the fact is that these are still mostly on paper and little headway has been made in this direction. The much hyped 'Make in India' projects involving private sector such as Futuristic Infantry Combat Vehicle (FICV) project, Tactical Communication System (TCS) and Battlefield Management System (BMS), have not reached even at development stage after almost 4 years.  The same is the fate of Strategic Partnership. Process involving the selection of the Production agencies, placement of orders is yet to be done. The actual production will take another decade.

Further, the Government's  biased approach towards Public sector entities, as these have vast infrastructure, nominated order, investments, and technology collaborations at their disposal through Government support; have resulted  in a lack of a level playing field till date and disheartening the private sector. This can be substantiated with the fact that over Rs 4 lakh Crores worth of military purchases have been cleared in the past four years and the Government asserts that two-thirds of the total approvals are under the 'Make in India' category. The reality, however, is different. In the same period, only 128 contracts worth about Rs 119000 Crores have been signed with Indian vendors for capital procurement of defence equipment. This is just more than one-fourth of the total, not two-thirds. And out of this 90% of domestic acquisitions are from DPSUs & 41 ordnance factories and about 10% from private sector. Of the total programmes cleared for acquisition, the private sector has been allowed to compete for about 35 percent of them by value. This figure was below 5 per cent in the preceding five years. These issues need to be addressed and catered by the Government.  Refer Diagram.

The Way Forward: A Collaborative Approach

Undeniably, the private sector has shown pioneering success in technological development/advancements but that has been more so through collaborations with foreign OEMs or for the matter of fact with the Public Sector (DRDO/DPSUs) as well. If India need to become self reliant then the Government should aim to operationally exploit the private sector. One way is through the implementation of Public-Private Partnership (PPP) in defence. In last few years the PPP model in development of certain technologies has led to the development of world-class weapons such as Dhanush and the Advanced Towed Artillery Gun System (ATAGS), Pinaka, Aakash missile to name a few. Furthermore, the involvement of Tata Power SED in building the Samyukta, India's first major Electronic Warfare (EW) system and L&T's important role play in the Arihant class nuclear submarine programme are some of the others remarkable examples to be considered.  Also, keeping in mind the phenomenal success that India achieved in the strategic nuclear and space sectors by involving the private industry during the initial stage, not as vendors but as risk-sharing partners, the Government should take necessary steps to replicate this in defence sector as well.

Another way is by allowing the private sector to bid in the defence procurements and giving them fair chance to compete for defence orders which can be done by letting them tie-up with foreign OEMs as though being competent and zest but the private sector still do not have the experience to develop a complete defence systems on their own given the fact the high investment and no assurance of orders that defines the defence sector. Thus, even when the orders are placed to them, it is most likely that they will fail to deliver. Partnering with the foreign OEMs or giving them more chances to become offset partners will help them to get the technological know-how where it lacks considerably. One such example is of Reliance Defence which tied up with France's Dassult Aviation and is executing offset contract that came with the procurement of 36 Rafale jets for the IAF. The share of Reliance is expected to be around 3 percent of the Rs 30000 Crore Dassault offsets contract. The Nagpur facility of Dassault Reliance Aerospace Limited (DRAL) was initially making only cockpits for the French manufacturer's Falcon business jets, besides other parts. Now the first set of doors that cover the twin engines of the fighter jets has been produced in Nagpur facility. Dassault is learnt to be in talks to buy out the stake of its partner Reliance in their joint venture 51:49 Dassault Reliance Aerospace Limited (DRAL).

However, barring such examples, it is seen that the DPSUs are still preferred for major defence programmes by MoD through 'nomination' basis i.e. without competitive bidding. In all cases where technology is purchased for subsequent production within the country, a public sector entity is nominated as the recipient even if a private sector company has the production capability by receiving only incremental technology. At times the technology is totally unfamiliar to the nominated public sector entity entailing long delays in its absorption and subsequent production. While, on the other hand, companies like L&T, TATAs, Mahindra, Adani Defence and Aerospace have shown that they have better capability in absorbing the technological know-how. Thus, cutting-edge technologies that have so far eluded Government organizations can be assimilated through foreign investments, acquisitions and partnerships by the private sector. Noteworthy, Indian private companies have already proved their mettle in sectors like steel and automobiles; thus the Government should entrust them and give them more responsibility in developing defence hardware.

It may also be worth mentioning here that the Joint Venture (JV) Company formed by an Indian partner with an OEM must be owned and controlled by resident Indian citizens. The OEM cannot, have more than 49% stake and must also obtain prior license for technology transfer from their own Governments. These provisions have been proving burdensome for the OEMs in particular as they feel subdued in tying up with Indian firms as they will be reluctant to transfer significant technology for production in India under a JV that gives them insufficient control.

Though, the policy does talk about protecting the property rights of OEMs. But this may not be enough of guarantee. Moreover at times, the Governments of the OEMs may also be unwilling to permit significant technology transfer under these conditions. This may result in the OEM choosing to supply the advanced sub-systems and components from abroad while enabling the Indian Strategic Partner to manufacture only lower-end technology in India. Thus, keeping these in mind the Government should permit the OEMs to have higher stake in the JVs they form. If the question is on national security when OEM has more authority in the JV, then the answer is that if we can directly buy defence items such as 36 Rafale fighter jets from France, the S400 air defence missile systems from Russia and the attack and strategic lift helicopters (Apache and Chinook) from the US that come readymade from the foreign OEMs with nothing made in India, then isn't it better that we allow the foreign OEM to have a tie-up with private company which has a high share of the OEMs but with conditions such as adequate transfer of technology. This way at least we can look forward to some excellent technologies absorption as well as other economic benefits including employment.

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