Strategic Partnerships : Challenges and Opportunities for Indian Corporates
Indian Military is today at the cusp of scanty preparedness, dealing with old and obsolete equipment and systems on the inventory, that they can neither use nor discard, with little hope of any replacements or upgrades in the near future. Indian defence procurement process is plagued with such incompetence that none in the corridors of power is either accountable or blamed for incompetency or non-performance, in ensuring compliance to the timelines laid down. They are in such a critical state of non-performance that they are not able to adhere to the time-lines laid down by themselves.
Observations from CAG clearly highlight the chinks in India’s armour. India’s defence forces have faced a shortage of personnel and critical equipment because acquisition and modernisation plans remain stuck in a mesh of bureaucracy. Out-dated equipment, technologically backward, low reliability, and perennially in short supply – these are just some of the problems with India’s defence equipment. Delayed modernisation has ensured that defence capabilities are way behind countries such as China. India now spends 1.1% of its GDP on defence (capital expenditure ex-land and construction), which is higher than the US (0.8%) and largely in line with that of UK (1.4%). While India’s capital defence spending has increased (vs. US and UK), only a small part of it goes towards new equipment. In addition, almost 60% of the annual capital budget is towards imports, mainly because India’s defence PSUs lack the expertise to manufacture complex systems and private sector participation is still nascent. In order to correct this anomaly, the current government has taken steps towards changes to procurement procedures – by introducing new category IDDM, revision of the defence products list, issuing industrial licenses to the private sector, and relaxing FDI norms. India’s Defence Minister, Shri Manohar Parrikar, has been leading from the front to address the sluggishness in defence preparedness, head on.
In December 2015, Comptroller & Auditor General (CAG) observed that Indian Army’s availability of authorised stock against War Wastage Reserve (WWR, which measures war preparedness) is low. Thus, against a WWR of 40 intense war (I) days, in 50% of the total types of ammunition, the availability was ‘critical’ – i.e., less than 10 (I) days. Inability of the Ordnance Factory Board (OFB) to meet the army’s demand was a major cause for this shortage. Delayed modernisation has ensured defence capabilities
are way behind countries such as China.
As an independent defence consultant following this sector, I feel that India’s annual capital defence spending has averaged US$ 11bn per annum over the past five years. However, only about 8% of this capex goes towards ordering new equipment; the rest is payments for equipment that was bought earlier. Something like a INR 60,000 earmarked for capital expenditure, only some approx INR 6000 is available for new purchases and the rest is scheduled payments for committed liabilities for the equipment and systems procured in the yesteryears. The reasons for the under investment, are well documented – India shares a border with two hostile neighbours – Pakistan and China. Also, its defence forces face serious shortages of critical equipment – not just fancy high-tech equipment, even basic war-time necessities.
|Defence Systems Comparison|
|Active Frontline Personnel||23,35,000||6,20,000||13,25,000|
|Armored Fighting Vehicles(AFV)||4,788||2,828||6,704|
|Self Propelled guns||1,710||465||290|
|Multiple-Launch Rocket Systems||1,770||134||292|
|Total Naval Strength||714||197||295|
|Coastal Defence Crafts||138||12||135|
|Source:||Global Fire Power, Media Articles|
OFB / DPSU Bashing
There is no dearth of statistics to highlight the poor state of the DPSUs and OFB in their preparedness and support for the Armed Forces. Many an author and defence experts writing on India’s defence preparedness, have done a great deal of OFB/DPSU bashing. I do not intend to do more. However, we need to come to terms with the reality facing the country. On the one hand we have a political establishment that wants to do more, in terms of bringing about fast-paced changes, much to the dismay of the lethargic government functionaries, who now no more can put up a pretence at work; on the other, we as a nation are consigned to the fate administered to us by the bureaucracy. One unique quality in the bureaucracy is to neither deliver nor let go of the legacy fiefdom, thus discouraging new ideas.
There is a time in the national growth process when traditional mindset must give way to usurp change to allow the “best” to flourish. Safeguarding of turf for plenipotentiary power needs to be curbed with an Iron Hand. It is time to reflect upon the past and allow the OFB and DPSUs a free hand, free from the strangle-hold of the Defence Ministry. They are not being allowed to function as business houses, their hands are tied, their wages are controlled, their ideas are shot down, they are mere pawns executing a dictat from the corridors of the South Block, a dictat devoid of strategy, completely contingent on favours and return favours. How long can such a mechanism work. How long will the Ministry continue to park funds with DPSUs and OFBs for systems and equipment that may never see the light of the day, or when it does, it is at the end of a very long and dark tunnel.
Our OFB and DPSUs have performed well, have done their best, despite being in the guided environment they were subjected to and now they enjoy a definite lead over the private industry in terms of infrastructure, skill, experience and the working environment. Once they are freed, they have the promise to become the Embraers of the world. The government could consider to retain a golden share however. As a first step, they could be placed under the Ministry of Heavy Industries, if their characteristic that of “Public Instrument” is required to be protected. They will then learn to compete and become price conscious. Presently, they are like any government department, spending public money, agnostic to value of the rupee. That’s why their products are costly, sometimes multiple times the market cost and this escalation is duly justified, by overheads and other estimates that the government must bear.
How will then the Armed forces get equipped to protect us or in other words, when will the Armed Forces get what they need
If we were to follow the traditional methods of procurement as we have been doing thus far, we are not likely to encounter any new results. Ambitions of the political leadership to institute corrective mechanism and vision of the government can be matched, only if we adopt new and innovative methods while also embracing the private sector. Mere lip sympathy will not be good enough. The government could do well to match the competencies in the corporate sector with that of the Public sector and find collaborative arrangements. Idea here is to mesh the efficiencies in the private sector with the infrastructure in the Public sector, a win-win situation will emerge.
DPP the work-in-progress document, has evolved to become an inclusive document, inclusive of the private sector as well as the MSMEs. The document however, falls short of defining the process through which procurement of strategically sensitive systems can be undertaken. Strategic Partnerships hold the key and probably provides a great hope(the only hope) for the Armed Forces to get the procurement executive to act in an atmosphere conducive to near-hassle free induction. The Committee of Experts constituted for formulation of the present DPP, recommended a recognition of the abilities in the private sector through Strategic Partnerships. A broad criteria for Strategic Partners was indicated by the Experts Committee, further refined by the successor committee, to draw up detailed pre-qualifications. Number of meetings were held by the MoD with various stake-holders, with the Minister leading from the front, to arrive at consensus.
In line with the progressive DPP 2016, the government will do well to soon notify the Strategic Partners’ chapter, albeit, an unfinished agenda.
Opportunities for Corporates
This is the first time the MoD, thanks to active intervention and intense participation by the Defence Minister, has come this close to create an all-inclusive document. From seeding the idea of Strategic Partners to building consensus, it was not a cake-walk, with plenty of opposition from various stake-holders, some of them out of fear of the unknown and some due to perceived notions of unfair play.
Once notified, SPs present a tremendous opportunity for the corporates to Walk the Talk. Strategic systems of the Armed Forces will be opened for the large corporates that qualify as Strategic Partners. Monopoly of the OFB/DPSUs will be intruded into, albeit gently, with this grand entry of qualified Indian corporates. This is fundamental to growth. From advanced missile systems to Guns and Ammunition, from surface ships to subs, aircrafts, materials, the entire spectrum has been kept wide open.
Procurement plans will be shared by the government with the SPs( at least this is the intention as of now), they would also participate in shaping these plans to provide best possible effect. Forces will be involved at every stage with the corporates, like they presently do with the OFB and DPSUs to provide for hand-holding as necessary. Forces may do well to revise their HR policy to enable their best talent to be posted with large corporates for better synergy. In order that the government “Walks the Talk”, these critical aspects of sharing of information and modus operandi for that must be documented in so many words, in the ensuing document. Else, the bureaucracy could find ways and means to mis-interpret these, thus finding a way to returning to status-quo.
Corporates must be able to seal off at least USD 10 bn equivalent in the first three years. Major systems on the map will yield more and this business, needs to flow in the country. The cascading effect it would have on the industry at large, could well be at least USD 30 bn. Cash flows will demand setting up of new infrastructure, best business ethics, global best practices, greater efficiencies, hiring of fresh talent, universities revising their curriculum to include Aerospace and Defence, tierisation of the industry and so on.
The greatest opportunity is to be able to participate in the strategic affairs of the nation by arming the Forces with systems better than those available elsewhere in the world. The opportunity is to place India on the global supply map and pose a challenge to technology as important as it is to production and processes. Bringing in technology into the industry for real is one of the biggest opportunities on which the industry as whole will flourish. The opportunity is to reverse the present import export ratio through indigenous development and production. The opportunity is to increase defence exports to such levels as to be able to shape foreign policy. Military diplomacy will have a new flavour.
What did the government want?
Experts committee set up by the Ministry of Defence, deliberated on this important aspect of improving the efficiency of the procurement process and help the Forces to be able to induct strategically sensitive systems at a desirable pace. Since this must be different from the standard procurement process, concept of Strategic Partnerships was suggested. Also, the concept of Raksha Udyog Ratna(RUR), fielded in the DPP 2006 never took off; so it was important that the identified pitfalls were addressed, while the concept is being re-vitalised a decade later. The concept was carefully crafted, with over riding stipulations such as there can be only one SP per segment. To quote the report, in concept, “Having considered the nature of defence materiel and the configurations of defence industry worldwide we have come to the inevitable conclusion that if the strengths of private industry are to be harnessed then they must be done under well defined models depending upon the strategic needs, quality criticality and cost competitiveness. Whenever the vendor base is large and competition is feasible, the competitive bidding process must be followed. There are cases however where certain platforms are of strategic importance. For these, we are recommending the ‘Strategic Partnership model’ for creating capacity in the private sector on a long term basis. Such a capacity will be created over and above the capacity and infrastructure that exists in Public Sector units. This is expected to spur the sectors towards a more efficient and effective mode of operation. Likewise, there are cases where quality is critical and vendor base is very narrow. For these we are recommending a model of ‘development partnership’. These models would depend upon the systems and products within the ambit of the requisite model.”
Industry was however keen that the market forces take over the decision of the SP in each of the segments and that they be allowed to be eligible for all segments. It was argued extensively in the committee’s report that adequate opportunity must be given to the private industry to enable enhanced defence production. While in the present context the “Buy and Make” category of procurement invites the choice of the indian production partner basis the market forces and best combined bid, the situation was sought to be reversed in the case of the SPs. Since in the selected segments that form the core of the nation’s war-fighting strength, self-reliance is considered to be of foremost importance. Options for selection/nomination could be either (i) after a G-G negotiation (ii) selection through competition (iii) selection prior to G-G negotiation and (iv) ab-initio selection for all segments. In order to address the issue of industry’s aspiration to be eligible for SP status in more than one segment, the committee felt otherwise and quoting from the report, “ having been declared a Strategic Partner in any one platform, or a family of complex weapons or a major network programme that entity or its associate or subsidiary should not be eligible to be chosen as a Strategic Partner for any other purpose under this dispensation. This is to prevent conglomerate monopolies emerging at the very start without production even having commenced. Likewise, they will also not be allowed to have cross-holdings in each others’ companies. The available capability and capacity in the concerned public sector unit will be an additional safeguard against any monopolistic tendency on the part of the Strategic Partner”.
While the Experts Committee deliberated on the strategically important segments they also called for a well defined protocol to identify the SPs, the primary focus being to support sustainability and the incremental improvements in capability of platforms through technology insertions over their life times. The selection procedure is central to the success of the scheme and therefore the Ministry is advised to define parameters to base the selection. Here is where the Ministry went ahead to form a successor committee which actually developed the parameters. These were thereafter deliberated by the Minister with his staff with the industry at large on a number of occasions.
The draft is now ready to be placed before the apex body of the ministry for its consideration.
What then are the Challenges?
The greatest challenge we have today is one of “Mindset”. An aggressive mindset with a clearly defined roadmap is the need of the hour.
While the present nascent state of the defence industry is a challenge, the corporate sector is capable of rising to the occasion to make the necessary investments and initiate winner collaborative arrangements. Technology transfer agreements will usher in a fresh outlook and will no more be consigned to the confines of dusty rooms in dilapidated buildings.
Technology transfer arrangements will actually bring in technology since it will now be seen with a microscopic eye by the stake-holders themselves. Government’s interference in negotiating technology transfer arrangements or at least overseeing them will be a major challenge the industry must resist and overcome. Interference of government would be minimal, however, this necessary evil, must be restricted to the lowest levels possible.
Corporates need to gear up and get ready to face the challenges of time and space. To deliver the desired strategic system within the time-frame in conformance to the highest quality standards with restricted availability of military grade raw materials and an un-organised defence industry will challenge the supply chain. Corporates must map the existing industry in terms of their preparedness quality and capacity. Gaps in the supply chain must be identified discipline wise and new ones developed, wherever necessary.
Development and sustenance of a quality supply chain will determine success in production. Involvement from design and development stage and hand-holding the supply chain in terms of processes will remain a challenge for some time, this must be addressed head-on.
Many corporates have made investments in multi-discipline sub sectors of Defence. However, the policy is indicative of just one SP per discipline. What then must the corporates do with the investments made in other disciplines? Collaboration, is the key-word. SPs must collaborate amongst themselves for sourcing, easier said than done, and work both as competitors as well as collaborators.
Idea of Strategic partnerships is indeed good, consensus on the criteria has largely been evolved, Implementation now is the key. While the government is good at making policies, it is weak when it is time for implementation. For example, the MoD is not able to adhere to the timeframe for procurement as enunciated by its own self. It may not be an exaggeration to state that not a single program has been in conformance to the timelines laid down by the MoD. They need to respect the policy they have laid down and bring in a great deal of accountability. The system lacks accountability, eg, a babu can hold on to a file relating to procurement of a system for our Armed Forces, under the garb of studying it, for perpetuity, no questions asked.
Decision making and timely decision making is paramount for any policy or program to succeed. Corporates may like to throw in a lesson or two here and this will most probably have an electrifying effect on the entire system and process.