Private Sector in Defence Production: an Appraisal

PRIVATE SECTOR IN DEFENCE PRODUCTION: AN APPRAISAL

(Communique Nov 2004)

Major General (Dr) Mrinal Suman, AVSM, VSM (Retd)

Confederation of Indian Industry (CII) has been making concerted efforts to have the defence production opened to the private sector. It was on the initiative of its National Committee on Defence that the Ministry of Defence (MoD) constituted six Joint Task Forces with CII in 1998. In a major policy change, the Government opened defence production to the private sector in January 2002. It also allowed 26% foreign ownership. 

CII has been striving to get MoD, Services Headquarters and the private sector on a common platform to interact with each other. A number of defence-industry seminars, conferences, partnership meets and exhibitions have been held. Given decades of insulation and prejudices, this is no small achievement.

Despite the above measures, there is no discernible change. All major defence deals are still being signed with foreign producers. Public Sector Undertakings (PSUs) continue to get bulk orders under transfer of imported technology. And, the private sector has to remain content with the supply of some low-tech items and components. There has also been no inflow of anticipated foreign funds.

It is time to carry out an appraisal of the ground situation, a sort of periodic review to determine if any mid-course corrections are required.

The Impediments

Some of the major reasons for the continued non-participation of the private sector in major defence procurements are as follows: -

• There is a lack of an effective institutionalized interface between the MoD, Services Headquarters and the private sector for regular interaction at the policy making level. There are a number of ‘groups’ or ‘partnership forum’ in place, but their utility is limited to exchange of views only.
• Decisions are taken by the Defence Acquisition Council to ‘Buy’ or ‘Buy and Make’ or ‘Make’ the equipment required by the armed forces, based on the advice given by Defence Research and Development Organisation and the public sector. No inputs are sought from the private sector. Its competence and potential are given no consideration.
• Parameters for the equipment to be procured are formulated with foreign equipment in mind, after reading their literature. Private sector is not consulted in this process, whereas minor acceptable changes in parameters may make the Indian equipment eligible for consideration.
• Requirements of the armed forces are not made known to the private sector sufficiently in advance, with the result that they do not get adequate time, either to scout for foreign tie-ups or to establish the necessary facilities.
• There is no data bank of Indian industries available with the MoD. Requests for Proposals (RFPs) are issued only to a few highly visible companies, while many others lose by default.
• As RFPs are also issued to foreign original equipment manufacturers, they prefer direct bidding. They decline joint ventures with local companies as it helps them to guard their technology and perpetuate their monopoly.
• RFPs are issued for one-time piecemeal quantities without indicating the envisaged total requirement over a period of time. This deters the Indian companies from committing resources for establishing production facilities. On the other hand, major foreign vendors who are already producing the item readily offer their product.
• In the case of all deals where transfer of technology is negotiated, the nominated recipient is always a PSU, even if a private sector company is better placed in terms of infrastructure and know-how to absorb the technology. A PSU may have to establish complete facilities ab initio, whereas a private sector company may need only incremental technology.

All nations promote, nurture and protect their indigenous defence industry by giving them preferential treatment. In India, it is just the opposite. There are gross commercial inequalities, which are highly loaded in favour of the foreign bidders. First, no custom duty is charged for imported items, whereas excise is levied on indigenous production in the private sector.  Secondly, an advance can be extended to a foreign vendor as a part of the commercial package but no such facility is provided to Indian private sector companies. And finally, even the payment terms are unfavourable to the Indian producers. Foreign vendors are released 90% of their dues on submission of proof of dispatch, whereas Indian companies get payment only after the inspection and acceptance of deliveries. This may take a few months, thereby increasing the cost of the capital involved.

The Way Ahead

The present process of interaction should be continued, albeit with renewed vigour and purpose. All joint committees should be represented at the level of decision makers, so that the follow up action can be taken in a time bound manner.

A representative of CII should be a permanent invitee to the Defence Acquisition Council for all agenda points that are not highly classified. His inputs as regards the technical prowess of the private sector will prove invaluable while deciding whether to import technology or not. Similarly, selected agenda points of Defence Procurement Board, Defence Production Board and Defence Development Board should be circulated to CII for advice. These steps will go a long way in integrating the private sector.

Equipment Directorates of the Services Headquarters should seek advice of CII before finalisation of parameters, as provided for in Para 13 of the new procurement procedure. CII, with its massive pool of knowledge, will be able to help the authorities in getting a better understanding of the latest technological advancements worldwide and indigenous competence. 

The procurement agencies invariably rue the fact that they are not aware of indigenous companies that have the necessary competence and the potential. Therefore, CII should publish an authenticated directory of Indian companies listing their areas of expertise. The directory should be made available to MoD, all the Services Headquarters and other procurement agencies.

Acquisition Wing should also write to CII six months prior to the issuance of RFP for the names of suitable Indian vendors, giving broad parameters and quantities required. CII could circulate this information amongst the concerned companies for their advance knowledge. This will give adequate time to the interested companies.

To help the Indian companies in taking decisions regarding investment of resources, RFP should invariably indicate the total requirement envisaged over the years. This could be without any firm commitment as such.

         

Policy on grant of waivers for deviations from parameters must make a distinction between an Indian and a foreign producer. Easier grant of waivers, albeit within acceptable limits, to Indian companies will encourage them to commit resources more willingly.

         

Commercial terms should be made more favourable to the local vendors as the lower life-cycle cost of indigenous equipment must also be factored in. Foreign producers should be given incentives for collaborations with Indian companies. It could even be made mandatory, as has been done by Great Britain under its Industrial Participation policy.

The private sector should also familiarize itself with defence procurement procedures. It must appreciate the sanctity of the parameters laid down for different equipment and try to meet them. Efforts should be made to identify synergies between existing facilities and the defence requirements.

Conclusion

A serious and concerted effort has been made by the Government to streamline the entire acquisition process with recent reforms. However, good intentions must get translated into discernible actions, promoting free competition and providing equal opportunities to all.

        

The Government has to understand and appreciate the potential of the private sector. PSUs and the ordnance factories should consider the private sector as partners in the national defence industry rather than as threats to their existence. On the other hand, the private sector has to accept the primacy of PSUs and the ordnance factories for the time being and endeavour to assuage their apprehensions. Unless a strong and fruitful relationship is built in a graduated and phased manner, the private sector shall continue to be a marginal player.

          

The these noble intentions are not getting translated into concrete actions due to the lack of a credible and practical phased road- map. Formation of various committees or task forces is of peripheral importance. At best they provide broad guidelines. What is actually required is an impetus at the working level.

translated into concrete actions due to the lack of a credible and practical phased road- map. Formation of various committees or task forces is of peripheral importance. At best they provide broad guidelines. What is actually required is an impetus at the working level.