We probably had a false sense of illusion that the Public Sector Enterprises will be the sole repository of India’s growth story post independence till we got a rude jolt in 1990’s and opened up to privatisation in a big way. While the private players since then have become global leaders, the public sector continues to remain a poor cousin by a considerable margin. If we analyse certain specific sectors such as IT, manufacturing, aviation, telecommunication and banking – just imagine where the country would stand in the absence of private players and how their presence in the market has benefitted the end consumers and the Indian economy as a whole.
By the same yardstick, to have left out the defence sector from the ambit of privatisation in ‘real terms’ is not only perplexing but defies logic. ‘Real terms’ does not apply to cosmetic changes made to the defence sector post January 2002, wherein 100 percent private sector participation was allowed, but with a retrograde ruling that the first preference to pick and choose went to the public sector. Every single policy that was framed, be it FDI, Offsets, “Buy”, “Buy & Make”, Taxes, incentives for R&D, and other policy frame works that flowed out from the successive versions of the ‘Defence Procurement Procedure’, were heavily biased towards the public sector. The private sector always saw the carrot dangling, but as its hands were tied, it made negligible investments.
Taking a cue from Leroy Hood, “If you just focus on the smallest details, you never get the big picture right”, let’s analyse some of the top arms exporters in the world to see what drives their defence markets. Barring Russia and China, where all markets are state controlled, the Indian corollary follows the well defined defence markets in America, Germany, France, Italy, UK and therein the top defence manufacturers such as Lockheed Martin, Boeing, BAE, General Dynamics, Raytheon, Finmeccanica, Thales, Airbus, Rolls Royce etc. If you study the history of these private firms, it is glaringly clear that they have been built through the sheer dint of political, diplomatic and financial backing provided by their respective countries. In 2014, the global sale of arms by Boeing and Lockheed Martin exceeded USD 65 billion which surpasses India’s defence budget allocation in any financial year till date. So, will we continue to remain the world’s largest importer of arms in the coming decades? No! The situation is fortunately changing
2015 has indeed been India’s watershed year in defence indigenisation – and the private sector juggernaut is finally set to roll. The present government deserves credit for not just understanding the dynamics of this game, but resolutely implementing changes that were so desperately needed. Rather than merely focusing on the nittygritty of improving the plethora of ordnance factories, the DPSUs and our R&D establishments, it has unleashed the humongous potential of the private sector, which will undoubtedly transform the landscape of defence indigenisation and ensure that the public sector either performs or becomes a laggard at it’s own peril. Those who understand the nuances of defence production and defence procurement will appreciate this as a masterstroke in transforming the defence sector, as finally, the intent of the government has transformed into concrete policies towards the private sector. The concerns of the private sector have been addressed with overwhelming urgency and a clear level playing field with the public sector has now been established. DPP 2016 is likely to bring in some major changes which will benefit the private players as under:
A new category called the ‘IDDM’ or ‘Indigenously Designed, Developed and Manufactured’ platforms is likely being introduced which will get top priority and will be first to be chosen for tenders. With a level playing field for both DPSUs and the private industry, it is now no longer feasible to simply import components from abroad, assemble in India and term it as ‘Made in India’. Neither is it possible for the public sector to take captive orders with impunity and as an organisational right. Also, under the new DPP, systemic changes have been proposed to the ‘Make’ category so as to kick start this stalled process. “Only firms with majority stake and controlled by resident Indians will come under ‘Make’ categories.
The ‘Make’ procedure is proposed to be divided in three sub- categories — Make I — which will involve 90 per cent funding of development cost by the government, Make II — in which case, the government will refund 100 per cent of development cost in case Request for Proposal (RFP) is not issued within two years from the time of development of prototype and Make III — which will be reserved for small and medium scale enterprises for projects worth less than Rs 3 crore. These are crucial changes as financial support provided by the government, coupled with accountability of the suppliers to deliver, will undoubtedly lead to concrete progress on the ground by the private sector
The L1 policy of selecting lowest bidder is being modified. 10 percent extra weightage will be given if a system displays better qualities than required. This, along with another new proposed change that ‘bids can be accepted even if there is only one supplier’ will help the defence establishment to focus on quality vendors, collaborate with serious partners and deter suppliers indulging in retrograde practices to remain afloat.
Strategic Projects have major ramifications on defence preparedness and have a direct correlation with both time and money. With private players joining the defence bandwagon in a big way, it will be more feasible to select vendors on their intrinsic worth rather than their face value. The new DPP is likely to carry a clause wherein “Projects with development costs equal to or exceeding Rs 5,000 crore, to have a minimum ‘net worth’ of 5 per cent of the development cost, subject to maximum of Rs 1,000 crore” and “Companies require to be registered for five years, three years in case of MSMEs and have a minimum credit rating of B++, from a recognised rating agency”.
In a major boost to R&D by private players, DPP 2016 is likely to allow government to fund up to 90 per cent of development costs to private companies of which 20 per cent will be given in advance and in 24 months the entity will be given a tender. If the tender is not given, the private company will get a refund of its expenses. Another addition is the funding of Rs 10 crore for R&D to medium-scale industry which will boost component level and small scale innovations.
In continuation to the government’s effort to reduce timelines, enhance accountability and address concerns of the private players, certain duplicate clauses which resulted in time overruns in defence procurements have been eliminated. Also, the DPP sets up an empowered committee to solve disputes or unforeseen issues. Till now, disputes went to DAC. The validity of Acceptance of Necessity (AoN) has also been brought down to six months from earlier one year.
The Race Begins
To quantify this statement, huge investments from local giants such as Reliance, Tata, L&T, Bharat Forge and Mahindra have already been committed as there is a business opportunity worth INR 250 billion in the coming 5-7 years. Joint ventures with Boeing for aero structures of Apache attack helicopters and components of Chinook heavy lift helicopters, BAE systems offer to make ultra light guns in India in collaboration with an Indian private firm, L&T outgunning global rivals to bag 5000 crore contract for mobile howitzers, Bharat Forge has already invested more than Rs 100 crore to develop indigenous self propelled howitzers, Tata,General Electric and Bharat Forge have entered into an alliance to bag an USD 11 billion deal pertaining to the Indian Army’s Future Infantry Combat Vehicle and many other such proposals are already in the pipeline by the Indian private sector.
Let the Best Horse Win
Keeping our National Interest in mind, a level playing field has been created between the public and private sector in defence production. Our arm imports are a staggering 40 times the size of its exports. As per a written reply in Lok Sabha in November 2014, our import bill for capital acquisitions in last 5 years was USD 16.72 billion, which in Rupee terms is more than 1 lakh crore. In the previous three years, our exports were a mere Rs 1,644 crores. We can not afford to import upto 70 percent of our defence requirements, be the largest importer of arms in the last few decades and yet be a formidable military power. Revival of the private sector in defence production is a quantum step in the right direction. The government has made its intentions aptly clear- ‘Tax payers money is not meant for laggards surviving under protectionist policies. Equal Opportunities – Equal Competition- May the Best Horse Win’.
The author is a Senior Fellow at CLAWS. Views expressed are personal.