With the swearing in of the Narendra Modi government in 2014, mission ‘Make in India’ became the cornerstone of the nation-building initiative. It was a highly overdue clarion call and a key statement of intent. As mere reiteration of intent produces no results by itself, an enabling environment had to be created and industrial sectors prioritized. Defence manufacturing was rightly identified as one of the key sectors.
However, to achieve the objectives of ‘Make in India’, a need was felt to realign the Defence Procurement Procedure (DPP). The Ministry of Defence (MoD) constituted an expert committee under Mr Dhirendra Singh in May 2015 to review DPP and evolve the necessary policy framework for the purpose. The committee was also tasked to suggest amendments to remove bottlenecks in the procurement process and simplify/rationalise various aspects of the acquisition procedure.
The Dhirendra Singh Committee, inter alia, came to the conclusion that ‘vibrant defence industrial base must necessarily include the private industry’ and suggested forging of long term partnership with the private sector. It went on to stress that fostering a constructive, long term partnership was not just an economic option but a strategic imperative to minimise dependence on foreign vendors. To harness maximum potential of the private industry, the committee advocated adoption of three types of well-defined partnership models – strategic, development and competitive – the key criteria being strategic needs, quality criticality and cost competitiveness.
As the suggestion of forging strategic partnership with the private sector has the potential of being a game-changer, it has evoked significant interest amongst various stake holders. As expected, their response has been highly subjective. Whereas the environment as a whole has welcomed the proposal, the public sector is up in arms against it.
Strategic Partnership Scheme
The scheme aims to progressively build indigenous capabilities, capacities and infra-structure in the private sector (over and above those existing in the public sector) to design, develop and manufacture complex weapon systems for the future needs of the armed forces.
The primary focus of the scheme is to support sustainability and incremental improvements in the capability of platforms through technology insertions over their lifetimes. The Dhirendra Singh Committee identified six broad segments for the purpose – aircraft (fighter, transport and helicopters); warships of stated displacements, submarines and their major systems; armoured fighting vehicles; complex weapon systems that rely on guidance; C4ISTR (command, control, communication, computers, intelligence, surveillance, target acquisition and reconnaissance); and critical materials.
MoD accepted the recommendation and constituted a task force under VK Aatre to evolve the selection criteria. Concurrently, with a view to get all stake holders on board before finalising the modalities, MoD constituted five industry-led sub-groups and sought their suggestions. The sub-groups had representatives of both the Aatre Committee and MoD.
The Aatre Task Force submitted its recommendations in December 2015. It recommended ten segments for Strategic Partners (SPs) – seven in the first ‘system of systems’ group (aircraft, helicopters, aero engines, submarines, warships, guns and armoured fighting vehicles) and three in the second group (metallic material, non-metallic material and ammunition). Further, it suggested selection of one SP in each segment of the first group and two SPs in every segment of the second group. It also recommended a cap of 49 percent FDI in respect of all SPs.
The strategic partnership policy was finally approved by the Defence Acquisition Council, the overarching decision-making body in MoD, in May 2017. The government has decided to have SPs in only four segments to start with – submarines, single-engine fighter aircraft, helicopters and armoured carriers/main battle tanks. Other segments would be added later on after gaining experience. While reserving aircraft and helicopter manufacturing exclusively for the private sector, the government has, most disappointingly, opened manufacture of submarines and armoured vehicles to the public sector as well. It defies logic. In case a public sector entity is selected as SP, the objective of involving the private sector for creating additional capacity will be totally defeated.
Selection of SP for each segment is proposed to be carried out in an open and transparent environment on the basis ofinherent capacity and ability of the entity to absorb technology; competence in system engineering; supply chain management for life cycle support; and interest in long term partnerships. Major qualifying parameters would include financial capability and prudence; technical and R&D competence; capacity and infrastructure; track record; and ownership structure.
The process of short listing of potential SPs will be done simultaneously with the process of identifying OEMs, primarily on the basis of the range and depth of technology they are willing to offer. The selected SP will be co-opted for negotiations with foreign OEMs for production in India. Partnerships or tie-ups between SP and OEM may take the form of joint ventures, equity partnership, technology-sharing, royalty or any other mutually acceptable arrangement between the companies concerned subject to the ownership conditions laid down by MoD.
In many aspects, SP scheme is similar to the Raksha Udyog Ratna (RUR) scheme, proposed by the Kelkar Committee in 2005. Both aim to recognize the indispensability of integrating the private sector in defence production by reposing faith in the competence of well-established companies and treating them at par with the public sector units. A look at the RUR scheme and the fate that it met will be highly instructive.
RUR: An Innovative Initiative that had to be Aborted
It was in 1998 that MoD took the first major step to involve the private sector in defence production and constituted six task forces in collaboration with the industry for recommendations. Consequent to their suggestions, defence production was opened to the private sector in January 2002. The private sector was euphoric and anticipated huge business opportunities. However, their hopes were soon belied when they realised that the public sector continued to get preferential treatment and the private sector had to remain content with the supply of sub-assemblies and components.
Repeated representations to MoD resulted in the constitution of the Kelkar Committee. The committee reached the conclusion that the private sector had to be co-opted as an equal participant if India were to achieve the often stated objective of self-reliance in defence production. It submitted its report in 2005.
The committee recommended that select private sector industry leaders be identified as RUR and treated at par with the public sector for all defence acquisition purposes, to include design and development of high technology complex systems under ‘Make’ procedure; bidding for defence contracts; production of platforms; integration of large weapon systems; receipt of contracted foreign technology and indigenous production thereafter; discharge of offset obligations; and receipt of funds for developmental projects.
The above suggestions were accepted by MoD. Department of Defence Production (DDP) in MoD issued detailed guidelines in May 2006, laying down eligibility criterion and selection procedure. The first selection committee under Mr Prabir Sengupta was constituted in May 2006. A total of 41 companies including most heavy weights applied. Around 15 of them were invited to make detailed presentations and reportedly 12 companies were finally short-listed for the award of the status RUR. The committee forwarded its recommendations to MoD in June 2007.
Although some opposition was always expected from the public sector, its intensity and stridency surprised the environment. For public consumption, imperilment of national security was touted as the stated rationale for their opposition; whereas the real reason was an acute sense of insecurity. Fully aware of their own inefficiencies, the public sector units were wary of competing against RUR companies on an equal footing.
Opposition to RUR was also orchestrated through the trade unions affiliated to the Left parties. The trade unions were cleverly brain-washed into believing that RUR would pose a threat to the very existence of their units as all future orders would go to RUR. Deviously, no attempt was made by DDP to allay the apprehensions of the trade unions. No one told them that the defence pie was large enough for all and that the public sector units would never be starved of orders.
Quite understandably, the workers of the public sector enterprises got agitated, became suspicious of RUR policy and opposed it fervidly. Unable to withstand the pressure exerted by the Left parties (whose support was essential for the government’s survival), the government considered it prudent to sacrifice the innovative scheme at the altar of political expediency. Twelve years have passed and the private sector continues to survive on the crumbs thrown at it by MoD.
SP Scheme: the Last Post has Already been Sounded
The primary aim of the SP concept, as spelt out by the Dhirendra Singh Committee, was to harness the potential of the private sector in the manufacture of high-tech defence equipment indigenously by creating additional capacity over and above the capacity and infrastructure that exists in the public sector. As the additional capacity was to be created in the private sector, production opportunities under SP scheme were to be reserved exclusively for the private companies.
Most disappointingly, under pressure from the public sector, the government has negated the very objective/purpose of the policy by deciding not to restrict SP scheme to the private sector alone. Manufacture of submarines and armoured vehicles has been opened to both the public and the private sectors. It defies logic. Public sector units already enjoy privileged position and are always chosen as the Indian production partner. In case a public sector entity is selected as SP, how can the primary objective of creating addition capacity in the private sector be achieved? This single dilution of the SP policy has rendered it utterly meaningless.
The above development has not come as a surprise. It was expected by the knowledgeable. It was known that the public sector lobby would never let the SP concept succeed. DDP is commonly considered to be the biggest impediment in the development of the Indian defence industry. Although it should be promoting both the public and the private sectors, it acts as the god-father of the defence public sector units. It shields an inefficient public sector and ensures that the services are forced to buy what they produce. Considering the private sector to be a threat to the monopoly of the public sector, all efforts are made to deny it a foothold through clever stratagems.
In addition, restricting industrial majors to a single-segment SP is a highly dissuasive provision. Many industrial houses like L&T, Tatas, Reliance, Bharat Forge and Mahindra have multiple interests and have been investing in myriad segments. Asking them to choose one segment and quit the other segments (for the selection of SPs) to others will be highly unfair. It will result in the wastage of their capabilities acquired after prolonged struggle. In fact, it will deal a fatal blow to their aspirations to grow to be global defence manufacturing giants. Instead of facilitating their growth, single-segment restriction will effectively stunt it.
Even the selection of SPs will be a tough call. As seen in the case of RUR, unsuccessful companies will certainly question the fairness of the methodology followed. Accusations of bias and favouritism will vitiate the atmosphere. Media will be instigated to raise questions about the integrity of the whole process. Some unhappy companies may decide to appeal to the courts to undo the ‘perceived injustice’ and legal tangles can stall further progress for years. Worse, fearing subsequent inquisitions, the bureaucrats would consider it safer to defer the selection procedure till they get posted out. No officer wants his integrity questioned retrospectively.
SP scheme is a long term engagement as it entails development, production and marketing stages. With long gestation period for the returns to materialise, SPs need a certain degree of assurance as regards the likely inflow of orders. The government’s past track record does not inspire much confidence as regards fair and impartial treatment. Many companies have expressed their serious apprehensions on this account – first the public sector will be fully loaded with orders and thereafter the overflow would trickle to SPs.
By capping FDI for SPs at 49 percent, the government has effectively ruled out inflow of cutting-edge technologies. No foreign OEM will be ready to share his exclusive technology in a joint venture without having controlling stakes. In addition, a number of provisions, like costing, scope and depth of technology, have not been spelt out unambiguously.
As is well known, the US government demands strict safeguards for its technologies before sharing them with the friendly nations. Before the sale of gun-locating radars to India, an agreement titled ‘General Security of Military Information Agreement’ (GSOMIA) was signed in January 2002. It lays down binding security conditions for safeguarding classified information that the Indian public sector units receive from the US. As the private sector companies of India are not bound by GSOMIA, the US is reluctant to allow its companies to share hi-tech information with them. As a result, private companies selected as SP will find it well-nigh impossible to tie up with the US companies unless GSOMIA is extended to them.
Finally
The idea of co-opting well-established private sector companies as SPs to boost indigenous defence production cannot be faulted on any account as it seeks to create capacities in the private sector in respect of platforms of strategic importance. The scheme aims to optimise utilisation of all national assets; harness strengths of public and private sectors; generate competition while avoiding wasteful redundancies; ensure economies of scale including exports; and create globally competitive defence industrial base.
However, as seen in the aborted case of RUR, the scheme has the potential of pitching the private sector against the public sector which perceives the private sector as a threat to its primacy and dominance. It dreads competition from the private sector and ingeniously employs all subterfuges to stall its entry in defence production. It succeeded in aborting the RUR scheme and has already dealt a fatal blow to SP policy, as seen above. Nomination of public sector units as SPs is a ridiculous proposition that renders the scheme meaningless. Public sector units are already being treated preferentially, virtually as super-SPs.
No reforms can ever succeed unless MoD rises above parochial turf bias and gets rid of its perverse attitude of treating the private sector unfairly. With DDP calling the shots, schemes like RUR and SP have no future. As they say, expert committees propose, but DDP mandarins dispose. As per the past experience, a lot of exciting noises will be generated, but the matters will continue to drift as hitherto fore; and the SP scheme will be given a quiet burial as in the case of RUR. DDP will have the last laugh and the private sector will carry on living in hope. *****
 |
Click here to Reply or For
|
No comments:
Post a Comment