Defence Industry

Private Sector in Defence Production
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Issue Vol 22.3 Jul-Sep 2007 | Date : 04 Jun , 2014

Boeing Apache

The Government of India has been reiterating its commitment to achieve the much-publicised target of procuring 70 per cent of its defence requirements from indigenous sources by 2010. Despite its best efforts over the last two decades, India is nowhere near that figure as yet. The Government is well aware of the emergence of private sector as a vibrant and dynamic force, especially in information technology, service sector and manufacturing fields. It has come to realise that self reliance would remain a pipe dream if it continued to bank on public sector alone.

One of the objectives mentioned in the new defence procurement procedure is to achieve self-reliance in defence equipment. But the whole procedure is silent about the role of the private sector and no worthwhile initiatives have been proposed to integrate its potential in India’s quest for self reliance.

In all deals where transfer of technology is negotiated, the nominated recipient is always a DPSU, even if a private sector company is better placed in terms of infrastructure and know-how to absorb the technology.

In addition to economic factors, defence industry is generally considered to be an instrument of national sovereignty and pride. Defence industry comprises of all industrial undertakings engaged in the production of hardware and services for use by the defence forces. The origin of the Indian defence industry can be traced to the establishment of Gun and Shell Factory at Cossipore in 1801. At the time of the Independence, India had 16 Ordnance Factories, established by the British to produce low tech items. Bharat Electronics Ltd was the first Defence Public Sector Undertaking (DPSU) established in 1954 to manufacture electronic equipment for the forces. Today, India has 39 Ordnance Factories and eight DPSU.

The Industrial Policy Resolution of 1956 divided industry into three parts:-

  •   Schedule A: Basic industries which are the preserve of the state, including defence and heavy engineering.
  •   Schedule B: Industries in which private industry was allowed to operate.
  •   Schedule C: All other industries.
Defence Industry Abroad
According to the US War Department, private sector is better equipped for defence industry because:•   Defence industry is highly technology driven and it is the private sector that adapts itself better to rapidly changing technology.•   The private sector possesses business acumen to spot fleeting opportunities for long term survival and continued prosperity of their enterprise.

•   Open and free competition compels companies to master frontier technology to beat their rivals for the limited orders available. It, in turn, helps the nation to build a reservoir of latest technology to give it an edge over its prospective adversaries.

Continued US military prowess fully justifies the confidence reposed in their private sector.

The Australian Government recognises the role of defence industry and considers it to be partner in the development of indigenous capability. It wants the industry to be aware of the long term defence plans to be able to identify and exploit emerging business opportunities.

Russia embarked on a major restructuring exercise of its defence industry in the early 1990s. One of the major steps was to create new corporate structures to undertake the complete gamut of research, design and production of defence systems. In a way, Russia wanted to follow the highly successful Western model. It privatised a large number of defence production facilities However, major research/design establishments and production facilities falling under strategic disciplines were kept under the Government’s direct control.

As per the UK Ministry of Defence Policy Paper No 5 on Defence Industrial Policy, a thriving, innovative and competitive defence industry is essential for the defence of the UK. The UK defence industry embraces all defence suppliers that create value, employment, technology or intellectual assets in the UK. The UK’s innovative science base supports the defence industry’s high levels of technology development, and this brings benefits to other industry sectors through the application of military technology to civil products. The UK Government works closely with industry and is committed to public/private partnerships. As a matter of fact, intense consultations are held with Defence Manufacturers Association before formulating Government policies.

Pakistan has also realised that private sector has to be dovetailed in the overall effort to produce defence equipment indigenously. Defence Production Division has been created in the Ministry of Defence Production to involve local industry in defence production. It has been made responsible to identify, integrate and utilise the industrial potential available both in public and private sectors for production and procurement of Defence Stores. It also tries to attain economies of scale by optimum utilisation of available production capacities in both sectors.

Manufacture of components, assemblies and sub-assemblies was thrown open to the private sector in 1991. With a view to promote defence-industry partnership, the Ministry of Defence (MoD) constituted six Joint Task Forces in collaboration with Confederation of Indian Industry in 1998. Consequent to their recommendations, the Government opened defence production to the private sector in January 2002. It allowed 100 percent private equity with 26 percent Foreign Direct Investment (FDI). It was a major policy change. Subsequently, the Department of Industrial Policy and Promotion issued detailed guidelines for the issuance of licence for the production of arms and ammunition.

The Kelkar Committee, constituted in 2004, made many radical recommendations. The Government has accepted a majority of them but their implementation has lacked earnestness and focus. The Department of Industrial Policy & Promotion (DIPP), in consultation with Ministry of Defence, has so far issued 37 letters of intent for the manufacture of various types of defence hardware which include armoured and combat vehicles, radars, electronic warfare equipment, warships, submarines, avionics, military aircraft, safety and ballistic products, armaments and ammunition.

Despite the above measures, there has been no discernible change in the ground situation. Only a handful of India’s top companies are involved in small value defence contracts. The private sector has to remain content with the supply of some low-tech items to the public sector. Its supplies to DPSU and Ordnance Factories grossed over Rs. 1200 crores and Rs. 1900 crores respectively last year. Whereas these figures signify the contribution made by the private sector, they also highlight the fact that the private sector continues to be merely an outsourcing base for the public sector.

Reasons for Continued Non-Participation of the Private Sector

A number of defence-industry seminars, conferences and exhibitions have been held in the recent years. Given decades of insulation and prejudices, this was no small achievement. But old mindsets, complexity of procurement procedures and clout wielded by the public sector have been acting as major deterrents to any meaningful participation of the private sector. New aspirants, in particular, find the whole regime to be highly forbidding.

Policy Issues

Decisions are taken by the Defence Acquisition Council to categorise a proposal as ‘Buy’ or ‘Buy and Make’ or ‘Make’ 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.

In all deals where transfer of technology is negotiated, the nominated recipient is always a DPSU, even if a private sector company is better placed in terms of infrastructure and know-how to absorb the technology. A DPSU may have to establish complete facilities ab initio, whereas a private sector company may need only incremental technology.

Procedural Issues

The Indian public sector has got used to a position of pre-eminence. Its hold over defence orders is total. It thrives because of its monopolistic clout and not because of any displayed excellence.

Requirements of the armed forces are not made known to the private sector sufficiently in advance, with the result that it does not get adequate time, either to scout for foreign tie-ups or to establish the necessary facilities. The time given for the submission of technical and commercial proposals is grossly inadequate for a new entrant in the field.

Parameters for the equipment to be procured are formulated with foreign equipment in mind, after reading manufacturers’ brochures. Private sector is not consulted in this process, whereas minor acceptable changes in parameters may make the Indian equipment eligible for consideration.

As Requests for Proposals (RFP) are issued to foreign original equipment manufacturers as well, they prefer direct bidding. They decline joint ventures with Indian companies as it helps them to guard their technology and perpetuate their monopoly with consequent financial gains.

All trials are carried out on ‘No Cost No Commitment’ basis. Whereas foreign vendors can incur the expenditure involved, many upcoming indigenous companies do not possess the necessary financial strength. This acts as a major disincentive.

Functional Issues

Due to the very nature of its usage, defence equipment has to meet highly exacting standards. There can be no failure in the face of the enemy. Regrettably, many Indian vendors have not fully grasped the import of this requirement and find the quality control regime to be extremely irksome.

Every producer seeks economies of scale and assured continuous orders. Unfortunately, Indian procurement regime precludes both. RFPs are issued for one-time piecemeal quantities without indicating the envisaged total requirement over a period of time. Additionally, no long term commitment is made regarding regular flow of orders. This deters Indian companies from committing resources for establishing production facilities as the venture can prove both expensive and risky.

Lack of Mutual Confidence

The Indian public sector has got used to a position of pre-eminence. Its hold over defence orders is total. It thrives because of its monopolistic clout and not because of any displayed excellence. It is fully aware of its weaknesses and knows that it cannot survive an open competition with the private sector. This sense of insecurity makes it wary of any move to facilitate the entry of the private sector and it tries all stratagems to block it.

On the other hand, many functionaries feel that the private sector is out to make a quick buck and lacks required perseverance. They tend to view the private sector as traders rather than committed manufacturers who can endure the travails of long drawn procurement procedure. According to them, anyone desirous of entering defence industry has to be fully aware of the fact that defence orders take inordinately long to materialise and vacillation invariably proves unproductive.

The Communication Gap

There is a total absence of an effective institutionalised interface between the MoD, the services and the private sector for regular interaction at the policy making level. There are a number of ‘groups’ or ‘partnership forums’ in place, but their utility is limited to exchange of views only.

(a). Procurement Agencies are Unaware of Industry’s Potential

Even today all major defence deals are signed with foreign producers. The public sector continues to get bulk orders under transfer of imported technology. The private sector continues to be a peripheral participant.

The procurement agencies are extremely keen to encourage indigenous production and limit imports to the minimum inescapable requirements. They, however, are unaware of the capabilities and potential of different private sector companies, as the competence of Indian companies has not been authentically catalogued as yet. They do not know whom to invite for submission of proposals. It is much easier to acquire details of numerous foreign producers.

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. Although, the Acquisition Wing has been tasked to create the necessary data bank, the process has hardly taken off as yet.

(b). Industry Lacks Knowledge of Defence Requirements and Procedures

On the other hand, many private sector companies have the capability to manufacture the whole range of defence requirements but do not know whom to approach to ascertain details. They are ignorant of the procurement agencies, their policies and procedures. This ignorance makes them wary of dealing with the defence.

To compound the problem, there are over 150 different defence procurement agencies with different procedures. There is no system of centralised notification of requirements and vendor registration. Due to this lacuna, a new entrant finds the whole environment highly dissuasive.

The Way Forward

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

Structural Reforms

A representative of the designated industry association should be a permanent invitee to the Defence Acquisition Council, depending on the security sensitivity of agenda points. 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 the industry association for advice. These steps will go a long way in integrating the private sector.

Early Interaction with Industry on Acquisition Proposals

The Acquisition Wing should indicate broad parameters of equipment under procurement to the industry association six months prior to the issuance of RFP. The association could circulate this information amongst the concerned companies for their advance knowledge. This will give adequate time to the interested companies to carry out technology scan and scout for foreign collaborations, if required.

Equipment Directorates of the Services Headquarters should seek advice of the industry before finalising parameters. The industry, 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 in India with their degree of stabilisation. Comments received from the association should compulsorily be put up to the approving committee. In some non-critical cases, indigenous capability may even influence the formulation of parameters.

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.

Support to Indigenous Industry

There is an urgent need to have a mechanism in place to facilitate the participation of Indian private sector in defence industry.

Most nations support indigenous producers by giving them purchase and price preference. 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.

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. Even 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.

Presently, the payment terms are unfavourable to the Indian producers. Foreign vendors are released full payment of their dues on submission of proof of dispatch (against performance and warranty bonds – each equivalent to 5 percent of contract value). However, Indian companies get payment only after the issuance of inspection note by the designated inspectors. This may take a few months, thereby increasing the cost of the capital involved. This incongruity needs to be addressed.

Facilitation Service

There is an urgent need to have a mechanism in place to facilitate the participation of Indian private sector in defence industry. Such a mechanism can serve twin objectives. First, it could assist in the assessment of a company’s current technical/manufacturing prowess and its potential for the development of defence products. A directory of credible defence manufacturers should be compiled with details of all assessed companies. This directory should be made available to all the defence procurement agencies to assist them to identify companies for issuance of tenders. The directory could also help foreign producers to locate potential Indian partners for collaboration.

Secondly, advisory service could be extended to companies as regards the availability of opportunities for the supply of their current products to the defence. The service could also suggest defence products which a company can manufacture with marginal addition to its facilities. Related areas for development/diversification could also be indicated. Thus, this service can acquaint a company with the prevailing business opportunities and guide it as well.

Public-Private Sector Partnership

The public sector possesses excellent infrastructure, manufacturing facilities and a highly experienced task force. It will be a waste of national resources if these assets are duplicated by the private sector.

The Government has to realise that both public and private sectors are national assets and harnessing of their potential is essential if India wants to achieve self reliance in defence production.

The private sector, on the other hand, can bring in latest technology, managerial practices, marketing skills and financial management. Therefore, a well-blended fusion of both will result in synergising of their strengths through economies of scale and prove mutually beneficial.

A strong and fruitful relationship can be built with mutual accommodation. The public sector should not regard private players as a persistent irritant and adopt a confrontationist attitude towards them. Similarly, the private sector must not seek to replace the public sector. Such an approach may be perceived by the public sector as a threat to their primacy and existence. It may make them close their ranks and resist all interaction with the private sector. That shall be counter-productive.

The Government has to realise that both public and private sectors are national assets and harnessing of their potential is essential if India wants to achieve self reliance in defence production. It should not play favourites and treat both as equal partners in progress.

Conclusion

The then Defence Minister of India, Mr Pranab Mukherjee, in his address at New Delhi in June 2005 had stated: “The Government is committed to the development of a vibrant and proactive defence industry in India. It should be ensured that the available capability, infrastructure and resources including intellectual capital are harnessed to the fullest extent as our national assets and optimally utilised in achieving this objective.” He further advocated a strong and healthy partnership between the public and private sector for enhancing the defence capability and in sustaining a powerful domestic industrial base for the future.

During the last three years, a serious and concerted effort has been made by the Government to reform and streamline the entire acquisition process. The Government has come to appreciate the potential of the private sector and wants it to complement the efforts of the public sector. A number of praiseworthy initiatives have been taken and policies reviewed. Yet, the results on ground have very little to show. There has been no appreciable inflow of anticipated foreign funds.

Even today all major defence deals are signed with foreign producers. The public sector continues to get bulk orders under transfer of imported technology. The private sector continues to be a peripheral participant with the production of some low-tech items and indigenisation of some components.

The present process of interaction and integration 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 implemented in a time bound manner. There is no point in having committees and joint task forces if their reports are going to gather dust with no follow up action.

Technological prowess of the private sector should be given due recognition and considered a national asset. The objective of achieving self-reliance will remain elusive unless the private sector is duly integrated and its potential fully harnessed to build a viable indigenous defence industrial base. The Government has to create an environment wherein the private sector feels assured of just business opportunities, level playing ground and fair play.

And finally, India plans to spend USD 100 billion on capital expenditure during the 7th Plan Period (2007-12). Imports account for close to 70 percent of capital expenditure and offsets are required equal to 30 percent of import contracts. Thus, India expects offset trade worth USD 21 billion during the next five years. Currently, Indian defence exports amount to paltry USD 50 million annually, i.e. USD 250 million in five years. From USD 250 million to USD 21 billion, it will be a quantum jump of enormous proportions. The public sector cannot handle it by itself. The private sector has to be closely integrated and its potential fully harnessed for beneficial absorption of the projected offset business.

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The views expressed are of the author and do not necessarily represent the opinions or policies of the Indian Defence Review.

About the Author

Maj Gen Mrinal Suman

is India’s foremost expert in defence procurement procedures and offsets. He heads Defence Technical Assessment and Advisory Services Group of CII.

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12 thoughts on “Private Sector in Defence Production

  1. Hey,
    I was looking for information on any vendor assessment specifications in terms of Defence Manufacturing..to put it simply, when a Defence contract is awarded to say a L&T or Reliance Defence, is it necessary for them to tie up with only specific vendors for their components/assemblies/sub contracting which are say approved by Indian Navy or only the work done by these companies is inspected??

    kindly help!

  2. sir offer one exhibition with sample of products which are the very much requirement for our indian force to the smaller sectors and you will see the difference because till know only big and influenced person are aware of it lets have one opportunity .

    Thank you.

  3. Sir Good afternoon
    I want to know how we get licence for manufacturing of arms & ammunition &other safety products for our army , police, and other government & other registered security services.How we colouration with foreign manufacturers in india for all these products.
    Thanking you
    From:Manik Luthra

    • If I wanted to start ammunition factory how can I get license from government and after starting production how it can be reached to wings of defence.?
      Will government provide any financial support?
      Where can get training and more information to start production of ammunition?
      Will government or any government ordinance factory will provide us training support?

  4. Dependence only on public sector and imports has lead to the present sorry scheme of things in defence where the services have been fighting obsolescence despite our sky rocketing import bills. Our joint ventures have not yielded any positive results for example have we really assimilated any worthwhile technology over the last fifty years during MiG manufacture (assembly?) in our sprawling MiG complexes that could be used to expedite our LCA? Every country has to learn critical technologies the hard way as we did in our space programs -developing even cryogenic engine on our own. Incremental FDI’s, strengthening DPSU’s or even modernising OF’s will not help, We have to bring in cultural change of taking pride in the Indian and the indigenous. For all major defence projects the user, private & public sector should be on the same page. For example the requirement of 60,000 plus assault rifles can be met part import and part indigenising or re-engineering. Inputs can be taken from our Insas experience and know how in the Ordnance factories-while mass production can be at L&T, Godrej , Tata’s or M&M. It will be best to phase out public sector from research and production in non-core domains like food, clothing, chemicals,materials etc and let private sectors make forays into these. DRDO can concentrate on missiles and armaments while Ordnance factories can focus on high explosives and filling. Even propellants can be assigned to the efficient private domain.

  5. Once again spot on For your information ISRO can send satelites into space and rockets to Mars harnessing the resources of the private sector in manufacture and assembly of most of the major components Note that all of them have been a success including the Mars project but the Defence Ministry has traditionally shown a jaundiced eye towards it It sees them as outsiders who are untrustworthy and potential spies whereas it shows implicit faith in the public sector companies most of which let them down either in timeliness or quality while the world over such as UK cited above and USA the private sector is strong partner of the government In fact the governments of those countries carry them along when they have to do export business Lockheed Martin,Rockwell Collins,Navistar,Allied Signal ( now Honeywell) Boeing,United Technologies and so on and on are the bedrock of US defense strength

    Today’s newspaper has an interview with A M Naik Chairman of L&T who quotes the following Naiks statements cant be taken lightly He was refused orders for Oil Drilling Rigs by the Oil ministry in the 80s but went on to make them for Kuwait and struck good business in the Middle East where L&T today has a strong position and has been able to weather the lows of the Indian market and economy Today L&Ts investments in Defence manufacturing and ship building are making losses for want of orders

    Quote “….L&T is the only Indian company to have capabilities in four segments — ship-building, field guns, missile launchers and weapon systems. It has a warship design group that can build warships from scratch, but is losing money for lack of orders. Naik says, “We will also focus on the field guns programme. Our Rs 1,700-crore investment in ship building will turn positive. That will make a difference to L&T’s overall top line and bottom line. Only six companies in the world can build nuclear submarines and L&T is one of them (in collaboration with partner Naval Design Group). Defence electronics is the next big opportunity as everything is dependent on communication and connectedness……” Unquote

  6. The Defence Ministry has paid lip service to the private sector all these years If India can send satellites into space and launch a successful Mars Orbiter it is because ISRO has harnessed the private sector most effectively Sadly the politics and evil shenanigans which devil the Defence Procurement system will continue to prevent this as the rot is at many levels Cleansing will be a huge exercise starting from the top

  7. Excellent article. We need a concerted effort to be self sufficient in defense production. Depending on imports is like depending upon borrowed teeth & claws to fight and defend. The Public sector has abjectly failed the Country in its role.An agency which has been in existence for more than a 100 years needs to be wound up. It is a colossal waste of public money, and its managers need to be taken to task. It is a matter of shame that, we cannot produce the basic infantry weapon, and are having to import rifles.Private sector should be inducted as soon as possible. With today’s import policy ,we are creating jobs & improving the GDP of other Countries The Defense Minister needs to be changed. Honesty is not the only criteria- DEFENSE PREPAREDNESS IS.

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