MoD to fund R&D by private industry - Broadsword by Ajai Shukla - Strategy. Economics. Defence.

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Thursday 26 April 2007

MoD to fund R&D by private industry

(Part 1 of a three-part article)

by Ajai Shukla
Business Standard, 26th Apr 07

As dawn broke on the Pokhran field firing ranges late last year, three of India's latest T-90 tanks readied themselves on the firing line. These were the first firing trials to determine whether Indian-manufactured T-90 ammunition could replace the Israeli armoured piercing ammunition that is imported at nearly Rs 10,000/- per round. As the zeroing targets 1800 metres away became visible through the Russian gun sights, the T-90s opened fire. It soon became apparent that the rounds were falling short of the targets, but there was no way to modify the tank's fire control system (FCS) to correct that. Asked to modify the FCS for Indian ammunition, the Russians pointed out that the T-90 contract had no such provision.

An irate Ministry of Defence (MoD) has told Russia that the proposed contract for an additional 347 T-90s depends on Russia modifying their FCS to fire Indian ammunition. And to modify the T-90s that have already been delivered, the MoD is making a potentially revolutionary departure from its traditional policy. It is looking towards India's private sector, and offering to pay most of the development costs for a software solution to the FCS problem.

Relying exclusively on the Defence R&D Organisation (DRDO) for its equipment needs is now in the past for the MoD. Instead, private companies who fulfil certain norms to be eligible for the honorific of Raksha Utpadan Ratna (RuR), will be given specific defence R&D projects and the MoD will pay 80% of the development costs.

Speaking exclusively to the Business Standard, Secretary for Defence Production, Mr KP Singh pointed out that the private sector, which stayed out of defence field due to high costs and uncertainty of military R&D, needed to be harnessed. "There is a need for risk sharing between the government and the private sector. The DRDO works with 100% government money. The private sector, in contrast, is not being given development costs. The Department of Defence Production will now fund the private sector R&D as well."

This significant new announcement is backed with money. A corpus of Rs 100 crores is being introduced, which will be funded from the MoD's capital acquisition budget. In terms of the overall military R&D spend, this is small change; the DRDO budget for this year is Rs 3186 crores. But it is a clear acceptance of the need to reduce the government's exclusive dependency on the DRDO and, like the USA, fund research by private corporations that have established themselves in the defence field.

The MoD has asked the Chief of Integrated Defence Staff (CIDS), Lt Gen HS Lidder, to identify ten important military R&D projects for the private sector, which can be subsidised by the MoD. Mr KP Singh stated, "I've asked the CIDS to keep the projects and the wherewithal ready for when the private sector companies come. I've suggested that he earmark ten projects, which we are ready to fund, the first of them being the T-90 FCS adjustment to fire Indian ammunition.

Blocking the immediate start of private sector R&D is the MoD's failure to identify any private companies as RuRs. A committee headed by Probir Sengupta was set up in May 06 to identify companies who fulfil RuR requirements, which are currently pegged at Rs 1000 crores in annual sales, Rs 100 crores in capital, and a proven track record in military R&D. Names should have come last September, but delays continue.

Private sector defence manufacturers welcome the MoD's proposal, but say that the requirements for RuR status have been pegged too high. Dr AJ Prasad from HBL, a Hyderabad based defence manufacturer, while agreeing on the need for strict requirements, says, "private sector companies who fulfil the MoD financial conditions do not have much of an R&D record. The companies that do serious R&D don't fulfil the Rs 1000 crore requirement. So there's a need to re-evaluate the issue of size and bring it down to perhaps half."

The MoD, nevertheless, is enthused by being able to tap into an increasingly capable private sector. Mr KP Singh declares, "I'm very optimistic. In 15-20 years, there will be an explosion of the private sector in the field of defence. We'll make the best use of them in defence production." But while this signals a dramatic shift in MoD views, resistance is building up from the DRDO, which sees its turf being encroached upon and from the Defence PSUs who fear aggressive competition from private players.

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