Defence panel seeks pvt firms as partners - Broadsword by Ajai Shukla - Strategy. Economics. Defence.

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Thursday 9 July 2015

Defence panel seeks pvt firms as partners

Private firms should be "strategic partners" of govt, operating as "prime integrators" in complex projects

By Ajai Shukla
Business Standard, 10th July 2015

After assuming charge last November, one of Defence Minister Manohar Parrikar’s first promises was a revised and simplified defence procurement procedure (DPP), which would expeditiously provide the military badly needed equipment, while boosting indigenous defence production.

To this end, a defence ministry committee, under former home secretary Dhirendra Singh, has recommended unusually bold changes. The report will be presented this fortnight to Parrikar. Then, after consultation with other ministries and the military, the defence ministry will incorporate changes into a new DPP-2015 --- the eighth version of the DPP first issued in 2002.

Business Standard has accessed a copy of the unclassified, 207-page report, entitled “Committee of Experts for Amendment in DPP-2013”.

Key recommendations include: nominating select private defence firms as “strategic partners”, to manage complex projects on a par with defence public sector undertakings (DPSUs) and ordnance factories (OFs); raising the required level of indigenisation each year across various procurement categories; and recognising defence procurement as “strategic”, and different from routine government purchases.

Unusually for such a government report, it provides detailed justification for many of its conclusions, even summaries of discussions with stakeholders.

A path-breaking recommendation is to identify select private sector firms as “strategic partners”, which would play central roles in developing “complex and strategic systems” within the country, or receive technology transferred from foreign vendors in large defence contracts. Essentially, this resurrects the notion of “Raksha Udyog Ratnas” (RuRs), or “Industry Champions”, which the Kelkar Committee had proposed in 2005-06 to empower large private sector companies as “system integrators”. However, the United Progressive Alliance government, fearing resistance from DPSU and OF trade unions, put Kelkar’s proposal on the back burner.

Now this could be back in contention. The report notes: “There is a need to create a capacity for absorbing technology… in the private sector on account of their agility, innovation and modern management practices… One will therefore have to create an avenue for selection and nurturing of a strategic partner on a long term basis.”

Executives from private sector companies with a large exposure to defence, like Larsen & Toubro and Tata Power, tell Business Standard they welcome this.

However they sharply criticise the report’s recommendation that “cartelization” be nipped in the bud by restricting each strategic partner to a single strategic system. The report also proposes to ban strategic partners from cross holdings in each other’s companies, and to require government permission for any material change in their share holding structure.

“We have built up capabilities in multiple sectors over decades. Restricting us to a single strategic system is absurd, especially if there are no other companies with such competences and the alternative is export”, says a senior executive from one of India’s most respected private sector defence companies.

The report also proposes to raise the mandatory indigenous content in various categories of procurement, with each successive DPP raising it incrementally, as each level stabilises. In DPP-2015, the 30 per cent indigenous component currently mandated in the “Buy (Indian)” category is proposed to be raised to 40 per cent, and to 50 per cent in the DPP after that. The current 50 per cent indigenous norm in the “Buy and Make (Indian)” category is proposed to be raised to 60 per cent in DPP-2015, and 65 per cent in the next revision.

Defence firm CEOs accept the percentages need a relook. Most agree the 30 per cent indigenous norm is absurdly low for the “Buy (Indian)” category, which, as the name suggests, involves the procurement of supposedly Indian products. On the other hand, in the “Buy and Make (Indian)” category, the indigenous stipulation of 60 per cent is considered high since the product would be manufactured with transferred technology, and it would take time to absorb technology and develop local vendors to boost indigenisation levels.

“It would be far better to have a flexible norm, varying between 30-70 per cent, which is laid down by the categorisation committee based on the product and its prospects for indigenisation”, suggests a DPSU official.

The report, for the first time, distinguishes between routine government procurement and the special nature of defence procurement. It notes that the General Financial Regulations (GFR), the government’s financial rulebook, is intended to guide routine purchases, whereas defence acquisitions are far more complex. For example, current procurement rules ensure that a “single vendor situation” delays procurement by 36 weeks, even though 70 per cent of defence procurements are single vendor based.

The report articulates a clear strategy to promote indigenous defence industry. The first part involves favouring procurement that creates opportunities for Indian industry. DPP-2013 already favours the “Buy (Indian)”, “Buy and Make (Indian)” and “Make” categories, which mandate high levels of indigenisation; over the “Buy (Global)” and “Buy and Make” categories, which allow a greater role to foreign production. Taking this further, the committee recommends that “within the Buy (Indian) and Buy and Make (Indian) the indigenous content has to increase steadily and significantly.”

Next, the strategy recognises that “Make in India” is useful only if intellectual property (IP) is generated, and systems are designed in India. The report states: “’Make in India’ (should) not become ‘assemble in India’ with no IPR or design controls and thereby perpetuating our dependence on the foreign supplier.”

Third, the strategy recognises the need to expand the market for vendors by “ballasting of indigenous capacity with a civil component and wherever feasible, an export component”.

Finally, the report leverages offsets into indigenisation strategy, recommending that, once Indian defence vendors start functioning more actively, “directed offsets” should be used to obtain critical technologies from foreign vendors.

Ministry proposals: what the industry says

Thumbs up
Thumbs down

Private firms to be “strategic partners”, operate as “prime integrators” in complex projects
Private firms restricted to one strategic project each. No cross holdings, govt nod needed to change share structure
Recognising “strategic nature” of defence procurement, vis-à-vis general government purchases
No incentives for higher indigenisation levels than minimum stipulated
Raise mandatory indigenization levels every year
Need for tighter definition of “Indian company” to prevent fronting for foreign vendors
“Make in India” must generate intellectual property and not become “Assemble in India”
No proposal for indexation of prices, for procurement delays by MoD
Leverage Indian defence orders with private sector and export orders
No acceptance of industry demand for interest on delayed MoD payments
Payment of up to 85 per cent of project cost to private companies, based on “project milestones”, as done with DPSUs
No stipulation that DPSUs must pay sub-vendors up to 85 per cent, as they are paid by MoD
Separate “Make” procedure for MSMEs with Rs 500 crore for disbursement


  1. Instead of finding ways and means to make India more competitive, this Govt's sole focus is to make a fast buck through dubious policies before they are booted out by the end of their five year term.
    Such moves will only mean enriching few Pvt companies with excellent political connections. Defense, where India spends the most, has become the new means to get rich quick in a nation where people struggle to make ends meet.
    No politcal party comes to power to run the country. Their main motive is to make as much hay as they can during their rule.This leads to crony capitalism and concentration of power and wealth in the hands of few poltical families and businessmen. Reliance and Adanis are the outcome of such crony capitalism. Tatas who used to tomtom about ethics, seem to have wizened and are greasing the palms of netas to curry favors.
    In this scheme of things, India remains a closed market without foreign investments which are the main generators of high quality jobs and growth of economy.
    Is it any wonder, that "make in India" is sounding like an empty slogan? There has been no effort from the current dispensation to do anything that will encourage foreign investors to invest in India.

  2. It seems Mr.Parrikar is more of a minister of procurement than minister of defense.

  3. This government is working solely for the interests few corporate biggies. Whatever precious little they've done since coming to power is either hyperbole or grand schemes through which few companies can loot the nation via new Land Act or this new Arms Procurement Policy which has gone 8 changes in last 10 years.
    How can companies which have no expertise in defense become "strategic" partners in defense? Are we going to surrender the defense of the nation to institutions whose raison detre is to make a fast buck? This government has been a big let down with wrong people occupying wrong portfolios. A semi literate TV actress is Minister of HRD, a hate spewing sadhvi is assigned to the Ganga cleaning project, a person suffering from foot in mouth disease is defense minister....... and the list goes on. No wonder this government found it fit to anoint "Yudhistira" as the new FTII chairman.

  4. @ anon 23:45 Strange comment cannot fathom what you mean. Everybody is generally happy that Parikar has kick started the process of arms procurement both indigenous and imports which were badly stalled in the previous regime. What do want a defence minister to do- charge to the border with a blood curdling war cry brandishing a gun?? Truly you cannot please some people all the time!!

  5. Under the "Thumbs down" section, the 2nd and 3rd ones are the only real worrisome issues in my opinion. The 1st one is probably there to prevent lobbying(hello again middlemen in a different cloak) and also prevent MOD supporting/subsidizing 2 research alternatives at the same time.

    Outside of that, it seems like this new DPP seems to be much better overall than the current one in place.

  6. The comments here are by the same people singing the same socialist/ communist tune over and over again. Sorry boys, your days are over

  7. I don't understand opposition to idea of including indian corporate. Some people are happy to give orders to foreign firms than desi corporates. And for keyboard warriors only big corporate can invest billions that's required for defense manufacturing. Defense is not startup that can be opened in garage.

  8. @Anon 16:32

    The moot point is not throwing open the defense manufacturing to Pvt Cos. which the Govt has done since early 2000. The point is at what cost? What does India stand to gain by such move? Why didn't the pvt cos invest even a single dime since early 2000 when this sector was opened to them, and conversely, why do we see all of a sudden such a mad rush by everyone and anyone to enter defense manufacturing? Something is fishy isn't it?
    How many of these Pvt Cos that both BJP and Congress parties are desperately trying to rope into defense manufacturing have a product of their own? The vast majority of them need to tie up with a foreign OEM to merely assemble the product for a hefty commission under some Indian brand name to beguile the Indian taxpayers. Will any ToT really take place in such arrangement even if it is part of the contract? Even if there is ToT, who will foot the bill? Why must taxpayers' money be used to enrich one particular businessman with no background or expertise in defense, particularly when there are state owned institutions with years of experience and expertise to do the job at no profit no loss basis? If tomorrow, there aren't enough orders, or for some reason the Pvt Cos chose to down shutters what will happen to the technology and the product that has been bought at enormous cost by the nation? Pvt Cos are in business to make a fast buck. WHat will stop them from selling secrets or technology acquired with taxpayers' money to third parties who may or maynot be inimical to India's interests?
    What is the role of Pvt Cos in this scheme of things? Aren't they another middleman in a system brimming with middlemen? Should the first task of a defense minister be to legalize illegal middlemen (netas and retired military top brass) in arms imports with inflated figures?
    When the country's economy is in the doldrums and severe unemployment all around, should the Govt be splurging on uber expensive arms imports under the guise of "make in India" or getting foreign investments under the same slogan? In a nation where less than 25% of our graduates are employable, should we be focussing on, hitech capital intensive arms industry which employs few or low tech labor intensive industries like garment, electronics etc?
    Finally, is it the job of the Govt to favor few businessmen or to create laws which are democratic and uniformly applicable to all?
    If the Govt gives special favors to a Cyrus Mistry, Anil Ambani or a Ruia why should remaining 129999997 not receive similar favors? Who really owns and runs this country? The masses or handful of political and business families whom you can count on your fingers? How different is the current situation from British rule which colonized India to serve big companies?

  9. @Anon 16:32

    Those billions will not come from the pocket of "big corporate" but indirectly bankrolled by gullible taxpayers. How do you think our billionaires made their billions? Can you tell me even one product of theirs' which is a commercial success both in India and abroad?

  10. I smell leftist despise for money makers in this discussion board. Indian making billions is much better than French, American or Russian making billions from taxpayers. At least few peoples will get job and some technology even if it's assembling parts will come to country. Please do some research why pvt never joined since 2000. DRDO and public defense organisation have major say in all major deals earlier. LCA could be given to private cos and would have been delivered by now. But earlier rules didn't give level playing field to pvt cos, and all orders given of pathetic OFB and HAL. And ask some infantry man how much they love ordinance factory products.

  11. @ Anon 9.16
    You are from bharatiya baniya party, the people who have amassed enormous wealth by keeping away foreign investments (as you people can't compete with them) in the name of "swadeshi". The money makers are your local baniya adultrators, who use all kind of underhand methods to cheat, rob and loot the ordinary masses. Now with the help of a baniya NRI PM, they've turned their attention on defense where the nation spends the most by keeping more than 500 million people literally bhooka and nanga.
    French, American and Russians will continue to make billions from taxpayers' money. Only hitch is, instead of arms being manufactured by a taxpayers' company the same will be done by a baniya company who will charge usurious rates to merely assemble products made by foreign OEMs. Earlier, when these defense products were made by DPSUs, they were made for no profit no loss. Even if they did make any profits, that went back to the Govt. Now with baniya companies replacing DPSUs, the cost of manufacturing will rise steeply adding additional burden to the gullible taxpayers of this very poor country. Its the duty of the Govt to provide jobs or create conditions that create jobs not of your tax evading adultrator baniya who will favor only people from his own "biradari".
    The Indian Pvt Cos didn't invest in defense as they do not want to compete. They want the Govt to use taxpayers' money to provide them with foreign technology, JVs, infrastructure and assured captive markets. Is this "level playing field" or perfect example of crony capitalism? Even a beggar (which the Ambanis were) can become a billionaire by this kind of state sponsored crony capitalism. This move was initiated by ultra kleptocratic congress party as a means to launder kickbacks from arms imports. Under the guise of Modi's "make in India" the same will continue only now you also have your ultra corrupt family owned baniya companies who will help launder the kickbacks from over expensive arms imports. How is this an encouragement to indigenous capabilities? Deliberately existing state owned military idustrial complex is being demonized by presstitute press of India who are owned by these baniya companies directly or indirectly.
    Now, under Bharatiya Baniya Bandar Party, defense of this country will be at the mercy of Indian version of Shylock the Jew.

    1. By your skewed logic india should continue importing because defence is only for big industrialists...there is no google in defence even in US.. capitalism will make some people rich but socialism didnt work for us..govt role is to create opportunities and level playing field. And left and reformed left called AAP will lead to more poverty and techno starved state

  12. All decisions have pros & cons. The corrections will occur with time. Focus is very important to grow in depth fir all companies. It is extremely good they are expected to work only in few areas, this needs to be enforced + a steep target put so that companies grow beyond screw drivers. Can we e.g gpgave TATA design a medium battle rank in 25 years ?

  13. This anonymous chap should actually be that. Other than spitting crap here he has no clue how the Defence projects work.


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