Private defence companies get new playing field

The defence ministry wants imports to be the last option. But the military could still scuttle indigenisation to buy abroad. What better example than the Arjun tank?

By Ajai Shukla

Business Standard, 28th May 13

The ongoing saga of India's artillery procurement highlights the difficulties that the defence ministry's ad hoc equipment acquisition process presents for private sector companies in the defence sector. As Defence R&D Organisation (DRDO) chief V K Saraswat points out, India should have begun developing today's generation of guns in the 1990s, when the Bofors FH-77B field howitzer had just entered service. That would have provided Indian scientists, engineers and companies with the lead time needed for developing an indigenous artillery system.



"Complex modern weapons systems do not get created by waving a jaadu-ki-chhari (magic wand)," explains Saraswat caustically. "They take planning, funding and, most importantly, time."



But none of this was forthcoming, recounts the DRDO chief. Over the years, the army blocked several proposals to develop a futuristic 155-mm gun, arguing that Bofors AG had handed over the technology to build howitzers in India, and that it would meet Indian requirements for decades to come. But the Ordnance Factory Board, which received the technology, never built the gun in India. As a result, there was no choice but to buy a successor to the Bofors FH-77B. But a decade of attempts to buy the weapon have come to naught, with potential suppliers like Denel, Rheinmetall, Soltam and Israel Military Industries (IMI) being blacklisted by the defence ministry for alleged corruption.



Today, worryingly short of artillery (guns, artillery and howitzers are used interchangeably), a panic-stricken defence ministry is acquiring 155-mm guns on several simultaneous tracks. A global tender has been issued for ultralight 155-mm, 39-calibre howitzers; at the same time, the Ordnance Factory Board has been charged with building a heavier 45-calibre version of the 39-calibre Bofors FH-77B gun; and DRDO is leading another programme to develop a futuristic 155-mm, 52-calibre howitzer.

(While all these guns fire shells that are 155 mm in diameter, the term calibre points to the length of the gun's barrel. A higher calibre indicates a longer barrel, which provides longer range.)



India's private sector defence companies are also in the fray. Having scrapped an international tender for buying a 155-mm, 52-calibre gun, the defence ministry wants the Indian industry to develop a gun through the "Buy & Make" (Indian) category. This would mean a domestic company would head the consortium set up for the project.



Changing the game


The "Buy & Make" (Indian) acquisition category, and the "Make" category, are now touted as key routes for the private sector to build real defence capabilities, which include R&D, prototype development, testing and manufacture. Until 2001, when the private sector was permitted into defence (subject to licencing and with no more than 26 per cent foreign holding), "indigenisation" had long meant licenced production in India of equipment already in service in foreign armies. Experience had shown that global vendors were unwilling to transfer high-end technology.



"The Indian experience of licenced manufacture consisted of building low-and-middle-tech components and sub-systems in India while importing key components and sub-systems," says Rahul Chaudhry, chief executive of Tata Power (strategic electronics division).



To break out of this corner and to catalyse the entire development cycle in India, including R&D, prototype development, testing and manufacture, successive Defence Procurement Policies (DPPs), including DPP-2005, 2006, 2008 and 2011, created procurement categories like "Make" and "Buy and Make (Indian)."



The "Make" category, which was promulgated in DPP-2006, harnesses Indian industry for developing complex, high-tech systems like combat vehicles, communications networks, etc. The defence ministry undertakes to pay 80 per cent of the cost of development in order to minimise financial risks, but the lead integrator company is left free to enter into technological partnerships with foreign vendors.



The "Make" category was to "energise the industrial base" of the country. Speaking at Defexpo, an exhibition of internal security systems, last year, the defence ministry's top procurement official at that time, Director General of Acquisitions Vivek Rae, had promised an eager audience of private sector chief executives that a list of 150-180 "Make" category projects would be put up on the ministry's website for companies to start developing those products.



"The process of design and development, and sharing of risks and costs on an 80:20 basis will galvanise the Indian industry and help develop capabilities," Rae had said.



But, the "Make" category has been languishing for some time now. In fact, it has not yielded a single product in seven years. Just two projects have been tendered-the Future Infantry Combat Vehicle, and the Tactical Communications System-but neither has led to a development contract. Meanwhile, the allocation of funds for "Make" projects has been cut to Rs 1 crore in 2013-14 from Rs 89 crore last year.



However, some recent amendments to DPP-2011 announced by the defence ministry last month give a glimmer of hope to the private sector. A detailed policy is still awaited, but the defence ministry has committed to sharing a public version of the military's Long Term Integrated Perspective Plan (LTIPP), covering the 15-year period from 2012 to 2027, with the industry. Termed the "Technology Perspective and Capability Roadmap," this document would spell out the broad outlines of weaponry and systems that the army would require in the coming 15 years. The idea is to give the private sector the lead-time needed for developing the systems.



The new policy expressly mandates that the military will buy foreign weapons only if every other option for developing the system in India has been explored and found non-feasible. This shifts the onus for pursuing indigenisation onto the military.

The new defence ministry procedure specifies "a preferred order of categorisation, with global cases being a choice of last resort. The order of preference, in decreasing order, shall be: "Buy (Indian)", "Buy & Make (Indian)"; "Make"; "Buy & Make with technology transfers"; and "Buy (global)".



To ensure that any deviation from this order of preference is properly scrutinised, the new rules require the military to provide a detailed written justification for the "reasons for excluding the higher preferred category/categories."



"This should give a fillip to domestic industry and enable technology tie-ups with global vendors. But, since the devil is in the details, we are waiting to see the detailed policy," says Rajinder Bhatia, who heads the defence business of Bharat Forge.



Chinks in the armour


Laxman Behera, an analyst at the Institute for Defence Studies and Analyses, fears that the military could still find ways to buy abroad by producing a file noting to justify overseas procurement. What is needed, therefore, is a mind shift within the military in favour of indigenisation, he says.



The recent amendments to DPP, however, will provide the private sector with a level-playing field against the government-owned companies. For instance, now maintenance transfer of technology from foreign vendors will not go to an ordnance factory nominated by the defence ministry; instead, the foreign vendor can choose the Indian partner that it believes will best discharge the maintenance responsibility that the contract specifies. So far maintenance, repairs and overhaul contracts have largely been the preserve of ordnance factories and defence public sector undertaking (DPSUs) .



Micro, small and medium scale enterprises (MSMEs) will also be able to obtain funds more easily for developing defence equipment. The new policy says, "SIDBI has decided to earmark an amount of Rs 500 crore for providing loans (to defence MSMEs), and further, a fund of Rs 50 crore for equity support out of 'India Opportunities Fund' managed by its subsidiary, namely, SIDBI Venture Capital."



Several other positive steps are in the offing, such as the simplification of licencing for defence production. As this newspaper reported, (May 18, 2013, "Defence ministry comes to private firms' aid"), the defence ministry has asked the finance ministry to give private sector companies exchange rate protection, much as it does with DPSUs and ordnance factories.

The defence ministry has also promised to quickly clear "Make" and "Buy & Make (Indian)" procurement contracts worth Rs 1,20,000 crore that are in limbo.



Private defence company chief executives admit that most of their key demands have been conceded by the defence ministry. If the private sector proves better than the discredited DPSUs in delivering equipment without time and cost overruns, the Indian military may finally rid itself from the humiliating tag of being the "world's biggest importer of defence equipment".

NEW PROCUREMENT GUIDELINES



* The onus for indigenisation is now equally with the military as with equipment makers



* The military will have to provide a detailed written justification for placing orders abroad



* The defence ministry will indicate what equipment it would require in the coming 15 years



* MSMEs will have easier access to funds for developing defence equipment



* Foreign vendors can choose Indian partners for transferring maintenance technology