Strategic Partnerships: Challenges and Opportunities for Indian Corporates
India’s defence forces have faced a shortage of personnel and critical equipment because acquisition and modernisation plans remain stuck in a mesh of bureaucracy. Out-dated equipment, technologically backward, low reliability, and perennially in short supply – these are just some of the problems with India’s defence equipment. Delayed modernisation has ensured that defence capabilities are way behind countries such as China. While India’s capital defence spending has increased (vis-a vis US and UK), only a small part of it goes towards new equipment. In addition, almost 60% of the annual capital budget is towards imports. With each budget, it appears that the Defence Spend is shrinking. In order to correct this anomaly, the current government has taken steps towards changes in procurement procedures – by introducing new category IDDM, revision of the defence products list, issuing industrial licenses to the private sector, and relaxing FDI norms. India’s Defence Minister, Shri Manohar Parrikar, has been leading from the front to address the sluggishness in defence preparedness.
In May 2015, Comptroller & Auditor General (CAG) observed that Indian Army’s availability of authorised stock against War Wastage Reserve (WWR, which measures war preparedness) is low. Thus, against a WWR of 40 intense war (I) days, in 50% of the total types of ammunition, the availability was ‘critical’ – i.e., less than 10 (I) days. Inability of the Ordnance Factory Board (OFB) to meet the army’s demand was a major cause for this shortage. Delayed modernisation has ensured defence capabilities are way behind countries such as China.
What is the Major factor in Sluggishness
Despite the formulation of the best policies, we lack effective implementation. Multi-vendor situation is the rule, broad based vendor selection is the norm, formulation of less stringent QRs to accommodate more vendors is mandated on the Forces and the lack of accountability on the procurement executive leads to sluggishness. It is not rocket science to understand that in a multi-vendor situation, only one can win. Then, what happens to the others that have participated? Where do they go? Their GPS systems takes them to the courts, to file a case pointing out lapses in procedures and file complaints against the one who has been declared the winner. The cases languish for ever, and the Armed Forces are deprived of the systems they need.
How can this be overcome?
One method to overcome this sluggishness is to enable the procurement executive in the MoD to proceed on a single vendor basis for procurement of systems. Only one vendor, easier to handle, hand-hold, manage, execute and thus expedite procurement. This is also industry-friendly since investment is made by only one vendor as against so many in a multi-vendor situation, which causes a financial loss for the ones who do not finally make it to the L-1.
How will then the Armed forces get equipped to protect us or in other words, when will the Armed Forces get what they need
If we were to follow the traditional methods of procurement as we have been doing thus far, we are not likely to get any new results. Ambitions of the political leadership to institute corrective mechanisms and vision of the government can be matched, only if we adopt new and innovative methods while also embrace the private sector. The government could do well to match the competencies in the corporate sector with that of the Public sector and find collaborative arrangements. Idea here is to mesh the efficiencies in the private sector with the infrastructure in the Public sector, hence a win-win situation will emerge.
Strategic Partnerships(SP) hold the key with a hope for the Armed Forces to get the procurement executive to act in an atmosphere conducive for near-hassle free induction.
What is Strategic Partnership
Moving away from a Government-Vendor relationship, recognising the industry as partners helps reduce the trust deficit. We have the Public sector and an emerging private sector. If we could recognise some of the industrial houses in the private sector as Strategic Partners with the government and therefore provide them with special benefits like those enjoyed by the DPSUs, then the government creates a level playing field between the Private and Public sector. Such SPs can then interface with the government more seamlessly and make necessary investments in infrastructure ahead of actually winning a contract, this also reduces the “Go-to-Market” time thus enabling expeditious deliveries.
Has this happened before?
Yes, DPP 2006, introduced the concept of RURs (Raksha Udyog Ratnas), for selecting few big companies and providing them a status as equivalent to the DPSUs. The aim was same, to enable the government to be able to go on a single tender to the private sector.
Why did that not work?
RURs were discipline agnostic. An industrial house for example the Tatas could enjoy the status of RUR and pitch in for Land systems contracts, Aerospace contracts, Electronic systems contracts, Marine systems and so on. This concept lacked focus, and failed to promote excellence. While we have on the one hand, the DPSUs specialising in a particular discipline, such as HAL for Aerospace, BEL for Electronics, BDL for missiles and so on; the same was not applicable to the private industry. So how then could the government go on a single tender enquiry to the private sector which could claim expertise in every conceivable discipline?
What is different now?
In the present dispensation, there can be only one SP per segment. This means that if the Tatas are declared as SP for fixed wing airplanes, they would be ineligible for the status in any other discipline. Therefore, the country could exploit the energy in the industry to create centres of excellence in identified disciplines, such as Aircrafts(fixed wing, rotary wing); Submarines, Surface ships, Ammunition, Guns, Systems, and so on.
This decade will witness emergence of the private sector in identified areas/disciplines, to become global leaders in business. They would have access to transfer of technology for all the Buy and Make category of programs and enjoy hand-holding from the Armed Forces as never before.
Opportunities for Corporates
Once notified, SPs present a tremendous opportunity for the corporates to Walk the Talk. Strategic systems of the Armed Forces will be opened for the large corporates that qualify as Strategic Partners. Monopoly of the OFB/DPSUs will be intruded into, albeit gently, with this grand entry of qualified Indian corporates. This is fundamental for growth. From advanced missile systems to Guns and Ammunition, from surface ships to subs, aircrafts, materials, the entire spectrum has been kept wide open.
Procurement plans will be shared by the government with the SPs( at least this is the intention as of now), they would also participate in shaping these plans to provide best possible effect. Forces will be involved at every stage with the corporates, like they presently do with the OFB and DPSUs to provide for hand-holding as necessary. Forces may do well to revise their HR policy to enable their best talent to be posted with large corporates for better synergy.
Corporates must be able to seal off at least USD 10 bn equivalent in the first three years. Major systems on the map will yield more and this business, needs to flow in the country. The cascading effect it would have on the industry at large, could well be at least USD 30 bn. Cash flows will demand setting up of new infrastructure, best business ethics, global best practices, greater efficiencies, hiring of fresh talent, universities revising their curriculum to include Aerospace and Defence, ‘tierisation’ of the industry and so on.
Bringing in technology into the industry for real is one of the biggest opportunities on which the industry as whole will flourish. The opportunity is to reverse the present import export ratio through indigenous development and production. The opportunity is to increase defence exports to such levels as to be able to shape foreign policy. Military diplomacy will have a new flavour.
Has this happened elsewhere in the world?
South Korea embarked on a similar concept which they called as “Industry Champions” and the results are in front of us, Samsung, Hyundai and so on. The US created the Boeing and the Lockheed Martin with complementary capabilities; Pratt, GE, Raytheon, NGC and the entire industry mushroomed. The US also has a mandate for the big boys to make investments into small companies, called as “Small Business Goals”, to essentially develop the MSMEs.
What did the government want?
The procurement process must proceed smoothly as planned for speedy induction of military hardware and systems for our Armed Forces. Will the SPs be able to solve the procurement puzzle? May not be entirely, but will smoothen the process to a very great extent. Coupled with the DPs(Development Partners) and hand-holding of the small industries, we are on the path of rapid progress.
What then are the Challenges?
The greatest challenge we have today is one of “Mindset”. An aggressive mindset with a clearly defined roadmap is the need of the hour.
While the present nascent state of the defence industry is a challenge, the corporate sector is capable of rising to the occasion to make the necessary investments and initiate winner collaborative arrangements.
Gaps in the supply chain must be identified discipline wise and new ones developed, wherever necessary.
Development and sustenance of a quality supply chain will determine success in production. Involvement from design and development stage and hand-holding the supply chain in terms of processes will remain a challenge for some time, this must be addressed head-on.
Many corporates have made investments in multi-discipline sub sectors of Defence. However, the policy is indicative of just one SP per discipline. What then must the corporates do with the investments made in other disciplines? Collaboration, is the key-word. SPs must collaborate amongst themselves for sourcing, easier said than done, and work both as competitors as well as collaborators.
Idea of Strategic partnerships is great, Implementation now is the key.
Decision making and timely decision making is paramount for any policy or program to succeed. Corporates may like to throw in a lesson or two here and this will most probably have an electrifying effect on the entire system and process.