Strategic Partnerships: Challenges and Opportunities for Indian Corporates
Vol 10 Issue 4 Sep - Oct 2016
Why Strategic partnerships are good and how perhaps ‘mindset’ issues are yet a stumbling block delaying the initiation of a veritable game-changer
Monday, October 3, 2016
Indian Military is today at the cusp of scanty preparedness, dealing with old and obsolete equipment and systems, on the inventory that they can neither use nor discard, with little hope of any replacements or upgrades in the near future. Indian defence procurement process is plagued with such infirmities that no one is either accountable or blamed for non-performance in ensuring compliance to the timelines laid down.
Observations from CAG clearly highlight the chinks in India’s armour. Its 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. India now spends 1.1% of its GDP on defence (capital expenditure ex-land and construction), which is higher than the US (0.8%) and largely in line with that of UK (1.4%). 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, mainly because India’s defence PSUs lack the expertise to manufacture complex systems and private sector participation is nascent. In order to correct this anomaly, the current government has taken steps towards changes to the procurement procedures – by introducing a new category IDDM, revision of the defence products list, issuing industrial licenses to the private sector and relaxing FDI norms.
In December 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.
As an independent defence consultant following this sector, I feel that India’s annual capital defence spending has averaged US$ 11bn per annum over the past five years. However, only about 8% of this capex goes towards ordering new equipment; the rest is payments for equipment that was bought earlier. Of something like INR 60,000 earmarked for capital expenditure, only approximately INR 6000 is available for new purchases and the rest is scheduled payments for committed liabilities for the equipment and systems procured in the yester years. The reasons for the under investment, are well documented – India shares a border with two hostile neighbours – Pakistan and China. Also, its defence forces face serious shortages of critical equipment – not just fancy high-tech equipment, even basic war-time necessities.
How will then the Armed forces get equipped to protect us
If we were to follow the traditional methods of procurement as we have been doing thus far, we are not likely to encounter dramatic results. Ambitions of the government can be matched only if we adopt new methods and embrace the private sector. Mere lip sympathy will not be good enough. The government could do well to match the competencies in the corporate sector with those 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, a win-win situation will emerge.
DPP the Work-in-progress document, has evolved to become an inclusive document, inclusive of the private sector as well as the MSMEs. The document falls short of defining procurement of strategically sensitive systems. Strategic Partnerships hold the key and probably provide a great hope for the Armed Forces to get their procurement act in an atmosphere conducive to near-hassle free induction. The Committee of Experts constituted for formulation of the present DPP, recommended recognising the abilities in the private sector through Strategic Partnerships. A broad criteria for Strategic Partners was indicated by the Experts Committee, further refined by the successor committee, to draw up detailed pre-qualifications. Number of meetings were held by the MoD with various stake-holders, with the Minister leading from the front, to arrive at a consensus.
In line with the progressive DPP 2016, the government will do well to soon notify the Strategic Partners’ chapter, an unfinished agenda.
Opportunities for Corporates
This is the first time the MoD, thanks to active intervention and intense participation by the Defence Minister, has come this close to create an all-inclusive document. From seeding the idea of Strategic Partners to building consensus, it was not a cake-walk, with plenty of opposition from various stake-holders, some of them out of fear of the unknown and some due to perceived notions of unfair play.
Once notified, SPs present a tremendous opportunity for the corporates to Walk the Talk. Strategic systems of the Armed Forces will be opened up for the large corporates that qualify as Strategic Partners. Monopoly of the OFB/DPSUs will be broken, albeit gently, with this grand entry of qualified Indian corporates. This is fundamental to 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, 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 all-inclusive industry will 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.
The greatest opportunity is to be able to participate in the strategic affairs of the nation by arming the Forces with systems better than those available elsewhere in the world. The opportunity is to place India on the global supply map and pose a challenge to technology as important as it is to production and processes. Bringing in technology into the industry for real is one of the biggest opportunities on which the industry as a 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.
What then are the Challenges?
The greatest challenge we have today is one of “Mindset”. An aggressive mind set 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. Technology transfer agreements will usher in a fresh outlook and will no more be consigned to the confines of dusty rooms in dilapidated buildings.
Technology transfer arrangements will actually bring in technology since it will now be seen with a microscopic eye by the stake-holders themselves. Government’s interference in negotiating technology transfer arrangements or at least overseeing them will be a major challenge the industry must resist and overcome. Interference of government would be minimal, however, this necessary evil, must be restricted to the lowest levels possible.
Corporates need to gear up and get ready to face the challenges of time and space. To deliver the desired strategic system within the requisite time-frame and to conform to the highest quality standards with restricted availability of military grade raw materials and an un-organised defence industry will challenge the supply chain. Corporates must map the existing industry in terms of their preparedness quality and capacity. 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 indeed good, consensus on the criteria has largely evolved, and implementation is now the key. While the government is good at making policies, it is weak when it is time for implementation. For example, the MoD is not able to adhere to the time frame for procurement as enunciated by the MoD itself. It may not be an exaggeration to state that not a single program has been in conformance to the timelines laid down by the MoD. They need to respect the policy they have laid down and bring in a great deal of accountability.
Decision making and timely decision making is paramount for any policy or program to succeed. Corporates may like to share a lesson or two here and this will most probably have an electrifying effect on the entire system and process.