Thursday, 14 January 2010

DPP-2010: New arms purchase policy on the anvil


(CII-KPMG report plugs the private sector)

by Ajai Shukla
Business Standard, 14th Jan 09

Facing mounting criticism by global arms majors and India’s private sector for his ministry’s poor policymaking and slow procurement procedures, Defence Minister AK Antony sprung a surprise today by revealing that the Ministry of Defence (MoD) would implement a new procurement policy this year.

Addressing an industry gathering in New Delhi today after releasing a CII-sponsored report that slammed MoD procedures, Mr Antony revealed that the new Defence Procurement Policy of 2010 (DPP-2010) would be more effective and faster than the current DPP-2008.

Defending his ministry’s procedures the defence minister explained, “Our procurement policy is… an evolving policy. We are learning from our experiences. I’m sure that DPP-2010 will address your complaints. How to avoid delay in the procurement process; how to speed up the process? When we come out with DPP-2010 you will appreciate that government is going step-by-step.”

Denying that the MoD policies were biased against private sector participation in defence production, Mr Antony observed that there was enough business for both public and private sectors to co-exist. The defence minister said, “Over many years, we have built up strong defence PSUs. I urge the private and public sectors to work together.”

The CII-KPMG report --- entitled “Opportunities in the Indian defence sector” --- report predicts that, by 2022, India will purchase Rs 4,50,000 crores (US $100 billion) worth of military equipment. Another Rs 44,000 crores (US $9.7 billion) will be spent by 2016 on India’s homeland security.

The report highlights that India’s resurgent private sector gets just 14% of this business. Foreign arms corporations service 70% of the annual shopping list of India’s Ministry of Defence; the rest goes, usually without competition, to the MoD’s business empire of 8 defence public sector undertakings (DPSUs) and 40 ordnance factories (OFs).

The CII-KPMG report also points to serious drawbacks in the FDI policy for defence industry. In the decade leading up to Feb 2009, the total foreign investment into the Indian defence industry adds up to a paltry Rs 70 lakhs. In May 2001 (vide the DIPP’s Press Note No.4 of 2001) the private sector was permitted into the defence sector, subject to an FDI cap of 26%. Licenses are required both for entry and for FDI.

Such disinterest amongst foreign arms companies, the report says, stems from the conviction that a 26% holding does not give the foreign company control over the secret and expensive technologies that they would like to bring in. Furthermore, 26% of the profit is hardly an attractive return.

The government, in its Economic Survey in 2009, had indicated that the FDI cap could be stepped up to 49%. But that has not been implemented, and the CII-KPMG report brings out that foreign companies would not be satisfied with anything less than a controlling interest of 51%.

Foreign arms companies, the report says, reject the argument that “national control concerns”, citing examples of many countries (including the US) which allow 100% FDI in defence, maintaining control and secrecy by allowing only security-cleared nationals to work in defence companies; restricting the number of foreigners on the board; stipulating that the company facilities be located in-country; and effectively ensuring that “except for foreign ownership and investment, the company is essentially a domestic entity.”

The CII-KPMG report calls for urgent reforms in defence procurement, pointing out that the MoD does not provide even established private vendors with its long-term equipment procurement plan, thereby denying private industry the lead-time needed to develop the equipment needed in the future.

The MoD’s Long Term Integrated Perspective Plan (LTIPP) --- which was to forecast equipment requirements for a 15-year period from 2007-2022 --- is still not finalised, two years into its tenure. The CII-KPMG report urges that the LTIPP, once finalised, be shared with private industry.

There is also a clear perception within private industry that the government is biased towards the public sector. A KPMG survey brings out that 85% of the member-companies of CII’s Defence and Aerospace division believe that “the playing field is loaded in favour of the DPSUs.”

Finally, the report recommends that private industry be extended the same tax benefits that DPSUs enjoy.



CII-KPMG REPORT: MOD's REPORT CARD

• Rs 5,00,000 crores on security by 2022

• Foreign vendors get 70% share

• Indian pvt sector gets just 14%

• MoD companies get 16%

• 2000-2009: Rs 70 lakhs FDI into defence

• 85% of pvt vendors say MoD favours DPSUs

20 comments:

riyaz said...

hi ajai,
do u have anything about Arjun vs T 90 trials or LCH first flight?

Anonymous said...

70% to foreign vendors and just 14% to private firms.

How wrong is that? :-(

We should be focusing on taking that 70% and moving it to the private sector, instead of having the private sector squabble with PSUs over the trailing 30%.

Hello!, haven't Indians in India heard about the evil that is the military-industrial complex that controls the West?! The minute they get too powerful India's independence is over.

ArjunTankFan said...

Yes please. aAtleast one sentence about Arjun vs T 90 trials

Sridhar said...

hi Ajai ji,

Heard in this report that Arjun firpower was far superior than the T-Tanks.

Ques
1) Indian cos can arm twist the govt to buy their products if pvt. player is allowed
2) Will the security citation be addressed for the small arms manufacturer (from maoists, etc)
3) Still Indian cos are manufacturing only nuts and blots?

AK said...

Seems like Mr. Antony is just lurching from one DPP to another. He is better off selling coconut oil in Kerela than being a useless def min.

El Phocho said...

I have a feeling that a viscous cycle is in the making. The low “investment” in Indian pvt sector would mean our own companies would conduct less defense research. (It also depends upon what kind of military hardware the MoD is purchasing from the Indian pvt sector companies.- can you please elaborate on this if possible Ajai?)

I am not sure that high rate of FDI is a good thing in the Indian context. India is not USA and the measures the US can take to ensure “control and secrecy” may not be possible here.

Still skeptical about whether our MoD can really bypass all the redtape and expedite the procurement process.

I guess the MoD should stop talking and let actions do the talking…

Anonymous said...

I think all government who came or who are right now do not want Indian private sector to be in. Seems they can not make huge money from Indian firms.
Shame on Antony, better you sell off coconut oil in Kerla

Shaunak said...

What's this? A report sponsored by the Confederation of Indian Industry, delivered by a private management consulting firm, advises the government to throw more money at the private sector?

I'm shocked! Shocked I say!

I'm going to disagree with all the private sector fanboys that usually comment here and question whether the private sector really has the heavy engineering / manufacturing prowess to pull of the major projects.

Nothing in their record suggests this.

Involving the private sector more heavily in defence production will result in a Industry-Military complex - we're already have crony capitalism ... do we really need it to spread to the MoD?

Anonymous said...

Why 70% give 100% to the foreign vendors. then only we will get bofors, barak, coffin, scorpene scams. sigh!

Vivek said...

I'm with Riyaz and ArjunTankFan.

Waiting eagerly on any news about the Arjun (and ofcourse we all know Broadsword's the one to go to). We've all been hearing some pretty encouraging rumours.

Also any news on the LSP-3 or LCH would be excellent.

Indian Sage said...

The opening up of the Defence Market is happening but too slowly to allow defence acquisition or modernisation to keep pace with technological development.
The fact that raising the 26% FDI Cap to even 49 % would not lead to a technological jump nor lend to self reliance in modern technology which is a pre requisite to a strong India but JVs are an attractive option utilising our financial muscle (based on healthy and sustained economic growth rate ) to buy high end technology. Govt JVs involving both public and private partnership is the way ahead.
DPP 2010 should lend itself to this approach to R&D, procurement and acquisition.
Indian Sage

Anonymous said...

Shuklaji, you never reply to any of our requests on Arjun vs T-90 trials.

the terminator said...

What is the point in our MOD, A.K. Anthony putting on a Mr. Clean facade when he can't even get his corrupted subordinates to change their ways? Failing which he should have kicked out a big number of those fat, greedy, incompetent and indolent pigs as soon as he took over his portfolio.

Not getting the big private sector companies like Tata, L&T and Mahindra to play a significant role in defence production just shows the stupid mentality of the GOI wallahs.

There is no point in lamenting that the private sector does not have the cutting edge manufacturing or design expertise when they are not encouraged to do so by giving them the projects that the public sector companies like HAL takes decades to deliver.

Since private companies do not have the luxury of not having to answer to their shareholders, they have to be transparent and accountable which the public sector companies do not.

Private sector companies thrive on quality products, timely delivery and profits which the public sector sorely lacks.

High time the GOI takes a second look on its policies especially with regards to its many public listed companies like the GTRE and others under DRDO.

Broadsword said...

ArunTankFan:

"Atleast one sentence about Arjun vs T 90 trials"

Riyaz:

"do u have anything about Arjun vs T 90 trials or LCH first flight?"

Anonymous 22:38:

"Shuklaji, you never reply to any of our requests on Arjun vs T-90 trials."

HOLD YOUR HORSES... ALL IN GOOD TIME.

Anonymous said...

"HOLD YOUR HORSES... ALL IN GOOD TIME."

Hmmm, that means something is cooking...
:)

AK said...

@Shaunak and other guys who are opposing the private sector participation in defence.

Some of you seem to be watching too much CNN and Hollywood movies.
Seems like you guys have hard time reading facts and figures. I suggest you read the report again and then post sensibly. Your defeatist and paranoid attitude has led to the current state of defence in India.

If private sector involvement will lead to military industrial complex, then what exactly is happening right now? We have an even worse babu-politician-foreign-supplier complex that is boring a massive hole in the Indian tax-payers pocket. Delays and denials are the order of the day. Artillery, Tanks, Submarine, Fighter planes and even bullet proof jackets and rifles are hard to come by. Look at Scorpene, AJT, MRCA and endless list of items that have been in the pipeline for decades and still nowhere in sight. Our soldiers die in Kashmir not because they are shot by a slimy Pakistani terrorist but because our Mahapurush defence minister Shri Antony is more concerned about preventing scandals than protecting India. Soldiers go to Kargil with no winter clothings, they don't have adequate protective equipment, the artillery has no guns to use, airforce is using planes made in sixties. Still some Indians insist that the lazy PSUs and greedy foreign suppliers are the answer to India's defence woes.

How exactly do you think will India become self sufficient unless our private industries are involved in the manufacturing process. We know that we may not have the technological base right now and that is why we are looking at foreign collaboration. If we never start how will we reach there. There is $100 billion over the next decade for picking. Is it better to spend that on building our own capacity or to just throw it off on foreign stuff like we end up doing always.

Anonymous said...

No one seems to appreciate the fact that AK is trying to clean up the Aegean stables singlehandedly. Who do you think started the whole clean up in the army? The babus are next. If only baba or his mother decided to take on corruption in a more public manner - that would however ensure a quick demise of the whole party. Why politician or babu other there is really pristine and clean? Not one of them!!! Those that are clean are banished to inconsequential posts and sycophants are groomed.

Woe be India. All this talk of a policy is but manure if we cannot eliminate the 10% babus. DPP if implemented is a great start though.

Shaunak said...

@AK

"babu-politician-foreign-supplier complex"

So involving the private sector will result in a cleaner process? Think again. I think the only displacement would be to add private sector to that chain you mentioned. It will be something like this ...

babu-politician-foreign-supplier-private-sector-company

"Delays and denials are the order of the day."

And most of these are because of the MoD's procurement policies! They aren't always because the evil foreign supplier wants to harm our country. Get a grip.

"Look at Scorpene, AJT, MRCA and endless list of items that have been in the pipeline for decades and still nowhere in sight."

The fault for each and every one of these, as Col Shukla has so often pointed out, lies with the MoD. Involving the private sector will not change this.

"Soldiers go to Kargil with no winter clothings, they don't have adequate protective equipment, the artillery has no guns to use, airforce is using planes made in sixties."

And our private sector makes none of the above. So what are you proposing?

"Still some Indians insist that the lazy PSUs and greedy foreign suppliers are the answer to India's defence woes."

Generalisations of this kind indicate a lack of thought, sir. I suggest you focus.

Everyone is greedy, even your much vaunted private sector companies. Which is why they would pay for a report which advocates that they be given access to a new market.

"How exactly do you think will India become self sufficient unless our private industries are involved in the manufacturing process."

Please make up your mind. Do you want our soldiers to get the best equipment ASAP or do you want private sector involvement? The two are not compatible as of now.

Anonymous said...

have the chinese hacked into prasuns blog? where is he

Anonymous said...

Foreign arms companies, the report says, reject the argument that “national control concerns”,..... “except for foreign ownership and investment, the company is essentially a domestic entity.”

and what about technology? It is ridiculous. While it is true that the foreign companies may need higher % investment in JVs but they should never be allowed to have more than 49% stake. Never ever.