(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