Tuesday, 17 March 2015

Making “Make” happen

By Ajai Shukla
Business Standard, 17th March 15

In the afternoon of November 10, within ten minutes of occupying his new office as defence minister, Manohar Parrikar proclaimed that “transparent and swift decisions” were his speciality. Since then, he has repeated that boast at least thrice, alongside other confident promises of policy reform. Yet, not a single important policy has emerged from Mr Parrikar’s ministry so far, only slipping deadlines that recall the enervating days of his predecessor, AK Antony. If the previous defence minister neither spoke nor acted, the current one is quick to promise transformation. Neither, however, has delivered real change.

At a media conclave in early December, Mr Parrikar promised ex-servicemen their One Rank One Pension demand within four to eight weeks. This deadline has been repeatedly extended, but exasperated ex-servicemen continue to wait. In December Mr Parrikar also promised a new policy by January that would monetarily penalise, rather than ban, corrupt arms vendors. That promise has been renewed repeatedly, including at Aero India 2015 last month. Yet, top helicopter maker, AgustaWestland, remains excluded from a slew of impending helicopter purchases (Mr Parrikar estimates the military will need 800-1000 new helicopters over the next five years), creating single-vendor situations in which India might buy choppers for hundreds of millions of dollars more than in a procurement where competing vendors drive down prices. In October, an Italian court threw out the bribery charges against AgustaWestland. Yet the defence ministry remains frozen, even though the Central Bureau of Investigation has failed to even file a charge sheet against AgustaWestland during the past two years.

Mr Parrikar’s most worrying delay relates to his promise to simplify and rationalise the “Make” category of defence procurement, under which Indian companies design and build major defence systems, with the defence ministry reimbursing 80 per cent of the development cost. Both Mr Antony and Mr Parrikar agree that “Make” category projects would vitalise Indian defence industry.

Like elsewhere, Mr Parrikar has overpromised and under-delivered on the new “Make” procedure. In December, he invited the who’s who of the defence industry to Goa and assured them of a new “Make” procedure by end-January. The next day, he told defence journalists in Delhi that the “Make” procedure would be ready “in the next two-three weeks”. Seven weeks later, Mr Parrikar declared during Aero India 2015, in February, that the “Make” policy would “crystallise” in March and be notified by April/May.

Currently, the government and private defence industry are debating the new “Make” policy, with private firms determined to wrest parity with the eight defence public sector undertakings (DPSUs) and 41 ordnance factories (OFs), in whose favour the deck has traditionally been stacked. To counter the defence ministry’s well-known bias towards its pet mastodons, the Prime Minister’s Office has asked the Department of Industrial Policy and Promotion (DIPP) to arbitrate the framing of the new “Make” policy. Even so, the draft of the new policy, which I have examined, remains contested. The private sector has told Mr Parrikar that the “Make” procedure, in its currently proposed form, is destined to fail.

First, the new policy ignores the private sector’s concern over the debilitating cost of capital. True, the defence ministry eventually reimburses the “development agency” (DA) --- the company, or consortium that leads a “Make” project --- 80 per cent of the development cost. However, until the money is reimbursed at stipulated development milestones, the DA must bear the cost of capital. With interest costs ranging from 14-16 per cent, industry argues that their putative 20 per cent share actually rises to 40-50 per cent. If the defence ministry cannot pay up front, private industry wants it to share the cost of capital in an 80:20 ratio. The government does not dispute the interest cost; but the draft “Make” procedure disallows “interest” from being included as a project cost.

Ludicrously, the defence ministry argues that the US Pentagon’s Defence Advanced Research Projects Agency, famously known as DARPA, which similarly sponsors small research projects, does not reimburse interest costs. The private sector retorts that DARPA reimburses 100 per cent of project cost; and capital costs just about 2 per cent in America anyway.

Second, major private firms have protested the dilution of three key eligibility conditions in the draft policy that could open the doors for foreign defence majors to access Indian funding under the “Make” procedure. So far, a company was eligible for “Make” projects only after operating for 10 years; the draft policy halves that to five years. Earlier, a company required an asset base of Rs 100 crore and turnover of Rs 1,000 crore to participate; the draft policy only requires a “positive net worth” that is 5 per cent of the project size. For micro, small and medium enterprises (MSMEs) the net worth criterion is waived entirely. So far, the policy required a company to have a defence licence; now it need only have applied for one. A foreign defence major can win development contracts with 80 per cent Indian government funding merely by forming a 49:51 joint venture with an unscrupulous Indian MSME that has had a sleeping company for 5 years.

Third, the private sector has strongly protested a draconian provision that renders any company that violates any policy guidelines (and presumably the ministry would be the judge of that) punishable by a five-year ban from doing business with the defence ministry. Industry bodies have requested that a ban be limited to ethical violations, which could be covered under an “Integrity Pact” that already forms a part of all defence procurement contracts.

“My board would never allow the company to participate in a development programme where the company could be excluded from all defence business for a minor procedural violation”, says a defence firm chief executive officer.

From the delays and disputes, it appears as if the defence minister is not entirely clear about what the “Make” procedure intends to achieve --- to create Indian “system integrators” that own the intellectual property that goes into a military platform, allowing not just in-country design and manufacture of that equipment, but also life-cycle support and periodic systems upgrades, all of which add up to 6-10 times the procurement cost. This is qualitatively more strategic than simply boosting manufacture to create jobs. So far Mr Parrikar’s embrace of the “Make” procedure is apparently rooted more in his boss’ enthusiasm for the “Make in India” slogan than from a hard-eyed realisation that Indian defence industry needs to be nurtured, hand-held and protected so that it can develop and supply defence equipment designed and built specifically for India’s military requirements. There has been enough delay and prevarication. The “Make” procedure needs to be finalised and at least 15-20 development projects contracted, for which the Rs 144 crore provided in the defence budget must be increased substantially.


Anonymous said...

foreign... manufactures... take him... for a wild ride...

Anonymous said...

Good article.

Anonymous said...

A journalist who batted for American fighter jets is now talking about indigenous efforts and make in India...

Hrishikesh said...

Mr Shukla,

This is to bring certain points to your attention.

Comparison of Mr Parrikar has been made with Mr Antony and indecisiveness has been called out.

I am surprised at some of the key decisions not finding mention at all that fall in Make in India domain - decision to get HAL to manufacture piston trainers instead of opposition from IAF, shortlisting L&T and Pipavav shipyards for submarine contracts, shortlisting Tata and BEL consortiums for BMS and development to be funded by GoI, and for all practical purposes burying Rafale purchase. Aren't we a step closer to getting a unified command?

I am more surprised at the fact that you and your colleagues have reported extensively on all these. Weren't all these taken in the last few months?

On Financial issues: cost of capital is also a function of the type of firm bidding. Highly credible firms get funds at much better rates than dodgy ones. And we do have dodgy ones. Banks shall lend to credible firms at much better rates than 14% mentioned. Moreover, we have moved into declining interest rate regime.

I can go on and on.

These are not small policy issues but ones which shall essentially shape this country's destiny. Almost all the developed economies in the world have deep defence moorings.

Its better to be late and right, than fast and incorrect. First time right as in manufacturing.

I find this article highly motivated and only reason it got center page placement in BS (pun intended) was because BS is decidedly anti - NDA and not willing to give any credit, even if its due.


Anonymous said...

Has Mr Ajay Shukla taken kickbacks from AugustaWestland ??

A Sunder Rajan said...

Mr Shukla,

Your article seems highly motivated against the RM Mr Parrikar. In the short time he has been in office, he has brought in lot of positive changes. To notice them, one has to have a clear and impartial mind, which you do not seem to have. Period.

AS Rajan

Anonymous said...

There is a lot that is unsaid in this article. So long as there is foreign technology involved there will be several lobbies etc who will be the true manipulators of the business. Me Pariker has very good intentions but has not been able to move with the speed because he is confronted with the 'quick sand' of these defence business manipulators. The make in India mantra has to be changed into 'Design in India' mantra. This is the policy of China and because of this they are today the world's third largest arms exporter. The policy is so well ingrained in China that even without experience of of operating an aircraft carrier they are going ahead with designing and building 2 aircraft carriers!! If 800-1000 helicopters are required is this not a good enough incentive for private players to invest in design??It is unfortunate that esteemed business houses like Tatas instead of investing in long term R&D are happy in license production which is nothing other than a mutated form of trading and commission business. The ADAG is angling for Pipavav are they doing it with an eye for creating an R&D base or only for licensed production in India of scorpene submarines etc?? There should be only one simple policy in India for defence production. The govt's first priority should be for design and manufacture in India . This should be overriding foreign acquisitions even if the technology is inferior.

Anonymous said...

What the Rasha Mantri alone can do when the end user's fancy foreign maal ???.The armed forces,It seems, do not feel an iota of responsibility towards indigenization.

Anonymous said...

Whoa there! Give him some time before you do you rapid fire rant.

Anonymous said...

Dear Hrishikesh, several of the policies you attribute to the NDA were in fact initiated in UPA times, such as considering private shipyards to build 75I subs, BMS projects and delaying Rafale. While it is good that Mr Parrikar has made those decisions, they arrived on his table as preexisting proposals and do not represent any great new vision.

Bhakts need to open their eyes and have a clear and impartial mind.

Anonymous said...

the congi stooge that he is./. not surprising that he sees nothing good coming our of NDA..

Sachin Khandelwal said...

The great Indian Bureaucracy has created a MINE FIELD of procedures which Mr Parrikar is trying to DE-MINE. He has to be fast but also sure that he has left any booby traps which will spell his doom. Of course not to mention our sab kuch foreign loving army and air force brass is not making things any simpler for Mr Parrikar.

Hari said...


I am an ardent reader of broadsword and I really admire your viewpoint of theings but I must disagree with you here. Mr. Parikkar has been in office for 4 months and Mr. A.K Anthony was in office for a little under eight years. I do not see how you can compare the two tearms in the same lens. Please walk out of the judgemental box and look at things in an objective way as you always have done in the past.

Anonymous said...

Wonder why Mr. Shukla is all riled up against Mr. Parrikkar ? It must be because his pension hasn't been fixed yet. Right - eh ?

Abhiman said...

Instead of the 80:20 rule, DRDO must keep designing products. But instead of stodgy PSUs like HAL and OFB, mass-manufacturing should be delegated to private companies.

This will really help indigenization.


Let's abandon the PAK-FA. Let's channelize our efforts in the AMCA.

captainjohann said...

Mr.shukla, I disagree with most of what you have written. He must talk less and do more in a silent way. This government took credit for lot of things which Antony did in his time. Let us hope Parrikker learns the power of import lobby and see things in a slow way as Mr.Hirikesh has said.

Anonymous said...

I get the sneaking suspicion that the defense minister actually reads your articles.
Let me list the topics mentioned on your blog.
He has talked about improving the servicability of the Sukhois.
There is some talk about the avro replacement being a waste(Again mentioned on your blog).
About the Rafale, he has talked about how there were other alternatives. He has also talked about speeding uo the acquisition of the FGFA. All in all, he seems to be in agreement with your views on many topics. Its only been 4 months, and its possible he is not exactly soft spoken. I think a little patience , might just be rewarded.

Anonymous said...

Ajai, I agree with many

Anonymous said...

I agree with many others' views that you seem to have developed a highly biased opinion against the RM (for reasons best known to you). Worse, your tweets on saffron jaddies is not in good humour! There are readers to your columns because of the unbiased and balanced approach you had taken in the past, hope better sense prevails. Indian citizens are smart enough to recognise who does work and who just speaks, leave it to the electorate and continue doing what you have done bets in the past, reporting facts!!

Anonymous said...

"At a media conclave in early December, Mr Parrikar promised ex-servicemen their One Rank One Pension demand within four to eight weeks."

That is total lie! Many of us saw his video. Mr. Parrikar promised on completing his side of commitments of OROP in 4 to 8 weeks and present his findings to the Finance and the Cabinet. He did not promise that OROP will be ready to be rolled out in that time frame. He hoped that his analysis will be accepted by the government given the constraints that India operates in.