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Boost public-private partnerships in Indian industry to make the most out of FDI in Defence

Saurav Jha @SJha1618

Updated: May 31, 2014, 11:43 AM IST
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Last October India's flagship 'make' (high-tech systems) program under the Defence Procurement Procedure (DPP) -2011, the Tactical Communication System (TCS), finally got some momentum going when the Ministry of Defence (MOD) issued staff qualitative requirements to the previously down-selected competitors for this program. Though long overdue, forward movement on TCS marks the beginning of an era wherein synergistic public-private models will be pursued towards furthering indigenisation. For instance under the 'make' category, 80 percent of the cost of development and prototyping will be borne by the MOD while the remainder is to be put up by the developing agency (DA). Incidentally, over 150 new projects under the 'make' category are going be rolled out this year in order to both defray risks as well as augment capabilities. Other initiatives that include the sharing of government held intellectual property with private companies in order to raise their technological base and thereby free DRDO to focus more on cutting edge developments are also on the anvil. If these measures are pursued doggedly, a quantum jump in the size and quality of India's domestic military-industrial complex can be achieved before the end of the decade itself.

The two DA's in the fray for the TCS program are of course Bharat Electronics Limited and a special purpose vehicle set up jointly by private sector majors Larsen & Toubro (L&T), Tata Power SED and HCL Infosys. Either DA is currently expected to submit a detailed project report (DPR) by the end of January. Subsequent to which each of the contenders will have to build TCS prototypes for about Rs 300-350 crore that will then be trialed by the Indian Army's (IA's) Corps of Signals. TCS, readers would note is a critical modernization project for the IA's offensive posture given that it is intended to replace the existing Army Radio Engineering Network (AREN) used by advancing formations to communicate with each other. TCS prototypes will consist of a digitized communication network linking frontline troops to forward command and control (C&C) centres and will have the ability to leapfrog into enemy territory with advancing formations through both plain and mountainous terrain while continuing to channelize high quality and secure data. Obviously strike corps will depend in the future on a state of the art TCS to establish theatre supremacy.

Now, the strong private sector interest in a project of this nature is in itself a testament to the capabilities built up by them through partnering with DRDO on electronic warfare, missile and naval systems development. Indeed, the two key players in the private consortium competing for TCS i.e L&T and Tata have cut their teeth in the indigenous nuclear submarine and Samyukta electronic warfare projects respectively. Granted private firms are also on the lookout for international partners for TCS and other 'make' programs but there is no denying that their (i.e foreign collaborators) participation in many such projects will be limited to experience sharing and orchestrating certain component supply chains.

Today the top ranking private companies in the defence space in India are in a position to evaluate the actual operational performance of the wares supplied by foreign majors elsewhere with reference to a particular program. This aspect is obviously important because projects in the past have been known to get delayed due to inappropriate selection of international collaborators by domestic companies. Even more importantly Indian private companies today have the necessary clout to credibly effect such partnerships and that too can be attributed in no small measure to their own growing in-house capabilities.

Amidst all this talk of foreign direct investment (FDI) in the defence sector it is pertinent to remember what one gets from overseas is ultimately a function of their own strength. To find appropriate international adjuncts for domestic projects, Indian majors both private and public have no alternative to continue to create credible intellectual property of their own. Foreign collaborators are often known to create troubles mid-way within programmes alleging problems with technology absorption at the Indian end of things and demanding either higher service fees or even greater percentage of home (i.e foreign) sourcing. The only way to ensure that such tactics are not employed is by constantly looking to move up the value chain.

What is more, most military modernization projects cannot be seen in isolation. Even as TCS is being executed, IA will move on to the at least five times larger by value Battlefield Management System (BMS) project which will replace the Army Static Switched Communication Network (ASCON). Since TCS and BMS will eventually be part of a seamless network for IA, the lead executor of the former will be well placed to be the same for the latter. It is therefore imperative that DAs down-selected for TCS choose their foreign collaborators well. Moreover, a lot of sub-contracting work can always take place between erstwhile competitors for a program as many instances from countries like the US indicate. The Indian defence industry is at the end of the day a single community where artificial distinctions such as public and private need to get blurred and the focus should be on timely execution and capability augmentation rather than on adversarial relationships that foreign parties may try to exploit. Competition need not be the same as conflict in the domestic context. For instance the success of BMS will be a key component of making DRDO's F-INSAS program, that will see large scale sub-contracting to private players, more effective. Clearly a consortia based long-term view will do more for indigenisation and bottom-lines than acrimonious posturing.

A stronger and wider defence industrial base both public and private is obviously a paramount domestic Indian interest. It is for this reason that DRDO has publicly stated that it wishes to move out of 'upgrades' altogether and leave it to industry which in now well equipped for the same. Indeed like Israeli companies before them Indian majors have developed a lot of in house expertise by participating in upgrades of Eastern bloc legacy systems ranging from air defence systems to artillery. Working with the military and DRDO on providing either new vehicular mounts or prime movers has provided India's automotive sector with invaluable experience in land warfare projects.

DRDO's present position on upgrades also comes in the wake of a recent government-industry interaction where it has been suggested that DRDO not sign exclusive IP sharing agreements with any particular company but allow public and private enterprises to build on a free license base for certain DRDO developed technologies to generate their own IP which can have proprietary claims. This proposal can be of immediate use in the biggest 'buy and make' program of them all - the future infantry combat vehicle(FICV) worth at least Rupees 50,000 crore to begin with and keenly contested by all of India's heavy engineering majors in association with foreign partners. Transfer of key DRDO developed technologies from the Abhay ICV tech-demonstrator program will not only allow all domestic participants to raise their game but also put them on a firmer footing in dealing with their proposed foreign technology partners. Once two DA's are down-selected for the final run-off more tech transfers can be effected. Upgrades after all need not only be in the sense of modifying existing systems but in terms of mark-2 variants of generic platforms.

Nevertheless, participation in even upgrade programs related to various Soviet era legacy systems has allowed Indian private industry to leverage their strengths in putting together packages based on conventional off the shelf technology (COTS) by ruggedizing the same for military use. Setting up domestic supply chains for electronic components and sourcing software indigenously is another arena where public-private partnerships need to be leveraged to increase the domestic component supplier base. Defence projects should therefore be coordinated with broader industrial policies to foster quicker growth. In this respect the request made last year by Indian industry associations to the government to allow small and medium defence enterprises to avail themselves of its technology development fund needs to be taken seriously. A bigger component supplier base, needless to say will only make it easier to compel foreign suppliers to meet their genuine offset requirements and help with localization clauses tied to FDI in defence.

The Indian private sector has realized that having a defence portfolio is a good way to buck recessionary trends. Moreover there are numerous commercial spinoffs from the technological and project experience garnered from working on defence programs. In fact given that defence programs both use and help spawn new commercial technology, it is imperative that any artificial public-private compartmentalization be dismantled and a consortia based approach be pursued for the sake of not just indigenisation but faster economic growth itself. Perhaps the Brahmos example can be studied more closely to evolve this approach.

At the end of the day, the need to move up the value chain cannot be emphasized enough. Arguments that suggest that majority stake holding by foreign majors be allowed in the Indian defence space to bring in technology and that they would do so on account of being 'lured' by India's large market completely miss the point. The military-industrial game is not about an Indian market opportunity for the next ten years. It is about future competition in the defence space. Military enterprise is one of the few arenas where western companies still hold industrial advantages. No western company or for that matter any other foreign company is going to part with its IP just for the sake of a 'market'. It would do so grudgingly however if the market it is tapping has credible domestic players of its own. Instead India should not make it clear that either foreign companies agree to fair terms on joint development or face another China like situation where reverse engineering is the norm.

Follow Saurav Jha on Twitter @SJha1618
First Published: May 31, 2014, 11:43 AM IST

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