The role of the private sector in defence modernisation and production is going to increase in the next five years.
From the perspective of self-reliance and ‘Atmanirbhar Bharat‘, India has a reason to cheer, as realisation dawns that the nation’s private sector in defence manufacturing is finally arriving in more ways than one. Yet, there are certain challenges that actually measure the gap between the status today and the lofty targets that are set out in the Ministry of Defence (MoD) policy driving documents in the recent past.
The K9 Story
On Nov. 10, a Defence. Capital report said that Larsen and Toubro (L&T) has flagged off its 81st K9 Vajra-T howitzer from its Hajira facility and claimed with justified pride that despite the pandemic, the company will stick to its delivery schedule of completing the entire contract of 100 howitzers in 42 months, as allowed by the ‘Force Majeure‘ clause due to COVID-19.
This little news is actually big news. It is not only in sharp contrast to the erstwhile practice of ‘endless time and cost overruns in the delivery of the projects, but also and more importantly, it signals a ‘new norm’ where the private sector delivers and delivers in time.
What is so special about the K9 case? Some points are enumerated in response to this question.
K9 is a 155-mm, 52-calibre self-propelled (SP) howitzer. The Original Equipment Manufacturer (OEM) of this weapon is Hanwha Defense of South Korea. The significance of K9 and its Indian connection are :
- K9 represents an important weapon system in the package of weapons recently inducted (or are due to be inducted) towards the modernisation of the Indian Army‘s Regiment of Artillery. This modernisation basically involves the induction of the latest guns, howitzers and other systems incorporating niche technologies, both through the indigenous, as well as import route.
- Some of the main weapons in the above package are the M777 155-mm, 39-calibre Ultra-Light Howitzers (ULH) from BAE Systems‘ American subsidiary; Advanced Towed Artillery Gun System (ATAGS) as a Public-Private-Partnership (PPP) project between Defence Research and Development Organisation (DRDO) and the private industry; and the 155-mm, 45-calibre ‘Dhanush‘ towed howitzer indigenously manufactured and inducted.
- The Request for Proposal for K9 Vajra-T was issued way back in 2011 while the contract was signed in May 2017 at Rs 4,366 crore ($800 million). It is not an ordinary ‘Buy (Global)‘ procurement case where the foreign OEMs call the shots and involves the Indian players as second fiddle, merely as a matter of procedural compliance. It was a case where for the first time, the bid was led by an Indian private sector major (L&T) with Hanwha Defence of South Korea in the tow. Kindly note the role reversal.
- The primacy of L&T was not only limited to the contract but extended all the way to execution. Riding on total technology transfer, of the 100 howitzers, only the first 10 were to be received from Hanwha Defence as Semi-Knocked Down (SKD) packages to be assembled in India, and the balance 90 were to be ‘wholly made in India’.
- The schedule for the 100 was: 10 to be assembled from SDKs by Nov. 2018, 50 to be made by Nov. 2019, and the balance 40 to be made by Nov. 2020. It is incredible to note the following:
- The total schedule was 36 months (Nov 2017-Nov 2020).
- Six months were granted as ‘Force Majeure’ clause due to COVID-19.
- The total schedule became 42 months. (36+6 months).
- All the 100 artillery units will be supplied well before the 42 months run out.
- This signals a new era. An era that not only sees the rise of the Indian defence private sector, but also a new-found capability to deliver within time.
The M777 Story
Even the procurement of M777 ULH as one of the weapons in the modernisation package of artillery regiments has a message to give. Salient points:
- The contract for 145 numbers of M777 was signed way back in Feb. 2016 between BAE Systems and Mahindra Defence Systems at a cost of Rs 5,060 crore ($685 million).
- The OEM reposed faith in the Indian player who went ahead to establish in India, a full-fledged Assembly-Integration-Testing (AIT) facility for making M777 end-to-end, right here in India.
- AIT goes beyond its thee alphabet acronym:
- It represents a global OEM reposing faith in the Indian player for producing his prestigious and signature weapon, totally in India.
- The above faith is pursuant to a thorough check that the Indian partner will be able to maintain the type of quality and consistency that will qualify it to carry the BAE Systems colours.
- The AIT will not only serve the Indian contract but also, will become a future manufacturing hub for the worldwide supply of the weapon system.
- In fact, the K9 followed the signatures of M777 as regards the ‘Make in India‘ component. The M777 contract signed just prior to K9 also envisaged that out of the 145 howitzers on order, only 25 will come fully assembled, the balance 120 will be made in India at the AIT facility near Delhi.
The ATAGS Story
A word now on the ATAGS 155-mm 52-calibre Advanced Towed Artillery Gun System. This project has several firsts to its credit. Some salient points:
- It is the first indigenous PPP project of this magnitude ever signed in the history of Indian defence procurement.
- Total requirement – approximately 2,000 ATAGS.
- The approved cost of 150 ATAGS by Defence Acquisition Council in Aug. 2018 – Rs 3,364.78 crore ($455 million).
- It is the first PPP project where a public sector player has partnered with four defence majors in the private sector. These are Bharat Forge Limited, Mahindra Defence Systems, erstwhile Tata Power Strategic Equipment Division (SED) and Punj Lloyd Limited.
- Each of the above private players has a significant work share in the overall gun that signifies a core competency and a niche capability.
- For instance, Bharat Forge’s ATAGS holds the longest range achieved record at 48.074 km (designed gun range is 45 km). In fact, it cuts both ways: on Sep. 12, Bharat Forge’s gun had a barrel burst after a firing test, causing injury to four army personnel.
- That the order of 150 ATAGS will be shared between the PPP players points towards the fact how each one has come out stronger in the developmental journey starting 2013-14.
Navy’s 3D Surveillance Radars
It was reported in Mar. 2019 that Tata Power SED has signed a Rs 1,200 crore ($163 million) contract with the MoD to supply 23 three-dimensional (3D) surveillance radars to the Indian Navy for ship-borne deployment, marking another success for the private sector.What is peculiar and heart-warming about this contract? Probably the following:
- The foreign OEM for this equipment is Indra Sistemas of Spain, but it is Tata Power SED, which is the prime contractor. It is an Indian player that has negotiated the contract with the MoD.
- This contract is under the ‘Make in India’ intiative and is being processed under the category ‘Buy and Make (Indian)‘ of the Defence Procurement Procedure.
- This follows a similar category of contract in 2017 which Tata Power SED executed while partnering with DSIT of Israel for supplying Portable Diver Detection Sonar (PDDS) to the Indian Navy.
In Dec. 2019, the MoD issued a list of contracts awarded to the Indian industry (both public and private) since 2014 when the ‘Make in India’ got going. It quotes a huge figure of Rs 196,000 crore ($2.6 billion) spread over 180 contracts.
A perusal of the list does bring out that while a major chunk of the contracts has, of course, go to the public sector, quite a significant share has been bagged by the private sector as well. Some figures:
- Public Sector: Rs 45,000 crore ($6 billion) contract for Mazagon Dock Shipbuilders Limited and Garden Reach Shipbuilders and Engineers Limited for seven stealth frigates, Rs 19,100 crore ($2.58 billion) contract for Ordnance Factory Board for 464 T-90 battle tanks, Rs 14,100 crore ($1.9 billion) contract for Hindustan Aeronautics Limited for 28 Dorniers, Rs 6,300 crore ($852 million) for Bharat Electronics Limited for seven squadrons Akash air defence missiles and Rs 7,900 crore ($1 billion) for BEL for the Indian Air Force‘s Integrated Air Command and Control System (IACCS) nodes.
- Private sector: Rs 4,300 crore ($590 million) for L&T for 100 K9 Vajra artillery guns; Rs 1,200 crore ($ ) to Tata Group for naval radars; and Rs 5,060 crore for Mahindra Defence Systems for the 145 M777 Ultra Light Howitzer.
- Some of the many private sector players, who received orders are Tech Mahindra, Tata Power SED, Larsen & Toubro, Ashok Leyland, Adani Group, Tata Motors, Bharat Forge Limited, MKU Limited, SMPP Delhi, Alpha Design Technologies Private Limited, Zen Technologies Limited, Force Motors, and Titagarh Wagons Limited.
The Indian government in the recent past has released two important documents in quick succession, spaced out by just two months. These are the Draft Defence Production and Export Promotion Policy (DPEP 2020) released on 03 Aug and the Defence Acquisition Procedure (DAP) 2020 released on 28 Sep. Both these documents have very strong and enabling provisions to strengthen the defence private sector. Some of these are
- Encouraging Foreign Direct Investments in the defence sector.
- Providing holistic support to Micro, Small, and Medium Enterprises.
- Earmarking a distinct budget head for domestic capital procurement.
- Working on a target for a year-on-year increase of 15 per cent in domestic procurement.
- Bringing in specific reservations for Indian vendors incertain categories (Indigenously Designed Developed and Manufactured, Make-I, Make-II, production agency in design and development projects, Strategic Partnership model and more.
- Encouraging ‘make’ and ‘innovation’ through vehicles like ‘Innovation for Defence Excellence‘ (iDEX), Technology Development Fund, and internal armed forces organisations.
- Bringing in industry-friendly commercial terms such as price-variation clause for large and protracted contracts, and parallel processing in payment to vendors. All the above provisions more certainly indicate the will of the government to enable and strengthen the defence private sector, but still there are huge challenges. Some of these challenges are:
Targets versus Current Realities
The DPEPP 2020 sets an ambitious target of achieving a defence manufacturing turnover of $25 billion (1,75,000 crore) and an export target of $5 billion (Rs 35,000 crore) by 2025. How far these are spaced from current realities? Here are the figures:
- In the year 2018-19, the annual defence production turnover was Rs 80,558 crore (approx. $11 billion) and export turnover was Rs 8,320 Crore (approx. $1.2 billion). Compared to the targets, the current levels are at 45 per cent and 35 per cent respectively for production and exports.
- While India’s defence exports declined by a net 32 per cent in the two periods 2010-14 and 2015-19, the country still remains the world’s second-largest arms importer with a near 14 per cent of the global import share. India’s defence export share in the global format is at a mere 0.2 per cent.
Some Positive Signs
While the challenges (read target gaps) are indeed huge, some positive signs are visible:
- Ever since the ‘Atmanirbhar Bharat‘ got the political wind in its sails, it is getting all-new traction. The same is increasingly impacting across the public, as well as private sectors.
- It has been argued many times for the need for an ‘attitudinal change’ in the mind of the decision-makers towards the private sector in defence and the need for the realisation that the private sector in defence has arrived. Thus, the private sector deserves its due share of orders, allocations, subsidies, handholding and more.
- Some positive signs are visible in this regard as well:
- The share of the private sector in the total defence production has gone up from 19 per cent in 2016-17 to 22 per cent in 2018-19. Consequently, in the same period, the public sector share has shrunk from 75 per cent to 72 per cent, yielding three per cent to the private players. While three per cent may give a minimalist feel but taking the overall kitty of total defence production budget as a whole, is a considerable amount.
- The Make-II procurement procedure, the Public-Private Partnership, and the Strategic Partnership model seem to be getting a move forward. Big names like the Larsen and Toubro, the Tata Group, the Mahindra Group, the Adani Group, the Hinduja Group, and the Kalyani Group are posting successes in the defence sector.
- The Tata Advanced Systems Limited and the Kalyani Strategic Systems Limited have posted respectable revenues in recent years from the defence sector. In Sep 2020, L&T bagged a deal of Rs 2,580 crore for the manufacture of Pinaka Multi-Barrel Rocket Launchers.
- Even the smaller players are benefiting. Indian Army has recently shortlisted several small companies for the $310-million project for designing and developing ammunition for its main battle tanks under the Make-II project. All the above and more are good signs and one more reason to celebrate in this festive season, as has been argued in Part-I of this article posted on Defence.Capital yesterday. You can read it here.That such reasons may continue to present themselves as reasons for abiding celebrations is the nation’s hope.
Article Courtesy: The article was originally published at Defence.Capital
Author Courtesy: Lt Gen (Dr) V K Saxena (Retd), PVSM, AVSM, VSM is the former Director-General of the Corps of Army Air Defence. He is a Distinguished senior fellow at VIF.
Title Image Courtesy : https://www.olivegreens.co.in/blog/defence-budget-allocation-inadequate-for-modernization-and-sustenance-of-forces
Disclaimer: The views and opinions expressed by the author do not necessarily reflect the views of the Government of India and Defence Research and Studies