Defence acquisition reform in limbo

www.livemint.com /Opinion/y0SWywRIpkjWihkQbJ5E7K/Defence-acquisition-reform-in-limbo.html

With
former
defence
minister

Manohar Parrikars return to the position of chief minister of Goa, the global defence industry is asking one big
question: What will happen to the defence reforms announced by him?

India faces a significant shortage of critical defence equipment, including fighter aircraft, submarines and
helicopters, which Indias defence public sector undertakings (DPSUs) have been unable to address. This reality
was publicly stressed yet again in March by a parliamentary standing committee on defence.

If the Indian military is to manage this challenge, critical policy issues such as defence procurement reform need
to be finalized.

To address this issue, Prime Minister Narendra Modi and Parrikar introduced the concept of nominating
strategic partners in defence production. The idea appears to be that the government should designate vetted
private Indian companies to specific areas of national security importance, such as manufacture of fighter
aircraft, tanks or submarines, to develop technologies and systems.

These companies would be free to partner with local vendors and foreign companies to acquire needed
technology and expertise. They would, in effect, take advantage of economies of scale to become the fulcrum of
activity for a particular defence requirement. Given the large capital, material and technical requirements of
major weapons platforms, coupled with the likelihood that the Indian military would at least initially be the sole
buyer of such systems, its reasonable to assume that only a limited number of companies can produce some
military systems. It appears that Parrikar was looking to have the ministry of defence generate public-private
partnerships to produce these strategic weapons systems.

The Defence Procurement Procedure of 2016 was released with an empty chapterto be filled with the details
of the strategic partnership arrangement. A year later, many wonder if this chapter will ever be written. This
uncertainty hinders Indias overall strategy for defence manufacturing and leaves foreign capital and expertise
confused about how to enter the Indian market. Defence is a capital-intensive industry with long time horizons
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and companies are hesitant to enter a market with potentially game-changing regulatory changes yet to be
announced.

One can sympathize with the ministry of defence (MoD). Acquisition reform is a complicated issue. Thoughtful
observers recognize that finance minister Arun Jaitley, who has been handling the defence portfolio since
Parrikars exit, has a tough task ahead of him. The strategic partnership model could accelerate Indias defence
capability by fostering much needed competition and mobilizing Indian and foreign capital for research and
capacity expansions. But this is not without risk.

If not managed carefully, the reform could simply shift Indias defence oligopoly from public companies to private
industry. The defence industry is far from a perfect marketa market with a large number of buyers and
sellers, transparent prices and costs, conditions that provide easy entry for new companies and clear exit routes
for non-performing companies, homogenous products that promote competition, etc. So it is reasonable for the
government to consider interventions and regulations that manage the defence sector. However, there is always
a risk when governments pick winners and losers in an economic sectorthe risk of stymieing critical
competition, which is essential to generating the greatest value for investment and stimulating new innovations.

And there is political risk as well in an industry with a history of corruption scandals. Politicians and bureaucrats
do not want to expose themselves to charges of favouritism or create conditions that increase their vulnerability
to the false perception of corruption. It is almost a certainty that those companies that are not deemed strategic
partners will protest and their protest will provide political ammunition for the opposition.

One of the biggest challenges in defining a strategic partnership model lies in the number of Indian firms
assigned to each area of national security importance. Initial statements from the MoD indicated a single
company per area but subsequent signals indicate a willingness to expand the number of designated firms per
area.

It is critically important that foreign companies have the flexibility to partner with whichever Indian company is
most suited to commercial partnerships. The global supply chain that governs the defence and aerospace
industry is complex. Government agencies are not well suited to manage the minutiae of joint partnerships in a
manner that optimizes efficiency and value. The more freedom foreign companies have to find Indian partners,
the more willing they will be to do business in India.

Successful policy reform will establish a predictable acquisition system that reflects the reality of economies of
scale, fosters healthy competition, empowers Indian and foreign companies to work together and adapt their
business models freely, and allows private industry to realize a return on its investment. Whether a new minister
of defence continues with Parrikars efforts or designs an alternative system to harness private industry, the
need for reform is apparent and most due. It is time to end the limbo in which acquisition policy currently lies.

Benjamin Schwartz and Sid Ravishankar manage the US-India Business Councils defence and aerospace
programme.

First Published: Tue, Apr 04 2017. 12 19 AM IST

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