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Private sector participation in defence faces many hurdles
June, 06th 2017

The government’s new policy to boost private sector participation in the defence sector is unlikely to bring in constructive contracts before 2019, according to analysts and corporate executives, and would start making “gainful progress” only when the new government takes over post-elections.

Workable system hurdle
Critics have argued that some corporates with defence licences are not “highly experienced with the business given their newbie status,” and that there are many who lack the requisite technological experience of a hi-tech original equipment manufacturer (OEM) to fulfil a project, which could put many a project at risk. “The defence sector was opened to one hundred per cent participation by the Indian private sector in 2001. If, however, it continues to play a peripheral role in defence manufacturing, it is on account of the Ministry of Defence’s (MoD) inability to evolve a workable system for engaging with them as prime contractors, under the ‘Buy and Make (Indian)’ category, or to nominate them as the Indian Production Agency in ‘Buy and Make’ case,” Amit Cowshish, former Financial Advisor (Acquisition), Ministry of Defence, told BusinessLine.

Stating that the strategic partnership scheme “appears to be an effort to overcome this problem,” Cowshish said it is “not clear as of now whether the strategic partner would become prime contractors or Indian production agencies would play the role, depending on the nature of the deal with an OEM.” Pointing to another major hurdle, Cowshish said: “The strategic partnership model envisages long-term legal covenants spanning the entire life of the platform. This is an area in which the MoD has no past experience.”

Delay in approvals
Lack of consistency and delay in defence approvals have jeopardised many procurement programmes and have put OEMs in tight spots. “OEMs have a rider, 49 per cent FDI cap. Most OEMs are bound to extract the technology cost through a transfer pricing mechanism,” said an OEM vendor. This would leave little revenue for the Indian partner.

Though the policy’s intention is to engage with private companies in the manufacture of hi-tech defence equipment, several delays have already plagued the sector. More than a decade after the ‘Make’ procedure was adopted by the Defence Ministry in 2006, the first design and development contract is yet to be signed. The 2006 ‘Make’ procedure was aimed at promoting indigenous research and design.

Ganesh Raj, National Leader, Policy Advisory Group, EY India, said the policy would “indirectly give an opportunity for MSMEs to work along with the Indian private sector as a part of a supply chain in design and development of these defence platforms.” However, since the process of selecting the platform would have to follow the same procedure as laid down in the Defence Procurement Procedure, it would entail lengthy field trials.

Amber Dubey, Partner and Head, Aerospace and Defence, KPMG in India, said, “we tend to spend two years or more in carrying out field trials inside India across locations and seasons.”

Company executives allude to further delays, since it would “take a while to select strategic partners, assuming that the process will go through without any challenge by those who do not make it to the privileged list.”

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