“Higher capital spending in defence will not only help meet the needs of the armed forces, but will also increase GDP.”
Jayant Damodar Patil, whole-time director and senior executive vice-president, Larsen & Toubro (L&T) defence business, is counted as the most experienced hand in the private sector defence industry today. Under his leadership, L&T has built a portfolio of products, systems and technologies, both on its own and by teaming up with the Defence Research and Development Organisation (DRDO) and the Indian Navy, and is today engaged in design-to-delivery of solutions across its chosen defence segments. Among Patil’s most notable achievements is the order for the K9 tracked SP artillery gun system, jointly developed by L&T with a foreign collaborator, the Pinaka multi-barrel rocket launchers, Akash missile propulsion airframes and missile launchers, and setting up the VLF (very low frequency) communication facility for the armed forces.
In an exclusive interview with Anupama Airy, Patil spoke on the story till date on the participation of the private sector in defence production, and the necessary way forward.
The government’s Make in India initiative for the defence sector brought along many hopes and promises for the country’s defence industry. Have the promises been fulfilled and are the hopes still intact?
Thanks to policy initiatives institutionalising a level playing field over the past three years, the import content has shown a downward trend. With the preferential categorisation of acquisition programmes towards indigenous sourcing, India’s imports are expected to continue to drop at the decision-making pace of Ministry of Defence (MoD). There is also active support and facilitation by the government towards defence export. Having said that, as a nation, we still have a long way to go picking up pace in decision making. What is needed is to take a few bold steps, speed up decision making, de-layer approval stages, eliminate repetitive process steps and bring in a real level playing field among Indian players, to unleash and actively promote indigenisation.
What will also help the national cause is realistic budget allocations to defence, given the geopolitical environment we are in. What have not been visible are budget increases in tune with changed taxes and duties structure and the fact that revenue expenditure and pension allocations due to successive pay commissions and one rank one pension (OROP) have put pressure on modernisation allocations.
Is the private sector capable of replacing the dominant public sector set up in defence?
It’s not about private sector replacing the public sector. The government has made huge capital investments in the public sector to create capacities and large skill set pool. This has served its purpose up to a point, but did not stop the growth in imports. Hence the need to involve the private sector, known for its nimblefootedness and innovation. We need a two-pronged approach. One, combine the strengths of public and private sectors, and two, grant a real level playing field to both.
But is there a level playing field between the public sector defence companies and the private sector?
The government has taken many progressive steps through a series of policy initiatives and systemic changes. But a few significant issues hurting the private sector remain to be resolved. The defence public sector units (DPSU) and ordnance factory boards (OFB) have been recipients of budgetary support (grants) for creation of assets, capacities and skills, as also beneficiaries of repeated transfers of technology, paid for by the government. These very resources are deployed by DPSUs to gain a competitive edge, while the private sector has to service investments made in asset (capacity) creation, skill development, knowledge (competence) development.
Also, MoD continues to nominate DPSUs/OFBs for large contracts that serve as long-term capacity booking, guaranteeing asset recovery. Such contracts also have generous payment terms and risk cover at nil costs. These enable DPSUs to bid against private industry on a “variable cost model” without loading depreciation and interest costs as well as overheads. This is especially true for labour-intensive programmes. There should be a mechanism of loading DPSUs and OFBs for utilisation of such tangible and intangible assets created through continued government funding/support.
When it comes to payment terms, DPSUs/OFBs are granted progress stage payments on nominated contracts by the MoD. DPSU policies, however, do not allow payments to their Tier-1 and Tier-2 partners. This results in huge surplus fund availability in the hands of a DPSU. These surplus funds get leveraged for competitive programmes, with no need to load working capital interest costs that the private sector must, as they are granted 15 per cent advance and balance payments are on delivery/after warranty period. This makes them borrow working capital through commercial borrowings and incur additional costs. These costs get loaded into their bids which at times end up being the differentiator with respect to DPSUs, and lose contracts. Therefore, the tierised partners on nominated contracts must be offered payment terms on back-to-back basis. Also, payment terms to the private sector need to be brought on par with DPSUs.
Does private industry have sufficient access to trial and testing facilities with the public sector?
No, although an honest attempt is being made. Facilities for testing, trials, certification should be made available through a proper queuing system to companies that have been issued defence industrial licences. One keeps hearing from small and medium enterprises that they do not get access, while large players would have some facilities created within their own complexes and are relatively less affected, except for field ranges. The user trials and special test facilities remain with DPSUs or DRDO. Although the facilities are formally open to private sector, generally industry testing is given least priority, including last-moment rescheduling, citing in-house programmes that must get the booking on fast track.
What do you think are the issues that still need to be addressed on the policy front?
Programmes under the strategic partnership model need some policy tweaking in favour of higher indigenisation by valuing segment-specific track record, technical competence and capacities, while selecting the partner for the programme. The Ministry of Commerce and Industry has issued the Public Procurement Order 2017 to assure preferential market access to Indian companies for buying by government. This needs to be incorporated in the defence procurement policy (DPP) and implemented by MoD. Every Rs 10-12 lakh worth of work in India creates one job across the tierised value chain.
I’ve already spoken about some of the level playing field-related issues. There is a need for a reciprocal risk-reward policy to encourage faster/early deliveries. This is an international norm and will accelerate the modernisation of our armed forces. The DPP 2016 needs to be implemented in letter and in spirit. Most of the forward looking stipulations under the same are yet to be implemented in any request for proposals (RFPs).
The government also seriously needs to increase the capital budget allocation for defence. Due to increased quantum of order placement over past few years, committed liabilities in the capital budgets have picked up. Defence imports are now taxed and this is borne by the defence capital budget. This has led to shrinking capital budgets in real terms. With mounting backlog of modernisation programmes, a sustained increase in the defence capital budget allocation is an imperative. An increased allocation would not only enable meeting the deficient needs across armed forces, it would contribute to increased GDP, though with a small lag, through the multiplier effect, if the increased allocation is targeted at indigenous production of the sector.
I quote a senior MoD official who said that defence is for long-term players and for companies who have patience. Why then so much noise on “no orders coming for the private sector”? Is industry being impatient or is the government really moving slow?
I could not agree more with the need for long-term perspective. Fact is, there are a few players who have invested in this sector for well beyond three decades, waiting to play a significant role. They made investments in R&D, creation of technologies, products, built infrastructure, developed many unique skill sets, well ahead of the public sector, which was continuously supported by the government. While the defence sector was opened for participation by the private sector 18 years ago, currently the private sector is still a fringe player — 95 per cent of indigenous orders continue to be placed with DPSUs/OFBs on preferential basis. The unending wait for the private sector seems to be stemming from old mindsets in the MoD that need to be addressed. The bane of old-time private sector players has been that there are only a few of them and at times a single player (compared to their global peers) in a particular segment. So even if the private sector player has better capabilities comparable to the best in the world, they are denied a contract, citing need for price discovery, and aversion to a single-vendor qualification, while DPSUs were granted similar programmes, not only on single party basis, they were also compensated by extra costs well beyond original contract values.
An L&T specific query... You have tie-ups with several foreign players. What progress has been achieved and what issues are you facing in your partnerships?
L&T has always believed in “equitable mature partnership” with foreign players. An example of non-equity based teaming is the K9-Vajra tracked SP gun system, jointly developed by L&T and Hanwa Techwin of South Korea. This, as you know, emerged the only gun system to qualify in the user evaluation trials, meeting the stringent technical requirements with no non-conformities in first user trials, a first in many decades in India. To build the guns in India, L&T has invested in a greenfield manufacturing complex at Hazira, Gujarat. The armoured systems complex will be the first tank factory by a private sector company in India and we are geared up for delivering the 100 guns from this complex.
Our joint venture (JV) with the US company MBDA is well-poised to develop and produce futuristic missiles and missile systems. Through this JV, we have access to fifth-generation anti-tank guided missile technologies, and plan to customise and develop it as offerings for the FICV (futuristic infantry combat vehicle) programme.
How are you doing with orders? What is your current order pipeline?
We expect some major orders to fructify soon by ordering of major weapon systems such as Pinaka, towed gun systems, bridging systems as prime contractor, and as Tier 1 partner to DPSUs in Akash, medium and long-range surface-to-air missiles, naval weapon systems and a range of indigenous naval engineering systems. We hope and wish that we would be allowed to compete for all future naval shipbuilding programmes, including highly weaponised ships, in keeping with the Prime Minister’s Office directives making nomination of naval platforms a thing of the past. We welcome the government directive that henceforth all missiles and missile systems will be bought from within the country and look forward to leveraging our long-term track record in this segment.
What about export orders?
I would say, the government’s Act East Policy has opened up several export avenues for mature players like us. We have contracts to supply high-speed interceptor boats for coastal surveillance to Vietnam. L&T has been able to leverage its track record of developing weapon and engineering systems for Indian naval ships to upgrade capabilities of naval fleets of friendly nations. We are pursuing multiple prospects in the Middle East, Southeast Asia and a few friendly neighbouring nations.