Public Private Partnership in Defence & Security Private Sector’s Perspective New Delhi, 29 Jul 10

1. Public Private Partnershipin Defence & SecurityPrivate Sector’s PerspectiveNew Delhi, 29 Jul 10 Cmde (Retd) Mukesh Bhargava General ManagerInternational Defence, Nuclear & Aerospace Business Copyright L&T

2. Scope • Background • Public Private Partnership (PPP) – Definition • Global Models • Success Stories – PPP in Strategic Sectors • PPP for the Naval Shipbuilding • Public Sector Vs Private Sector • Recommendations Copyright L&T

3. Background • Government main player in Defence & Security Inddustry • Private sector not developed - excessive controls (Socialistic Model), Rates of Taxation, Expensive Capital, Single customer scenario, Profit - dirty word,….. • Economic Liberalisation • Profit was no longer a dirty word. • Industry developed, became globally competitive. • Telecom, IT, Automotive Industry – world leaders • Earliest PPP model evolution - “Maruti” • Strategic and Security Sectors • Technologies Intensive • ToTavailable but at huge costs and mostly obsolete. • If not obsolete, then either denied or was unaffordable • What was developed by DRDO, was not used by Services. • Result - Country remained Net Importer of Nation’s Security Copyright L&T

4. PPP Definitions • An agreement between a government entity and one or more private industry to perform work or utilize facilities and equipment. The PPP initiative is directed toward improving the output and performance of organic activities of DoD/DHS through increased participation by the private sector via industrial partnering. - US DoD • Improves the financial viability of organic activities and result in increased private sector investment in facilities and equipment. • Forms: Complex Teaming & Work-share Arrangements through a contract, Leasing of facilities, direct sales of article or services to private sector. • Origin of PPP in Defence & Security in India – when the defence sector was opened for private participation • Possible fear of survival of DPSUs/OFs, being averse to competition. • Private sector asking for level playing field • Govt. thought of the middle path – PPP in Defence & Security • PPP in defence & security makes sound logic as it is the win-win-win for Public & Private Sectors as well as the Users/ MoD /Home Ministry Copyright L&T

5. Global Defence & Security Models Nations world over are revamping for slimmer shape, consolidating resources for developing reliable Defence & Security products UK • Strategic Def Review-98, PPP to address problem of declining funds & increasing competition from private sector • Incentives • Gain Sharing – Smart Acquisition. Accelerated delivery, improved performance, reduced costs. Mantra: Faster, Better, Cheaper • PPP Tools: Private Finance Initiative – Investment from Pvt Sector in Defence & Security (2Bn+ GBP). Risk sharing partnership with Govt. Allows MoD / MHA to focus on it’s core Mil. and security Tasks with services support from Pvt sector, less costly • Information Sharing with Pvt Industry, understanding Ind. Capabilities South Korea • Def R&D shifted from Govt. (80’s) to Industry (90’s) – new product development, Defence Exports • Pvt. Industry Champions (‘Chaebols’): Hyundai, Samsung, Daewoo Copyright L&T

6. Global Defence & Security Models (contd.) USA • Sharp cut in defence spend post end of Cold War • Massive def. industrial consolidation – 22 companies merged into 4 def. Majors – Boeing, LM, Raytheon and Northrop Grumman • Pooling of resources, advantage of economies of scale and Sustainable Def. Industry • Entire value chain of defence business – in Private Sector • All R&D is funded by Govt. Extremely tight control on release of technology – Problems of partnering as ToT clearance is always an issue India • 3rd Largest Importer of Def. Equipment, 10th largest spender on def. • 08 DPSUs, 39 OFs and 50 DRDO Labs. > 2 Lakh employees. • Reserved sector till 2001. 100% pvt equity and 26% FDI permitted • Licenses Issued to pvt sector, but support through orders an issue • Pvt sector role limited to supplier of raw materials, components and sub-systems. Kept out of System Integrator role. • Reforms through DPP-2005-06, 08 and 2008 (Ammendments) Copyright L&T

7. SUCCESS STORIESPPP IN STRATEGIC SECTORS NUCLEAR & AEROSPACE Copyright L&T

8. Success Stories - Nuclear & Aerospace Sectors • Complimentary – Collaborative PPP approach • DAE / DOS Focused on Basic Know-How Development while • Industry Focused on Design, Engineering & Production of Equipment & Systems • Developmental orders for critical, long cycle equipment were placed ahead of project approval • Industry treated as valuable contributing partner • Project monitoring & control by DAE / DOS Copyright L&T

9. Nuclear & Aerospace Sectors: Experience • ‘Ab initio’ thrust on self reliance for processes & technology • Adopted suitable models after studying global models • Policies & procedures were structured with a view to have Industry playing an important role in the journey towards total self reliance • Key capabilities were identified & built-up by Industry to respond to technological demands and challenges User, R&D and Industry moved in unison, thus, Nation could Sustain Development even under Sanctions Copyright L&T

10. Nuclear & Aerospace Sectors: Results • In-depth understanding of technology and processes available within the country • Capability to take on development of new technologies & improvements • Built in-house ability to meet global benchmarks in terms of schedules & costs Nuclear • India considered a world class design, engg. and construction hub by leading global majors • Indian companies being sought out for tie-ups by global majors Aerospace - Recognised global player - launching international satellites • Record 11 satellites payloads carried on a single vehicle • Hugely successful moon mission – Chandrayaan L&T is proud to be a significant contributor in these national achievements Copyright L&T

11. PPP in Naval Shipbuilding • Shipbuilding - complex and tech intensive activity • IN must graduate from ‘buyer’s’ to ‘builder’s’ Navy • Strong Navy – Protect EEZ interest & project Blue Water Capability, ferment stronger relations – littoral neighbours • Stronger Infrastructure needed to meet IN aspirations • DPSU yards facing capacity and capability constraints • Creation of capacities and capabilities in pvt sector yards • Leverage professionalism, efficiency, mega projects management skills, short time-to-market approach of private sector to unleash cost effectiveness of Projects Recommendation: Include private sector yards in Warship building Chapter of DPP-2010, at par with DPSU Yards and share major Warship and S/m building programs Copyright L&T

12. PUBLIC VS PRIVATE SECTOR Copyright L&T

13. Public Vs Private Copyright L&T

14. Issues for PPP in Defence & Security • Does it help in increasing exports and reduce imports? • Does it pose a threat to National Security? • Dose it increase the scope of Weapon Proliferation? • Does it lead to subversion of Regulation? • Is the competition good for defence & security Industry? • Telecom, Airlines, banking, manufacturing Industries • Competition helped both sectors, customers and nation • Win-win-win for all leading to nation’s economic prosperity • Will the Industry deliver? • Nuclear Sector – overcame West sponsored apartheid, emerged even stronger. Global supplier of hi-tech today • Aerospace- Self reliant, launching global payloads, Successful Moon Mission, World’s envy Copyright L&T

15. Way-ahead for Defence & Security Industry through PPP • Reduce Imports of Defence & security products from 70 to 30% by 2015 • Increase share of private sector participation to 25% • Operationalise RURs • Facilitate JVs between DPSUs/ DRDOs and Pvt sector • Do not force the PPP on stake holders. Let market forces dictate the implementation of PPP • Encourage consortia approach through policy changes • Give impetus to R&D in defence& security through pvt sector • Active involvement of users in development projects • Follow model of co-operate and co-exist Copyright L&T

16. Recommendations • 3 Phased Approach • Ph I – Substitute imports by indigenous products & technologies • Ph II – Develop & build products & systems, solutions • Ph III – Export globally • ToT to be given to 2 entities – at least one private • Twin lines of product development and production • Users to have choice of production partner, in long run • Project based consortia between DRDO/DPSU/Pvt. • JVs between public & private sectors • Life cycle support by private sector • GOCO model to be followed for capital intensive projects • Upgrade programs to be reserved for PPP Consortia • Limit offsets applicability to ensure inflow of technology Copyright L&T

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