The much- touted entry of the private sector into India’s defence sector remains a distant dream. Private sector investment by Indian companies in the defence industry was allowed up to 100 per cent while foreign direct investment (FDI) of up to 26 per cent was permitted. However, not much headway has been made on this front as the private sector feels that there are still huge entry barriers and there is a lack of long-term business prospects on a guaranteed basis. Almost 70 percent of the military hardware is being imported today largely from seven-eight countries like Russia, France, Italy, the USA, the U.K., Germany and Israel. Defence Minister A.K. Antony has expressed his intentions of reversing this trend by involving the private sector in defence production. The private sector is expected to build a quality infrastructure and take advantage of the long-term opportunity in the defence sector. But is the Ministry of Defence actually on track to implement the vision of having a sustainable and thriving defence manufacturing industry in the country?
Take the case of the Indian navy. Its frigates and aircraft carriers are still being built in Russia while oil tankers are made in Italy. The Navy has placed orders for corvettes, submarines, frigates and destroyers, among others amounting to about Rs. 1,25,000 crores on public sector defence companies such as the Mazagon Dock, the Hindustan Shipyard, the Goa Shipyard and the Garden Reach.
Contracts worth another Rs. 1,25,000 crores for submarines, frigates, LPDs, etc are lined up for defence PSCs. Ironically, the cumulative annual revenue of shipyards has never crossed beyond Rs. 5,000 crores. The consequences are huge time overruns resulting in massive cost overruns. The Navy has been seriously worried about this. The Ministry of Finance and the Comptroller and Auditor General of India (CAG) too have raised concerns from time to time.
In fact, the CAG strongly remarked against 6-8 years delay per ship by the Mazagon Dock and the cost overrun in excess of 240 percent, which by any stretch of imagination is a serious issue. By not finding an equitable local solution, the Ministry of Defence is indirectly supporting avoidable imports.
The private sector has been looking for playing a role in defence production but industry insiders say the Department of Defence Production in the Ministry of Defence is supporting only the Government owned manufacturer.
Despite apprehensions, some private sector players have taken the initiative to plunge into defence manufacturing. One such venture, Pipavav Shipyard, was dedicated to the nation by Prime Minister Manmohan Singh in June last year. This shipyard, with on estimated investment of $1 billion (Rs 5,200 crore) is one of the largest and most modern shipyards in India and is perhaps the biggest among any existing or upcoming shipyards in the country. The company has since then been trying to secure contracts for naval ships either directly or through joint venture with defence PSCs.
The Mazagon Dock (MDL) and the Department of Defence Production made an earnest beginning by floating the expressions of interest (EOIs) among various Indian shipyards and to look for appropriate synergy to liquidate their orders. It was followed by the EOIs by the Hindustan Shipyard Ltd and the Garden Reach.
The MDL gave almost three months time to all the companies for submitting the proposal. After the submission of the proposal by each of the participants by end-May 2011, the Board of Directors of MDL appointed a committee of 3 directors consisting of two Independent directors and one Functional Director along with senior officials to visit the facilities belonging to all participants. The committee was also tasked with carrying out the assessment of each proposal from all the private players and putting its their recommendations to the Board of the MDL.
The committee of the directors and other senior officials visited all the facilities during June and July 2011 and during that period several rounds of discussion took place between the private companies and MDL authorities.
In August, all private parties -- L&T, ABG, Bharati and Pipavav -- were called to make their presentation to the Board to explain their business plans and proposals in detail and have a thorough discussion with the MDL Management Committee and Functional Directors/Independent Directors.
The MDL sought further clarifications from L&T, ABG Shipyard and Bharati Shipyard after the opening of proposals from all the parties. The MDL’s Board of Directors finally approved Pipavav Shipyard as its joint venture partner. It is learnt that the MDL Committee also suggested that Larsen & Toubro (L&T), which had proposed to set up a shipyard on the east coast, and Hindustan Shipyard ( which is also located on the east coast) could enter into a tieup with each other as the Hindustan Shipyard Ltd and the Garden Reach Shipbuilders, Kolkata, have issued similar EOIs to select private sector partners.
But then, as happens with many Government tenders where private sector players are at each other’s throats, things took a different turn. One of the contenders, L&T, filed complaints before various agencies alleging that due process was not followed in the selection of a joint venture (JV) partner. The L&T was obviously keen on a tie-up with the MZL, even though its proposed shipyard is being set up on the east coast and the entire Board of Directors of MZL – including nominees of the Government – decided on the selection of the JV partner. With the L&T making allegations, the JV between the MZL and the Pipavav Shipyard has been put on hold by the Ministry of Defence.
Such events do not go unnoticed by the industry. When a Ministry entertains allegations from any aggrieved company, it must study the consequences of questioning the wisdom of the Board of Directors of a public sector company which has Government nominees as well. It definitely sends a wrong signal to other private sector aspirants who are taking the risk of entering into a fledgling and an uncertain industry.
