A level playing field for defence PSUs, please

To be able to manufacture 111 naval utility helicopters for the Indian Navy under the strategic partnership process, the Ministry of Defence issued an Expression of Interest specifying that the applicant needs to be a ‘private sector company'. Defence Public Sector Undertaking (DPSU) HAL cannot be selected as a strategic partner as the project is reserved exclusively for the private sector. So much for a level playing field, a condition of basic fairness and equality of opportunity amongst the public and private sectors, that is a demand repeated ad nauseam by the private sector.

Public sector firms run the risk of becoming non-competitive in the face of excessive regulation and an outdated legal framework requiring DPSUs to be bound by various constitutional provisions. The functioning of the DPSUs and private sector firms is entirely different. One’s transactions are audited by the Comptroller & Auditor General (CAG) who, besides the regular audits, performs supplementary and forensic audits, while the other's are not; one has to give contracts purely on a tendering basis, the other need not; one has to hold an examination and settle for whatever talent is available, the other can go to campuses and conduct direct recruitment; one has an assigned Chief Vigilance Officer (CVO) on its premises, the other does not; one is subject to inspection by Parliamentary Standing Committees like the Rashtra Bhasha Samiti that periodically  review the progress made in the use of Hindi by the PSU! The other is not subject to anything of the sort.

Yet, the biggest reason for seeking a level playing field by the private sector is the assumption that DPSUs enjoy advantages of assured capital, a well-established manufacturing chain, experienced and skilled manpower and management and, most importantly, an assured purchase of their product. The reality is different -- the government does not guarantee purchase; and it has brought in parity by doing away with all strategic advantages — like on the payment of Central Excise and Customs Duty or price preference.

India is the fifth largest military spender, after the US, China, Russia and Saudi Arabia. But it holds the dubious distinction of being the world's largest importer of military hardware, importing more than 70% of its defence requirements. And 90% of the balance supplies come from the five DPSUs, four shipyards and 41 ordnance factories. That has made the government keen to cut dependence on imports through greater private sector participation in aerospace, defence and other high-tech areas by opening up the defence sector to 100% foreign investment for selective high technology equipment, while seeking to protect domestic industry through an offset policy.

Therefore, a level playing field is relevant not only between the public sector and the domestic private sector but also with the foreign supplier as well. Internationally, the private sector is the main stay of a nation's defence production, where a ‘military–industrial complex’, an informal alliance between a nation's military and its defence industry caters to the national requirements. Not so in India, because our dependence on imports for 70% of military hardware makes it imperative to have a ‘Make in India’ campaign.

Incentivizing the private sector, including foreign OEMs, to engage with the defence and civil aerospace sector, simplification of rules and procedures to promote private participation under defence manufacturing and exports, introducing the GOCO (Government-owned and corporate-operated) concept for running Army Base Workshops dealing with repair and recovery of sensitive defence equipment, encouraging strategic partnership between foreign OEMs and selected big Indian business houses to facilitate joint ventures for the manufacture of aircraft, ships, submarines, missiles and artillery guns, etc., should stimulate big-ticket investments and build India's military industrial ecosystem.

Not Defence alone, but other sectors like the power sector, too, clamour for a level playing field for private sector players via-a-vis the State-run Power Grid Corporation of India in the allocation of transmission projects. The private sector similarly wants a stop to predatory bid pricing and not cross-subsidize tariff-based competitive bidding projects. In the aviation sector, the situation is reverse -- a level playing field in competing with private airlines is required for Air India, which finds the complex world of the public sector no match for the private players.

Undeniably, the public sector and the private sector serve different ends. While the private sector excels at maximizing returns for investors and focuses on quarterly performance, the public sector primarily invests for the long term and tries to maximize social benefits. The decision-making processes, the contractual mechanisms, the checks and balances and the clarity in the mind of the owner are totally different. Yet, as the naval helicopter bid shows, it is the public sector that should be asking for a level playing field with the private sector today, with the former making that pitch as much as the latter for greater advantage for its business!

(The writer is a former director on the Board of BEML)