Public Private Partnership Model in Defence: Beset with Hurdles

India is witnessing a strategic shift in its political environment with the recently concluded General Elections 2014 which created a stir not only in India, but worldwide. With the new right leaning majority government assuming power shortly, it is expected that the country will exhibit substantial growth patterns, specifically in economic development and military modernisation. Defence being at the forefront of national policies deserves priority attention with several new and existing models of smart acquisition, timely production and effective collaborations likely to be adopted. Public Private Partnerships (PPPs) have rapidly gained momentum in several civil and limited defence projects in India. PPPs have been successfully used in development projects in infrastructure, energy and transportation sector, water and waste management and public buildings. The Indian Ministry of Finance defines PPP as an arrangement between the government/ government owned entity on one side and a private sector entity on the other, for the provision of public assets and/or public services, through investments and management undertaken by the private sector entity, for a specified period of time, where there is well defined allocation of risk between the partners and the private entity receives performance linked payments.[i] PPPs are characterised by the design, build, finance and operate (DBFO) model of partnership. Such partnerships involve the sharing of investment, risk, responsibility and reward between the partners. PPPs provide benefits of accelerated delivery, improved performance, reduced costs, pooling of resources, advantage of economies of scale and a sustainable defence industry.

United Kingdom first adopted the PPP model in defence in the 1990s with the signing of a PPP contract for provision of non combat vehicles, called the White Fleet. Since then, the UK MoD has implemented several PPP projects ranging from housing and construction to the highly technological Future Strategic Tanker Aircraft (FSTA) and Skynet 5 satellite communication projects. The first PPP contract signed by the Republic of Singapore Air Force (RSAF) was for helicopter pilot training programme. The Australian Defence Force (ADF) was keen on considering PPP approach for several acquisition programmes, however chose direct purchase over the former. The United States has largely been using the PPP approach for military housing projects but is not convinced about the feasibility of PPP for critical defence equipment.

The private sector possesses the managerial and technical expertise and employs world best practices in which the public sector lags. The mandate of defence and security is such that the public industry is made responsible for this critical sector with limited involvement of the private industry. Furthermore, the public sector has the experience and requisite know-how for implementing defence and aerospace projects. Through PPPs, the expertise and resources of the public and private sector are brought together to achieve efficiency at optimum utilisation of resources. In reality, however, defence PPPs are more complex and risk averse than the ones in the civil sector. This is so because of the unpredictable and dynamic threat environment as well as the wide ranging and difficult to define requirements of the security forces. These pose challenges in the project implementation process right from tendering to management of projects down to the performance maintenance of assets. The global security environment is fast changing, uncertain and fraught with risks. It is not possible to foresee and predict every eventuality and incorporate it in the contracts. The PPP contracts require a certain degree of flexibility to address changes and evolving situations in the environment. The divergent goals of the public and private sector add to the complexity of framing a common mission and objectives.

A relatively new player in the defence sector, the Indian industry is faced with numerous issues that impinge on the success and viability of PPP projects, such as concerns over intellectual property, excessive bureaucratic requirements, distrust of government over the private partner resulting in interference and monitoring of company affairs. These hurdles when weighed against the limited defence market make PPPs an unviable option for the profit-oriented companies. PPP is an effective contracting model but, it cannot be successful unless a planned, structured and transparent acquisition/ production system exists. Lack of a coherent PPP policy in defence and limited institutional capacity further add to the obstacles in PPP execution. There are huge financial risks and delays involved in large scale defence acquisition programmes that do not ensure timely return on investments to the equity based private companies. Uncertain demand patterns, changing user requirements, opportunistic behaviour by the private partner, rate of technological change and high project costs lead to further complications in the pursuance of the partnership. 

Properly planned, structured, executed and evaluated partnerships with aligned objectives can provide a strong foundation for a successful PPP model. Understanding and adapting to each others’ goals and work culture is important for the relationship to bear fruitful results. PPPs engaging in Research and Development (R&D) involving the industry, academia and government agencies can play a prominent role in innovation and development of new technologies. It is essential to understand the specific environment in which the PPPs operate and make them adaptable to changes. PPPs have been unable to make considerable inroads in India’s defence industry despite well intentioned attempts. Considering the availability of resources and skilled manpower, but lack of word-class technology and manufacturing expertise in India, other variants of alliances like joint ventures (JVs), consortium approach, Foreign Direct Investment (FDI) and collaboration could better suit India’s needs. The 50:50 BrahMos JV approach is a tested model to emulate for other critical defence acquisition programmes. Several ‘Make’ programmes of the Indian Army such as the Battlefield Management System (BMS), Future Infantry Combat Vehicle (FICV) and Tactical Communication System (TCS) are intended to be developed using the consortia approach, but not much progress has been made in this regard. In principle, such partnership models appear to be suitable options to develop India’s defence industry, however they need to be backed by well defined policies and their implementation would require tremendous efforts and time by the MoD and other stakeholders. Currently, a number of obstacles like excessive checks and controls, taxation, licensing, FDI limitation, export controls, single customer scenario, huge capital and risk intensive industry etc. are detriments to the role of the private companies in India’s defence modernisation projects. The private firms need to be treated as valuable contributing partners for the success of PPPs and strategic alliances. The Indian defence market is in the growing phase and is not mature enough to handle experimental models. Now is the time to adopt and execute realistic and proven approaches. The indigenous resources and capabilities will have to be amalgamated with global expertise to create partnerships that contribute towards a state-of-the-art Defence Industrial Base in India.

Karanpreet Kaur is Research Assistant at CLAWS. Views expressed are personal.