Major orders are still awaited and the delay in decision making is affecting the credibility of Indian Industries with OEMs, says Jayant D Patil.

 

By Anupama Airy

Mr Jayant D Patil needs no introduction and is a well-known name in the Defence industry. After spending nearly three decades at India’s leading engineering, construction and manufacturing firm, Larsen and Toubro (L&T), Mr Patil is presently the Senior Vice President, Head of Defence & Aerospace, L&T and is responsible for the entire defence and aerospace strategic business of the company.

He is also member of the Board of L&T Heavy Engineering as also Member of the National Executive of FICCI and Chairman of FICCI’s National Defence Committee.

In an exclusive interview with Anupama Airy, Founder&Editor of DefenceAviationPost.com, Mr Patil—an Alumnus of IIT, Powai did some plain speaking on how delays in decision making was affecting the Indian Industry’s image before the OEMs. He said that while there is certainly some change in mind-sets over treating private Industry as part of National endeavour by the MoD, there is still a long way to go to create true trust based relationships. He also spoke in detail on the expectations and preparedness of the Indian defence industry on the forthcoming programs of the Ministry of Defence.

 

Excerpts of the Interview

Q: The Defence industry has been reasonably upbeat following the announcements in the Union Budget, given a notable increase in the budget for capex allocation. Do you think a 10-20% increase in capex allocation is sufficient to meet the huge defence procurement requirements of India.?

Ans: Defence Capex allocation for FY 17-18 has been increased by almost 20% over RE 16-17 and 10% over BE 16-17. To my mind, this is a good directional change as Defence Capex is up 20% while the Revenue expense is nearly flat over RE of 16-17.

Annual Defence Budget – pertaining to the Capital Acquisition caters for

  • Payments during the year for on-going programs (acquisition initiated earlier)
  • Payments for programs being finalised during the financial year
  • Inflation Indexation Costs from OFB / DPSUs for variable part of the ongoing programs
  • Additional payments towards Forex changes on existing programs

Considering the above, the increase should facilitate new acquisition programs being pushed through. It is also generally known that about 85% of capex budget is committed to contingent liabilities. The same may be higher this year as many new acquisition programs are signed over past two years.

Notwithstanding this, the 20% Capex increase would mean increased quantum of fresh contracts over past year by the Ministry of Defence. As Indigenisation picks up, the competitiveness of Indian Industry would only enable additional ability to MoD to acquire more for the same

Q: Is L&T in particular and the industry in general satisfied with the pace at which India’s defence programs are moving?

Ans: The Defence Acquisition Council has, in the past two years, granted Acceptance of Necessity (AON’s) for major programs totaling almost over Rs 300,000 crore. Of these nearly 85% are categorised in favour of one or the other Indian categories of acquisition, where Indian companies would be prime contractors. Industry is thus happy that there has been a visible and significant shift towards domestic procurement, although these are in various stages of ordering pipeline and would be contracted over the coming 2-3 years.

Having said that, there is tremendous scope for improvement in the pace of acquisition through definite shift towards a trust based model. There are delays in issuance of RFPs when seen in light of stipulated period of 12 months under DPP13 and 6 months under DPP16 after grant of AON.

With the Ministry of Defence (MoD) still busy clearing backlog of older AON cases, when nomination of Govt owned companies was the order of the day, traction on major orders on Private Sector companies is still awaited. They seem to be getting mired under repeated decision cycles while conclusion of contracts has been visible in favour of foreign original equipment manufacturers (FOEMs) and the defence public sector undertakings (DPSUs). There is also inability to consume budget provision leading to return of funds rather than them being used to conclude Private Sector contracts.

The pace of decision making nearly adds a clear year between contract conclusion and award of contract. This only adds cost at the hands of the contractor due to inflationary trends. This calls for process reforms. One way to accelerate is to provide inflation indexation beyond a reasonable time of say three to four months so that everyone in the decision chain will rush to save on indexation costs, lest being pointed out in audit.

Make” Programs including the ones for which Development Agencies (DAs) have been shortlisted couple of years back are still to get into development phase as Prototype Supply Orders (PSO) are yet to be awarded.

Technologies get into obsolescence with the passage of time (delays), with cascading effect on specification and cost changes, calling for repeated investments by the DA’s at their own cost to stay relevant in absence of PSO. The delay in decision making is effecting the credibility of Indian industries with OEMs.

Lastly, industry is awaiting finalization of the trust based Strategic Partnership Model as a way forward to contribute to Make-in-India and cut imports in mega platform domains.

Q: So what as per you is the need of the hour?

Ans: One is unable to gulp down why the programs first cleared at CFA level needs to go through multiple financial authorities— first to MoD’s Finance wing and then to the finance ministry for approval before putting it up for CCS (when the MOF reviews and approves the program budget upfront and CFA approvals have been accorded).

Like in efficient enterprises, NVAs in the process need to be weeded out to make the processes simpler & faster.

The Vikek Rae, later Pritam Singh committee mandate was precisely to recommend empowerment to acquisition setup and make it accountable for provisioning the armed forces, enhancing indigenisation, building capabilities in the country and creating Military Industrial Complex in India. Also Gen Shekatkar committee debated on process simplification. As both these reports are under consideration and not yet put up in public domain, one will have to await the outcome of their recommendations accepted by MoD.

There is certainly some change in mind-sets in treating private Industry as part of National endeavour by the MoD, there is still a long way to go to create true trust based relationships.

With the visible shift in categorisation focus over past two years towards indigenous sourcing, MoD’s approach needs to transform to one of partnership with Industry to build indigenous capability– if we are to build self-reliance in Defence and later become trade neutral through exports.

Honourable Raksha Mantri Shri Manohar Parrikar has brought out this intent clearly in DPP-2016 through slew of initiatives. Strategic Partnership will be a watershed in the Indian Acquisition Process by Making in India what we would have necessarily imported. This will accomplish gaining access to state-of-the-art Defence Technologies & creating experience and track record in private sector system integrators (denied to them through the nomination regime of the past) in the country today. From past experience in strategic sectors building mega platforms under this model would also accrue huge savings through indigenous

Q: During the Def Expo 2016 in Goa and recently at Aero India Show in Bengaluru, we saw a series of MoUs being announced between the Indian Industry and foreign companies. Your view on this trend and the relevance of these MoUs?

Ans: The Indian Defence Industry is growing in capabilities and maturing by the day. Thanks to inverting the acquisition focus (Buy Global is least preferred category) by the Government, the message that is going out to the foreign OEMs is that days of gross exports to India across her requirements are over.

In case of defence sector, India is no longer an import focussed nation. With change in our policy focus, we no longer will import complete systems and undertake system engineering and integration indigenously by sourcing what is required to be sourced overseas. Thus the visible change in enhanced focus of the OEMs to get into building relationships with competent Indian players.

Today we are seeing majority of programs being categorised in Buy Indian – IDDM, Buy Indian, Buy & Make or Make categories signalling the intent to acquire indigenously with or without support of foreign technology partners. This shift in policy confers Indian players with an upper hand to choose the right partner rather than be chosen by the foreign players. This grants them ability to just source what is needed from overseas than accept large imports and be forced with lower tier work. For the new gained position to get seriously deeply rooted requires expeditious conclusion of acquisition cases though IDDM and other Indian categories.

Certain class of Defence technologies are strategic by nature. Having invested over decades, sovereign nations would not like to share critical technologies, without commensurate benefits and controls. G2G relationships would still play a decisive role in such cases wherein Make in India would be a prudent step for the Government rather than resort to imports.

Q: While L&T is present across the defence value chain, is there still a requirement of any further backward or forward integration is needed in order to align itself with the forthcoming programs? Quiet a few companies are doing so.

Ans: No player can be efficient and play across all sectors and L&T can’t be an exception.  L&T certainly has clear differentiators and lead in many of them having spent as many as three decades in R&D, partnering with DRDO and in-house R&D in select critical needs of the armed forces from weapon systems to sensors to command and control systems to engineering systems to complete platforms.

We have indigenously developed and built 200 plus systems and you can track it that we have unique breadth in weapon system development – from a Missile to Rocket to Torpedo launchers, engineering systems across Land and Naval segments and so is Naval platforms.

We are today capable of building ‘system of systems’ – say for instance, a submarine, a ship, a complete communication solution; or a FICV and a whole variety of weapon turrets.

While we have a large number of weapon systems and sensors in our portfolio but the “weapon” was the missing link. Our MBDA JV seeks to precisely address that. We are very excited about this special relationship that matured over time to address the Buy Indian (IDDM), Buy Indian and Buy & Make (Indian) segment.

L&T’s long association with DRDO to develop complete systems within the country has led to L&T operating at three levels with ability to realise them through spread across the value chain to address Built to requirement, built to specifications, built to design, as also built to print opportunities in subsystems and systems domains

Multi-Disciplinary Equipment and Systems

Platform Construction & System Integration

Platform level (from design and system level engineering to System-of System level integration) play in Naval (Submarines, Warships) as well as Land (Armoured Vehicles, Tracked Guns etc.) domains.

Our indigenous basket of technologies enables leveraging / customising across segments to ensure increased Indian content not only in the realisation phase but also for the upgrades / through life support.

Q: Your chairman recently mentioned of the gun order for Rs 4600 crore that is expected anytime soon. What other orders are in the pipeline for L&T?

Ans: Besides the Tracked SP Gun, we look forward to orders for couple of orders in the naval segment. We have built unmatched track record in Submarine construction as also in Warships as we began as equipment and systems builders and then matured to system level to grant us role across the Float, Move and Fight segments of Naval platforms.

We expect to see over coming year – year and a half fructification of LPDs, Shallow water ASW corvettes, Large Survey vessels, Diving support vessels and the conventional submarines.

With mega investment we made in Naval Shipbuilding yard on the east coast in addition to the one on west coast, we also looking forward to midlife refits of submarines and warships.

We should also see conclusion of a large military communication order from the Navy as also additional requirements of Pinaka, Akash, military bridging systems, Naval Weapon Systems for latest frigates ordered on MDL / GRSE.  We also keenly look forward to progress on placement of PSOs for prototype development for TCS and BMS Make Programs and their conversion to orders in the long term. We await decision making in yet another Make Programmes (the FICV).

With the current policy directions and implementation in pipeline, we hope to see order inflow of up to Rs. 70-80000 Cr over the next 3-4 years with revenues of 10,000 Cr across Defence segments.

Q: Other than exports to Vietnam of patrol vessels what else is firming up on the export front?

Ans: Defence exports are a part of Military diplomacy and our National Leadership seems to be engaged in making India the emerging regional superpower.

The early signs of providing military aid / export credit financing to friendly nations is now visible. Presently, L&T is pursuing multiple Defence export prospects in SE Asia, in the Middle East, Africa, Bangladesh, Sri Lanka, Myanmar, besides few other friendly nations, based on Government clearances for export of some systems. These, promise to build volumes progressively.

It is noteworthy that MoD under the new leadership is extremely favourable to exports and have instituted processes for expeditious clearances as well as facilitating Defence Exports. Our belief and learning from the export markets is that PPP makes eminent sense for India to target the export opportunities. This would bring together the track record of the DPSUs / OFB and the agility and flexibility of private sector to customise the system engineering to suit the needs of the foreign customer. MoD is very supportive of these initiatives and there is a success story in the making in export through PPP model.

We have successfully completed the turret upgrade for few armoured land platforms in the Philippines as a trial order and look forward to repeat orders.  Another example to quote is the exemplary work we did for Malaysian navy to replace complete Electrical Power Generation and Distribution (PGD) systems and degaussing system on a sunken Naval platform (Survey Ship) to give her a new life. We are currently in process of executing Automated Power Management System and PGD on another naval platform.

Besides, L&T has been offsets partner to few select foreign OEMs from Europe and Israel with a growing export volumes with few significant success stories.

Q: Can you list out your strengths when it comes to meeting up the defence programs of the Government? 

Ans: We have been the oldest and significant partners to pioneering success of ISRO in the space sector starting from early 70’s with the boosters for SLV program. With the modular development strategy followed by ISRO we built the boosters for ASLV and continue to build many subsystems for the PSLV, and GSLV Mk3. This is extremely technology intensive sector with a need for reliability with no room for failure in this single shot systems. It keeps our production engineering and manufacturing teams on the edge of perfection in every delivery all the times and served to constantly upgrade L&T’s manufacturing prowess to create benchmarks only to be broken later date.  This relationship with ISRO has been extremely rewarding mutually as value partners and continues so.  Today we serially produce mid segments for main rocket motor boosters, hydro-test complete main booster assemblies with the only facility of its kind, composite heat shields for payloads, satellite mounting composite deck plates, solar array deployment mechanisms and hinges, etc. for the PSLV.

ISRO is planning to significantly enhance role of partner industries in Launch Segment through Govt-Public-Private model for scaling up Space Launches.

With our unmatched Systems Design and development capability and ability to provide value add from fundamental science and technology stages, we have been trusted by ISRO to design and build Hypersonic Wind Tunnels, a nature of work that would necessarily be denied to India by just a few nations that have this capability. Our indigenously developed facility has not only created global benchmarks in new ways of system engineering and hardware building, but also the cost point at which such facilities are built. The 6 mac facility is operational for couple of years while the 12 mac facility is slated to be dedicated to the nation in coming days.

With expertise and skills in “Space Manufacturing” we have setup Precision Manufacturing & Systems Complex at Coimbatore which is producing missile rocket motors and airframes as also range of other airworthy systems, subassemblies and components. This unit currently is working with foreign OEMS (including MBDA France and UK units) on major subsystems of missiles as also subsystems for reusable launch vehicle program of ISRO, hypersonic technology demonstrator vehicle program of DRDO, as well as engineering and production partner to Team Indus in their enterprising adventure of moon mission. Similarly the advanced composite facility at Vadodara has gained out of ISRO relationship to be development and production partner to DRDL, BrahMos, HAL, ADE and foreign OEMs for composite airframes for missiles, UAVs, Helicopter subassemblies.

Not many are aware that our avionics group at Bengaluru collocated with military communications business group is a development and production partner for various Flight worthy Line Replaceable Units (LRUs) for the LCA besides developing lifesaving systems such as On-board Oxygen Generation Systems for helicopters and fighter aircrafts. Beside the, we have been able to develop Chemical Agent monitors. As Space and Aviation Tier 1 player our Bangalore, Powai and Vadodara units are CEMILAC certified for design and building airborne units, five of our units are ISO 9100 certified and two production units are NADCAP certified.

We have been a partner to DRDO for numerous Programs that also include sub-systems of missiles such as Akash, BrahMos, Astra, and HSTDV to name few.

With our relationship and the ToT we took from ADE, DRDO, we would include MALE and HALE UAVs in our portfolio through opportunities in Make programs and through Industry – Academia – National R&D partnerships.

 

Q: The industry is quiet disappointed on the pace of decision making when it comes to crucial programs like FICV. Your views?

Ans: The FICV program had the distinction of being the first Make program for which EoI was issued in May 2010 to four players after a thorough evaluation by the user over three years. For variety of reasons the same could not reach logical conclusion and was retracted in 2012. After a gap of three years the same was issued to ten Indian players, few not even meeting the norms defined in DPP08, and some six responses, have been received by the user. Thus it is not surprising that having not done appropriate filtration at the stage of issuance of EOIs the evaluation phase if taking more time with added complications due to legal issues wrt to SPVs / Consortiums.

Although as per media reports the evaluation by IPMT seems to have been completed, the MoD is yet to take a final call on shortlisting the two DA’s besides OFB. Longer the delay, more the non-level playing field to private sector DA’s as OFB is anyway shortlisted one and a half year back due to the process followed and being Govt owned department, will anyway get fully funded through R&D budgets without awaiting funding under the Make program. To match, the serious few players from Industry are forced to continue building the FICV solution at their own cost without access to MoD funds.

I believe that FICV unlike other programs that would have very large quantum of indigenous content during production phase and thus its award would be a watershed for Indian Industry to build tierised supply chain. Assuming conservative 80% indigenous content, this program could contribute about 3 lakh crore to Indian GDP over the decade of production. In other words it will singularly generate ~1.5% of the manufacturing GDP with current growth rates. The decision making in FICV is thus crucial to the growth and hence keenly awaited by the Indian Industry.

We are the solo respondent for FICV with completely indigenous solution as we believe in the principles of “Make Program” and thus the imperative to build an indigenously architectured solution over offering a legacy solution leveraging foreign partner’s existing product and modernising the same to evolve an FICV.

One only wishes that had MoD’s processes been robust then, we would have been trial evaluating the FICV today. In a sense it is time lost but not a lost opportunity. I am hopefully that this Make program will be on track soon.

Q: ‎While the government is focusing on the Make in India plan to transform the country into a global manufacturing hub. You think at this pace India will be able to do so in near future.?

Ans: As said earlier things are moving in the right direction however the implementation pace needs to be pushed by the leadership. I believe operationalising a few key Strategic partnerships and getting the three make programs on way will provide the right impetus to this movement. Both along with conclusion of few major Buy IDDM programs will ensure establishing of tierised industry structure, driven by delivery imperative and operational efficiency, in the near term and provide Indian Industry the scale to be globally competitive. This would leverage harnessing

Q: As the head of FICCI defence committee, what are your suggestions to the government on behalf of the Indian defence industry?

Ans: Through a series of reforms in procurement procedures and changes in the policy frame work the Defence sector has completely changed over the past two years. Multiple amendments to DPP 13 followed by Release of DPP 2016 on the eve of DEFEXPO 2016, the intent of the MoD leadership has been made known to make Defence Manufacturing India-centric and put in place “Trust-based” partnership model with Private Industry. These initiatives have spurred life in the fledgling Indian Defence Industry in the Private sector.

To put things in perspective, I believe the Indian Defence Industry players have the necessary capabilities in most of the segments which if hand held through trust based model can mature to establish the much needed robust and vibrant Defence Industrial Base in the country. What they lacked all along since opening of the sector in 2001 was opportunities that continued to be denied with focus on Imports and nominations to Defence PSUs. With the market size there has always been a room to create System Integrators in the Private Sector having been partners to DRDO across domains. Harnessing such capabilities and handholding them can transform the Industry, cut dependence and progressively build exports to make the Defence Sector import trade neutral in less than a decade. I want to congratulate Hon Defence Minister and his team for forward looking slew of policy initiatives in the right direction and through inclusive dialog process.

With this the seeds for a strong defence economy have been sown by the new government to concurrently facilitate enhanced participation of the Private Sector as well as nurture and support the Govt owned Sector. Over the last 26 months, AONs have been granted by the MoD for defence programs worth nearly INR ~3 Lakh Cr. With this done, the Industry has the following expectations:

Enhance Defence Budget Allocation: There is a need to strengthen the National security setup that suffered due to the decision paralyses over the past. We have over the same period seen neighbouring countries evolve from being largest importer to a major exporting nation while India swapped positions to become largest importer of national security. Besides the slew of initiatives to source indigenously, a sustained increase in the defence capital budget allocation is imperative and can be enabled with sustained growth in GDP. Although this year’s capital budget allocation has gone up over the revised estimates, the growth is half when compared from FY17 (B) to FY18 (B) provisions.

Promote Exports: Besides institutionalised export promotion, there is need to extend Defence specific allocation in Line of Credit to friendly nations to boost export of Indian designed and developed defence systems.

Incentives for R&D in Industry: With Defence being at the core of Make in India initiatives, Industry expects that targeted R&D in Defence sector be incentivised on a long-term basis. This may be done by enhanced weighted tax deduction under Corporate Taxation rules. This has become even more important as the general purpose R&D incentives have been halved and the same are planned to be completely phased out by GoI by 2020.

Categorise more Programs under Buy (I-IDDM) & Make: As indicated in the DPP 2016, Industry expects MoD to announce more programs under Buy (I-IDDM), & Make categories as these will promote Indian IP to sustain the indigenisation in long run. In addition, the MoD can convert Buy & Make contracts, not yet delivered by FOEMs, under Make-in-India initiative by encouraging FOEMs to undertake system integration in the country by Indian partner. This would facilitate Indian Industries develop necessary skills and enable them provide through-life support with cost efficiency.

Anupama Airy

Anupama Airy

Founder & Editor
DefenceAviationPost.com

Independent Journalist and Energy Expert.​ (Worked with leading mainline financial and national daily for 23 years.​)​ Also, Guest Contributor with busines​sinsider.in.

Currently, Writing books for Penguin India The author can be reached on anupama.airy@gmail.com (9810661825)​
Anupama Airy

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