Defense offsets in India

In a recent conversation I was introduced to Defense offsets in India when I met a person who was organizing a conference on the subject. Within 15 minutes I made a suggestion based on a number of reasons that I - who knew nothing about defense offsets - believed were wrong with Defense Offsets and needed to be fixed.

Defense Offsets require all firms bidding for Indian Defense contracts to either source a certain percentage (30%) of the product from manufacturers in India and/or set aside a certain amount of money to make a investment of not more than 26% share of an Indian firm. The expected Defense Offset through 2020 is considered to be up to USD 30 billion!

Broadly speaking my view was that with its Defense Procurement policy, the government is back to its “Be Indian, Buy Indian” stance albeit with the major difference that they are trying to encourage private enterprise. Their fundamental notion itself can be questioned since we all know where the “be Indian / Buy Indian” stance took us. I should also add that the planned conference is to discuss how the policy can be improved.

Opinions I shared (questions I asked) within minutes of hearing about Defense Offsets (and one I did not) were as follows.

1)      What I did not say, but feel, is that in stipulating the offset, there is a good chance that the contracts will be priced somewhere between a 100 and a 130 rupees. Rather than question the practice, my interest is to see if the practice can be made more palatable to all sides. Opinions I did state were as follows (there may be mechanisms built into the Defense process that address the concerns – I do not know).

2)      Stipulating certain sectors narrows the choice. Further, within those sectors there may only be limited opportunities that are attractive.

3)      Those limited investment targets are likely to know their position and use it to their advantage given the acquirer’s choices are limited.

4)      It is not inconceivable that target firms may also try to influence the selection process to increase the chances of receiving equity funding.

5)      It is possible that the Defense Department makes a choice of supplier because they agree with that particular bidder’s  investment choice.

6)      The government is using its buyer power to force FDI to occur – and does not get any benefit (other than hopefully the best product their money can buy!). The benefit goes directly to the private enterprise. A good thing with the above caveat that only select sectors get the benefit.

7)      The bidding firms presumably do not have the wherewithal to evaluate all opportunities in all sectors.

The next morning I read up about defense offsets. What struck me forcefully is that many of the negatives I had raised turn out to be the very points being made against the program. How is it that a person with average intelligence can so quickly see so many negatives and the people who run the program cannot?

While the solution I proposed did not appear to have been suggested earlier (cannot be sure since my internet search was just for a couple of hours) it does seem to address the concerns raised by others. This is not to say that the suggestion is palatable – just different to the ones that essentially call for a lifting or broadening of the range of FDI (foreign direct investment) equity ownership. Some concerns I had raised have tried to be mitigated by the Defense Dept broadening the scope of offsets (increases the investment choice) to include internal security and civil aerospace and training.

It also appears to me that there a whole range of interests arrayed for and against – a lot of vested interests that stand to gain from policies being maintained and those on the other side.

Insofar as the increased efficiency of the related value chain, attempts have been made: a few clusters already exist; there are groups whose stated interest is to foster innovation and commercialization of technology etc.; and there are think tanks set up (at least one of) whose major interests is to look at issues related to Defense Finance and Defense Budgeting.

In my limited search I could find no mention of studies or suggestions regarding the improved financing of the firms in the above noted value chain. 

Part of my goals once I have a better grasp and better network is to apply my mind to such work. The basic notion here is to use a pool of capital that is hidden in plain sight and to leverage capital for greater effect. The two areas we ought to study and find solutions in are: the financial efficiency of the Defense procurement value chain and the creation of a pool of investment capital sourced from Defense Offsets but investible in any type of industry that FDI is currently allowed in. It would be split into a defined number of smaller pools and each would be managed by experienced investors and cover specific groups of industries. 

Advantages of I can think of (of creating an investment pool) are as follows.

1)      If bidders had a specific target investment in mind they could still pursue that – all that would have done is outsource the due diligence

2)      It opens up the opportunity to all sectors and leverages the available capital in the sense that the funds are now more likely to be directed to the best opportunities.

3)      The bidders do not have the hassle of negotiating the stake, accounting for it, managing the relationship etc. They could simply state the sector they want to be invested in or leave it open.

4)      In return for their role in sourcing capital for the funds they can charge say half a percent (USD 150 MM over 8 years) and use the proceeds to encourage technology commercialization, R&D etc. (though not through the same stodgy mechanisms/vehicles that have proven they do not work).

Needless to say framing the intermediary role and appointment criteria will be key. 

I look forward to your views and suggestions.

With my best wishes, Vishnu.

Driving Enterprise Growth Part 3

I have received more private comments on the notion that changing road use behavior can lead to changed attitudes that translate to better behavior in general and better work place behavior. Behavior, I feel, is necessary if we want to make quality products and provide world class service. Behavior, I think, that is necessary for us to have pride in our handiwork and a belief that we can make our future bright. The past, however glorious, (this is not heritage I am talking of, which is also important - but rather a finger pointed at our habit of extolling past achievements that we do not truly value but only speak of) is past. We can no longer depend on that. We must make our future.

A key thread in those comments I received is that; for good behavior there must be an expectation and a threat. This is logical since as a friend pointed out, the same person that for example, drives badly behaves better in the work place. Reason is that he/she is expected to and knows that there will be consequences of considerable magnitude.
Whilst this is correct, it cannot explain the poor work attitude that is commonplace (think not only of the starched shirt that relies on sycophancy to get ahead; but also of the carpenter who leaves a mess because cleaning up is not his job; and everything in between). In most firms it should be possible to reinforce and flood peoples minds with what is expected. This seems to work better if the leadership practices what it preaches. Also, as pointed out by a person that handles training in the work place, changed behavior lasts longer if it is properly introduced and reinforced early in the career.


So should the argument be turned on its head - reinforce better practices at work and expect them to become better road users? Perhaps, and I would like to hear your views.

For one, the solutions that can address better road use are deeper (should address more than what a company addresses). Two, they can be broader (in terms of range of people impacted - unemployed and employed). Three, they are more universal (they are transferable across job and "extra-curricular" functions and processes).

As an aside, this seems to work well even before a career starts. Get school kids to pick up rubbish as a mandatory course requirement and they are unlikely to throw their rubbish around. This experiment was tried in a small way at the University of Hyderabad and seems to work. One solution therefore is a mandatory course on good use of roads that is taught in every grade from kindergarten to the end of school with the course covering every aspect of road use - from behavior specifics to attitude to the environment and most importantly why each aspect is so important and it should include practical work as well.

This in turn raises a new argument. Should we simply focus most of the effort on school children and those that have not been able to go to school but are at the age where they use roads? Perhaps.

There is yet another argument. This has to do with my view that people in cities behave more badly than people in villages because in a city (or any crowded environment) one has to compete for resources (from bus seats to movie tickets to pavements and jobs). So if we were to provide more resources would the behavior change. For example, if we had more and better busses and roads?

An academic suggested that the problem may be because we are a collectivistic society. If I understood him right, we are expected to be responsible for not just ourselves but our families, servants etc. This could make us more aggressive in our behavior especially when it comes to "being first" for resources - be those resources movie tickets or blood banks!

For this theory, while one cannot ask people to not look after the people they are responsible for, over time we could make it easier for people to not HAVE to look after all those people. If they WANT to, fine.

My learning from the above is what I had suspected at first. There is no one solution. We should identify as many reasons / arguments as possible and then craft solutions for each. They need not be coordinated but they must be wide and sustained. Flood and flood repeatedly. There must however be only one objective: of getting us to naturally take pride in what we do and how we do it.

Look forward to your ideas. Am glad more folks are reading this and would be most appreciative if you got the message out and the comments in.

My best wishes to all, Vishnu.

Driving Enterprise Growth Part 2

Wonder if Sunil's point (see message from him to the Part 1 post) was the same as (similar to) the one made by Gurcharan Das in his book India Unbound. I qiote from the bottom of page 312.

"The answer (to the question as to why there is no appetite for education reform in India) may well lie in the liberal fallacy - that is, the naive assumption that reasoning will prevail over interests."

Mr. Das goes on to point out that the opposite often happens and that the road to power is through satisfying interests.

If so, I definitely do not disagree. This point is actually at the very heart of my suggestion. That the value of behaviour modification via better road sense is to our economy and employability (if there is such a word). It is meant to address the interests of employers and employees.

My sister in Canada who seems to hesitate about posting her views on the internet, realized this when she suggested that I go to a couple of large Corporates and get them interested in the idea.

Let us all build the argument and the methods.

Look forward to your opinions and views.

Vishnu.

Testimony of Kauffman Foundation Senior Scholar before the U.S. Subcommittee on Technology and Innovation

http://www.kauffman.org/newsroom/testimony-of-brink-lindsey-before-the-subcommittee-on-technology-and-innovation-house-committee-on-science-space-and-technology.aspx

While this has to do with the U.S., and while Entrepreneurship has been growing in India, the solutions presented by Brian Lindsey would not be out of place in India. India has in my opinion, benefited from a latency (pent up demand for entrepreneurship caused by regulation) that has encouraged entrepreneurs despite obstacles thrown at them. If this latency is viewed as sufficiency of reform, that would be complacency and lead to a situation that the U.S. is in now.

Vishnu.