Public Private Partnership: A Model for Army’s Base Workshops

Summary: While there may be some merit in the arguments put forth by those resisting the Government Owned Contractor Operated (GOCO) model for army’s base workshops, their concerns can be accommodated through a rightly structured bid under the Public Private Partnership (PPP) model. It is unfortunate that the term PPP is frequently used without understanding the distinction between PPP and the conventional contracts. PPP is not intended at compromising any services. PPP projects in the defence sector typically are designed to overcome the challenges of fiscal constraints, life-cycle costs, and manpower rationalisation. 

Former Defence Minister Late Shri Manohar Parrikar had constituted a Committee of Experts (CoE) under the Chairmanship of Lt. Gen. D.B. Shekatkar (Retd.) on May 2016 to recommend measures to enhance combat capability and rebalance defence expenditure of the armed forces.1 The Shekatkar Committee submitted its report in December 2016.

There are eight Army Base Workshops (ABWs).  Seven of these ABWs are responsible for repair and overhaul of equipment/weapons, while one workshop has been tasked with the responsibility of indigenisation and manufacture of spares.  The functioning of these ABWs was commented upon in the Comptroller and Auditor General’s (C&AG) reports.2 The findings of these reports had brought to light the issues of determination of workshop capacities with reference to manpower, non-exploitation of available capacities, under performance in achieving overhaul targets, delays in overhaul, idling of manpower and backlog in overhaul of fighting equipment. The first phase of reforms was approved by the government on August 30, 2017 for implementation in a phased manner.3 It was to be completed by December 31, 2019.

In the context of the Army, the Ministry of Defence (MoD) had approved 65 out of the total 99 recommendations made by the Shekatkar Committee for implementation.4 One of the  approved recommendations taken up for implementation  involved the “Restructuring of repair echelons in the Army to include Base Workshops, Advance Base Workshops and Static/Station Workshops in the field Army.”5 Press reports of the time suggested that Government Owned Contractor Operated (GOCO) Model was adopted  and  four of these were to be transferred  under Phase I and  completed by April 2019.  The remaining four under Phase II were to be transferred by December 2019.6 The Army engaged PricewaterhouseCoopers Pvt. Ltd. (PwC) in January 2020 to assist in evaluating the GOCO model.7 It was also mandated to hold conferences/consultations with interested industry participants.  While the speed at which the committee worked, and the recommendations  processed by MoD and approved by the Cabinet Committee on Security (CCS) for implementation was  impressive, what has come as a dampener is a recent news report published  in The Economic Times (ET) suggesting resistance in the Army to this proposal.8

The major reasons cited for Army’s reluctance are:

• It can increase the cost.
• Private companies in India do not have the necessary skills to implement this work.
• The model will deplete the army’s capabilities built over the years to overhaul equipment.

While there may be some merit in the arguments put forth by those resisting the GOCO model, yet their concerns can always be accommodated through a rightly structured bid under the Public Private Partnership (PPP) model. It is indeed unfortunate that the term PPP is frequently used without understanding the distinction between PPP and the conventional contracts with private entities involving work being presently performed by government employees.

At the outset, a clear understanding of PPP is required. The PPP Guide for Practitioners issued by Department of Economic Affairs of the Ministry of Finance states:

“A PPP means an arrangement between Government or statutory entity or Government owned entity on one side and a private sector entity on the other, for the provision of public assets and/or related services for public benefit, through investments being made by and/or management undertaken by the private sector entity for a specified period of time, where there is a substantial risk sharing with the private sector and the private sector receives performance linked payments that conform (or are benchmarked) to specified, pre-determined and measurable performance standards.”9 

In the context of army base workshops, PPP subsumes all the objectives of the service that was being provided earlier and will continue to be provided.  It is not intended to compromise any of these services.  Notably, three unique features distinguish PPP from direct provision of services by a GOCO model:

• A partnership based on well-articulated ‘contract’.
• A long-term relationship between the Army and private sector entity.
• Flexibility and responsiveness in decision-making.

In principle, it is argued that PPP leads to improvement in both ‘efficiency’ and ‘effectiveness’ in service delivery. PPP projects in the defence sector typically are designed to overcome the following challenges:

Fiscal Constraints: The appetite for resources in the defence sector is huge.  However, it has to compete with other pressing needs of the government. There is also the need to acquire capabilities at the earliest and maintain a level of preparedness to meet security threats.  Therefore, in times of fiscal constraints, PPP enables the creation of capabilities by leveraging the ability of private sector to raise resources and pay for them over the course of several years.

Manage Life Cycle Costs: Most countries have realised that life cycle costs in defence are like a glacier floating in water. The visible portion of the glacier above the surface, which is about 25 to 30 per cent, represents the acquisition costs, while the submerged glacier, of about 70 to 75 per cent, represents the remaining elements of life cycle costs. A classic PPP model contract comprises the entire length of project life with the bidders quoting for payments over the usage period after which the assets belong to the government. This represents the life cycle costs in the most appropriate way.

Reduce Pressure on Military Personnel and Manpower Rationalisation

Manpower costs in defence forces in all major countries account for a substantial portion of the budget. One of the most widely used strategies in controlling defence expenditure   involves restricting the usage of organic combatant manpower for core combat roles and obtaining the support services through private industry.

The PPP model of long term measurable quantified output specifications, along with payments based on minimum assured demand with elasticity for additional demand-based payments, are best suited to meet the defence services support commitments. The Army’s net revenue Budget Estimates (BE) for 2020-21 – after reducing Ex-Servicemen Contributory Health Scheme (ECHS), Military Farms, Directorate General of Quality Assurance (DGQA), National Cadet Corps (NCC) and Rashtriya Rifles – is Rs. 133.08 lakh crores.  In this, 77 per cent is allocated for Pay & Allowances.

In case of the Navy (net of Joint Staff) and the Air Force, the share of Pay & Allowances in the revenue budget for 2020-21 is 54 per cent and 60 per cent respectively.10 Hence, all three services need to seriously examine the PPP option.

The ET report highlights growing privatisation as the cause for the Army’s resistance.  In this context, the differences between PPP and privatisation should help assuage these reservations.

PPP and Privatisation

The key difference between PPP and privatisation may be summarised as follows:

• Responsibility:Under private sector projects,the responsibility for delivery and funding a particular project/service rests with the private sector. PPP, on the other hand, will involve full retention of responsibility by the Corps of Electrical Mechanical Engineers (EME), in the case of base workshops,for providing service to the dependent formations.
• Ownership:While the ownership rights under private sector projects lie with the private sector along with associated benefits and costs, PPP will continue to retain the legal ownership of assets by the government. However, the specific rights for a specified period may be assigned to the concessionaire.
• Nature of Service:While the private provider determines the nature and scope of service under private sector projects, under PPP, the nature and scope of service is specified in the concession agreement with payments being linked to the performance.
• Risk and Reward:Under private sector projects, all the risks inherent in the business rest with the private sector. Under PPP, risks (by way of assuring the minimum annual task) and rewards areshared between the government and the private sector (the contract may allow the concessionaire to augment the existing infrastructure in the ABWs and use the facility for tasks other than the army’s).
• Output Standards Based Contracts: PPP contracts specify output standards and linking the payments to achievement of performance linked standards.

A PPP contract is anchored in a revenue model as defined in the bid document and subsequently included as part of the contract. In the case of defence-related contracts, the revenue model for the concessionaire will depend on whether or not the concession agreement provides for a revenue stream (see figure 1 below).

Figure 1: Revenue Models for Defence PPP Contracts

Source: Author’s suggested model.

The PPP model, thus, helps in improving the productivity and exploiting the full potential of asset-based services that base workshops provide. This is particularly relevant when there exists a competitive market and a benchmark for the army between an in-house and an external solution. 

Three major reasons have been quoted in the cited ET report for resistance to the proposal:

1. Increase in Cost: It is true that two elements of cost will get added. These include:  
 

• Insurance Premium: Government property is not insured while in its custody. However, Rule 225 (xii) (a) of the General Financial Rules (GFR) 2017 specifies that, “specific provision for safeguarding government property (including insurance cover)” is to be made. The concessionaire would not only take insurance cover for the assets of the facility but also for the work in progress and flight and ground risk insurance for maintenance, repair and overhaul (MRO) of aircraft. This is presently being carried out by the Hindustan Aeronautics Limited (HAL) for the repair and overhaul work of the three services.
• Profit: Profit is the primary motive of any business. The profit margin is proportionate to the risk, moderated by competition.

These costs are more than offset by improved efficiency, prompt delivery, and a higher level of serviceability and availability.  Crucially, it also entails a higher savings on account of the hitherto used organic manpower costs. As a result, the total cost to the Army will substantially reduce.

2. Private Companies in India Do Not Have the Skills to Carry Out This Work: The private sector in India maintains common user vehicles in millions as well as complex and specialist machines and platforms, besides manufacturing them.  The Delhi and Mumbai airport projects can be key case studies. Before the advent of privatisation of airports in India, none of the Indian private companies had any experience of running an airport. GMR and GVK, the two concessionaires of the Delhi and Mumbai airports respectively, were until then merely infrastructure companies. Notably, the responsibility for two of India’s biggest airports changed hands from Airport Authority of India (AAI) to the concessionaire without any impact on the services. The transformational change in these two airports in terms of continuity of round the clock operations make them relevant examples.

Today, ABWs are required to continue to provide service to the formation.  Any change over, therefore, needs to be seamless.

Figure 2: Airport Authority of India's (AAI) Lease Revenue (Rs. in crores)

Source: AAI annual reports for the respective years.

Notably, AAI’s cost has also substantially come down, as they are now restricted to providing air traffic control and metrological services.

3. The Model Will Deplete Army’s Capabilities:  The manpower rationalisation issue has been discussed earlier. The focus needs to be on restricting the use of organic combatant manpower for core combat roles.  There is no gainsaying the fact that exposure to technicians at the 3rd & 4th line servicing (major repairs and overhaul) enhances their confidence in diagnosing and troubleshooting issues at the 1st and 2nd line stage (operational and inspection level in the field). The concession agreement can provide for a specified number of combatant tradesmen from EME, who are qualified on specific types of equipment, to be posted for shorter tenures. This is likely to be mutually beneficial since they can explain to the concessionaire technicians the issues faced during exploitation at the field level.  They can also learn the depth of work involved and likely pass on the skills to their colleagues when they go back to the field units.

A key issue, though not listed in the ET report, is the future of existing employees. As seen in the recent past, 80,000 employees of the OFB had gone on strike in August 2019.  They re-joined only after the government assured them that “the matter regarding corporatisation of OFB is under examination and that no final decision has been taken by the government in this regard.”11

What Happens to the Existing Employees?

A mix of combatants and civilian government employees man ABWs. A major concern in transferring an existing on-going facility to a PPP entity is of ensuring obligation on the concessionaire to meet the existing commitments that the erstwhile organic government entity had towards the government and other stakeholders. Complex as they may be, these can be adequately addressed in the concession agreement.  More importantly, the job security of employees needs to be addressed. The model used for the Delhi Airport can be customised for defence organic facilities that will be farmed out to PPP entities. The bid document usually has a minimum threshold prescribed for absorbing existing manpower.   Weightage is given to the bidder who has quoted beyond the threshold with an option to both sides to take a call after three years.

Defence PPP - International Experience

Farming out ABWs to a PPP contract, if implemented, will be a first for the Indian defence services. The experience of other countries such as Australia, France, Germany, Japan, South Korea and the United Kingdom (UK) can address India’s apprehensions. These countries have harnessed PPP (called PFI in the UK) in defence, ranging from infrastructure creation to upgradation and maintenance, ICT, satellite communication, simulators, MRO, training, the Future Strategic Tanker Aircraft (FSTA) contract of the Royal Air Force, and helicopter, fighter jets and weapons systems training programmes for French armed forces. The uniqueness about FSTA of the RAF and the two French contracts for pilot training is that the concessionaires are responsible for the aircrafts, simulators, and maintenance. The concessionaires have been handed over the entire existing infrastructure. They are responsible for upgradation and creation of additional facilities with a view to provide the contracted output. Notably, the concessionaires are responsible to provide a defined number of aircraft every morning. Only the operating crew of FSTA, when preforming RAF task, is from the RAF. Similarly, only the pilot instructors of the French training contracts are French defence personnel. The payment to the concessionaire is based on ‘per hour of flying’. The contract also provides for minimum guaranteed usage with a provision to use additional hours over the minimum assured hours.

Potential of PPP in Defence

Given the robust prevailing appetite to fill capability gaps and overcome budgetary constraints, there exists great potential to harness PPP in the following segments of India’s defence sector:

• Infrastructure
• Married accommodation
• Bachelors accommodation
• Dry docks/floating docks
• Maintenance services of existing infrastructure
• In-service training
• Simulators - both operations and maintenance
• Performance based logistics
• Base workshops/depots/dockyards/base repair depots of IAF
• Utilisation of infrastructure and spare capacity of workshops/depots and DRDO facilities.
• Third and fourth line maintenance services
• Optimum utilisation of testing/specialist facilities, quality assurance, etc.
• Provision of vehicles for logistics and heavy-duty equipment like cranes/JCBs12, etc.
• Provision of aircraft for training - common for all services including the Coast Guard and the Border Security Force.

The Ecosystem

The central and a few state governments in India have embarked on an ambitious programme of developing infrastructure through PPPs.13 As a result, India now has the largest number of PPP projects amongst all emerging market countries. It has been observed that PPP is the preferred model for several road, airport, port, power generation and distribution projects. The central government has developed procedures and bidding documents which seek to achieve the twin objectives of transparency and robust competitive bidding for PPP projects.

As the number of PPP projects have expanded, there have been unexpected problems in the course of their implementation. These issues have been primarily related to the “revenue model”.

In case of defence PPP projects, the revenue model is likely to be either ‘annuity based’ or ‘pay as you use with guaranteed minimum usage’.  It is also likely to allow commercial exploitation in order to optimally utilise the infrastructure/facility wherever possible. Since these revenue models are based on payments by the government, they are insulated from the problems that some projects in other sectors have faced.

The ecosystem comprising PPP division under the Department of Economic Affairs in the Ministry of Finance, the long-term financial exposure of the Indian banking sector and financial institutions has enabled PPP to emerge as the preferred delivery mechanism in several sectors. To extend it to the defence sector, the MoD can take the following steps:

1. Create a PPP Division in MoD and Service HQs.
2. Provide training to a core group of officers from multiple disciplines (including armed forces personnel and civilians). The PPP division should comprise of officers with domain knowledge of specific areas.  They should also receive PPP training.
3. Prescribe unique special purpose vehicle (SPV) norms for distinct types of PPP projects in defence. Delegate powers to the Defence Public Sector Undertakings (DPSUs) to become SPV partners.
4. Lay down qualitative norms specific for each project for short-listing potential bidders.
5. Pre-qualified consultants, to begin with, may need to be engaged and co-opted in order to prepare Detailed Project Reports (DPRs) and Request For Proposals (RFPs), before in-house capacities become available.
6. Draft Defence Procurement Procedure (DPP) 202014 has a new Leasing Operational Requirements (LOR) category even though draft guidelines are yet to be formalised. PPP subsumes leasing as one of the options.  A robust PPP system exits for various sectors. Instead of leasing only as a category, the PPP can be added as a category.
7. Modify procedures in various regulations, for instance, the DPP and Defence Works Procedure (DWP), among others.
8. MoD’s proposals should be examined by the Department of Economic Affairs and Department of Expenditure in the Ministry of Finance.

Conclusion

Combat manpower is an invaluable national asset. It entails more expenditure, not necessarily due to pay and allowances, which anyway remain comparable with civilian central government employees, but on account of the necessity to provide essential facilities amidst their demanding work environment. Post their early retirement (to keep the fighting force young), they have to be provided a pension for a decent living. One way for rationalisation of combat manpower is to limit their deployment to the core combat roles. This reduction not only curtails the current recurring cost but also moderates the future financial obligation of pension for a fewer people. Defence forces have been pressing for reforms in the DPSUs and OFB as their low productivity puts an additional burden on the scarce defence budget. The experience of previous defence reforms, as conceptualised by defence personnel, receiving a quick cabinet approval, highlights the necessity of a Services led initiative at reforming India’s defence.

Views expressed are of the author and do not necessarily reflect the views of the Manohar Parrikar IDSA or of the Government of India.

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