BUDGET AFTERMATH : LESS CAN BE MORE
Introduction
1. Now that the budget for Financial Year 2005-06
has been declared by the FM, dissected and discussed by the experts under the
limelight of the media, chewed and
digested by the public, it is time to get to work for the finance whiz-kids of
each ministry and department to assess their respective gains or losses. The
Ministry of Defence (MoD) is no exception. With the allocation for each Service
being finalised, it is now upto the Services to individually plan the
expenditure for the fiscal year 2005-06.
2. The Defence allocation has been increased
from Rs 77,000 Cr in 2004-05 to Rs 83,000 Cr, an increase of Rs 6,000 Cr or 7.79
%. The increase, though welcome, is probably not as much as desired by the
Armed Forces for their modernisation programme. Over the past few years, the
allocation has not been enough for the modernisation programme to gather worthwhile
momentum, as sought by the Services.
3. Modernisation is an important facet of
military planning, be it in the Army, Navy or Air Force. In a developing
country as ours, there are many other competing sectors that vie for a large
portion of the fiscal pie, some due to political compulsions while others to
maintain the economy. If the Armed Forces do not get the required share, how
best can they cope with such a situation created by budgetary constraints? It
would be the endeavour of this paper to examine some proposals for creating
finances that could be utilised for the modernisation programme of the Armed
Forces. Being a “man of blue”, it is but natural that the tilt would be towards
the Air Force.
Methods of Financing
4. As budget deficits soar all over the
world, leading to non-availability of precious resources for modernisation of
the armed forces, some countries are resorting to innovative methods to raise
the required funds for military hardware that is becoming more
technology-intensive with high costs, than what it was a few years ago.
Countries in Europe , for some years now, are
trying to bring together resources through private financing initiative (PFI), albeit
on a small scale. The trend seems to be catching on with banks and defence
manufacturing consortiums also pitching in, offering lease agreements to ensure
the sale of their equipment. Bankers view the defence and security sectors
purely as profitable business propositions with opportunities of public-private
cooperation.
5. United
Kingdom Britain ’s MoD has signed as many as
50 contracts in the last 10 years, ranging from providing water and wastewater
services to military satellite communications.
6. Germany Austria Germany , an important member of the
EU, is also known to want to adopt PFI methods to meet its military needs. The
German Government has announced a 488 million euro contract with a consortium,
for simulator training for NH90 helicopters. Austria is also seeking ways to get
money to buy military hardware and is planning a three pronged approach. First,
it is looking at ways to shrink operational costs through down-sizing its Army.
Second, it wants to privatise no-longer needed and less-used facilities and
lastly, the Ministry of Defence is seeking an appropriate and fixed part of the
GDP.
7. France France ,
in its first case of public-private partnership, is pursuing a 70 million euro
deal for a helicopter training school after its efforts to purchase a warship
through a bank-loan was not accepted by the Finance Ministry. If sanctioned, it
could serve as a precedent for many more such cases in France . Through
such innovative methods to garner resources, France hopes to budget a six-year programme
for the modernisation of its forces. While the Finance Ministry does not want
to cede budgetary control to the Defence Ministry, for obvious reasons, it is
examining the PFI proposals of the Defence Ministry. Apart from helicopter
training, the French Defence Ministry is also looking at other projects with
the same aim in mind, such as, transfer of Army sports school, purchase of
flight hours at the fighter pilot’s training centre and simulators.
Can India
8. The allocation for defence in India has
generally been pegged at 2.5% of the GDP. The availability of funds for each
Service for the respective modernisation programme is, therefore, restricted, with
the bulk of the expenditure diverted towards maintenance of the human resources
and machines, and payments towards ongoing contracts.
9. The expenditure on defence in China and Pakistan is far
higher than in India .
This, however, is at the cost of building the social infrastructure, which is
not the case in our country.
10. With a limited amount available for the
much-needed modernisation programme, there is, therefore, a necessity to look
at alternates for generating funds in the Armed Forces. This cannot be decided
uni-laterally and needs to be analysed with the models available in the world. The
implications against the advantages have to be debated, as the issue involves
national security. Some of the areas that can be studied are discussed in the
following paragraphs.
11. Among the assets that can be financed
through private means are the training schools, construction and maintenance of
buildings, managing of common-user vehicle fleets and the Messes.
(a) A helicopter flying training school can be
run by a private enterprise. A
training institution is being run by the IAF with HAL manufactured Cheetah and
Chetak helicopters. The helicopters for training in the private school would be
owned by a contractor or a bank. The contractor could be tasked to ensure the
availability of aircraft for flying, with severe penalties for any breach of
contract. The operational aircraft of the Air Force, being used in the training
institution, could then be released for use in the field. Similar arrangements
can be made for training on jets (HJT-16) and the basic trainer (HPT-32). Training
pattern would be as per the Service requirement and can be made out for Army,
Navy and the Coast Guard. With a beginning having been made by the acquisition
of helicopters by the Border Security Force, a para-military force, training
can be extended to pilots for such organisations also. The training package could
also include simulator training and ground training. In a reverse scenario, the
Air Force is already using a civil training facility at Hyderabad , run by another government agency,
for simulator training of its pilots on the B-737 aircraft. The Navy had
outsourced helicopter training for its pilots but was soon discontinued as the
quality of pilots passing out was not as per the required standards.
(b) The Armed Forces have already started utilising
the services of private companies, in place of the Military Engineering Service
(MES), for the construction of accommodation for its personnel. This could be
further extended to maintenance of the buildings and construction of office
accommodation and maybe even aircraft hangars. In a manner of speaking, this is
being done through tendering by the MES, but, at times, the quality suffers.
(c) On similar lines, the test and repair
facilities available at Base Repair Depots of the Air Force and Station
Workshops of the Army could be leased to private contractors for maintenance of
aircraft and other equipment. Once again, the advantage of making available a
large pool of trained manpower for operational tasks cannot be over-emphasised.
(d) Another asset of the Armed Forces that can
be handled by the private sector is the large fleet of common user vehicles.
The entire fleet of a Service can be sold to a contractor, who can then act as
a fleet-manager. This would release a large chunk of trained manpower for
maintenance of specialist vehicles of missile and aircraft systems.
(e) Management of the messes can also be
outsourced to private vendors. The vendor can be chosen as per credentials and
not necessarily as per the remuneration offered. The Air Force can start on an
experimental basis as it has only static units as compared to Army and Navy.
Conclusion
12. Handing over assets to a private sector
vendor or accepting a service offered by one, would have associated advantages
in releasing equipment and manpower for use in operational units. The financial gain of leasing assets for the
use by the contractor could offset expenditure in other areas, thus making
available funds for much needed purchases. The cons would have to be studied in
detail before deciding the nature of involvement of the private sector in PFI.
Bankers and the private sector see the defence and security sector as a
business opportunity. Would we, however, compromise security if such a line of
action is followed – or is it an opportunity for the Armed Forces that cannot
be missed?
13. A pilot project can be selected that can
then be progressed using PFI. Each subsequent case would have to be decided on
the individual merits of the case, but a beginning definitely needs to be made
if the Armed Forces have to modernise their inventory without depending much on
public money.
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