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Pakistan could create a company for defence exports
April 24, 2017
Aircraft Manufacturing Factory at Pakistan Aeronautical Complex (PAC). Photo credit: PAC.

Pakistan could create a company for defence exports

Speaking to the National Assembly’s Standing Committee on Defence, Rana Tanveer Hussain, Pakistan’s Minister of Defence Production (MoDP) recommended that the country establish a company committed to driving defence exports.

The recommendation was made in light of the fact that Pakistani defence exports have grown by 35% in the past three years. In order to capitalize on recent successes, such as the Super Mushshak sales to Qatar and Nigeria, and to cultivate new high-value opportunities, the standing committee offered a number of suggestions. For example, Shehryar Afridi proposed that each of Pakistan’s state owned enterprises, e.g. the Pakistan Aeronautical Complex (PAC) and Heavy Industries Taxila (HIT), set up business units dedicated to generating commercial activity.

Hussain also urged that investment be made on cultivating nascent arms industries in areas such as Darra Adam Khel, which is a home to many privately owned small-arms makers.

Also briefing the standing committee was Major General Muazzam Ali, the Director General of Military Vehicles Research and Development Establishment (MVRDE). According to Maj. Gen Ali, upwards of 128 different items are currently produced by MVRDE for use by the Pakistan Army, Navy and Air Force. With MVRDE’s work, Pakistan has been able to make substantial gains in domestically sourcing equipment, thus reducing its dependence on foreign suppliers.

Comment and Analysis

The MoDP’s recommendation of setting up a defence export company seems to mirror the model used in Russia via Rosonboronexport. Rosonboronexport is a state owned company responsible for the sale of Russian military equipment; it receives hardware requests, manages negotiations, prepares contracts, and acts to administer transactions It is also an intermediary of sorts between Russian manufacturers, such as United Aircraft Corporation, and prospective buyers.

Some may mistake the Defence Export Promotion Organization (DEPO) as such a company, but DEPO’s work – which is more focused on marketing and outreach – is only one aspect. Rosonboronexport actually manages the full end-to-end process, including post-sale client management. An advantage of such a company is that it would serve as a single channel for prospective and existing customers on all matters related to Pakistan’s defence products. For example, on issues relating to the JF-17 Thunder, the Nigeria could simply contact the export company.

While this does add a layer between the client and the vendor (in this case PAC), it does help in a number of important areas. First, the JF-17 is not just a product of PAC, if the Nigerian Air Force (NAF) wants to use precision-guided munitions, the Pakistani export firm could connect the NAF to Global Industrial Defence Solutions (GIDS), which produces the Range Extension Kit (REK) for Mk-80-series general purpose bombs (GPB). This company can basically act as the means to help vertically integrate customers across Pakistan’s wider defence industry, thus boosting exports.

The second primary advantage is that the administrative and commercial burden on PAC is lightened. In other words, PAC can continue focusing on the engineering and development side, but leave much of the client management work (especially after a contract is signed) to the export company. Yes, PAC would still need to market its specific goods, but if a country is interested, the work to transform interest into a sale could be done by an entity that is equipped for the task. PAC – and by extension the Pakistan Air Force (PAF) – would not need to completely manage negotiations and client relations. Of course, it would still need to have input, but it does not need to be burdened by the legwork. After the sale is implemented, the export agency could then work on trying to generate new opportunities for PAC and other Pakistani firms, potentially private sector players as well.

Rosonboronexport also maintains partnerships with foreign vendors. For example, before the Ukraine crisis, Rosonboronexport worked with Thales in order to acquire TopSight-E helmet mounted display and sight (HMD/S) systems for use on the MiG-35. The Pakistani agency could potentially work with Leonardo (formerly Finmeccanica) to provide subsystems for an export version of the JF-17 for certain markets. It could engage with Denel Dynamics to co-market and co-produce air-to-air and air-to-surface munitions. It may even work with Aselsan to co-market the ASELPOD alongside the JF-17.

Of course, the existence of a Rosonboronexport-like entity does not entirely absolve the likes of PAC and HIT from their commercial due diligence. On this point, Shehryar Afridi’s proposal that each manufacturer maintain a business unit is valid. At the end of the day, trade exhibitions and air shows are attended by the companies looking to attracting customers (getting the contract signed is another job – one for an export company). It is no secret that Pakistan’s defence enterprises need to substantially improve in the area of marketing and engagement, but it is inappropriate to not delegate this job to those with competency in the area. An entity such as PAC would need a team devoted to researching and analyzing other markets, examining competitors, understanding the political and economic realities of other lands, and building marketing plans for prospective customers.

The Pakistani defence industry is at a critical juncture. Not only is there an issue of setting up the industry for overseas success, but there is also the question of enabling the industry to better provide for domestic needs, especially in the coming years. Pakistan Ordnance Factories (POF) was lamenting about its ageing facilities and its inability to secure contracts from the Pakistan’s law enforcement agencies, whilst HIT and Karachi Shipyards and Engineering Works (KSEW) will need to fulfill increasingly complex armed forces requirements in the coming years. While one could discuss arms procurement, it is also important to pay heed to the question of strengthening one’s domestic supply chain, so as to ensure long-term cost savings and strengthen independence.

  • middleway1

    What is to prevent the politicians from running such a company into the ground like they did with PIA?

    • It’s a bad environment all around, so nothing will be 100% protected from corruption. That said, an export agency could essentially just be another armed forces owned company, except one where they hire and use civilians from the business community.

  • SP

    It would be a step in the right direction, but what is really required is for organisations like PAC and HIT to be spun off from the military and to be converted into independent companies run by independent board of directors who have experience in running private sector organisations particularly in the manufacturing sectors, with a small representation from the military on the board as non executive directors. Only then can these entities become sales driven with a focus on quality and innovation. The profits made would then be ploughed back into the business in the form of R&D and better products.

    • middleway1

      Agree. Privatization should focus on selling shares to Pakistani citizens and involving expatriate Pakistani talent for financing as well as technical skills. People with skills should be brought on board with stock options just like they do in the US.

      • Commercial offsets are the way forward. For example, if an HMD/S system is bought from Thales, have Thales set up a subsidiary with a local Pakistani company (e.g. SHIBLI Electronics) to produce the HMD/S in Pakistan.

    • I wouldn’t go for privatization per se, rather, state owned enterprises that are kept at arms length from political machinations. Unlike PIA, I’d say PAC and HIT would at least have the umbrella of the armed forces to shield them from the politicians. If additional barriers need to be put in place by law (e.g. a politician hiring someone to a position at PAC results in the automatic eviction of the politician from his or her post), then so be it.

      That said, the private sector can be driven via offsets from big procurements, e.g. buying MRAPs from Paramount Group in exchange for having Paramount Group raising a subsidiary (jointly owned by local shareholders) in Pakistan.

  • Sami Shahid

    why not ? go for it

  • Syed Bushra

    This is a sign of maturity and something very much needed.

    PAC, HIT, POF, and other state-owned defense enterprises should focus on engineering and industrial processes while legal, communications, sales & marketing can be managed by the new entity. Otherwise, you end up with incoherent sales strategies and redundant sales & marketing staff. Engineers, Pakistani or otherwise, are not good at sales & marketing or communications. Its a different culture altogether.

    On a related note, I hope Pakistan can form a Common Web Platform for all the government agencies and corporations similar to New Zealand (silverstripe.com/what-we-do/public-sector) and Canada.

  • Quraishi

    There is no need for a such a company, this will only create more hurdles, more commissions, and bribes in deals.
    There should be more open market, and companies allowed to directly market and sell their products.
    Just coz Russian or the US does something, doesnt mean we should follow suet.
    Often a manufacturer can deliver to a customers demands, but the middle man causes problems.
    At the moment Pakistan arms quality and quantity are not high, I dont really see any significant justification for this SPV.

    • No one is saying, “because Russia is doing it, we should do it too” – it is very unfair to ignore the real advantages of this model.

      The agency would remove redundancies between each of the many SOEs in the area of client management, i.e. receiving requests, managing negotiations, dealing with financing, etc. In fact, whereas PAC can only manage the JF-17 and the subsystems it produces, it has no direct bearing on munitions or third party goods. The agency can step in and issue those contracts, thus enabling the end-user to just see *one* channel, as opposed to nine or ten. It simplifies the negotiation process, and helps put the end-user at ease by not burdening them with, “well if you need a targeting pod, you will need to talk to ASELSAN or CATIC.” Instead, the agency will come up and say, “the JF-17 can be acquired with REK, ASELPOD, and A-Darter, and here is what each costs, when shall we issue the contracts to PAC, GIDS, Aselsan and Denel?” And not every form of emulation is blind copying, sometimes another’s model or method has value, hence the reason why a certain approach was adopted in the first place.

      And the statement about Pakistani arms quality not being high, this requires verifiable information on the inside and access to said products, how are you able to make such a conclusion?

      • Quraishi

        Reason y Russia needed such a company was because they were coming directly from communistic culture, and had no systems or clue or marketing or doing business in other countries. Which is so different then Pakistan. Various companies should market individually, and can sure have partnerships in various areas as per their need, but forcing local companies to go through a third party doesnt really seems a good model to me.
        For the russians they were moving one step towards open system, for Pakistani companies its opposite, its moving towards more close system.
        PAC will not go as in individual to do the legal work, nor their engineers, they simply have to hire reverent lawyers and human resource.

        Anyhow I guess there was need for the relevant agents to have hired a consulting firm to advice on turing a local industry into its set targets (exports, sales, legal work etc)

        • Rosonboronexport did not emerge to cater to Russia’s transition to free market capitalism, I assure you. The underlying entity was always around, even in the Communist days, because it was good practice to have a central entity award contracts on behalf of clients to the vendors.

          The U.S. does this for Foreign Military Sales too, but through the Department of Defense. Sweden has a Rosonboronexport-like entity known as the Försvarets Materielverk, and the French government convenes on behalf of the French industry.

          A state owned entity like this is there to help vet what can be exported and what should not be sold, this is especially important if you have private sector entities that are not under the command of the armed forces (like PAC or HIT).

          You also did not deal with the specific points I raised about supporting client management and cutting down redundancies in administration, negotiation, finding funding mechanisms (if need be), etc.

          I’ll repeat it again. A state owned export agency is the ideal conduit to push vertical integration – i.e. getting a customer to buy more from the Pakistani defence industry – and it can serve as *one* channel to make it happen. Whether it be JF-17s from PAC, guided bombs from GIDS, or (insh’Allah) other systems from private sector firms, the agency can come up with a packaged contract to the end-user, who then would be responsible for depositing the money necessary for the agency to award contracts to PAC, GIDS, etc.

          The other advantage is having an entity that can maintain relationships with external support vendors like Aselsan and potentially Indra, Leonardo, Denel, etc, to ensure the end-user (1) has clearance to buy the goods, (2) has a price, and (3) can initiate the process with the agency, which will (4) tap into its ties with local and external vendors to get the ball moving.

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