The Real Threat to Pakistan’s National Security – Part 1

Author Profile: Syed Aseem Ul Islam is PhD candidate at the University of Michigan, Ann Arbor, USA, specializing in adaptive and model-predictive flight control systems. He received his bachelor’s degree in aerospace engineering from the Institute of Space Technology, Islamabad, and his master’s degree in flight dynamics and control from the University of Michigan.

Due to being located at the crossroads of three key regions (South Asia, Central Asia, and the Middle East), Pakistan has ‘geostrategic importance.’ However, that ‘importance’ has been both a blessing and a curse for Pakistan. It is no secret that Pakistan resides in a dangerous neighborhood, nor is it a surprise that the country’s defence requirements take priority over other spending needs. These are not unique issues.

Unfortunately, one (of many) side effects of seeing its surroundings as threats is a counterproductive, but at times necessary, paranoia. As a result, Pakistan sees many “threats to national security” – some real, but many imagined. When the ‘imagined’ threats clog the perspectives of decision-makers and the public, the genuine threats – e.g., water insecurity and struggling economy – slip through the cracks. Fortunately, water and the economy are entering the mainstream discourse, but the nation still needs to unearth more genuine threats. This article aims to uncover one more – the decline of Pakistan’s defence R&D capability.

Pakistan’s territorial security is contingent on its ability to maintain both strategic (i.e., nuclear) as well as conventional arms parity with India. Despite being several times smaller in India in terms of its economic output, population, and (not to be ignored) inherited industry base from partition, Pakistan has done quite well thus far through careful planning, conscientious use of limited funding, and force-multiplier systems. However, with India’s now burgeoning economic might and current geostrategic value (as assistance for the United States in containing China), the parity gap between Islamabad and New Delhi is widening.

For Pakistan, some constraints are obvious – e.g., a struggling economy – but others are more to do with the general misuse of existing resources due to legacy processes and a poor understanding of optimal and efficient alternatives. This constraint is glaringly obvious to this familiar with Pakistan’s defence industry. Thus, Pakistan must examine its capabilities and, in turn, chart a future path that would allow it to “loose the fat” and become the leanest it can be so that it can counter India’s growing edge.

Design and Implement a Well-Thought-Out Defence Policy

Firstly, Pakistan’s defence policy needs must gain real buy-in from every relevant stakeholder. Sadly, the policy documents written by the Ministry of Defence Production (MoDP) have no chance of materializing if they lack the support of the armed forces. In Pakistan, the armed forces must be aligned with any new defence policy; otherwise, the defence policy will be dead-on-arrival (DOA).

Pakistan already has the raw ingredients necessary to develop a robust defence industry. It is, for example, a large market for weapon systems, and defence spending takes up large portions of the annual budget. Sadly, a lot of this money ends up leaving the country to sustain foreign weapons purchases where it could – or rather, should – have served as an economic stimulus to support the domestic job market and industry development (especially in technologically intensive areas, such as aerospace).

Basically, a huge portion of Pakistan’s fiscal resources are flowing outside of the country to support jobs and industries in other countries. Moreover, by importing arms, Pakistan ends up ceding leverage to the governments of those foreign arms suppliers and, in turn, compromise the country’s ability to conduct an independent foreign (and, arguably, at times even domestic) policy. This dynamic is a threat to Pakistan’s national security, and Pakistan must work to reverse it as soon as possible.

However, there are reasons why Pakistan continues to rely on foreign suppliers. One reason is a failure of the country’s state-owned enterprises (SOE) in the defence sector. Like their civil counterparts (especially Pakistan International Airlines), the defence sector SOEs also suffer from massive inefficiencies. However, the public rarely hears about these issues due to the veil of secrecy surrounding these organizations. These issues have real impacts on human resource management, which Quwa will cover in later articles.

Thus, the revised defence policy must start offloading the production and sourcing work to the Pakistani private sector. This will allow the armed forces to shed most of the ‘defence industry overhead’ costs (e.g., maintaining facilities and payroll), and retain more cashflow for procurement. If the armed forces commit to buying local, Pakistani investors could help grow the domestic industry and, in turn, generate more jobs and drive new product development to match emerging warfare trends.

Pakistan must pair this ‘physical economy’ development with a program to nurture the ‘knowledge sector’ – i.e., invest in think-tanks. These think-tanks can draw on the expertise of both retired and serving armed forces personnel, private sector industry representatives, scientists and engineers, researchers, and policy experts to chart out Pakistan’s future threat perspectives for the next 10, 20 and 50 years. If endorsed by the country’s defence planners, the industry can align its long-term planning to those goals. This will help ensure that the domestic industry develops products that draw on emerging technologies.

Basically, the armed forces must start using ‘knowledge generation’ as a tool to inform its planning. Think-tanks must evolve into genuine policy incubators, not soundboards to echo the military’s narratives. The country’s decision makers must escape their echo chambers and, instead, learn to continuously take new and outside perspectives. This approach will allow Pakistan to continuously course-correct and maintain a proactive, evolving, and forward-looking disposition.

Curb Over-Reliance on State Owned Enterprises

In terms of its defence industry, Pakistan put its metaphorical eggs in one basket – its defence sector SOEs, and with little-to-no involvement from the private sector. Unfortunately, the SOEs have many issues.

Firstly, the SOEs have no incentive to generate profit. Their only incentive is to carry out the work handed down to them by the government. Unsurprisingly, this dynamic stifles innovation as there is no incentive (for career growth) to carry out such work, nor is it encouraged because the management will only invest in such work if they deem it important to their prime directive.

Secondly, SOEs often become places to park government employees. The government feels that it should provide jobs, and these SOEs are often a good destination, regardless of whether these jobs are productive or not. This behavior leads to massive overstaffing, which one can see in Pakistan International Airlines as well as Pakistan Steel Mills, among other civil SOEs. The defence SOEs are not that different. For example, each of Pakistan’s defence SOEs suffer from large dormant capacity issues. Pakistani taxpayers are funding these SOEs, but these entities are not producing to capacity (and the military is buying from abroad).

To solve this issue, Pakistan can start with the following:

Vertical Dis-Integration

There is a tendency among defence sector SOEs to control each part of the supply chain, i.e., everything from raw materials all the way to the final product. Basically, there is a massive level of vertical integration across these SOEs. This could be due to a gross misunderstanding of “indigenous production” or secrecy.

In any case, the situation results in dormant and unused capacity, the maintenance of which costs Pakistan dearly. For example, Pakistan Aeronautical Complex (PAC) Kamra does not need to dedicate an entire site with its own machines and technicians to manufacture its own screws, nuts, and bolts. This set-up works at 10% the capacity, but it costs more to maintain. There is no reason why PAC could not offload this work to the private sector which can manufacture these products at a lower cost as well as maximize the output to supply to local and overseas buyers (thereby saving and generating foreign currency).

Not only does the SOE take on unnecessary work, but it also nurtures an environment that makes it almost impossible for a private organization to compete. The SOE does not need to make a profit, yet it ends up monopolizing an entire sector the local private sector could readily handle. Not only that, but the people of Pakistan directly end up paying for the SOE’s inefficiency, and still deal with the economic fallout.

Unfortunately, the state-sponsored monopolization is not an accident, but actively pursued by the SOEs. Haroon Javed Qureshi (CEO of East West Infiniti) said in a webinar:

“Effectively, they will try and duplicate your work, and say if you can do this, then why can’t a state-owned R&D organization do it? That is my 35 years of experience: If you can do it, why can’t another state establishment do it?”

On the one hand, intellectual property (IP) is stolen from private sector defence companies, and on the other hand, the private sector is not allowed to expand its work (which the military justifies on the basis of national security). It seems that these are actions of organizations desperately trying to maintain their relevance to justify the huge sums of public money that goes into supporting them. Thus, the government and military leadership must check and discourage this behavior through policy.

These SOEs should offload lower-level tasks and less technologically intensive tasks to the private sector. There is no security risk with these areas and, in turn, the SOEs can focus on the high-level research and complex tasks they were originally created for and paid to do.

Involve the Private Sector

Currently, the private sector’s involvement in the defence industry is trivial. Pakistan must work to ramp-up the private sector’s involvement and grow its share in the supply channel. Whereas a bloated SOE will cost Pakistan its public funds, the robust private sector will pay taxes to Pakistan as well as generate jobs, invest in developing new products, and independently sustain its capacity.

Many of the SOEs have functionally failed in their mandates and are now causing a hemorrhage of funds to sustain their operations. For example, for reasons unknown to the public, Heavy Industries Taxila (HIT) was unable to produce the al-Khalid main battle tank (MBT) at capacity. In turn, the Pakistan Army ordered VT4 MBTs from China at additional cost to the Pakistani state (i.e., on top of the cost of support HIT). Had it been a private enterprise, HIT would either shut down (or sell itself) due to the failure or improve itself internally to ensure it meets the Army’s product and delivery requirements. Unfortunately, as a SOE, those expectations do not exist within HIT, so there is no incentive to course correct. Finally, by ‘solving’ the al-Khalid shortfall by importing VT4s, the Army deflated local investor confidence by rewarding foreign OEMs the contract. This is unacceptable for a country with limited foreign currency and fiscal capacity.

Instead, the Army leadership should have worked with the Ministry of Defence (MoD) and MoDP to pivot from HIT to the domestic private sector. For example, the army could have released a tender to the local industry for 300 new MBTs (e.g., “Haider”) whereby at least 51% of the sourcing and production must be within Pakistan. This tender would have two effects. First, foreign suppliers who are after lucrative Army contracts will have an incentive to set-up shop in Pakistan and, in turn, create jobs for Pakistanis. Second, local investors will recognize the $1.5 billion US opportunity and inject money into the economy to either compete for the contract or enter its supply chain (if a foreign OEM wins it). If the Pakistani industry shows enough efficiency, the OEM could continue buying from Pakistan for third-party orders, thereby adding a residual value to the Pakistani economy that lives after the conclusion of the original contract.

To be clear, “involving the private sector” does not mean throwing $10 billion US on the table and asking a local company to develop a next-generation fighter aircraft (NGFA). Of course, no such company exists within Pakistan. The process of involving the private sector must be gradual, but the state must nurture it through long-term contracts, contract security, and incentives for investors to build capacity and spend in continual R&D. For example, by supplying aerostructures for a PAC-designed drone, a Pakistani company could invest in composites research to control its costs and compete with better pricing. In turn, the same company offer solutions using the same internal IP to foreign aircraft makers, thereby boosting exports.

Speaking of internal R&D, one impediment of its growth in Pakistan are overblown security fears. Private companies must seek government approval before even starting their design work. Countries all over the world (including Israel, which is surrounded by existential threats) can maintain vibrant private defence industries that pose no risk to national security. Clearly, there are ways for the private sector to work, and clearly, the security excusive is just that – an excuse.

Promote the Establishment of Feeder Industries

One area Pakistani policy planners overlook is that a defence industry is not a fundamental industry. Put another way, most defence industry setups require moderate-to-high-tech inputs, including high-quality steel alloys, electronics, rubbers, composites, and others. These inputs come from industries that one can call feeder industries. Pakistan would need robust and reliable steel manufacturing (and continual R&D in steel) for a lot of defence products. Unfortunately, deindustrialization in Pakistan since the 1970s meant that its feeder industries at the time had no buyers and, eventually, they shut down (or never evolved).

Thus, the private sector must be encouraged to set up feeder industries that can provide critical inputs to the local defence industry. It would still be a gradual process, but the point is to set-up a chain of incentives (that start with the military committing to buy domestically) that flow down from industry to industry. So, for example, if there is a requirement for a miniature cruise missile with a 100% local sourcing mandate, the main contractor could release contracts for the development of a miniature turbojet engine, hardware for seekers, and lighter aerostructure materials. If the cruise missile is a multi-billion-dollar purchase that could span across several decades, the private sector will look to develop the IP. It may develop the IP by investing in internal R&D and/or buying out foreign expertise and projects (e.g., South Africa).

Incentives

It seems that Pakistan suffers from a severe lack of domestic investor confidence. Thus, the government must take steps to encourage local investors to establish capacity and kick-start projects. One method is to set-up special economic zones (SEZ). For example, any private defence company registering in Pakistan that will keep more than 70% of its profits in Pakistan could have a 5-to-10-year tax holiday and subsidized utility bills. These SEZs should be located near the SOEs so that the two can synergize their efforts.

Looking Forward

Part-one of this series looked at the policy-level decisions that Pakistan can and should take to establish a robust defence R&D regime and production industry. Parts two and three will take a closer look at the major issues Pakistan’s defence sector SOEs are facing, and how those issues are causing a decline in R&D and production in Pakistan. This series will also offer solutions on how to address these issues.