It is matter of great honour and pride for us
Indians that Tejas is sucessful in getting operational clearance. As ministry
of defence (MoD) has sanctioned Rs 1,556 crore for building Tejas fighters, I
wish to give some suggestions for fast tracking production and creating
positive externalities out of this project.
Building an Indian aircraft is a dream project, which if been successful, would be a giant leap in technological expertise of the country. This project is close to heart of Indians . It is argued by many economists that defence equipment if manufactured at home would create six to seven million jobs. Apart from this, there would be huge reduction in trade deficit and increase in GDP due to domestic production. Manufacturing activity in this sector can take India to path of 10% plus growth rate.
Further, indigenous manufacturing of aircrafts has big Strategic importance and it can put India in league of advance nations who could not be arm twisted for supplies of components at later stage.
Succeeding of project
Since independence, India has invested heavily in organisations like Hindustan aeronautics limited (HAL), Defence research and development organisation (DRDO), Ordinance factories, IITs etc for building indigenous capacity in aerospace and defence production. These investments combined with strong pool of technical and scientific manpower in India should have put India at least at par with China. However, in 2011, Indian domestic defence manufacturing is only a small fraction of China’s. India has achieved infamous distinction of being largest importer of defence equipment in world. This is despite the fact that many scientists and engineers in NASA, Boeing and Airbus are Indians. Indian organisations have not produced desired high end products but are doing low end jobs of maintenance or assembling.
Therefore, building a world class high technology product like aircraft needs a high performing world class organisation. Creating a high performance organisation requires careful planning, hiring best technical and managerial talent and above all creating a positive environment for fostering learning at all levels – individuals, groups and organisation. It must create a positive environment that supports, encourage and maximise every possible opportunity for learning and development. Such organisation needs to look at people as its most valuable asset so that performance of individuals is maximised and innovations are captured by the organisation.
Before making any investment, government should keep in mind the reasons of failure and success of Indian organisations in the past.
Maruti Udyog limited is one example of highly successful joint venture company of Government of India and private sector. Maruti Udyog not only built a highly successful technically advanced car, but also served as hub for building cluster of large number of auto part ancillary units in India. Maruti and its vendors eventually led the India to become home of one of highly successful auto manufacturing industry in the world. As against this, defence PSUs like HAL, DRDO have failed to produce desired results.
Organisational Problems of Aero and Defence Public sector
Indian aero and defence sector is dominated by public sector. Only three Indian enterprises—Hindustan Aeronautical Ltd (HAL), Bharat Electronics Ltd and Ordnance Factory Board (OFB) figuring among the list of top 100 defence outfits in the world are state run organisations. It is therefore an obvious conclusion that little/limited progress in field is due to failure of public sector to perform up to the expectations. Some of reasons of failures are:
1. Bureaucratic setup of research institutions
Research organisations of India have long hierarchies of staff and these are governed by more or less same set of rules for recruitment, promotion, salaries of staff as for other departments of government. Due to long hierarchies and fixed set of rules, these departments are bureaucratic organisations. These organisations are able to deliver standard service and perform routine works, but are not suitable for research organisations since research by definition is “search for knowledge”. Research is about searching new solutions to problems whereas bureaucracy is about Rigidity and inertia of procedures.
As Max Weber himself defined “bureaucratic organization as one in which work is performed with strict accordance to the written rules and procedures and duty and responsibility of each official is limited do certain types of work only.” In a bureaucratic organisation, following a rule for making decision is sometimes considered more important than its effect. This makes decision making slow or even impossible if there is a change or unusual case. Further, long hierarchies and overspecializations make individual officials not aware/absolve them of larger consequences of their actions.
Therefore bureaucratic setup can be good for standard delivery of simple services but it can choke any process of change or evolution. Bureaucratic setup of DRDO or HAL hinders the research process while little flexible set of rules and little autonomy for IITs and IIMs, make them more efficient.
2. HR Policies
Rama Rao committee report and Kelkar committee report on DRDO pointed out that “situation cries for reforms in HR policies” and “biggest challenge is to attract, nurture and retain talent.”
It is not correct to say that public sector employees of India are underpaid or there is need of more spending by government. On date, salaries paid by government are best in the Industry; however, output of government departments and employees is not a fraction of that of private industry. Employees of public sector and private sector are drawn form same pool of institutions. Managers and employees of public sectors are selected through toughest selection process and only toppers and hard working ones make through it. Poor efficiency of better educated employees means that there are organisational problems in Indian public sector.
Core of the problem is wrong design of HR policies. Basis of any HR policy should be alignment of goals of individuals with that of the organisation. This is where the HR policies of government departments fail; goals of individual workers in Indian Public sector are different from goals of the organisations they work for. This principle – agent problem is basic problem of any organisation. This problem manifests itself in Indian public sector setup in two ways:
Problem no 1: Apathy
To check the problem of favouritism, cronyism and to introduce administrative transparency, democratic government of India decided to reduce discretionary powers of Officers/managers to grant out of turn promotions or grant extra salaries to staff working below. Further administrative decisions are subject to scrutiny of courts.
However, providing time bound promotions and fixed salaries to staff have resulted in killing the incentives to perform. It is common adage that “Horses and donkeys move together in government”. An employee of public sector does not see any financial motivation for performing work with efficiency. Further, risks of audit checks, vigilance and CBI checks are much lesser for non-performers than for performing employees.
Problem no 2: Lack of control
In case of managers/officers of public sector organisations, there are better incentives for performing like postings on positions of responsibility, timely promotions and public respect etc. There seems to be better interest shown by managers/officers for targets assigned to them. However, principle agent problem manifests in much stronger way in case of officers as interests of Officers (managers) differ widely from need of the organisation (Poor alignment of goals). Even bigger problem exists that there are very few disciplinary forces to discipline managers to work for organisation’s interest. Main problem is governing and unclear goals.
It is well established by management thinkers that managers work for self interest. It is also true that for success or failure of any organisation, maximum contribution is made by top management’s policies. Therefore, top managers need to be controlled.
An answer to above problems has to be found while designing organisation structure of proposed company for the project. For success of project, following steps would be essential:
1. Building an organization free from bureaucratic problems through Public- Private partnership
Private participation would increase efficiency and output of organisation. This has been proved in 1991 reforms and this has given 8-9% growth to the country. With Private participation, best outside trained talent can be hired, which is not feasible in public sector due of non-possibility of lateral entries. This company should be able to hire talent from both public sector organisations like DRDO, HAL etc as well as from private partner.
Smaller hierarchy and flexible rules are conducive for carrying out research activity as it brings better focus on results than procedures. Leaner organisations can reduce bureaucratic delays and better control can be exercised. This can be done by offloading works to private other partner ancillary organisations.
2. Defining incentives to perform
As I have already stated that managers work for their self interest whether it is public or private companies. There are instruments to align goals of managers with that of the organization. These instruments are incentives, promotions etc. Incentives can be defined on basis of achievement of targets defined and agreed at the beginning of financial year. It has been observed world over and even in Indian public sector like Railways that Performance-linked incentives wherever introduced are value-creators. Incentives go a long way in raising performances.
A small comparative study of premier education/ research institutes would reveal that government funding is not the reason of success but it is the professional freedom and financial incentives which make these institutes perform. Therefore researchers and managers should be allowed to get a share of profit. This is very effective tool for making a job interesting. Therefore incentives should be available to people hired form private as well as taken on deputation from public sector.
3. Equity participation by government
A big question in success of project is to fill the technology gap which exists between India and advanced nations like US, France and China. Developing the technology from scratch leave India 50 years behind advance nations and better products are offered by foreign suppliers.
This technology gap cannot be filled solely with the opening of sector to domestic private industry. Due to uncertainties and long gestation period, role of hub in aerospace manufacturing cluster has to be played by government. Long gestation period in case of R&D and uncertain output makes private investment difficult and public investment is necessary and appropriate for this project.
To develop and manufacture technologically advanced equipments, R&D has to be funded by the government. Government of India should participate in project as equity holder to cover the bulk of investment in R&D stage while private partner can be major investor in manufacturing stage. This does not mean that R&D has to be carried out by public sector but proposed company should control the entire project.
4. ESOPs for scientists and managers
The company should provide for shareholding to scientists and managers of the company so that they are concerned about long term performance of the company rather than just meeting the short term targets assigned to them. Examples are around to prove that employee shareholdings improve the performance of the business. ESOPS is one of most effective method to retain talent in private and it is very strong motivational tool for bringing efficiency in employees. These employees not only work themselves but also question bad decisions by the management.
CEO of Lufthansa Carsten Spohr spoke on problems of Indian Airlines “government involvement alone does not help in running airline business as it involves taking quick decisions. Lufthansa was privatised partly in 1992 and fully five years later. Stocks are put on the market through stock exchange and employee’s unions are also the shareholders.”
5. Listing on stock exchange to control managers
Market is disciplinary force for managers of listed companies. Any wrong decision by management is reflected immediately by fall of stock prices on stock exchange. In case of government organisations, ownership lies with the citizens of India who govern these units through their elected representatives. Diffused ownership of public sector units makes it very difficult to exercise control over the management. In practice, control of public sector is weakly exercised through elected representatives.
Due to Lack of incentives and control, perverse incentives attract many managers of Public sector organisations. Therefore, listing of this company can bring control over managers as usual government controls like audit department, vigilance and CBI has not helped much in public sector.
Main benefit of listing is increasing of accountability. The very fact that a company is listed increases its transparency and accountability quotient, making it responsible to shareholders and to the market regulator. This company can also be listed on stock exchange when government funding is clearly defined in advance.
Above suggestions is accepted can help in building a world class organisation which not only designs and manufactures a technologically advanced aircraft but also build a defence and aerospace manufacturing cluster in India and lead India to 10% plus growth path.
NOTE: Views expressed are my personal and not of the Indian government or railway
Building an Indian aircraft is a dream project, which if been successful, would be a giant leap in technological expertise of the country. This project is close to heart of Indians . It is argued by many economists that defence equipment if manufactured at home would create six to seven million jobs. Apart from this, there would be huge reduction in trade deficit and increase in GDP due to domestic production. Manufacturing activity in this sector can take India to path of 10% plus growth rate.
Further, indigenous manufacturing of aircrafts has big Strategic importance and it can put India in league of advance nations who could not be arm twisted for supplies of components at later stage.
Succeeding of project
Since independence, India has invested heavily in organisations like Hindustan aeronautics limited (HAL), Defence research and development organisation (DRDO), Ordinance factories, IITs etc for building indigenous capacity in aerospace and defence production. These investments combined with strong pool of technical and scientific manpower in India should have put India at least at par with China. However, in 2011, Indian domestic defence manufacturing is only a small fraction of China’s. India has achieved infamous distinction of being largest importer of defence equipment in world. This is despite the fact that many scientists and engineers in NASA, Boeing and Airbus are Indians. Indian organisations have not produced desired high end products but are doing low end jobs of maintenance or assembling.
Therefore, building a world class high technology product like aircraft needs a high performing world class organisation. Creating a high performance organisation requires careful planning, hiring best technical and managerial talent and above all creating a positive environment for fostering learning at all levels – individuals, groups and organisation. It must create a positive environment that supports, encourage and maximise every possible opportunity for learning and development. Such organisation needs to look at people as its most valuable asset so that performance of individuals is maximised and innovations are captured by the organisation.
Before making any investment, government should keep in mind the reasons of failure and success of Indian organisations in the past.
Maruti Udyog limited is one example of highly successful joint venture company of Government of India and private sector. Maruti Udyog not only built a highly successful technically advanced car, but also served as hub for building cluster of large number of auto part ancillary units in India. Maruti and its vendors eventually led the India to become home of one of highly successful auto manufacturing industry in the world. As against this, defence PSUs like HAL, DRDO have failed to produce desired results.
Organisational Problems of Aero and Defence Public sector
Indian aero and defence sector is dominated by public sector. Only three Indian enterprises—Hindustan Aeronautical Ltd (HAL), Bharat Electronics Ltd and Ordnance Factory Board (OFB) figuring among the list of top 100 defence outfits in the world are state run organisations. It is therefore an obvious conclusion that little/limited progress in field is due to failure of public sector to perform up to the expectations. Some of reasons of failures are:
1. Bureaucratic setup of research institutions
Research organisations of India have long hierarchies of staff and these are governed by more or less same set of rules for recruitment, promotion, salaries of staff as for other departments of government. Due to long hierarchies and fixed set of rules, these departments are bureaucratic organisations. These organisations are able to deliver standard service and perform routine works, but are not suitable for research organisations since research by definition is “search for knowledge”. Research is about searching new solutions to problems whereas bureaucracy is about Rigidity and inertia of procedures.
As Max Weber himself defined “bureaucratic organization as one in which work is performed with strict accordance to the written rules and procedures and duty and responsibility of each official is limited do certain types of work only.” In a bureaucratic organisation, following a rule for making decision is sometimes considered more important than its effect. This makes decision making slow or even impossible if there is a change or unusual case. Further, long hierarchies and overspecializations make individual officials not aware/absolve them of larger consequences of their actions.
Therefore bureaucratic setup can be good for standard delivery of simple services but it can choke any process of change or evolution. Bureaucratic setup of DRDO or HAL hinders the research process while little flexible set of rules and little autonomy for IITs and IIMs, make them more efficient.
2. HR Policies
Rama Rao committee report and Kelkar committee report on DRDO pointed out that “situation cries for reforms in HR policies” and “biggest challenge is to attract, nurture and retain talent.”
It is not correct to say that public sector employees of India are underpaid or there is need of more spending by government. On date, salaries paid by government are best in the Industry; however, output of government departments and employees is not a fraction of that of private industry. Employees of public sector and private sector are drawn form same pool of institutions. Managers and employees of public sectors are selected through toughest selection process and only toppers and hard working ones make through it. Poor efficiency of better educated employees means that there are organisational problems in Indian public sector.
Core of the problem is wrong design of HR policies. Basis of any HR policy should be alignment of goals of individuals with that of the organisation. This is where the HR policies of government departments fail; goals of individual workers in Indian Public sector are different from goals of the organisations they work for. This principle – agent problem is basic problem of any organisation. This problem manifests itself in Indian public sector setup in two ways:
Problem no 1: Apathy
To check the problem of favouritism, cronyism and to introduce administrative transparency, democratic government of India decided to reduce discretionary powers of Officers/managers to grant out of turn promotions or grant extra salaries to staff working below. Further administrative decisions are subject to scrutiny of courts.
However, providing time bound promotions and fixed salaries to staff have resulted in killing the incentives to perform. It is common adage that “Horses and donkeys move together in government”. An employee of public sector does not see any financial motivation for performing work with efficiency. Further, risks of audit checks, vigilance and CBI checks are much lesser for non-performers than for performing employees.
Problem no 2: Lack of control
In case of managers/officers of public sector organisations, there are better incentives for performing like postings on positions of responsibility, timely promotions and public respect etc. There seems to be better interest shown by managers/officers for targets assigned to them. However, principle agent problem manifests in much stronger way in case of officers as interests of Officers (managers) differ widely from need of the organisation (Poor alignment of goals). Even bigger problem exists that there are very few disciplinary forces to discipline managers to work for organisation’s interest. Main problem is governing and unclear goals.
It is well established by management thinkers that managers work for self interest. It is also true that for success or failure of any organisation, maximum contribution is made by top management’s policies. Therefore, top managers need to be controlled.
An answer to above problems has to be found while designing organisation structure of proposed company for the project. For success of project, following steps would be essential:
1. Building an organization free from bureaucratic problems through Public- Private partnership
Private participation would increase efficiency and output of organisation. This has been proved in 1991 reforms and this has given 8-9% growth to the country. With Private participation, best outside trained talent can be hired, which is not feasible in public sector due of non-possibility of lateral entries. This company should be able to hire talent from both public sector organisations like DRDO, HAL etc as well as from private partner.
Smaller hierarchy and flexible rules are conducive for carrying out research activity as it brings better focus on results than procedures. Leaner organisations can reduce bureaucratic delays and better control can be exercised. This can be done by offloading works to private other partner ancillary organisations.
2. Defining incentives to perform
As I have already stated that managers work for their self interest whether it is public or private companies. There are instruments to align goals of managers with that of the organization. These instruments are incentives, promotions etc. Incentives can be defined on basis of achievement of targets defined and agreed at the beginning of financial year. It has been observed world over and even in Indian public sector like Railways that Performance-linked incentives wherever introduced are value-creators. Incentives go a long way in raising performances.
A small comparative study of premier education/ research institutes would reveal that government funding is not the reason of success but it is the professional freedom and financial incentives which make these institutes perform. Therefore researchers and managers should be allowed to get a share of profit. This is very effective tool for making a job interesting. Therefore incentives should be available to people hired form private as well as taken on deputation from public sector.
3. Equity participation by government
A big question in success of project is to fill the technology gap which exists between India and advanced nations like US, France and China. Developing the technology from scratch leave India 50 years behind advance nations and better products are offered by foreign suppliers.
This technology gap cannot be filled solely with the opening of sector to domestic private industry. Due to uncertainties and long gestation period, role of hub in aerospace manufacturing cluster has to be played by government. Long gestation period in case of R&D and uncertain output makes private investment difficult and public investment is necessary and appropriate for this project.
To develop and manufacture technologically advanced equipments, R&D has to be funded by the government. Government of India should participate in project as equity holder to cover the bulk of investment in R&D stage while private partner can be major investor in manufacturing stage. This does not mean that R&D has to be carried out by public sector but proposed company should control the entire project.
4. ESOPs for scientists and managers
The company should provide for shareholding to scientists and managers of the company so that they are concerned about long term performance of the company rather than just meeting the short term targets assigned to them. Examples are around to prove that employee shareholdings improve the performance of the business. ESOPS is one of most effective method to retain talent in private and it is very strong motivational tool for bringing efficiency in employees. These employees not only work themselves but also question bad decisions by the management.
CEO of Lufthansa Carsten Spohr spoke on problems of Indian Airlines “government involvement alone does not help in running airline business as it involves taking quick decisions. Lufthansa was privatised partly in 1992 and fully five years later. Stocks are put on the market through stock exchange and employee’s unions are also the shareholders.”
5. Listing on stock exchange to control managers
Market is disciplinary force for managers of listed companies. Any wrong decision by management is reflected immediately by fall of stock prices on stock exchange. In case of government organisations, ownership lies with the citizens of India who govern these units through their elected representatives. Diffused ownership of public sector units makes it very difficult to exercise control over the management. In practice, control of public sector is weakly exercised through elected representatives.
Due to Lack of incentives and control, perverse incentives attract many managers of Public sector organisations. Therefore, listing of this company can bring control over managers as usual government controls like audit department, vigilance and CBI has not helped much in public sector.
Main benefit of listing is increasing of accountability. The very fact that a company is listed increases its transparency and accountability quotient, making it responsible to shareholders and to the market regulator. This company can also be listed on stock exchange when government funding is clearly defined in advance.
Above suggestions is accepted can help in building a world class organisation which not only designs and manufactures a technologically advanced aircraft but also build a defence and aerospace manufacturing cluster in India and lead India to 10% plus growth path.
NOTE: Views expressed are my personal and not of the Indian government or railway
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