"One of the biggest obstacles to the growth of Pakistan’s private defence sector was the 'no cost, no obligation basis' through which the armed forces typically engage these companies," Shehzad Ahmed Mir, Managing Director of Bow Systems Ltd., told Defense News in 2019.
No cost, no obligation: how Pakistan’s armed forces engage private firms
In plain terms, "no cost, no obligation" means that when a private company responds to an armed forces requirement with an indigenous solution, the state will neither fund nor co‑fund development nor commit to buying the product. The private firm must finance engineers, prototypes, testing, tooling and refinement, while the state retains the freedom to walk away at the end of the process. The result is that the state carries little of the development risk and provides no certainty that a successful program will generate an order.
Why a single credible buyer makes bold private investment irrational
Pakistan’s defence market, the source explains, effectively has one credible buyer: the armed forces. In such a market structure, the interplay of high development costs, long timelines and the absence of committed demand makes ambitious private investment commercially irrational. At first glance, the "no cost, no obligation" approach can appear fiscally prudent—the armed forces avoid spending on products that may not work, and companies are expected to prove competence before receiving public funds. But defence firms face unique dynamics that necessitate both public funding for initial support and state orders to drive early momentum.
State-owned enterprises, private firms, and the innovation bottleneck
The policy outcome is visible in Pakistan’s industrial landscape: a large state‑owned enterprise (SOE) sector and comparatively few private firms capable of delivering complete military systems. Because private developers must shoulder the full development burden without guaranteed procurement, the market discourages the heavy upfront investment required to field integrated platforms. In consequence, the private sector remains fragmented and risk‑averse while SOEs continue to dominate major system deliveries.
What this means for private defence firms, Pakistan’s armed forces, and SOEs
- Private defence firms: They will either limit activity to low‑risk subcontracts and components or absorb unsustainable development costs in hopes of a future order. The "no cost, no obligation" rule makes end‑to‑end system development commercially unattractive.
- Pakistan’s armed forces: They retain flexibility and low near‑term fiscal exposure but face a constrained supply base for indigenous innovation. Without demand signals or co‑funding, access to new private sector solutions is throttled.
- State‑owned enterprises: SOEs remain the default route for delivering complex systems. That dominance protects continuity of supply but may hinder broader competition and the diffusion of private innovation across the defence technology base.
Policy fixes and comparative models: co‑funding, conditional procurement, Make‑I/Make‑II and SSB‑Baykar
The source argues the remedy is not to abandon SOEs or to subsidize failure, but to divide risk more rationally. Practical steps offered include co‑financed, milestone‑based development; conditional procurement against defined requirements; multi‑year demand signals; testing access for developers; and intellectual property protection. India’s Make‑I/Make‑II routes and Türkiye’s SSB‑Baykar model are cited as examples that show the principle works. The analysis also notes that Pakistan already applies this approach in select programs—the JF‑17 and the Al‑Khalid—just not broadly to private developers.
Those facts define a clear choice for policymakers: preserve short‑term fiscal caution or accept deliberate, shared risk that can seed a competitive private supplier base. The evidence in the record is unambiguous — without co‑investment and credible procurement commitments, the private sector cannot rationally underwrite the costs of turning prototypes into fielded military systems. The next policy decisions will determine whether Pakistan widens the exception around a few platforms into enduring rules that mobilize private innovation, or leaves system development concentrated within state enterprises.
