Elevation of Smt Nirmala Sitharaman to the post of the Defence Minister is a master Stroke in Modi’s strategy. Defence industry is the major ailment of the defence sector suffers in its road to progress. The Synergy between the Ministry of External Affairs, Ministry of Commerce and industry and the Defence Ministry would ensure harmony In International relationships and a show of strength on the military diplomacy. For a democracy it is essential to optimise international relationships with an element of military diplomacy and that’s exactly what the Modi government is doing. We cannot but appreciate the choice of the Defence Minister at this point in time when many programs are held up and the newly announced strategic partnerships policy is ailing. The path to success will be pinned on the initiatives from Nirmala Sitharaman to push the strategic partnerships towards logical conclusion and conclude the contracts before October 2018. Major programs and inviting of foreign direct investment into the Defence sector is one of the key areas that the Prime Minister was looking at. This can be achieved if at all, only by Nirmala Sitharaman. We are in for good times and interesting times. – Col K V Kuber
Say “Yes” or “No” was the thought that was engaging the minds of many corporates both domestic and foreign. While the industry was confused and apprehensive on the decision-making ability of the government, well, the corridors of power were busy sifting the various reports from different committees and trying to build a consensus. As it is normal in such policy formulation, there were differences in opinion from the stake holders and it was important for the government to take them all together.
The concept and fundamentals were laid down by the Dhirendra Singh Committee. To quote, “There are cases however where certain platforms are of strategic importance. For these, we are recommending the ‘Strategic Partnership model’ for creating capacity in the private sector on a long term basis. Such a capacity will be created over and above the capacity and infrastructure that exists in Public Sector units. This is expected to spur the sectors towards a more efficient and effective mode of operation. Likewise, there are cases where quality is critical and vendor base is very narrow. For these we are recommending a model of ‘development partnership’”. The committee further recommended few segments like aircrafts, warships, AFV, complex weapons networks, materials, and suggested a well defined protocol for selection of SPs. The follow-on task force dwelled into the details to lay down parameters for selection of SPs followed by Industry-led discipline oriented sub-committees. Issues concerning requirement of industrial Licence, minimum revenue of 4000 crs, three years of growth, weightages on segment specific criteria and more were deliberated in an Industry interaction on 11 June 2016. In less than one year, the the cabinet approves the policy and chapter VII of DPP 2016 stands populated.
Before we have an understanding of the polisy enshrined, let me address a few apprehensions such as, (a) What will happen to the JVs already established? Many of them may be in sectors now not declared as SP. (b) It jettisons the idea that market forces should drive development and competition. (c) Will value for money be achieved if orders on exclusive basis are given ? (d) What will happen if MoD decides not to buy the equipment after the SP produces it.
The reasons for such apprehensions can be figured out with less difficulty. They want to keep the pot boiling so that the Indian establishment continues the consultation process without speeding up implementation. As I see it, the initial efforts at forming JVs was only to take advance action and gain experience. No Indian company has wasted resources in actually building platforms. Market Forces do not work in monopsony conditions and the investment are so high that no one can risk it. However, it can be noticed that market forces have a role to play in the determination of SP, since it is the lowest bidder amongst the shortlisted ones that makes the grade. In fact, Value for money is achieved by various ways and not only thru competition, these have been illustrated in the spirit enshrined in the Dhirendra Singh committee report as well as the policy. In fact the standard procedure for value chain build up and long term vendors is based on constant interaction to improve quality and reduce costs. This is the standard procedure in civil Industry and in India the auto industry is a good model. So giving exclusive orders can be more beneficial to the country in the selected platforms. The question of not placing an order does not arise as the SP model is based on the RFP being issued on the basis of assured demand. The Indian Industry ( big for SP and small for DP) must whole-heartedly support the GOI in this venture, not miss this golden opportunity, ignore the doubting Toms and make India self sufficient in defence equipment manufacture.
The fundamentals of the policy are strong. For any strategic procurement, the nation needs to have a say in the choice of the platform and the supplier. For “Make in India” to be effective the nation must drive the initiative through reforms and choose their partners in progress. MoD will have control over the short-listing of the OEM on the one hand and the SP on the other, thus having a say in both the platform under procurement and the SP. In addition, the GoI has given due importance to Market Forces in actual determination of SP.
GoI has now come out with a business oriented policy, business first. This is a program based policy, addressing in the first phase four programs, viz, (i) Fighter Aircraft (ii) Helicopters (iii) Submarines and (iv) Armour Fighting Vehicles. The corresponding programs are easily interpolated, SAAB Gripen/Lockheed for the single engine, Airbus Helicopters and others for the Naval Utility Helicopter program and other multi utility helicopters, DCNS, HDW and other probable OEMs for the P75 I, and the FICV/FRCV program with multiple choices including RADS, BAE and others. With a clear business visibility, the MoD has proceeded to pick up their OEMS and SPs.
Initial shortlisting of SPs will be based on the model recommended by the Task Force with two gates, first being the minimum qualification criteria to include financial, technical and other general criteria and the second stage would be a site verification with an evaluation of financial and technical capabilities. Thus, the MoD intends to create a pool of SPs from the private sector. At this stage no apriori allocation of disciplines or segments is being made and therefore none of the SPs in the pool can lay claim on a particular discipline/segment. This is indeed a very smart move, providing a level playing field to the prospective SPs to compete for their rightful place in the choice of discipline.
As a part of parallel processing technique, MoD would send out an EOI or RFI to the prospective foreign OEMs for these particular programs seeking requisite technology in range and depth. From a purely technological perspective, based on an assessment of the responses received, two OEMs per program/discipline would be shortlisted. Thus, the MoD would have made a choice on both the platform/OEM and the desirous prospective SP.
Now it is time for the market forces to come into play. For the programs short-selected in the first phase, as above, the MoD will now issue an EOI/RFP to the prospective SPs, indicating in the RFP the short-selected OEMs for the program. Prospective SPs are expected to indicate their preferences for segments concerned. Prospective SPs in turn are expected to find their comfort zone with the OEMs and submit a single bid. The lowest bidder is the SP for the segment/discipline/program. In this final selection stage the GoI has left room for assessment/evaluation of segment specific capabilities within the SPs so contending, thus indicating a L-1/T-1 concept.
Evaluation criteria follows the task force recommendations thus reposing confidence, that included two stages of evaluation, stage 1 based on minimum qualification criteria and the second stage comprising of financial and technical parameters. Subject to compliance to certain aspects such as wilful default to the banking system or being black listed by the RBI or any joint lenders forum, debt restructuring and not classified by any bank as NPAs, all participant companies that qualify the first stage evaluation, will be considered for the second stage evaluation.
Few questions emerge, such as, While considering the single engine aircraft, is it wise to also consider the power pack and hence call for an SP for engine manufacturing? Should the percentage of R&D spend be the only criteria or there also be an absolute number to it? Could the third and fourth segment experience a single vendor situation with only few in the pool? Should the selected SP not perform, is there any exit clause and what options does the government have to fill the voids in defence preparedness?
What are then the outsourcing norms? From the concept outlined by the Dhirendra Singh committee, one aspect stands out loud and clear, SPs and DPs go together. What are DPs and how do they affect the defence industrial ecosystem? DPs are Development Partners; what SPs are to the GoI, DPs are to SPs. If the GoI is reposing trust on the SPs, the SPs are in-turn expected to repose their trust on the DPs, else this system will collapse. If India lives in villages, industry lives in MSMEs. The policy on SP must mandate a minimum specified amount of outsourcing, say 50% of which another 50% must find favour with DPs. It is expected that invariably DPs are from the MSME segment. It is perceived that the major beneficiaries of the SP model would be the small-scale industries, well only then will the ecosystem develop.
The question that comes up is what next? One of the highlights of the draft policy is that aspects like Performance based logistics for ten years, spares, MRO, life cycle support, upgrades, setting up of testing and proving laboratories, all of which are by themselves huge follow-on contracts during the life of the system. Therefore, MoD has kept it open for market forces to determine an SP for a future requirement in the same segment. While the initially nominated SP may have the first-mover advantage, room is provided for a new entrant and hence room for innovation and no-room for complacency. This is clearly a win-win situation for the Armed Forces as well as for the industry. For future acquisitions MoD has provided incentives such as investments made to improve segment specific infrastructure, nature of R&D investments made which is qualitative, development and acquisition of relevant technologies and extent of ecosystem created.
No country can win wars with other’s arms. It is time we introspect and develop a formidable indigenous defence industry to support our Armed Forces that are forever in combat, without any respite. To build a formidable indigenous defence industry, it is imperative that the ecosystem is developed, and once the ecosystem is developed, only system of system integrators remain, sourcing can be done at will. New industry champions will emerge, new trends will be set, knowledge will grow and the nation will emerge stronger.
The preamble to the policy, the definition of SP and the clauses relating to issue of EOI make it absolutely clear that there is NO ROLE for DPSUs in the SP model. The SP has to be private industry. The only role of DPSUs/OFB is to team up with the SP along with MOD, DRDO etc to carry on indigenous efforts to make India self-sufficient in defence products . It is clear that the SP production will be over and above the DPSU capacity . This is as per the Expert Committees recommendations. It is the Private Sector for whom this policy has been carved out and that the policy states that along with the SP the Development Partner will also have a role and most of them will be MSMEs.
Is there a price the nation has to pay? Unfortunately, our Finance experts in the confines of the government buildings understand only L-1, the lowest bidder; ie, the lowest cost quoted by a bidder for a particular system or equipment. Has anyone spoken about the cost to the country? In the path to progress with great emphasis laid on “Make in India”, it is possible that the cost of design, development, supply chain management and production may be costlier than a foreign made fancy toy. Well, since the complete development, ecosystem and production is taking place within the geography of this country, the entire tax-payers money so billed against the Indian manufactured system under consideration, is circulated within the same geography many times. Thus, the cost to the country would be far less than the L-1 cost, if seen in this perspective. This is a perspective that needs to be dovetailed with the SP policy.
Is there a case for management control with the foreign OEMs within the existing framework of 49/51 FDI to enable the FOEMs to transfer technology seamlessly? Since the segment wise technical capability could be a challenge for SPs to showcase, should this be evaluated in a more comprehensive manner to include the “Offered Technology”? Once this is done, the FOEM will be incentivised to transfer technology in range and depth in sync with the spirit of creating the ecosystem in India. What are the limitations to Liaibility and how is this carved out for protecting the nation’s interest? Will the GoI hold a “Golden Share” in the SP, thus enabling protection? This is essential, to ensure that the SP/FOEM do not sell their shares in the market thus causing a disturbance in the existing relationship.
The document is great and aspects mentioned herein need attention to make it robust and encourage sound relationships.