Don’t Forget Nuts And Bolts: Govt Should Hammer Out Details Of Strategic Partnership Model Soon
A turning point in the establishment of a strong defence industrial base for India has finally been achieved in the form of a new policy enunciating the selection process for private sector participation in defence manufacturing.
The Strategic Partnership Model (SPM) was devised and recommended by the Dhirendra Singh Committee in its report to the government in July 2015 to create long-term manufacturing capacity for major defence platforms and equipment in India’s private sector. It was envisaged in consonance with the larger Make in India initiative of the Modi government. The Dr V K Aatre Task Force was subsequently set up to define the criteria and methodology for selecting suitable strategic partners from private industry, who would be both capable and willing to undertake such heavy investment manufacturing.
After lying dormant for a while, it was in the course of the last fortnight that the SPM was given both sanctity and wings. In a flurry of activity, the Defence Acquisition Council cleared the policy on 20 May, which was quickly followed by the Cabinet Committee on Security approving it three days later. Almost immediately thereafter, the Ministry of Defence (MOD) brought it into force on 31 May as the long-awaited and missing chapter VII of the recently updated Defence Procurement Procedure (DPP), issued by the MOD in 2016.
While the broad framework of the policy is quite clear, much needs to be clarified before private industry can be expected to take the plunge: it is being envisaged that it will invest large sums of money in infrastructure, research and development and expertise sine qua non for manufacturing and integrating major platforms for the armed forces.
In accordance with the policy, the government will ‘select’ private companies with adequate turnover and net worth as Strategic Partners (SPs) to manufacture four types of frontline platforms, namely, single-engine fighter aircraft, conventionally powered submarines, light helicopters, and armoured fighting vehicles (tanks). The selection of the SPs “will be based on the inherent capacity and ability of the vendor to emerge as a systems integrator and to set up a vendor network for sourcing”.
This will be done in conjunction with an established foreign Original Equipment Manufacturer (OEMs), whom the government will select on parallel terms. “The MoD will implement the process of shortlisting of OEMs for each segment simultaneously with the process of identifying SPs,” but it is not yet clear how it will bring this union about. Will this be an arranged marriage, with the government playing matchmaker? Or will either the SP or OEM, or both, have a say in choosing their partner? Can a latecomer Defence Public Sector Undertaking (DPSU) enter the fray and execute a shotgun wedding?
There must also be clarity regarding the primary contractor. The Indian SP must not become a production agency for the OEM. The MOD needs to come out with specific implementation guidelines on this and other issues.
There is also always the question of how the government will keep the public sector units alive since the SPM is meant to create capacity ‘over and above’ that available in the DPSUs and ordnance factories. It appears that it will reserve the right to nominate selected DPSUs as and when it deems necessary. It is also evident that no government can guarantee follow-up orders to the SPs selected for an initial order.
Clearly, the cake may be insufficient to go round, covering both the private and public sectors: some entities may have to die. This can, of course, be mitigated if the SPM is matched by concurrently promulgating a pragmatic and ambitious export policy for defence manufacturing.
It will have to be seen whether foreign OEMs will display an appetite for this model, which will prevent their control—the maximum being 49 per cent equity—over the joint venture or Special Purpose Vehicle that they will enter into with the Indian SP. These OEMs will also have to agree to considerable transfer of technology, underwritten by their own governments, before being awarded any contract. Moreover, the OEM will be jointly responsible along with the SP for certification, and quality assurance of the platforms supplied to the MOD.
Rather unexpectedly, ammunition has been omitted from the first list of items to be progressed through the SPM. Though the government must have its reasons, private sector participation in the manufacture of ordnance should be a priority, and the same had been recommended by the two committees.
There is also concern that either the policy itself or specific selection of SPs and OEMs will face legal challenges as a result of India’s increasingly litigious environment, combined with inherent corporate rivalry, given the stakes involved. Even an accusation is sufficient to halt the acquisition process, and the government will do well to address in advance the possibility of this occurring.
The SPM is a welcome and path-breaking initiative, which will hopefully go down in history as the turning point in the establishment of a strong defence industrial base in India. Realistic implementation will certainly be crucial to its success, if it is not to meet the fate of the earlier ‘Make’ policy, enunciated in the DPP 2006, which has yet to launch its first venture.
This article was originally published in Gateway House and has been republished here with permission.
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