Strategic Partnerships :Development Partnerships : Ecosystem
Vol 11 Issue 2 May - Jun 2017
Article delineates objectively on the need for strategic partners
Wednesday, May 24, 2017
Whether it is going to be “Yes” or “No” is the thought that has been engaging the minds of many corporates both domestic and foreign. Delayed decision making in many programs has been attributed to the lack of conclusion regarding “Strategic Partnerships”. While the industry was a little confused and apprehensive, the corridors of power were busy sifting various reports from different committees and trying to build a consensus. As it is normal in such policy formulation, there were differences of opinion amongst the stake holders and it was important for the government to bring them all on board.
Government of India, Ministry of Defence, under the leadership of Shri Arun Jaitley, who also doubles up as the Defence Minister, besides his other important portfolios of Finance and Corporate Affairs, devoted due energy to dwell on the finer aspects of Strategic Partnerships(SPs). The Ministry called for a meeting of the top industry chambers to deliberate on the proposed draft. What stands out clearly is the desire of the government to indulge in the matter. Having perused the reports of the two committees and having grasped the essentials, the government has formulated a draft that is reassuring to the industry, in spite of two years having passed since the Dhirendra Singh committee placed its report on Defence Procurement Procedures 2016. For the first time, concept of SPs was suggested in Defence Procurement in the said report even though the chapter on SPs was left blank. The GoI has thus displayed its intention to bring about the formulation on SPs soon.
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, AFVs, complex weapons networks, materials, and suggested a well defined protocol for selection of SPs. The follow-on task force further dwelled into the details to lay down parameters for selection of SPs followed by Industry-led discipline oriented sub-committees.
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. The Ministry of Defence has just done that. It is one thing to consider a report prepared by the appointed committee and another to go beyond that and make value addition. Here we have a great model. 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.
While the Aatre Task Force (ATF) had recommended an ab-initio choice of two groups and six SPs in the first and two in the second, this had a few drawbacks as highlighted in the discussions pursuant to the report, the GoI has been able to come out with a more industry friendly model. However, everyone in the industry has asked one question where is the business? So what if we are nominated as a SP, if we cannot get business and no EOI/RFP is made available? Why would a private sector company invest in infrastructure without an idea of business volumes?
GoI has now come out with a business oriented policy, so commendable and so welcoming. The MoD has defined the business first. This is a program based policy, addressing in the first phase four programs, viz, (i) Single Engine Fighter Aircraft (ii) Helicopters (iii) Submarines and (iv) Armour Fighting Vehicles and Main Battle Tanks. 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 six SPs from the private sector. At this stage no prior allocation of disciplines or segments is being made and therefore none of the SPs in the pool can lay claim to 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.
In order that there is no loss of time, 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 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 bid. Only one bid per SP is being allowed. 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 has not been tampered with by the government thus reposing confidence in the recommendations of the task force. 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 being classified by any bank as NPAs, all participant companies that qualify the first stage evaluation, will be considered for the second stage evaluation. In stage II, financial and technical parameters have been given equal weightage of 50% each. This also includes a site verification. Reminder of evaluation criteria is a matter of detail and has been dealt with in the Task Force report.
Few questions emerge, such as, whether the consolidated turnover of INR 4000 crores for each of the last three financial years is too high and if a reduction is possible, since many would be excluded on this count. Also, the consolidated capital assets pegged at INR 2000 crores was causing discomfort in those that were not making the cut. Of the six short-selected companies, it was not clear if this was applicable as one per business house or is it applicable to individual companies. The tone and tenor of the presentation indicated that it was one per business house. While considering the single engine aircraft, is it not wise to also consider the power pack and hence call for an SP for engine manufacturing? In any case our DRDO has not been impressive with the progress on the Kaveri engine. Should the percentage of R&D spend be the only criteria or there should also be an absolute number to it? Do we have enough number of private companies competent enough to be called as system of system integrators or is the number of six too less? Could the third and fourth segment experience a single vendor situation with only six being in the pool? In any case this number of six prospective SPs is for the four programs indicated above. This process will continue for any future programs, thus adding to the pool of six. 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 report, 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. DPs are invariably from the small and medium industry segment. Fortunately, this has been enshrined in the vision as also highlighted by the RM that the objective is to create a production base in India. The catch is the BASE. At the base lie the small industry segment. Larger the base, taller is the pyramid. It is perceived that if the major beneficiaries of the SP model would be the small-scale industries, only then will the ecosystem develop.
Is previous experience mandatory to be nominated as a SP? A counter question would be that can an inexperienced and ill trained soldier be sent to the front to defend the nation? We are in the strategic defence domain and every nut and bolt counts, not one of these can slip at the time of reckoning. Some of the major players in this industry have existing relationships, such as the Tatas with Lockheed Martin, Sikorsky; M&M with Airbus Helicopters and SAAB, Reliance Industries with Dassault Aviation and so on.
What the draft policy did not contain is the long-term covenant proposed by the Task Force. 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 there is room for innovation but no-room for complacency. For future acquisitions MoD has provided incentives such as investments made to improve segment specific infrastructure, nature of qualitative R&D investments made, development and acquisition of relevant technologies and extent of ecosystem created.
It is time we introspect and develop a formidable indigenous defence industry to support our Armed Forces that are 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.
Is there a price that the nation has to pay? Unfortunately, our finance experts in the confines of the government buildings understand only L-1, the lowest bidder. What must be considered is the total 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 higher 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 the correct perspective. This is a view that needs to be dovetailed with the SP policy.
SPs need hand holding when they showcase their products and systems to a foreign geography. Our personnel in uniform must accompany the SPs or any other industry that exports with pride, to reinforce the reliability of the product and its effectiveness as a proud user.
A laudable initiative indeed, will soon see the light of the day. As I pen down my finishing remarks, I am given to understand that the apex body (DAC) has deferred the decision to another day, very soon, with a full-fledged refined policy. Kudos to the Ministry of Defence and the Indian Defence Industry.
We have bright times ahead.