Editor’s Note
The strategic partnership model has been announced after considerable delay since the time when Defence Procurement Procedure (DPP) 2016 was released in the public domain. However, will the model as defined by the MoD, really work? The ‘Make’ procedure introduced by the government in 2006 has not led to positive results as yet.
The author feels that perhaps the greatest obstacle the Ministry of Defence is likely to experience in making the strategic partnership model work is the attitude of the staff manning the MoD. He perceives the need for far greater dynamism and responsiveness at the MoD to be able to drive the new model through and achieve tangible results.
STRATEGIC PARTNERSHIPS – STILL A LONG WAY TO TRAVERSE
The chapter on strategic partnerships, missing from the Defence Procurement Procedure (DPP) when it was released in March last year, was finally notified by the Ministry of Defence (MoD) on 31 May 2017. Titled ‘Revitalising Defence Industrial ecosystem through strategic partnerships’, it contains a mix of policy and procedure on the subject.
Image Courtesy: Ministry of Defence
While one sincerely hopes that this approach to catapulting the Indian private industry to the centre stage of defence production works, it would be naive to think that the mere notification of a scheme guarantees its successful implementation.
Had that been the case, the ‘Make’ procedure, introduced by MoD in 2006 to promote prototype development by the Indian industry through indigenous design and development, would have started showing some result by now. Tragically, more than a decade later, even the first development contract is yet to be signed under this category.
Successful implementation of a scheme depends on its being a composite flawless package as well as organisational capacity to make it work. A dynamic system of decision-making, capable of resolving problems as and when they arise during implementation of the scheme, is also critical to achieving its intended objectives. The effort to forge strategic partnerships could run into difficulty on all these counts right from the starting line itself.
The scheme envisages setting up of an appropriate institutional and administrative mechanism within MoD, with ‘adequate expertise in relevant fields like procurement, contract law and Transfer of Technology arrangements’ for effective implementation of the scheme. If this is sine qua non for the roll-out of the scheme, it could take a long time before the first contract is awarded to a strategic partner.
But the real challenge would be to select the strategic partners based on a set of criteria that is ‘fair, reasonable, non-arbitrary, transparent and rational’ and, in turn, is structured around ‘the broad parameters of financial strength, technical capability and capacity/infrastructure’ of the applicant companies. The concept is unexceptional but converting it into specifics could be a tightrope walk.
The financial criterion, for example, is to comprise the consolidated turnover, net worth and credit rating of the applicant companies. Putting a value on the first two parameters can be tricky as no cut off values can be entirely objective and, therefore, could be challenged by the companies facing the prospect of not making the cut.
Considering that at this stage only four segments – fighter aircraft, helicopters, submarines and armoured fighting vehicles/main battle tanks – are on offer, selection of strategic partners is going to be fiercely contested by a handful of the Indian companies who will undoubtedly look very closely at the possibility of interpreting various criteria laid down by MoD to their advantage.
To prevent this from happening and consequently derailing the process, MoD will need to come up with iron clad criteria which do not lend themselves to varying interpretations. Past experience in this regard, especially in the context of ‘Make’ projects, does not inspire much confidence.
The industry’s expectation was that, once chosen, a strategic partner would continue to be associated with the supply, maintenance, life-extension and upgradation of the equipment throughout its life. The notification belies this expectation.
Image Courtesy: Live Mint
In fact, the scheme talks about providing adequate weightage to experience and track record in the respective segments while evaluating bids for subsequent acquisitions in a particular segment with a view to incentivising and motivating the Indian companies to make long term investments for development of infrastructure, tiered ecosystem of vendors and skilled human resources as well as for futuristic research and development.
It remains to be seen whether Indian companies would be happy making such long term investments despite the fact that the strategic partner who bags the initial contract will have to vie with other competitors at the time of subsequent acquisitions of the same equipment.
In fact, the scheme does not seem to guarantee award of the contract even for maintenance/ performance based logistics beyond the initial period of ten years, though this seems to be at odds with another stipulation in the scheme that the OEM will be required to confirm life-cycle support for the platform along with the strategic partner. Be that as it may, these factors will surely have a bearing on long term investment decisions of the strategic partners.
The strategic partners will be heavily dependent on transfer of technology from the foreign Original Equipment Manufacturers (OEMs) but the latter will have to make do with a minority stake in the Indian company they tie up with. The OEMs could also form a Joint Venture (JV) or set up a Special Purpose Vehicle (SPV) with the strategic partners but any such entity will also have to be owned and controlled by the resident Indian citizens.
The foreign OEMs have not been very warm to the idea of being minority shareholders in Indian entities. The stipulation that they will also be jointly responsible for certification and quality assurance of the equipment supplied to the MoD could queer the pitch further for them.
It is also not clear whether the stipulation that the contract between the strategic partners and the OEM will have to provide for ‘protection of classified information and technology transferred by the OEM’ adequately addresses the concerns the foreign companies have about protection of their intellectual property rights (IPR).
These uncertainties are exacerbated by some provisions of the scheme the import of which is hard to fathom. Take, for example, the statement that strategic partnerships seek ‘to enhance indigenous defence manufacturing capabilities through the private sector over and above the existing production base’.
Image Courtesy: Rediff
The notification goes on to say that ‘keeping this broad objective in view, MoD may consider the role of DPSUs/OFB at the appropriate stage(s) keeping in view the order book position, capacity and price competitiveness’. It is difficult to envisage how this provision will actually play out.
These, and many other similar imponderables, do not pose an insurmountable obstacles but MoD will have to break away from its past attitudes to be able to take bold decisions and make this scheme work. This may, by far, turn out to be the biggest challenge for MoD in the coming months as it sets out to implement the scheme.
One last thought: why could the objectives sought to be achieved through the strategic partnership scheme not be achieved by procuring equipment and technology through ‘Buy and Make’ route, leaving it to the foreign OEMs to select the Indian production partners – something that is permitted by the Defence Procurement Procedure 2016? It could save MoD the trouble of selecting strategic partners and micro-managing the complex contracts involving strategic partners and OEMs, which it is ill-equipped to handle.
Amit Cowshish
(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of BharatShakti.in)
