India wants to develop its warship building capacity at an exponential rate. It is well nigh impossible for DPSU shipyards to meet the complete requirement of the Navy and the Coast Guard in the required time frame. Potential of private shipyards must be optimally utilised. In the absence of challenging orders, the growth of private shipyards is bound to get stunted.

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Warship building is a multifaceted and highly technology-centric activity. It entails identification, selection, procurement (from multiple sources) and integration of numerous systems. In addition to propulsion, power generation, auxiliary system, facilities for crew, fuel and provisions, a warship requires a huge array of weapons, sensors and surveillance equipment. Finally, an effective combat management system has to be evolved by interlinking and integrating all facilities. Therefore, a separate procedure is required to carry out design conceptualisation, construction of platforms, mounting of systems and their integration.

...the clout enjoyed by the public sector denies even a foothold to the private sector. Shipbuilding is no exception.

Ship Building Procedure (SBP) was first introduced as a chapter of the Defence Procurement Procedure (DPP) in 2005. The said SBP was made applicable for the acquisition of naval ships through indigenous design and construction by Defence Public Sector Undertaking (DPSU) shipyards. There was no mention of the private sector at all. By the time DPP-2006 was issued, the scope of SBP had been enlarged to state that it would also be used ‘for guidance’ for acquisition from other Indian shipyards. However, all orders continued to go to DPSU shipyards as no large-sized shipyard existed in the private sector.

Earlier Ministry of Defence (MoD) had three shipyards under its administrative control – Mazagon Dock Limited, Garden Reach Shipbuilders & Engineers Limited and Goa Shipyard Limited. Recently Hindustan Shipyard Ltd (HSL) has also been transferred to MoD, thereby increasing the number of DPSU shipyards to four. Mazagon continues to be the premier defence shipyard in the country with a capacity to build warships up to 6,000 DWT and merchant ships up to 27,000 DWT.

...economic downturn had adversely affected orders for civilian vessels, threatening the survival of the private sector shipyards.

However, a number of major shipyards are coming up in the private sector now. ABG Shipyard is setting up dry-dock facilities with capacity to build vessels up to 120,000 DWT. Pipavav Shipyard has 720 meters of sea front and 685 meters of outfit quay while L&T Shipyard at Hazira aims to develop capacity to construct high-technology vessels with displacement of 20,000 tonnes. Bharati Shipyards is another major player with capacity to build larger vessels over 200 meters in length. Several shipyards for specialist vessels are also under various stages of development. Apparently, the private sector has acquired enough muscle and competence to challenge the monopoly enjoyed by DPSU shipyards so far.

MoD has been repeatedly stating that it wants to integrate the private sector in defence production to achieve self-reliance. Yet, the clout enjoyed by the public sector denies even a foothold to the private sector. Shipbuilding is no exception. Three factors have combined to force MoD to revisit SBP. One, there are large gaps in India’s maritime security while the Navy and the Coast Guard continue to be woefully short of vessels. Expeditious procurement to cover gaps is critical. Two, DPSU shipyards are already overloaded with orders and are unable to deliver. All projects are running late – Scorpene project at Mazagon is delayed by close to three years. Three, economic downturn had adversely affected orders for civilian vessels, threatening the survival of the private sector shipyards. Considerable pressure was exerted by business associations on their behalf as only defence orders could keep them going.

New Warship Building Policy

MoD opened warship building to the private sector by modifying the shipbuilding chapter of Defence Procurement Procedure – 2011 (DPP-2011). It is claimed that the shipbuilding procedure has been revised comprehensively with the twin objectives in mind – to encourage participation of the private ship building industry on a level playing field; and to promote indigenisation and self-reliance in warship construction. Shipbuilding has been divided into two sections as follows:-

For procurement on multi-vendor competitive basis, normal procedures for procurement under ‘Buy Indian’, ‘Buy and Make’, ‘Buy and Make (Indian)’ and ‘Buy Global’ are required to be followed as per the categorisation of the case.

• Section A. Acquisition of Naval and Coast Guard Ships, submarines, yard crafts and auxiliary crafts etc ‘by nomination to DPSU’.
• Section B. Acquisition of Naval and Coast Guard Ships, submarines, yard crafts and auxiliary crafts etc ‘on competitive basis’.

As regards procurement by nomination under Section ‘A’, DPP-2011 mandates that the Service Headquarters (SHQ) will carry out a capacity assessment of the shipyards in consultation with the Department of Defence Production (DDP). Recommendations regarding the nomination of DPSU shipyard that should be assigned the project will be forwarded to the Defence Acquisition Council (DAC) along with the proposal. In case of nomination of more than one shipyard, allocation of ships to each shipyard has to be recommended and the lead shipyard earmarked. Similar procedure has to be followed for Coast Guard ships and sanction for nomination of a shipyard obtained from DAC.

For procurement on multi-vendor competitive basis, normal procedures for procurement under ‘Buy Indian’, ‘Buy and Make’, ‘Buy and Make (Indian)’ and ‘Buy Global’ are required to be followed as per the categorisation of the case. However, a certain degree of amalgamation of the above procedures with the process mentioned for shipbuilding by nomination will take place.

Implications of the New Provisions

Creation of two separate sections (nomination and competition) is being justified on the ground that the second section would provide a level-playing field to the private sector. However, knowledgeable observers are skeptical about it. It is feared that all major proposals would be decided by nomination. It is only when all DPSU shipyards get fully loaded and decline to accept additional orders that the proposals would get transferred to the competitive section. Further, such proposals would invariably relate to low-tech low-cost vessels which may not be considered remunerative enough by DPSU shipyards. In other words, only the discarded overflow would be thrown open to competition.

...with the integration of the private shipyards, indigenous shipbuilding capacity would have recorded a quantum jump, thereby obviating the need to depend on foreign ship builders. Unfortunately, MoD has missed a golden opportunity...

DPP-2011 clearly states that capacity assessment of DPSU shipyards would determine their nomination. An interesting point needs to be highlighted here. In case a single DPSU shipyard is unable to accept the complete order, it has to be split with other DPSU shipyards and not with private shipyards. It implies that no order will ever be split between public and private sector shipyards. Further, every proposal has to be categorised for nomination or competition in entirety. The quantity required cannot be split between the two categories.

The above provision will ensure that no comparison can ever be done between the efficiency and cost-effectiveness of public and private sector shipyards. As per earlier plans, India was to build six next generation diesel-electric submarines in India under Project 75I – three at Mazagon, one at Hindustan Shipyard and two at private shipyards. It was an exciting prospect for the private sector as it would have given it an opportunity to prove itself when pitched against DPSU shipyards. However, in a sudden turn around, MoD decided to keep private sector out of Project 75I, preferring to place orders for two submarines on foreign shipyards.

It is apparent that no DPSU will ever participate in competitive bidding under Section ‘B’ of the policy. The reason is simple – if a DPSU possesses spare capacity and covets the order, it can bag it through nomination at a negotiated price at the outset. It would never forego nomination route to compete for the order under Section ‘B’ through a commercially competitive bid. Thus, the open competitive category would be limited to private shipyards only. As is well known, public sector units loathe the idea of competing against the private sector.

The Way Forward

Building of naval ships, submarines, yard crafts, auxiliary ships and coastal vessels is a complex activity. It is both capital and technology intensive. That is the reason why only a handful of nations build warships. India wants to develop its warship building capacity at an exponential rate. It is well nigh impossible for DPSU shipyards to meet the complete requirement of the Navy and the Coast Guard in the required time frame. Potential of private shipyards must be optimally utilised. In the absence of challenging orders, the growth of private shipyards is bound to get stunted.

It is apparent that no DPSU will ever participate in competitive bidding under Section ‘B’ of the policy.

As discussed above, splitting of SBP into two sections is a detrimental and convoluted step. It amounts to reserving contracts for DPSU shipyards without open competition. The sole objective of the policy appears to perpetuate the existing monopoly of DPSU shipyards and to ensure that they are never made to compete against more efficient private shipyards.

It would have been more prudent to keep shipbuilding under a single ‘open competition’ category, thereby providing equal opportunities to all shipyards. This would have resulted in immense gains for the country. First, the potential of private shipyards would have been harnessed and further developed. Secondly, DPSU shipyards would have been forced to improve their functioning and efficiency to be able to compete. Thirdly, orders would have flown to the most efficient and cost-effective shipyard. And finally, with the integration of the private shipyards, indigenous shipbuilding capacity would have recorded a quantum jump, thereby obviating the need to depend on foreign ship builders. Unfortunately, MoD has missed a golden opportunity due to its inability to rid itself of pro-public sector bias.