Indian Defence Review

The Strategic Partnership Policy (SPP) approved in May 2017, is a milestone that unequivocally displays the resolve of the Government (Govt) to give the desired push to “Make in India” drive in the Defence Sector. In fact, the Defence Minister, Smt Nirmala Sitharaman has herself proclaimed that “Make in India in the Defence Sector” is one of her top priorities. The stated aim of the SPP is, “To progressively build indigenous capabilities in the Private Sector to design, develop and manufacture complex weapon systems for the future needs of the Armed Forces”. Many domestic as well as foreign companies are keen to invest in Defence manufacturing and have welcomed the approval of SPP by the Govt. However, the industry still has certain apprehensions about a few unresolved issues viz. the Foreign Direct Investment (FDI) Limit and the resultant Ownership Issue, Joint Responsibility for the Quality of Product, Transfer of Technology (ToT), Funds for the Project/ Research & Development (R&D), Future Orders, Assurance of Transparency and Level Playing Field amongst others. In order to ensure successful implementation of the policy, these concerns expressed by the Industry in media and various other forums need to be addressed on priority.

The issues, assessed implications and recommendations are discussed in subsequent paragraphs.

FDI Limit and Ownership

Issue. The current policy implies that the maximum permitted FDI shall be forty nine percent (49%). No pyramiding of FDI in Indian holding companies or in Indian entities subscribing to shares or securities of the Applicant Company or the Strategic Partner (SP) shall be permitted. Indirect foreign investment shall be accounted for, in counting the forty-nine percent (49%) FDI.

Implication. This restriction, by design, ensures that the ownership remains firmly with Resident Indians. The foreign companies have not taken this restriction favourably and are reluctant to enter into partnership with potential SPs.

Recommendation. It is strongly recommended to retain the restriction on the FDI at forty-nine percent (49%) in the best interest of the Nation, the Armed Forces as well as the Domestic Pvt Industry. However, the limit may be relaxed in exceptional circumstances, on case to case basis, in consultation with the Armed Forces/ respective Service HQ.

Transfer of Technology (ToT)

Issue. ToT by the foreign OEMs to the potential SP for development of complex and highly sophisticated weapon systems to meet the future requirements of the Armed Forces, is a pre-requisite for the success of the Policy. The Industry seeks clarification about the methodology, if any, likely to be adopted for costing of technology and quantum of ToT.

Implication. The OEM(s) expect appropriate incentive(s) for offering a higher percentage of ToT. Costing of technology is another area which requires detailed analysis and bench marking.

Recommendation. Higher quantum of ToT, if offered by OEM(s), may be accorded appropriate weightage. The incentives should be clearly stated to send positive signals to the environment. Methodology for costing of technology and quantum of ToT is required to be worked out unambiguously, without leaving things to speculation/ manipulation.

Future Orders

Issue. Strategic Partnerships would require large investments and patience till the production begins. Though limited security in terms of initial orders, does exist, however, there is no assurance whether the SP would be able to receive future orders, in a particular segment.

Implication. Visible reluctance on part of the Private Industry, due to requirement of huge initial investments and a real possibility of drying up of future revenue stream, as the future order(s)/ quantities are not assured.

Recommendation. Consolidated requirement of particular weapon system(s) in a particular segment, for the next 10 years, can be assessed in advance by the Perspective Planning Directorate of the Army in conjunction with other stakeholders and by similar organisation(s) in the Navy and Air Force. Phased procurement contract, to meet requirements for up to ten years, may be worked out with clearly defined goals for product up-gradation and establishment of maintenance/ repair facilities. The segment could be thrown open for other competitors, post delivery of ordered quantities over an initial period of ten years of the Strategic Partnership.

Funds for Projects

Issue. The potential SPs are expected to raise funds for projects all by themselves. Whether the Govt would be willing to financially support the project and subsequent R&D, is a question that needs to be clarified to reassure the potential SPs.

Implication. As the investments for manufacture of complex weapon systems by the Strategic Partners are likely to remain ‘Non-Performing’ assets till the production starts, the risks that the potential SPs face are intimidating. Further, the R&D for up-gradation/ product improvement also requires substantial amount of funds.

Recommendation. The Govt may consider partial funding of projects for supporting the SPs in initial phases. The funds could be made available in the form of advance and adjusted against orders in a phased manner. A separate corpus may be created by the Govt for funding of R&D by the Private Industry and Educational Institutions/ Universities to stimulate research in selected segments.

The potential SPs may also explore various innovative ways to generate sufficient funds for projects. Some of the suggested ways are:-

• Issue of bonds in consultation with the Govt.
• Bank Credit.
• Debt Financing.
• Public Offers etc.

Eco-System of Domestic Manufacturers        

Issue. SP is expected to submit a plan for developing tiered industries in each segment by developing partnerships or entering into teaming agreements with Micro, Small & Medium Enterprises (MSMEs), Defence Public Sector Undertakings (PSUs), Ordnance Factory Board (OF Board), Defence Research & Development Organisation (DRDO), other PSUs and foreign companies for development of an Eco-System of domestic manufacturers and repair/ maintenance facilities. However, the implementation will be monitored by the Ministry of Defence (MoD).

Implication. The potential SPs have apprehension about the degree of freedom that is likely to be available for carrying out vendor development in accordance with the approved action plan and level of deviation that may be permitted in case MSME or any other team partner fails to perform to the desired level. Whether the relationship between an SP and local vendors would be fixed or open, needs clarification. Monitoring by the Govt/ MoD, is an area of concern.

Recommendation. All relevant aspects about development of Eco-System need to be clarified by the Govt. Limited monitoring by the Govt with a view to ensure adherence to the approved plan for developing tiered industries is an inescapable requirement. However, the relationship between a SP and MSME(s)/ local vendors should generally be ‘open’ to allow sufficient flexibility to the SP.

Joint Responsibility for Quality

Issue. The OEMs have in various forums expressed reservations about joint responsibility for quality of product in view of foreign stake being limited to 49%.

Implication. Quality of product has been accorded the highest priority by the Armed Forces in all procurements. Lack of joint responsibility could eventually jeopardise the entire effort.

Recommendation. Joint responsibility is vital to ensure that the final product and subsequent upgrades are of the desired quality. Any let up on this issue would virtually permit the OEM to abdicate all responsibility for the quality of product, which may not be acceptable. Clarification may be issued on the subject by the MoD.

Level Playing Field

Issue. The Private Industry (both Domestic and Foreign) is apprehensive of the Govt’s contention in keeping open the option to consider the role of Defence PSUs/ OF Board/ DRDO in conjunction with SP or separately, for development of the weapon system(s).

Implication. The Private Industry seeks assurance that overly protectionist policies with respect to ‘Govt Controlled Enterprises’ will not be arbitrarily adopted, which could jeopardise the efforts and investments of the SP and OEM.

Recommendation. The Govt has already taken a slew of measures to provide a ‘Level Playing Field’ for the Private Industry. Imposition of taxes on products of Defence PSUs and OF Board is an example of the sincerity displayed by the Govt on this issue. It is recommended that specific conditions in which DRDO, Defence PSUs/ OF Board may be involved in production of the weapon system(s) subsequently, are required to be clearly stated ab-initio. This would put to rest, the apprehensions of potential SPs with respect to intent of the Govt. Overly protectionist policies of the Govt with respect to Defence PSUs, OF Board and DRDO are required to be avoided to exhibit the Govt’s resolve to provide ‘Level Playing Field’ to the Private Industry.

Transparency

Issue. The Private Industry has been requesting for higher degree of transparency.

Implication.  Enhanced transparency will undoubtedly contribute towards building up the required degree of confidence in the Industry about sincerity of the Govt with respect to successful implementation of the SPP and ‘Make in India’ initiative.

Recommendation. It is widely acknowledged that analyses, deliberations and recommendations by Collegiate(s) are invariably more productive and reliable, than appreciation/ opinion(s) of individual officers in the decision making chain. Hence, for issues specific to Costing of Technology, Quantification of ToT, Road Map for Indigenisation, Defence Exports and other relevant aspects, that may crop up prior to or during the implementation of the SPP, a ‘Committee of Experts’ (CoE) should be appointed. A suggested composition of the CoE is as under:-

Chairman – Defence Secretary
Members – Vice Chiefs of Army, Navy and Air Force,
Secretary Defence Production,
Master General of Ordnance,
(Equivalent officer(s) from Indian Navy/ Air Force for segment(s) pertaining to them),
Director General Weapons & Equipment
(Equivalent officer from Indian Navy/ Air Force for segment(s) pertaining to them),
Director General Acquisition,
Financial Advisor Defence Services,
Representatives of DRDO, OFB, Defence PSU (as applicable),
Representatives of Potential Strategic Partners,
Any other member(s), as deemed necessary by the Chairman.           

Member Secretary – Acquisition Manager in MoD. 

The formulation of Segment wise CoE would send positive signals to the environment on the seriousness of the Govt about enforcing transparency. The Raksha Mantri would inevitably have the final word on all issues while according due consideration to the recommendations of the CoE.

Conclusion 

The SPP is indeed a defining initiative of the Govt, aimed to give a fillip to defence manufacturing and building indigenous capabilities in the Private Sector to meet future needs of the Armed Forces. Acceptance of the above recommendations is likely to allay the apprehensions of the Private Industry (both Domestic and Foreign Industry) and create conducive environment for effective and successful implementation of the Policy.

Courtesy: http://www.claws.in/1830/strategic-partnership-the-way-forward-sushil-chander.html