Indian Defence Review

In a major policy reform intended to promote Make in India in defence manufacturing, the Ministry of Defence (MoD) announced on May 31, 2017 the much-anticipated Strategic Partnership model for the Indian private sector.¹ The model, whose concept was first suggested by the Dhirendra Singh Committee in its July 2015 report, populates Chapter VII of the Defence Procurement Procedure 2016 (DPP 2016). It visualises designating a few private companies as Strategic Partners (SPs) that would not only assume the role of system integrators but also lay a strong defence industrial foundation by making long-term investment on production and R&D infrastructure, creating a wider vendor base, nurturing a pool of skilled workforce, and making a commitment to indigenisation and technology absorption. The ultimate aim of the model is to enhance India’s self-reliance index in defence procurement which continues to remain at an abysmally low level despite a huge defence industrial complex much of which is managed by state-owned Defence Public Sector Undertakings (DPSUs) and the Ordnance Factory Board (OFB).

Strategic Partnership: The Model

The strategic partnership model seeks to identify a few Indian private companies as Strategic Partners who would initially tie up with a few shortlisted foreign Original Equipment Manufacturers (OEMs) to manufacture big-ticket military platforms. In the initial phase, the selection of SPs would be confined to four segments: Fighter Aircraft, Helicopters, Submarines, and Armoured Fighting Vehicles (AFV)/Main Battle Tanks (MBT). In each segment, “only one SP would generally be selected”, says the new DPP chapter.

To allay fears that the MoD may favour one company over another, the selection of SPs and their foreign OEM partners would be based on a competitive process to be undertaken simultaneously. The main criteria for the selection of OEMs would be the compatibility of their products with the Services Staff Qualitative Requirements (SQRs), and their commitment to provide technology and other assistance to enable their Indian partners to produce in India with maximum indigenisation. Parallel to the shortlisting of OEMs, the MoD would also identify a list of Indian companies in each segment based on certain technical, financial and infrastructure-related parameters. These shortlisted Indian companies would then be issued Requests for Proposal (RFP) along with the list of segment-wise OEMs in order to enable them to engage foreign partners and submit bid responses. Post submission of bid responses, field trials of the equipment would be conducted to shortlist the Indian companies whose products meet the technical and performance requirements of the armed forces. After field trials, the financial bids of the companies that qualify in each segment would be opened to identify vendors who have quoted the lowest price. In each segment, the contract would be awarded to the company that has quoted the lowest price, and it would be designated as a Strategic Partner. It is to be noted, however, that existing Strategic Partners would not be the automatic choice for future contracts, although they would be given some weightage in the tendering process for the core expertise developed during the execution of the initial contract under the Strategic Partnership model.

According to the guidelines stipulated in the new Chapter VII of DPP 2016, any applicant company interested in participating in the selection process for strategic partners must be owned and controlled by resident Indians. This means that the majority in a company’s board of directors, including the Chief Executive Officer (CEO), must be resident Indians, and that a minimum 51 per cent of its equity must be owned by resident Indians. The cap of a maximum of 49 per cent Foreign Direct Investment (FDI) in SPs, which is also the condition in the newly revised ‘Make’ procedure, is intended to keep the crucial decision-making and intellectual property rights (IPR) in the hands of resident Indians.

In a major departure from the recommendation of the Dhirendra Singh Committee, which had strongly recommended against any cross-holding in two or more SPs by one parent company, the MoD’s notified model has left this issue open. This would allow a number of subsidiary companies of a particular conglomerate to be eligible to be designated as SPs, provided they satisfy the other stipulated condition.

Potential Benefits

The SP model, if implemented well, is likely to have a number of benefits for both the private sector and the larger Indian defence industry. From the private sector’s point of view, the biggest benefit would be the opportunity to participate in some big ticket contracts – estimated to be worth over two lakh crore rupees in the initial phase of execution ¬– which were hitherto reserved for the DPSUs and OFs. At the same time, the model would also go a long way in bridging the long-standing trust gap between the Indian private sector and MoD, with the latter perceived to be friendlier toward public sector entities.

Further, Strategic Partners, being private sector companies, are expected to exploit their dynamism, competiveness, profit orientation, and exposure to the civilian sector for efficient utilisation of the technology, manpower and infrastructure developed in the process. Moreover, given that future orders would not be awarded automatically after the initial contract, it is in the interest of SPs to constantly improve upon their competitiveness and core expertise. The development of competitiveness and expertise to compete to win future contracts, which was lacking in the case of DPSUs/OFs because of a constant flow of orders handed over on a platter by the MoD, is something that would contribute to laying a strong and credible foundation for India’s military industrial complex.

Some Concerns

Despite potential benefits, there are two concerns which need to be addressed to make SPs contribute in a meaningful and time-bound manner. The first and foremost concern is the lack of institutional capacity and ability to guide the new process to its logical conclusion. In the past, several promising measures, especially those connected with the ‘Make’ and ‘Buy and Make (Indian)’ procedures, have failed to yield the desired results because of these shortcomings. Although the new Chapter VII of DPP talks of “an appropriate institutional and administrative mechanism” besides “adequate expertise in relevant fields like procurement, contract law and ToT [Transfer of Technology] arrangements”, much would depend on how they unfold. Needless to say, it is the lack of reforms in the structures and decision-making processes surrounding procurement and production that have inhibited the development of a strong defence industry.

There is also a concern regarding the long-term viability of SPs largely due to the privileged position enjoyed by public sector entities. Time and again, the MoD has deviated from its own promise of fair play in award of contracts and handed over large orders to DPSUs and OFs on nomination. It would be futile to expect SPs to make major investments if the government does not provide a level-playing filed to the private sector.