Unions stall private sector entry into warship building

INS Teg, the fourth of six Talwar-class frigates that the Indian Navy is buying from Russia. Indian defence shipyards have the capability, but not the capacity, to meet the navy's warship requirements.

By Ajai Shukla

Business Standard, 8th Oct 12

The Defence Ministry’s (MoD’s) belated move to speed up warship building by bringing in the private sector has been delayed, apparently due to pressure from workers’ unions in the MoD shipyards.

In July, defence shipyard Mazagon Dock Ltd (MDL) --- snowed under with naval warship orders and running years behind schedule --- formed joint venture companies (JVs) with two private sector warship builders, Pipavav and L&T, to speed up the building of surface warships and submarines respectively. This would marry MDL’s expertise with the private sector’s new capacities.

Two months later, not a single order has been placed on the JVs, apparently for fear of angering MDL’s powerful workers’ unions. Instead, MDL has engaged a consultant, IDBI Capital, to advise the shipyard on what work to transfer to the JVs.

Top MoD officials say that MDL workers’ unions would resist the transfer of work to the two JVs, despite the public sector yard’s unmanageable order book, and its inability to deliver warships on time.

“MDL’s unions will have to be satisfied that there is a case for taking work away from MDL and giving it to the JV. They will have to be convinced that they will not suffer,” says the MoD official.

Ironically, this roadblock comes at a time when the navy desperately requires more warships, operating with 134 vessels against an assessed requirement of 160. In 2010, a Comptroller and Auditor General (CAG) audit found that the navy has just 61, 44 and 20 per cent respectively of the frigates, destroyers and corvettes that are its minimum requirement. The CAG report notes that “The lead ship in all projects is delivered or expected to be delivered after a delay ranging from four to five years from the original delivery date.”

The JVs with Pipavav and L&T were to end these delays, by outsourcing work on surface warships to Pipavav’s Rs 3,000 crore shipyard near Dahej; and L&T’s submarine yard at Hazira and its 3,500 crore shipyard at Kathupally, near Ennore.

“After signing the Share Holders Agreement, we are waiting for MDL to decided the scope of work to be allotted to the JV,” says MV Kotwal, who heads L&T’s heavy engineering division and oversees its defence initiatives.

But MDL says that engaging a consultant is inescapable, since guidelines specify that the JVs can only be given work that is beyond the public sector’s capacity and capabilities.

“An assessment of what work can be transferred to the JVs is best done by a third party, which can provide an objective assessment that is based on our existing order book, seen in the light of our performance in the past,” says Rear Admiral (Retired) Rahul Shrawat, the MDL chief.

Shrawat says that IDBI Capital, the selected consultant, would also identify the minimum quantum of work --- called Minimum Economic Order Quantity, or MEOQ --- that would have to be placed on the JV. This assured business would be necessary to make the JV economically viable and nurture it through is initial days.

Pipavav and L&T worry that their JVs are now at the mercy of a consultant, IDBI Capital, which has no experience in warship manufacture. MDL officials, however, say that the company is experienced in infrastructure-related consultancy.

Besides the issue of work share, the MDL-L&T JV also faces a problem of intellectual property rights (IPR). This relates to the technology that MDL has obtained from French submarine builder, DCNS, for building six Scorpene submarines under Project 75. According to Admiral Shrawat, “we will have to take our collaborators, DCNS, into confidence before we can transfer Scorpene work to a partner.”

Project 75 is already running more than three years late. The first Scorpene, which MDL was to deliver in 2012, will not be joining the navy before 2015. But MDL officials say that the JV is not likely to substantially speed up work, since it cannot be given any substantial outfitting work for at least the first two or three Scorpenes.