Aatre Task Force recommends Rs 4,000 crore entry bar for private firms building weaponry as “strategic partners”

Workers assemble a Chinook main pylon at Dynamatic Technologies, Bangalore (Image: courtesy Pallon Daruwala)

By Ajai Shukla

Business Standard, 28th Jan 16

Group I

Seven segments: aircraft, helicopters, aero engines, submarines, warships, artillery and armoured vehicles

One private company to be chosen for each segment

Must have Rs 4,000 crore turnover for last three years

Capital assets of Rs 2,000 crore

Should have grown at least 5% in three of last five years

Credit rating at least CRISIL/ICRA “A”

No default on loans, or declared non-performing assets

Group II

Three segments: metallic materials and alloys; non-metallic materials; and ammunition, including smart munitions

Two private companies to be chosen for each segment

Must have Rs 500 crore turnover for last three years

Capital assets of Rs 100 crore

Should have grown at least 5% in three of last five years

Credit rating at least CRISIL/ICRA “A”

No default on loans, or declared non-performing assets

A ministry of defence (MoD) task force, under the leadership of former Defence R&D Organisation (DRDO) chief, VK Aatre, has recommended stiff guidelines for selecting private sector companies as “strategic partners” for building high-technology, complex systems for the military.

The report was submitted to the MoD last week, but has not yet been publicly released. The Business Standard has reviewed a copy of the report

The Aatre Task Force (hereafter, Task Force) has laid down two sets of eligibility criteria for evaluating prospective strategic partners. A “financial gate” will ensure a company has deep pockets to support its equipment for the duration of its service life, which is often decades long; and a “technical gate”, which requires applicants to be capable of building systems with multiple technologies.

The financial gate will exclude all but very large companies. A strategic partner must have a consolidated turnover of at least Rs 4,000 crore for each of the last three financial years; and capital assets of Rs 2,000 crore. The company should have grown at minimum 5 per cent for at least three of the preceding five years. Finally, its credit rating must be equivalent to at least CRISIL/ICRA “A” (stable).

The Task Force was set up after a MoD expert committee, under Dhirendra Singh, recommended that one be constituted to lay down criteria for selecting one private “strategic partner” for each of six “strategic segments”. These were: aircraft/helicopters, warships/submarines, armoured vehicles, missiles, command & control systems, and critical materials.

However, the Task Force has rearranged these into two groups. Group I has seven segments that include aircraft; helicopters; aero engines; submarines; warships; guns and artillery; and armoured vehicles. The Task Force recommends that just one strategic partner be chosen for each segment.

For the three segments in Group II --- metallic material and alloys; non-metallic materials; and ammunition, including smart munitions --- the Task Force recommends two strategic partners for each.

The financial requirements for Group II are less stringent than for Group I, since integration of systems is not needed for developing materials and ammunition. The Task Force stipulates that strategic partners must be “an engineering and/or a process technology company”. The financial gate is Rs 500 crore turnover for each of the last three financial years; and capital assets worth Rs 100 crore.

In addition, strategic partners in both Group I and II are required to have “robust good governance”. They should not have defaulted on loans, or have loans they have taken classified as non-performing assets. They should not be under Corporate Debt Restructuring Mechanism (CDR) or Strategic Debt Restructuring Scheme.

In rearranging the “strategic segments”, the Task Force has recommended that separate strategic partners be appointed for aircraft and helicopters, since these are “essentially different segments and require different technologies.”

It also recommends that a separate strategic partner be appointed to develop aero engines since “these are critical for any aircraft project and India does not have adequate expertise in this field.” The report cites the global environment, where aero engine makers like Pratt & Whitney, General Electric, Rolls-Royce are separate from aircraft developers like Boeing, Airbus, etc.

The Task Force recommends that “C4IRS networks” --- which govern the realms of command, control, communications, computers, intelligence, reconnaissance and surveillance --- should not be developed through a strategic partner. Instead, it recommends the model of “Development Partners”, presumably referring to the “Make” procedure, under which two network systems are being developed --- the Tactical Control System and the Battlefield Management System.

The Task Force has recommended a gradual implementation. In the first phase, it recommends that strategic partners be identified for just five segments: aircraft, helicopters, submarines, armoured vehicles and ammunition.

Norms have been laid down to ensure that only an Indian companies can be a strategic partner. Applicants cannot have a composite foreign direct investment (FDI) of over 49 per cent, including all types of investments. The chief executive must be a resident Indian.

In extreme situations, like war, the government “would have the right to acquire control over the intellectual property used and facilities developed pursuant to the Strategic Partnership.”

The Task Force has also recommended the establishment of an independent regulator for Strategic Partnerships, which would allow “orderly development and regulation.”

The “Report on the Task Force for Selection of Strategic Partners”, was handed in last week to the MoD. It is authored by former DRDO chief, Dr VK Aatre; former HAL chairman, NR Mohanty; legal expert, Shardul Shroff; heavy industries executive Ishan Shankar, banker, VP Shetty; ICRA chief, Naresh Takkar, accountant, Dr Asish Bhattacharyya; former army procurement chief, Lieutenant General AV Subramanian; and others.

The report notes that the chosen strategic partners must function as systems integrators, building a large eco-system of specialized vendors and suppliers, including from the MSMEs sector.

Defence industry experts say the notion of strategic partners is no different from that of “Raksha Udyog Ratnas”, or RuRs, that the Kelkar Committee had mooted in 2005. That, however, was put on the back burner by then defence minister, AK Antony, following strong resistance from the trade unions of defence public sector undertakings, who had apprehensions about the entry of the private sector into defence.

Perhaps to allay these fears, the Task Force notes: “Strategic Partners shall co-exist with the Defence Public Sector Undertakings (‘DPSUs’), Ordnance Factories (‘OFs’) and Defence Research and Development Organisation (‘DRDO’) and the MoD (defence ministry) shall be at a liberty (sic) to utilize all these entities for its needs."