Ministry of Defence struggles to nominate private sector “strategic partners”

By Ajai Shukla

Business Standard, 9th May 16

Defence Minister Manohar Parrikar has ordered an intensive weekly interaction between his office and private defence industry to finalise, by the end of May, a procedure for nominating “strategic partners” --- each one a private company nominated as the preferred production agency for a specific technology area like warships, submarines, aircraft, etc.

At a meeting in his office on April 25, Parrikar encountered deep divisions within the ministry, industry and the military on the methodology for choosing strategic partners (SPs), and whether such nomination would be desirable at all.

On Friday, Parrikar told parliament that the new Defence Procurement Procedure of 2016 (DPP-2016) was promulgated on March 28. However, there remains a gaping hole in DPP-2016: an entire chapter on SPs remains to be added.

Business Standard learns that continuing disagreements stand in the way of an agreed policy. Ordnance Factories (OFs) and defence public sector undertakings (DPSUs) see the nomination of private sector SPs as threats to their long-held monopolies. Meanwhile, smaller private companies worry that entry barriers --- like size of company, net worth, turnover, etc --- would bias the selection of SPs in favour of large private sector players.

The idea of private sector SPs is the brainchild of the ministry-constituted Dhirendra Singh Committee (2014-15). Subsequently, the VK Aatre Task Force (2015-16) recommended designating one private sector strategic partner (SP) for each of seven technology areas --- aircraft; helicopters; aero engines; submarines; warships; guns and artillery, and armoured vehicles. It recommends two strategic partners each for three other technology segments --- metallic material and alloys; non-metallic materials; and ammunition, including smart munitions.

The OF/DPSU establishment, tacitly backed by the Department of Defence Production (DDP), argue that private sector SPs lack expertise and experience; and that they could fold up, or exit the defence business, leaving the equipment they built without life-cycle support.

Meanwhile, defence medium, small and micro enterprises (MSMEs) told Parrikar that only limited indigenization could be expected by limiting SPs to large private industry with heavy manufacturing capability but no high-technology expertise.

HS Shankar, who heads an MSME, Alpha Design Technologies, told Parrikar: “The hull and turret of a tank are just containers for the high-technology combat systems inside. Large companies will manufacture the hull and turret, but, if you want true indigenization, MSMEs that build the complex fire control systems inside, must be a part of the SP. The current entry gates debar us from being nominated SPs.”

The ministry is now considering whether private sector consortiums, which bring together several companies with different skills, should be SPs rather than individual companies with less diversified skills.

Smaller companies have also raised questions over the calculation of entry gates. The Aatre Committee recommends that SPs must have annual turnover of Rs 4,000 crore. It has now been asked whether joint ventures (JVs) between small Indian companies (that do not meet the turnover requirement) and global majors that comfortably do, should be eligible. The MoD is examining the question.

In resolving these questions, there is little clarity even within the MoD. At the meeting, Parrikar unexpectedly proposed that a company selected as a SP for, say, helicopters, would not be allocated every helicopter order. Instead, each helicopter project would be allocated on a case-to-case basis.

“It is this MoD reluctance to provide assured orders to private companies that invest in R&D, or in production facilities, that is at the root of the problem,” complains a defence company chief.

The Aatre Task Force report mentions that the government should reserve the right to first place orders on OFs/DPSUs; and only after filling public sector capacity would orders go to the concerned private sector SP.

MoD insiders believe that, given so many disagreements, the nomination of SPs may eventually be truncated to fields like fighter aircraft and submarine production, where contracts are imminent.

Bureaucrats also worry about future allegations of bias in nominating SPs. “The decisions over nominating private sector companies in spectrum and coal block allocations led to major scams. Why should the nomination of SPs be any less contentious?” asks one industry chief.