Reliance Naval’s eligibility question holds up warship orders worth Rs 63,000 crore (Rs 630 billion)

The MoD is unable to decide whether to permit, or to disqualify, Reliance Naval from a clutch of impending tenders

By Ajai Shukla

Business Standard, 27th Sept 18

On Wednesday, the defence ministry announced a contract for building two diving support vessels (DSVs) awarded to the defence public sector undertaking (DPSU), Hindustan Shipyard Ltd (HSL) for an estimated Rs 2,000 crore (Rs 20 billion).

Obscured by the fanfare around this relatively small order, warship building projects worth at least Rs 63,000 crore (Rs 630 billion) have ground to a standstill. In all these cases, the defence ministry has halted tendering in wait for a government decision on whether to allow, or to exclude, Anil Ambani’s shipbuilding firm – Reliance Naval and Engineering Ltd (RNAVAL) – from those contracts.

The navy has a major grouse with RNAVAL, which has failed to deliver five Naval Offshore Patrol Vessels (NOPVs), an order that Pipavav Shipyard won in 2011. It was to deliver the first NOPV in November 2014 and all five before November 2016. But, four years after the delivery date, not even the first NOPV has been handed over.

“For a similar infringement, the navy cancelled an order on ABG Shipyard, leading to its bankruptcy,” points out a shipbuilding industry executive.

The defence ministry is also undecided on allowing RNAVAL to bid in warship tenders because IDBI Bank – one of its biggest lenders -- has taken RNAVAL to the National Company Law Tribunal (NCLT), seeking debt resolution. An 18-member consortium of lenders has reportedly declined RNAVAL’s settlement offer for at least Rs 9,000 crore (Rs 90 billion) in outstanding loans. The NCLT is understood to have granted time till October 10 for resolution.

At least one lender – Vijaya Bank – has classifed its loan to RNAVAL as a non-performing asset. The company’s auditors, Pathak HD & Associates, have noted that cash losses, erosion of net worth, recalled loans and other adverse indicators “may cast significant doubt on the company’s ability to continue as a going concern.”

In the circumstances, RNAVAL’s presence has stalled a tender, worth an estimated Rs 20,000 crore (Rs 200 billion), for building four Landing Platform Docks (LPDs) in India – large vessels that carry helicopters, tanks and vehicles for amphibious landings, or for disaster relief. 

In 2014, the navy issued a “request for proposals” (RFP) to three private shipyards: Larsen & Toubro (L&T), ABG and Reliance’s Pipavav shipyard, later renamed RNAVAL. The winner was to build two LPDs, with HSL nominated to build the other two. However, with ABG going bankrupt, a fresh RFP was issued in May 2017 to L&T and RNAVAL for building all four LPDs. Since then, action has stalled on the of whether RNAVAL is eligible. The bids still remain unopened.

“The LPD provides us an important capability. It will take minimum two years from RFP to contract signature and another three years to build the LPDs. So 2023 is the earliest we can get this capability”, says a senior navy admiral.

Worse, at least 42 vessels, urgently needed by the navy and coast guard, are facing similar or longer delays because the final list of eligible bidders is not finalised. There are no questions over the eligibility of the four DPSU shipyards – Mazagon Dock Ltd, Mumbai; Garden Reach Shipbuilders & Engineers, Kolkata; Goa Shipyard and HSL – and private shipbuilder L&T has demonstrated both engineering capability and shipyard capacity. However, one question is holding up the tendering: Is RNAVAL also eligible, given its building record and financial condition?

Sources in the navy say the 42 vessels lined up for tendering are: seven next-generation corvettes, six next generation missile vessels, six next generation OPVs, four multi-purpose support ships, three cadet training ships, five survey vessels and one survey training vessel. The coast guard is waiting to tender two pollution control vessels and eight fast patrol vessels.

Industry sources say the total value of the navy’s contracts would be at least 60,000 crore (Rs 600 billion). The coast guard vessels would require another 3,000 crore (Rs 30 billion). 

Finally, the decision on RNAVAL’s eligibility will be crucial for the execution of Project 75I, to build six conventional submarines in India. The government is working on guidelines for choosing “strategic partners” for submarine building, based on technology transferred by a chosen foreign vendor.

The defence ministry and Reliance Defence did not respond to requests for comments on these issues.

On Tuesday, after clearing changes to the Defence Procurement Procedure (DPP), the defence ministry stated: “These measures will go a long way in obviating procedural delays and will hasten activities besides shrinking the procurement timelines giving due preference to indigenization.

However, private shipyards that have invested heavily in creating capacity for warship building, say their financial viability depends upon whether the order bottleneck can be resolved quickly. Central to that is a decision on RNAVAL’s eligibility.