Private firms lament entry of DPSUs into “strategic partnership” tenders

Mazagon Dock, which is building Scorpenes under Project 75, is being allowed as a "strategic partner" into Project 75-I too

By Ajai Shukla

Business Standard, 3rd May 19

The entry of Hindustan Aeronautics Ltd (HAL) into a helicopter purchase that was reserved for the private sector has raised controversy over the “strategic partnership” (SP) model of procurement.

On April 26, HAL submitted two responses to the navy’s Expression of Interest (EoI) issued to industry for building 111 Naval Utility Helicopters (NUHs) for an estimated Rs 21,738 crore. The NUHs are being acquired under the SP model, which involves choosing an Indian private firm to build the helicopters in the country, with technology provided by a selected foreign “original equipment manufacturer” (OEM).

The SP policy states: “Strategic Partnerships seek to enhance indigenous defence manufacturing capabilities through the private sector over and above the existing production base.” 

The Dhirendra Singh Committee conceived the SP policy in 2015, to implement the prime minister’s “Make in India” vision. The policy aimed to develop private sector firms to rival defence public sector undertakings (DPSUs) and ordnance factories (OFs), which had achieved only limited success in indigenising weaponry.

To implement the Dhirendra Singh report, a task force under VK Aatrey, former chief of the Defence R&D Organisation (DRDO), recommended methodology for choosing private SPs in ten technology realms – one SP each for building aircraft, helicopters, aero engines, guns, submarines, warships and armoured vehicles; and two SPs each for manufacturing metallic material and alloys; non-metallic materials; and ammunition, including smart munitions.

The intent was to select deep-pocketed private firms that could be nurtured and encouraged to scale up in size and capability, through automatic orders in their respective fields. 

“In essence, the MoD had a stake in developing its SPs into a globally competitive firms, just as it had built up DPSU and OF infrastructure and facilities, and provided them assured orders on ‘nomination basis’, rather than through competitive bidding,” says an industry CEO who helped develop the SP policy.

But the MoD bureaucracy shrank from selecting private sector firms to be recipients of government largesse. In 2017, when Manohar Parrikar resigned as defence minister, Arun Jaitley hurriedly announced an SP policy that required every contract to be competitively tendered.

The number of technology realms for SP category procurement was also reduced from ten to just four – aircraft, helicopters, submarines and tanks.

“This has already diluted the SP policy. Programmes in this category have now reduced to no more than licensed manufacture, with the government independently selecting Indian and the foreign vendors,” says Jayant Patil, who heads L&T’s defence business.

Private sector firms particularly oppose DPSUs being allowed into SP model procurements, pointing out that their government-builtinfrastructure, transfer of technology (ToT) over the years and “nominated” contracts advantage them over private firms who must raise and service finance over the program duration.

Yet, the SP policy states: “MoD may consider the role of DPSUs/OFB at the appropriate stage(s) keeping in view the order book position, capacity and price competitiveness.” HAL cites this as rationale for participating in the NUH project.

In Project 75-I, which involves building six advanced conventional submarines in India, the MoD is allowing DPSU shipyard Mazagon Dock Ltd (MDL) to participate, ostensibly because there is only one private firm – L&T – with the capacity and capability to build advanced submarines.

If the MoD’s concern relates to price benchmarking, that can be broadly established through Project 75 – the building of six conventional submarines that MDL is currently delivering. The only additional factor that must be costed into Project 75-I is its “air independent propulsion”; the cost of which is known since the DRDO is building it.

Patil points out that numerous projects continue being awarded to DPSUs and OFs on a nomination basis based on past decisions. But the MoD dithers and delays procurement of retracts RFPs when there is a single vendor situation.

In the NUH tender, there is not even a “single vendor” situation that requires HAL to participate. Six private firms have bid and at least two – Mahindra and Tata Advanced Systems – appear likely to qualify technically.

“But the flawed SP policy allows HAL to compete. The outcome is clear: the government will have only one aerospace SP and that will remain HAL,” says the CEO of one of the competing private firms, who requests anonymity.