Gateway House Defence boost for private sector?

In a flurry of activity commencing on May 20, the Defence Acquisition Council cleared the Strategic Partnership Model (SPM) policy for private sector involvement in India’s defence manufacturing. Three days later, it was followed by the approval of the Cabinet Committee on Security, and almost immediately thereafter, on May 31, the Ministry of Defence (MOD) brought it into force as the long-awaited and missing Chapter VII of the recently updated Defence Procurement Procedure (DPP), that it had issued in 2016.

This policy, now given both sanctity and wings, was devised and recommended by the Dhirendra Singh Committee two years ago [1], and clears the way for the development of long-term manufacturing capacity for major defence platforms and equipment in India’s private sector.

In accordance with the policy, the government will ‘select’ private companies with adequate turnover and net worth as its Strategic Partners (SPs) to manufacture four types of frontline platforms, namely, single-engine fighter aircraft, conventionally powered submarines, light helicopters, and armoured fighting vehicles (tanks). The selection of the SPs “will be based on the inherent capacity and ability of the vendor to emerge as a systems integrator and to set up a vendor network for sourcing”.

The policy was envisaged in consonance with the larger Make in India initiative of the Modi government. The Dr V.K. Aatre Task Force [2] was subsequently set up to define the criteria and methodology for selecting suitable strategic partners from private industry, which will be both capable and willing to undertake such heavy investment manufacturing.

While the broad framework of the policy is quite clear, much needs to be clarified before private industry can be expected to take the plunge and invest the large sums of money required in infrastructure, R&D and expertise.

The selection of the strategic partners will be done in conjunction with an established foreign Original Equipment Manufacturer (OEMs), which the government will select on parallel terms. [3] “The MoD will implement the process of shortlisting of OEMs for each segment simultaneously with the process of identifying SPs.” However, it is not yet clear how this union of OEM and SP will come about. Will this be an arranged marriage, with the government playing matchmaker? Or will either the SP or OEM, or both, have a say in choosing their partner? Can a latecomer Defence Public Sector Undertaking (DPSU) enter the fray and execute a shotgun wedding?

There must be clarity regarding the primary contractor. The Indian SP must not become a production agency for the OEM. The MOD needs to come out with specific implementation guidelines on this and other issues.

There is always the question of how the government will keep the public sector units alive since the SPM is meant to create capacity ‘over and above’ that already available in the DPSUs and ordnance factories. It appears that the government will reserve the right to nominate selected DPSUs as and when it deems necessary.

It is evident that no government can guarantee follow-up orders to the SPs selected for an initial order.

At the moment, there may not be enough business to go round, covering both the private and public sectors: some entities may have to die. This can, of course, be mitigated if the SPM is matched by concurrently promulgating a pragmatic and ambitious export policy for defence manufacturing.

It will have to be seen whether foreign OEMs will display an appetite for this model, which will prevent their control—the maximum being 49% equity—over the joint venture or Special Purpose Vehicle that they will enter into with the Indian SP. These OEMs will also have to agree to a considerable transfer of technology, underwritten by their own governments, before being awarded any contract. Moreover, the OEM will be jointly responsible along with the SP for certification and quality assurance of the platforms supplied to the MOD.

Rather unexpectedly, ammunition has been omitted from the first list of items to be progressed through the SPM. Though the government must have its reasons, private sector participation in the manufacture of ordnance should be a priority, and both committees had recommended this.

There is concern in private sector circles that either the policy itself or specific selection of SPs and OEMs will face legal challenges as a result of India’s increasingly litigious environment, as also the inherent domestic corporate rivalry, given the huge stakes involved. Even an accusation is sufficient to halt the acquisition process, and the government will do well to address in advance the possibility of this occurring.

The SPM is a welcome and path-breaking initiative, which will hopefully go down in history as the turning point in the establishment of a strong defence industrial base in India. Realistic implementation will certainly be crucial to its success, if it is not to meet the fate of earlier Procurement Procedures, some dating back to 2006 [4], which have yet to launch even one venture.

Vice Admiral Anil Chopra is Distinguished Fellow, International Security and Maritime Studies, Gateway House. He was the former Commander- in-Chief of the Western Naval Command, the Eastern Naval Command, and former Chief of the Indian Coast Guard.

This article was exclusively written for Gateway House: Indian Council on Global Relations. You can read more exclusive content here.

For interview requests with the author, or for permission to republish, please contact outreach@gatewayhouse.in.

References

[1] Press Information Bureau, Government Of India, Steps Taken on Dhirendra Singh Committee Report, (New Delhi: Ministry of Defence, 2016), <http://pib.nic.in/newsite/mbErel.aspx?relid=142247>

[2] Ministry of Defence, Government of India, Report of the Task Force on Selection of Strategic Partners, December 2015, <http://mod.nic.in/dod/sites/default/files/UPload.pdf>

[3] Ministry of Defence, Government of India, Defence Procurement Procedure 2016, (New Delhi: Ministry of Defenece, 2016), Chapter 7

[4] Ministry of Defence, Government of India, Defence Procurment Procedure 2006, (New Delhi, Ministry of Defence, 2006), <http://www.mod.nic.in/sites/default/files/dpp2006.pdf>