Ten Imponderables in the Strategic Partnership Scheme

June 22, 2017

The missing seventh chapter of Defence Procurement Procedure (DPP) 2016 entitled “Revitalising Defence Industrial Ecosystem through Strategic Partnerships” was finally notified by the Ministry of Defence less than a month ago.1 The strategic partnership scheme, intended to produce a ‘transformational impact’ on defence manufacturing through the involvement of the private sector, will initially be rolled out in four segments: fighter aircraft, helicopters, submarines, and armoured fighting vehicles/main battle tanks. More segments may be added later, if required.

There is no denying that private sector companies continue to operate on the periphery of defence manufacturing even 16 years after the sector was opened for their participation. There is also no denying that all efforts made since then, such as the introduction of the ‘Make’ procedure in 2006 or the ‘Buy and Make (Indian)’ category in 2008, have had little impact. More than a decade after the ‘Make’ procedure was adopted for indigenous design and development of prototypes, not a single development ‘Make’ contract has been awarded and very few ‘Buy and Make (Indian)’ projects have been awarded to the private sector because of the difficulty in identifying Indian companies to which the Request for Proposal (RFP) could be issued.

Private sector companies have also hardly ever been nominated as an Indian Production Agency (PA) in ‘Buy and Make’ cases since the MoD has not been able to figure out how to choose a private sector entity as its nominee. The ‘Buy and Make’ category, it may be recalled, entails outright purchase of a specified quantity of equipment from a foreign Original Equipment Manufacturer (OEM), followed by manufacture of the remaining quantity in India by an MoD-nominated PA, which could be from the public or private sector.

The ‘Buy and Make (Indian)’ category is much the same, except that in this case the contract is between the MoD and an Indian company. Moreover, the company has to make the equipment selected by the MoD in India with the help of technology transfer from an OEM.

The strategic partnership scheme seems to be an effort to address the problem arising from the MoD’s inability to award buy-from-abroad-and-manufacture-in-India contracts to Indian companies or to nominate them as Indian PAs in contracts awarded to OEMs. The new scheme, which seems to straddle both the aforesaid categories, envisages selection of a certain number of strategic partners (SPs) from the Indian private sector based on a set of technical and financial criteria.

In a separate exercise, MoD will select foreign OEMs which could supply the equipment that meets its requirement. Having done that, MoD will issue the RFP to the SPs specifying the OEMs chosen by it. The SPs will need to tie up with the chosen OEMs to be able to respond to the RFPs. The contract will then be awarded following the usual process involving field trials, staff evaluation and contract negotiation.

This sounds promising as it could indeed lead to a greater involvement of the private sector in defence production. But there are also a number of imponderables in the scheme which the MoD may need to reckon with as it starts executing it.

One, ‘only one SP will generally be selected per segment’ so that it ‘maintains focus on a core area of expertise’. This obviously cannot mean that the MoD will pre-select only one SP for each of the four segments. That would make it impossible to award the contract on a competitive basis, which is what the scheme envisages. The only interpretation, therefore, could be that having won a contract in a particular segment, the concerned SP will not be eligible for any other project in any other – or even the same – segment. If this indeed is what it means, it could queer the pitch for the MoD since the private sector has apparently been vehemently opposed to this idea all along.

Two, this scheme seeks ‘to enhance indigenous defence manufacturing capabilities through the private sector over and above the existing production base’ and so MoD ‘may consider the role of DPSUs/OFB at the appropriate stage(s) keeping in view the order book position, capacity and price competitiveness.’ It is difficult to make out what it means.

Three, if the past experience of selecting Development Partners for ‘Make’ projects is any indication, it will be quite a challenge to evolve a set of objective eligibility criteria for selecting SPs without facing a stiff challenge from those who do not make the cut in this once-in-a-lifetime opportunity.

Four, the condition that the SP should be an Indian company that is ‘owned and controlled by Indian citizens’ implies that foreign OEMs will be minority stakeholders in the SP company. It remains to be seen if they will be happy transferring technology to an entity over which they have little management control and yet be ‘jointly responsible along with the SP for certification and quality assurance of the platforms supplied to MoD.’

Five, the idea being floated in the run up to notification of the scheme was that once selected for a particular project, the SP will remain associated with it throughout the life of the equipment and, in fact, it would also be responsible for life-extension and upgradation of the equipment. The scheme notified by the MoD belies this expectation. It appears that the SP which bags the initial contract may have to compete with others to win the contract for subsequent acquisitions. This does not seem to be in harmony with the stipulation that ‘the selected SP in each segment will be required to present a roadmap for future development including PBL, upgrades, etc.’ which includes development of an eco-system of domestic manufacturers and an R&D roadmap for achieving ‘self-reliance within the country in respect of the Segment.’

Six, the scheme envisages Performance Based Logistics (PBL) by the SP for a period of 10 years. Considering that a platform, once inducted, normally remains in service for over three decades, working out such arrangements after the initial 10 year period could be a challenge, especially since it may become virtually impossible for the MoD to award PBL/maintenance contracts on a competitive basis at that stage.

Seven, the scheme is somewhat ambiguous as regards the basis of selection of the OEM. On the one hand, it says that the ‘mandatory requirements related to indigenisation, roadmap, Transfer of Technology, creation of R&D capabilities and skilling provisions, etc.’ will be indicated in the RFP. But, on the other hand, it says that selection of the OEM will take into consideration such factors as the ‘range, depth and scope of technology transfer offered in identified areas’, ‘extent of indigenous content proposed’, etc. This obfuscates the issue in terms of whether the selection of the SP for award of contract will be based on the lowest quoted price (L1) or the lowest offer will be determined by giving weightage for the offer to transfer technology that goes beyond what is asked for in the RFP. It is difficult to say whether the MoD is ready to handle the latter method of selection.

Eight, the provisions relating to periodic assessment of the level of technology absorption and audit of ‘costs relevant to the Segment at all or any stages (tiers) of manufacturing/ production/ assembly’ require certain capabilities that the MoD perhaps does not possess at present and could take a long time to develop. The scheme also provides that the MoD will have the right to terminate an acquisition contract in the event of, inter alia, ‘material breach’ of the contract or for ‘any other contractually relevant issue’. These are vague grounds and will undoubtedly require a lot of fine tuning by legal experts at the contract negotiation stage.

Nine, it is difficult to visualise how some of the provisions will actually play out. Take, for example, the provision that ‘in order to encourage spiral development of technologies and systems’, factors such as investment in development of infrastructure, technologies and eco-system, as well as in R&D ‘may be given adequate weighatge in deciding upon development partners for projects, including those of DRDO, as well as those under Make procedure of DPP.’ These factors, according to the scheme, will also have a bearing on the selection of Indian partners for ‘enhancing the production capacities/establishing work share with DPSUs/OFs in future.’ It will take some doing to translate this into action.

Ten, the notification says that ‘an appropriate institutional and administrative mechanism for effective implementation of the Strategic Partnerships will be set up within MOD, with adequate expertise in relevant fields like procurement, contract law and TOT arrangements.’ There is no indication how soon this mechanism is likely to be created and whether implementation of the scheme will remain on hold till then.

One last question remains: why the objective sought to be achieved through the strategic partnership scheme could not be attained by resorting to an existing provision in DPP 2016 empowering the MoD to allow foreign OEMs to select Indian private companies as production agencies.

Views expressed are of the author and do not necessarily reflect the views of the IDSA or of the Government of India.