Key Defence Procurement Reform In Jeopardy

Vishal Thapar Dec 14, 2021

The Ministry of Defence (MoD) on December 13 sought inputs from Industry bodies on proposals which suggest that the ambitious Strategic Partner (SP) concept is set to be diluted in order to co-opt Defence Public Sector Undertakings (DPSUs) into the model.

The SP Model - as enunciated in Chapter 7 of the Defence Acquisition Procedure (DAP) 2020 and its predecessor, the Defence Procurement Procedure (DPP) 2016 - was meant to facilitate the emergence of private sector complexes for the design and manufacture of complex military platforms, including fighter aircraft, helicopters, submarines and battle tanks, as an alternate to the DPSUs. The methodology envisaged was to nominate some big procurements as SP programmes where only the Indian private sector would be considered as bidders in collaboration with Foreign Original Equipment Manufacturers (FOEMs).

But the DPSUs have hit back to force a re-think on the model which was poised to end public sector monopoly in India’s Defence Industry as systems integrators for military platforms. The very first SP Programme – the $3 Billion Naval Utility Helicopter (NUH) project – has been stalled for the last two years after the MoD asked the Indian Navy to consider including an insistent Hindustan Aeronautics Limited (HAL) on its Strategic Partner shortlist. HAL is India’s biggest DPSU and its sole aircraft manufacturer.

Now, after a two-year impasse, the MoD wants Industry feedback on proposals to amend the SP Model. The thought process suggests that the Government is open not only to co-opt the public sector into the SP Model but even to ensure its continued primacy in Defence manufacturing.

Inputs and “value additions” have been sought from Industry bodies, including SIDM, FICCI and ASSOCHAM on the following points:

“1. Recommended strategy to ensure SP Model is distinct from existing ‘Licensed Production’ & Transfer of Technology (ToT) model being followed between FOEM & DPSU/Ordnance Factory. This to include overcoming issue of IPR for manufacturing additional quantities or for development of variants. Investing in System ToT rather than their production.

2. ToT /IP for production of limited numbers only & subsequently improved models/ variants be developed by the Strategic Partner independently or jointly.

3. A Hybrid SP Model where only a part of the technology is sourced from FOEM & balance from DRDO / DPSU. This model would circumvent the need for 'Licensed Production'.”

Industry watchers infer that the immediate fallout of the “re-think” on the SP model could be the certain inclusion of HAL in the NUH programme. “This would defeat the original purpose of the SP Model, which was to develop private sector alternatives to a slothful public sector. How can the private sector be expected to raise new industrial complexes and yet compete on price with the public sector where manufacturing facilities exist for decades and whose costs have long been amortized?” asks an observer.

The note seeking Industry inputs signals strong preference on DPUs to uphold Indian interests. “In certain cases, DPSUs have also been recommended to be included as a partner along with foreign OEM to further the cause of ‘Indigenisation’ & ‘Technological Atmanirbharta’ & ensure that we are not completely dependent on foreign OEM,” the note states.

The second SP Programme for building six diesel-electric submarines under Project 75 (I) has already accommodated the public sector by default. Only one private Indian shipyard – L&T – qualified for the SP shortlist, and the public sector Mazagon Dock Limited (MDL) was thus co-opted to avoid a single-vendor situation. BW Businessworld recently reported reservations about the SP model by some FOEMs, which threaten to derail or delay Project 75 (I).