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October 17, 2017
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Strategic Partnership Model – Fine Print Will Hold the Key to Success

By Amit Cowshish Published: June 2017
 

New Delhi. Endorsement of the Strategic Partnership (SP) model by the Cabinet Committee on Security (CCS) on 24 May 2017, within days of its being cleared by the Defence Acquisition Council (DAC), has taken a section of the strategic community and the private sector industry champions by storm.

Though the details of the policy are yet to emerge, it is already being hailed as the game-changing reform which will catapult the Indian private sector to the centre-stage of defence production through transfer of technology from the foreign Original Equipment Manufacturers (OEMs).

It bears recalling that defence production was opened to full participation by the private sector in 2001 but it continues to play a peripheral role with very few big contracts going its way. It is, therefore, not a day too soon to do whatever it takes to energise the domestic industry.

Recommended by a Committee of Experts (CoE) in July 2015, the SP model is uncannily similar to the Raksha Udyog Ratna (RUR) concept, thought of more than a decade back but abandoned at the last minute, ostensibly under pressure from the Defence Public Sector Undertakings (DPSUs) who ran the risk of being sidelined.

Considering the speed at which the proposal has been moving of late it seems the government is determined not to succumb to any such pressure this time. While this may be reassuring some other concerns remain.

The SP model recommended by the CoE envisages selection of OEMs for procurement of strategic platforms and simultaneous selection of SPs, who could then be nominated by the Ministry of Defence (MoD) as the Production Agencies (PA) for manufacturing the selected platforms in India with the help of technology acquired from the OEMs.

The strategic partners would remain associated with a given platform throughout its lifetime and even beyond that if it requires life-extension or upgradation. The life time support would entail maintenance, repair and overhaul.

This will obviously give a monopolistic control to the strategic partners, unless MoD comes up with a mechanism to deal with this situation, as also the critical issue of determination of price in all subsequent cost-plus contracts with the SPs after the initial manufacturing contract is fully executed. These subsequent contracts, for life-extension, upgradation or even maintenance, will obviously not be on competitive basis.

Reports suggest that the scheme may be rolled out in four segments: fighter aircraft, helicopters, submarines and armoured vehicles. More segments could be added later but these will probably be commercially less rewarding.

There is no doubt that generally MoD will have to select the platform through a competitive process. If the past experience is any guide, this could take a long time, unless some simplified procedure is introduced as a part of the new policy.
While selection of the platform may not be much of a problem, selection of the strategic partners could present a bigger challenge, not least because of the difficulty in evolving objective and unchallengeable selection criteria.

The media reports suggest that the selection criteria may include turnover of Rs 4,000 crore (approximately USD 620 million) for each of the previous three years, capital assets of Rs 2,000 crore (approximately USD 310 million), a minimum credit rating of CRISIL/ICRA ‘A’, and demonstrated capability to absorb technology and integrate the systems.
Each of these selection criteria could be challenged by those who lose out on grounds of being prejudicial or bereft of objective justification. Just to illustrate, it would be quite a task to evolve a completely objective and unassailable method to assess the technological capability of a company.

The DPSUs were to be kept out of the scheme but the recent reports suggest that they could also be chosen as strategic partners. This adds a new dimension to the process of selection of strategic partners and adds to the uncertainty about whether there is going to be only one strategic partner per segment or there could be more than one.
Some reports suggest that instead of unilaterally deciding to nominate an SP, MoD is mulling the possibility of creating a pool of six Indian companies as strategic partners and eight-odd OEMs and let the former compete for being selected as PAs for various projects.

The modalities of this arrangement will need to be worked out carefully because eventually two of the six SPs will be left twiddling their thumbs after the projects have been awarded in all the four segments.
Creation of this pool would also potentially close the door for new entrants. This may violate the competition laws. Surely, the government would be conscious of this and it will be reasonable to assume that the scheme will keep a window open for new aspirants.

A window will also need to be created for the Micro, Small and Medium Enterprises (MSMEs) who will obviously not figure in the list of the strategic partners because of the high selection benchmark in terms of turnover, assets, et al.
The scheme envisages long-term contractual relationship between MoD and strategic partners on the one hand and between the latter and the OEM on the other. It could also be the other way around, depending on whether MoD follows the ‘Buy and Make (Indian)’ or ‘Buy and Make’ route for acquisition of platforms from the OEMs. It could even be a tripartite agreement.
Drawing up long-term legal covenants that bind the OEM and the SP over the entire life of the equipment and management of such covenants will require MoD to acquire legal acumen which it presently does not possess.

It is difficult to visualise at this stage how the scheme will play out. The devil is always in the detail and unless every aspect of the scheme is carefully worked out it could end up the same way as the ‘Make’ procedure, adopted more than a decade back, for promoting indigenous design and development of prototypes of high-technology complex systems.
That not a single development contract has, however, been awarded till date under the Make category only underscores the consequences of not addressing the inconvenient issues while formulating a policy. The imperatives of ‘Make in India’ in defence do not brook repetition of the same mistake.

One last thought remains. There is no doubt the SP model will entail transfer of technology to the Indian PAs from the chosen foreign OEMs for indigenous manufacture of the equipment. That being the case, one cannot help wondering, why it cannot be left to the OEMs to select the Indian PAs of their choice. This could save MoD the hassles of selecting the strategic partners and yet achieve the same objective as it intends to achieve through the SP model.

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