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Strategic Partnership Model: Repackaging RUR

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The Experts Committee has recommended the Strategic Partnership Model (SPM) for creating capacity in the private sector, over and above the capacity and infrastructure that exists in Public Sector units. The SPM model is recarnation of RUR concept suggested over decade back by Kelkar Committee, which could not be implemented for reasons known…

Indian defence industrial base mainly comprises of Govt owned production agencies DPSUs, PSUs or OFB. The Indian private industry has been playing a peripheral role. For more complex and strategic systems, the technology transfer today invariably happens through public sector entities. As a result, these entities quite often get overburdened vis a vis their existing capacity constraints. Even otherwise, there is a need to create a capacity for absorbing technology for such systems in the private sector on account of their agility, innovation and modern management practices. To harness the strengths of private industry, there is a need to evolve well-defined models. The Experts Committee has recommended three models for the Indian set up  Strategic Partnership, Developmental Partnership and Competitive Partnership. According to the Committee, the choice of the model should be based on “strategic needs, quality criticality and cost competitiveness". These models would depend upon the systems and products within the ambit of that model. In present case we study the Strategic Partnership Model.

Segment for Strategic Partnership

SPM needs to be created on a long term basis for creating capacity in the private sector, over and above the capacity and infrastructure that exists in Public Sector units. Strategic partners are required in six segments of strategic significance where self-reliance  is of paramount importance.

  • Aircraft - fighter, transport and helicopters and their major systems
  • Warships of stated displacements and submarines and their major systems
  • Armoured Fighting Vehicles and their major systems/ weapons
  • Complex weapons which rely on guidance systems, to achieve precision hits, which may include anti-ship, air defence, air to air; air to surface, anti-submarine, land attack
  • Command, Control, Communication and Computers, Intelligence, Surveillance, Target acquisition and Reconnaissance (C4ISTR), and
  • Critical materials (Titanium alloys, Aluminium alloys, Carbon composites, Nickel/ Cobalt alloys etc.)

The strategic partnership model also visualises selective identification of a few big private players and nurturing them through preferential treatment, which would entail co-opting them for 'Buy and Make' and Government-to-Government procurement programmes.

Salient Parameters for SPM

Some of the salient parameters recommended by the expert committee for evaluations are as follows.

  • Financial Capability: Annual turnover, profitability, net worth, risk appetite, appropriate ratio of program size to annual revenues;
  • Financial Prudence: Credit ratings, quality of disclosures, No CDR status;
  • Technical Capability: Domain specific capabilities (range and depth), organisational processes, outside domain large programme capability, Global reach / network;
  • R&D Capability: Track record in development of technologies and products, R & D investments over past five years, R & D centre certification and accreditations;
  • Capacity/Infrastructure: quality of infrastructure w.r.t. global benchmarks;
  • Executive Track Record: Delivery Track Record
  • -.Ownership Structure: Public/Private, Family/ Professional, Promoter driven / widely held.

Having identified the major segments and broad criteria, private sector Strategic Partners (SPs) need to be identified. A well-defined protocol would need to be promulgated for selection of Strategic Partners. The primary focus of strategic partners would be to support sustainability and the incremental improvements in capability of platforms through technology insertions over their lifetimes. Thus the key competence, that one should be looking at in such partners are:

  • Competence in system engineering
  • Supply chain management to manage life cycle support;
  • Companies that are looking for assured revenue streams based on such long term partnerships, rather than those who could prefer one off contracts from time to time.

The compensation package to the SPs has to be subjected to a rigorous audit, including cost audit. The contract would allow for inspection of books for the purpose. DDP should set up a Facilitation Desk, through an internal mechanism, to maintain a two way communication with private industry including MSME.

The committee has recommended that the selection be based on market segmentation with just one / two SPs in each segment and selection be done through a well-defined and transparent process. The selection procedure would obviously be the most crucial aspect of the Model. It should be applicable to platform projects of a high value say higher than Rs.10000 Crores Similar thresholds would need to be laid for weapons and Networks. The other operational issues which would need to be clarified as the process starts include:

  • Investment on the basis of assured orders.
  • Programme specific Fixed / Variable cost models.
  • Inflation correction, ERV, Taxes and duties change mechanisms.
  • Development and programme implementation.
  • Joint Review mechanism, mechanisms to deal with unknowns and imponderables as they surface during the execution phase.
  • Prime contractors (SPs) to be mandated to develop tierised industries as partners, on the same principles, to accelerate program execution.
  • Encourage teaming agreements between SPs and DPSUs, because of the latter's head start.
  • Long term covenants between Government, Strategic Partners and tierised partners to guide not only the first contract (after determination of the segment and SP) but subsequent ones to follow, so that resources are utilised optimally over long periods of time.

SPM Criteria Repackaging of RUR

In case we cross compare, the Strategic Partnership criteria elements with those recommended for “Raksha Udyog Ratna” (RUR) concept propgated by kelkar committee in early 2000, they are essentially the same. Surprisingly, the expert Committee has neither referred to the RUR concept of the Kelkar Committee nor to the RURs identified by the Sengupta Committee. Apparently there are only cosmetic changes, if we compare them:

Comparison of Recent Expert Committee and Kelkar Committee Report

CriteriaExpert CommitteeKelkar Committee
Financial Capability Annual turnover, Profitability, Net worth, Risk Appetite, appropriate ratio of program size to annual revenues  Companies with Capital assets in India not less than Rs.100 crores and turnover not less than Rs.1000 crores for each of the past three years 
Financial Prudence Credit ratings, quality of disclosures, No CDR status  A minimum credit rating equivalent to CRISIL/ICRA – “A”. Company with consistent profitable financial record showing profits in at least three years of the last five years and with no accumulated losses.
Technical Capability Domain specific capabilities (range and depth), organisational processes, outside domain large programme capability, Global reach / network Companies with established track record in engineering (including software) and Manufacturing for real value addition – Not a trading company/agency 
R & D Capability Track record in development of technologies and products, R & D investments over past five years, R & D centre certification and accreditations Companies with established R&D Base or willing to invest in R&D as decided by the Regulatory Authority 
Capacity / Infrastructure  Quality of infrastructure w.r.t. global benchmarks  Companies with units/divisions with established Quality Control System & security infrastructure
Ownership  Structure  Public / Private, Family / Professional, Promoter driven / widely held with foreign holding not exceeding 26% excluding FII.  Public Limited Indian Company registered for minimum ten years with foreign holding not exceeding 26% excluding FII. 

The committee further recommended a Task Force be constituted to lay down the criteria in detail after studying best practices including the US and French models. The Ministry of Defence (MoD) has set up task force under Dr VK Aatre to recommend the criteria for Indian private companies for mega 'Make in India' defence manufacturing projects in the above sectors. The task force has been advised to interact with representatives from the industry, armed forces, defence ministry, banking sector, credit rating agency, specialized consultancy etc. The task force is to submit detailed criteria at the earliest for incorporation into the new defence procurement policy being planned by the ministry.

Back to square one!

In the past similar recommendations were made by Kelkar Committee wherein they had recommended that some major industries may be identified and their involvement could then systematically be encouraged to contribute in Defence Production and to assume the role of system integrators of large weapon systems and producers of platforms required by the Defence Forces.  The Committee has named these industries as “Raksha Udyog Ratnas”/ “Champions”. The RURs were to be treated at par with Defence PSUs, which are selected by the Government for receiving technology and undertaking license production with Transfer of Technology (ToT) from overseas sources.   The Government had accepted the recommendation for implementation. Accordingly, a Selection Committee was constituted for identifying/selecting RURs/Champions, which took almost two years. Some of the companies which were expected to be shortlisted as RURs were Tata Motors, Larsen and Toubro, Tata Power Company, Mahendra and Mahendra, Godrej and Boyce, Bharat Forge, Infosys Technologies, Wipro Technologies and Tata Consultancy Services etc.

Incidentally, just to mention the RUR failed to take off apparently due to objections mainly from trade unions affiliated with public sector defence entities and few others. Those road blocks are likely to be created even now.  Does the Govt of the day will have the power to overcome them?

Is Make in India Criteria not Good enough?

The Committee feels that this issue can be addressed by using requisite criteria stated upfront followed by a transparent selection process for selection of one private sector strategic partner in each of the identified segments / product / system. The above stipulated criteria are almost on the pattern of recent Make in India EOI for FICV (Armoured Fighting Vehicles and their major systems/weapons segment) to shortlist the vendor. MoD has issued an evaluation criteria as per their given weightage (in %):

  • Commercial Assessment Criteria 26.08% - This will evaluate the company's/consortiums annual turnover, profit after tax, net worth and fixed assets.
  • Technical Capability Assessment Criteria 34.24% - This will evaluate the R&D capability of a company/consortium across its entire spectrum of activity.
  • Critical Technology Assessment Criteria 31.37% - This refers to “core technologies” and “critical technologies” that company/consortia can offer for the platform
  • Technical Specification Assessment Criteria 08.31% - This involves proposing specifications for the platform.

These guidelines have also been applied for "Make" cases in TCS and BMS (Command, Control, Communication segment). The project to indigenous manufacture of six conventional submarines, the AoN was accorded in October 2014. The Rs 50,000-80,000-crore project, under ‘Make in India’ programme has not moved any further. Later the MoD constituted  committee to shortlist Shipyard has also submitted the report. Understood further progress is in limbo  awaiting  revision of DPP. Why two sets of standard one issuing an EOI under DPP-2008 and other waiting for revised DPP.

Hence, the need for a separate committee for the purpose is not understood.

Analysis

The recommendations have further cautioned care has to be taken, however, to ensure that the same entity is not selected for more than one strategic system, so that conglomeration formation or cartelisation does not happen. As a prudent measure, it should be stipulated that these private sector strategic partners do not create cross holding in each other's companies and that any material change in the share holding structure of the company has to be made with prior government approval. Once such a selection is done through a transparent selection mechanism, the concerned partner has to be associated with any future project in that segment on a long term basis.

The committee has further suggested that just one or two private players should be identified in each segment with a rider to prevent so called 'conglomerate monopoly', only one SP should be permitted in one segment, and once chosen in a particular segment it should not be considered directly or indirectly (through cross holdings in another company) in the other segments. One wonders why such stipulation? Such restrictions are not there in developed industries. This could be keeping the interest of DPSU monopoly in mind and apparently not gone down well in the industry.

The experice from developed defence industry reveals given the nature of these technologies and systems, the number of private sector partners will invariably be limited. Today all major foreign OEMs are working on number of product segments e.g. BAe, Finmeccanica, Airbus, SAAB, Lockheed Martin etc.  We need to have a serious re-look of this aspect and not put such restrictions. Even the Kelkar committee's recommendations on RUR have not stipulated such restriction. Probably Govt will have to create an avenue for selection and nurturing of a strategic partner on a long term basis.

It is pertinent to note that the availability of the capacity to absorb the requisite technology in the public sector will as an effective counter poise to any monopolistic tendency on the part of strategic partner, particularly when his books of accounts are open to the MoD scrutiny. The competitor's consolidation will take place as we move forward due to competition in production of major platforms and weapon systems as in developed defence industries. We have seen signs of such consolidations amongst Indian competitors in forming of consortia in "Make" projects floated recently.

 

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