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INTERACTION WITH GAURAV MEHNDIRATTA, PARTNER INTERNATIONAL TAX AND REGULATORY, KPMG IN INDIA

 


Defence ProAc Biz News interacted with Gaurav Mehndiratta to get his views on the latest development on 'Strategic Partnerships Model'. Here are some excerpts—

 

(Defence ProAc Biz News) DPA: Can you throw some light on the background of SP Model?

(Gaurav Mehndiratta) GM: The policy on 'Strategic Partnerships' released in May 2017 by the Ministry of Defence ('MoD') is an important cornerstone in the defence procurement procedure entailing a shift from imports to 'Make in India' and likely to set the trend for many upcoming procurements. The policy envisages the establishment of long-term strategic partnerships with Indian private defence majors through a transparent and competitive process, wherein they would tie up with global Original Equipment Manufacturers (OEMs) to seek technology transfers to set up domestic manufacturing infrastructure and supply chains. Such Indian players shall be referred to as 'Strategic Partners' for a particular segment/platform and it is expected that they develop the requisite capabilities and supply chain for the future in-country manufacturing of such segments/platforms.

 

DPA: How shall the policy work i.e. how shall procurement be undertaken through SP route?

GM: The proposed process is as follows:

  1. The government shall issue an Expression of Interest (EOI) to Indian private industry to shortlist Indian companies and simultaneously shortlist OEMs for each platform/segment
  2. A Request for Proposal (RFP) will be issued to the shortlisted Indian companies. A list of shortlisted OEMs shall be annexed to the RFP so that Indian companies could engage with OEMs to submit the techno-commercial offer

iii. An Indian company can negotiate with all shortlisted OEMs but has to submit its techno-commercial offers with one OEM(two in case of a diverse platform).

  1. Technical offers shall be evaluated and a field and staff evaluation shall be conducted if necessary
  2. Commercial offers shall be opened for companies qualifying at the technical stage
  3. Selection of the LI bidder. Indian entity submitting the lowest bid to be designated as the 'SP'

vii. Negotiation, finalisation and signing of the contract

 

DPA: On what platforms/segments would the policy be applicable?

GM: In the initial phase, SPs are to be selected in the following segments viz. fighter aircrafts, helicopters, submarines and Armoured Fighting Vehicles (AFV)/Main Battle Tanks (MBT).

Gradually, the government may add more segments/platforms or further sub-divide the platforms as it deems necessary.

 

DPA: How can Indian companies contest to become SPs?

GM: At the outset, it is imperative to note that only one SP is likely to be selected per segment/platform.

  1. The MoD shall issue an EOI to Indian private companies for the selection of SPs in defined segments. The companies shall be required to comply with specified ownership and control related conditions and a 'Minimum Qualification Criteria' (MQC) comprising of financial, technical and segment-specific parameters
  2. Evaluation of companies based on MQC and segment-wise verification of the segment-specific criteria

iii. Companies qualifying the criterions shall be eligible to receive the RFPs for the respective segment/platform

 

In addition, the capability and credentials of the applicant company shall be considered while shortlisting the companies. However, acknowledging that Indian companies have limited experience in defence manufacturing and even lesser experience with respect to the final integration of complex defence systems and sub-systems, the policy provides that:

  • Besides any experience in defence manufacturing, potential SPs will be identified primarily based on their experience and competence in the integration of multi-disciplinary functional system of systems, engineering and manufacturing
  • Flexibility is provided to the applicant company to rely upon the group company(ies)'s experience in that particular segment

 

DPA: How shall the OEMs be selected?

GM: The process of shortlisting of OEMs shall be parallel to the shortlisting of Indian companies as detailed hereunder:

  1. Issuance of Request for Information (RFI) to potential OEMs
  2. Formulation of Services Qualitative Requirements (SQRs) covering aspects of the platform as well as weapons required, wherever feasible

iii. Based on the SQR and information collected, an EOI shall be issued to OEMs which should be responded to within two months

  1. Undertaking field and staff evaluation
  2. OEMs that meet the Technical Evaluation Committee (TEC)'s requirements to be shortlisted

On the flip side, the policy provides that even if one OEM is shortlisted, the process of evaluation shall be completed. This is a welcome move, by doing away with the legacy practice of scrapping the tendering process in the event of a single vendor situation. As Transfer of Technology (ToT) is one of the main factors in selection of OEM, the quantum and scope of technology being offered for transfer by the OEM will be a primary consideration in the selection procedure.

 

DPA: What are the other relevant issues/ observations and implications of the Policy?

GM: The policy on SP is an important development which is likely to set a new normal in procurement methodology, with greater participation of the domestic private sector. The release of this policy and with the pressing requirement of procurement from the forces it is likely that some of the long awaited RFPs (such as that of the light utility helicopter, naval multi-role helicopter, reconnaissance and surveillance helicopter, fighter aircraft, future ready combat vehicle, Project 75I, etc.) may see the light of the day through the SP route.

The industry expected the government to lay down a clear and comprehensive policy with all details penned down to the last detail (as suggested by both committees). However, in the fine print, many aspects (such as qualifying criterions, ToT expectations, indigenisation blueprint, etc.) are yet to be clarified in the EOIs, RFPs, etc. Having said this, it is a new beginning.

Some of our key observations from the policy are as below:

  1. Contrary to the proposition of the Aatre Committee, the policy does not prohibit Indian companies/industrial groups to bid for more than one segment. This move shall help large houses having multi-disciplinary infrastructure and credentials to bid in more than one segment.
  2. The final selection of bids shall be purely on L1 basis, instead of a weighted methodology of cost and technology as proposed by the committees. Considering the huge impetus on ToT and indigenisation, this move is not in sync with the intent of the policy.

iii. Ten to fifteen per cent of the platforms may be allowed to be manufactured at the OEMs premises for the purposes of training and skill development of SP manpower. This move shall help the forces get equipment delivered for immediate usage. Also, this is a pragmatic step acknowledging that there is a gap in the current manufacturing infrastructure and time shall be required to bridge the gap for complete in-country systems manufacturing.

  1. Unexpectedly the government refrained from spelling out the thresholds/benchmarks for the qualification for Indian companies and left the same to be defined in the EOIs. A detailed policy could have helped the Indian companies to prepare and move towards the desired benchmarks.
  2. While there is a clear impetus on ToT and indigenisation, however no express guidelines have been provided in the policy. The industry had expected some guidance on the quantum and extent of indigenisation and more details on the evaluation criterions for OEM selection on account of ToT.
  3. There is little clarity on any commitment from the government to the SPs or OEMs for any future procurement. While the initial tendering for upcoming RFPs could be under the SP route, there is no commitment on any subsequent procurements within same segments from such SPs.

vii. The segment of procurement has been widened from 'single engine fighter aircraft' to a broader segment 'fighter aircraft' expanding the ambit of procurements to be undertaken through the SP route.

All said and done, the most important role is that of the government, since it is the pragmatic policy maker and customer. The suggested procurement methodology in its current form is very broad and requires clarifications and hand holding from the government to create a conducive environment for the policy's successful implementation.

The views and opinions expressed herein are those of the author and do not reflect the views and opinions of KPMG in India.

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