Who gets to make in India, who doesn’t A close look at what the strategic partnership model means, and the debate around its pros and cons.
Written by Sushant Singh | Published:January 26, 2016 12:41 am
Naval warship INS Kochi at the Mumbai dockyard. (Express Photo by Amit Chakravarty)
When Defence Minister Manohar Parrikar announced the new Defence Procurement Procedure, 2016, earlier this month, he clarified that the chapters on strategic partners in defence production will be finalised after studying the Aatre Task Force’s report. A closer look at what this strategic partnership model means, and the debate around its pros and cons.
What is the ‘strategic partners model’ in defence production?
A major recommendation of the Dhirendra Singh Committee, formed to review the defence procurement procedure, which submitted its report last year, was to identify select Indian private sector defence manufacturers as “strategic partners”. These companies would play central roles in developing “complex and strategic systems” within the country, or receive technology transferred from foreign suppliers in large defence contracts. The committee argued that this will create capacity in the private sector on a long-term basis, which will be over and above the capacity and infrastructure that exists in defence public sector units. It will spur the sectors towards a more efficient and effective mode of operation.
But a company that has been declared a strategic partner in any one platform, say submarines, will not be be chosen as a strategic partner for any other programme, such as aircraft or artillery guns. This is to prevent conglomerate monopolies from emerging at the very start.
How will strategic partners be selected?
The defence ministry formed a task force headed by former DRDO chief V K Aatre to recommend the modalities of the strategic partnership model. It submitted the second part of its report earlier this month where it divided the sectors eligible for strategic partnerships into two groups.
In Group 1, there are aircraft, helicopters, aero-engines, submarines, warships, guns (including artillery guns) and armoured vehicles including tanks. In Group 2, the segments are: metallic material and alloys, non-metallic material (including composites and polymers) and ammunition, including smart ammunition.
The task force recommended that in the initial phase, only aircraft, helicopters, submarines, armoured vehicles and ammunition be considered for strategic partnerships. It has also recommended a series of criteria for the ranking of the companies, whereby the highest-ranked applicant company shall be selected by the defence ministry as a strategic partner.
Do other countries follow this model?
The US and France are two major defence manufacturers where a similar system has been in vogue for quite some time.
Has this model been proposed in India earlier?
Yes. In 2006, the Kelkar Committee had proposed the model of ‘Raksha Udyog Ratnas (RuRs) or Industry Champions’ to empower large private sector companies as “system integrators”. However, the then UPA government did not implement the proposal because of the opposition from trade unions of defence PSUs and ordnance factories.
Are the private companies happy with the proposal?
No. Though they broadly like the idea, most top defence manufacturers are sharply critical of the task force’s recommendation of restricting each strategic partner to a single strategic system. They feel that this model would restrict them to just one field and, therefore, their overall investment and growth plans will be affected. Some firms have already created capabilities in various sectors and their investments will go waste. The task force also proposes to ban strategic partners from cross holdings in another strategic partner company and to seek government permission for any material change in their share-holding structure, which the private companies are opposed to.
Smaller firms feel that the selection criteria mean that only big companies will get selected as strategic partners. The defence ministry has, however, promised that interests of small and medium enterprises will be taken care of.
Are there any other objections?
Many feel that such a model, where a private company is guaranteed a particular project, is a return to the old licence raj and will create monopolies. Sacrificing the benefits of competitive bidding for a cost-plus model, where the company will be reimbursed its expenses plus a fixed profit, they say, will breed inefficiency and make private firms just another version of public sector units. There is also a fear among defence companies that such a model will bring charges of return of “crony capitalism”. Foreign defence suppliers feel that this restricts their options as the Indian government will be deciding their Indian partner for them.
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