Decoding Strategic Partnership Policy

By making Indian industries as the most preferred vendor, the Ministry of Defence (MoD) has given a clarion call to Indian industries both public and private to come forward and take the challenge of picking up our own very large defence market. Is our industry ready to meet this challenge head on? The direct answer is a big “No” for complex weapon systems like fighter aircraft, helicopters, submarines, etc. This is primarily due to absence/near absence of self-sustaining defence industrial ecosystem within the country. Sans this all attempts by lead integrators within DPSUs have fallen short of national necessities giving the tag of one of the biggest importers of defence weapon systems.

While DPP 2016 has addressed primary concerns of placement of order on Indian entities, taxation and ERV (exchange rate variation), other attendant issues, which  would unleash the power of Indian private sector to fill the void of tier-1/2/3, remained a blank page in DPP 2016. Strategic partnership (SP) policy is expected to enable establishment of defence industrial ecosystem. Policy has found tremendous traction and applause from Indian private sector. It has found favourable media support. This policy passes the litmus test of ‘necessary’ in the context of “necessary and sufficient” criteria but is it really ‘sufficient’ to achieve the stated objective of revitalising defence industrial ecosystem?

Revitalisation doesn’t hinge only on selection of SP from private sector that would be akin to existential DPSUs like HAL, MDL, BDL, BEL, etc., who are present lead integrators of weapon systems in their respective segments. Private sector’s power of generally creating mentor-mentee relationship with their supply chain would not be sufficient catalyst especially, in the instant case wherein ToT (transfer of technology) from foreign OEM will flow from their tier-ed partner to our tier-ed company for most of critical technologies. Therefore, apart from focussing on selection of SP from our own private sector, we definitely need to look at tier-ed companies that are critical to establishing this defence industrial ecosystem. Typically, SP companies would be drawn from large Indian companies while tier-ed companies would be drawn from MSMEs who are thirsty for inorganic growth.  

Building The Ecosystem    
Promulgation of strategic partnership policy is considerably the corner stone to revitalise the much desired defence industrial ecosystem. It aims at empowering private sector,  the other arm of national economy to achieve self-reliance in this very elusive domain.

Strategic partnership is essentially a partnership between MoD and Indian private entity. This Indian entity will enter into relevant tie-ups with foreign OEM. The government assures to work out licensing and ToT as well as provisions for IPR issues under the aegis of G-to-G (government to government). The Indian private entity will be selected on broad parameters of financial strength, technical capability and capacity/infrastructure. This will keep all big players in fray and may not be contested since each one of them can have a go at huge market size of potential defence market size.

However, selection of foreign OEM will be driven by SQRs (Services’ Qualitative Requirements) proposed by service HQs. Usually, an analytical study of SQRs may foretell eventual winner at the end of the very long drawn process that one has to go through. This, being the given situation, discovery of cost through so called competitive bidding will still remain a mirage.

Evidently, there are no equivalents in major weapon systems like aircraft, submarines, helicopters and armoured fighting vehicles. Usually their SQRs are very comprehensive and are driven by well spelt out warfighting requirements based on threat perception and the sovereign needs of nation. These are developed within each service HQ with great diligence. On one hand, any dilution of them by civil bureaucracy for creating competition will defeat the very purpose of building warfighting potential of nation on another this is not a financially prudent situation.

Creation of defence industrial ecosystem happens to be the pivotal idea of SP policy. A G-to-G agreement in this context for all chosen weapon systems in various segments of SP would not only dramatically reduce the time of acquisition but would also put a cap on tremendous game plans that are played by various stakeholders in pursuit of such large orders. Nation may also be spared of ensuing embarrassments and controversies. It may be worthwhile to consider taking a policy decision to acquire all such mega programmes on G-to-G/FMS route and then nominate these to identified SP(s) in private sector by the MoD. This approach becomes even more relevant since onus of facilitating ToT and IPR is still within the scope of GoI. Make no mistake, that ToT and IPR are considerably the toughest part of the contractual negotiations. All foreign OEMs resist transfer of technology irrespective.

Going back to our main theme of establishing defence industrial ecosystem. A defence industrial ecosystem essentially means a vibrant tier-1/2/3 that need to co-exist along with Prime. Prime in our case is identified SP for that segment. It may be of consequence to note that critical technologies reside within various sub/sub-sub modules like aerengines, undercarriage, main rotor blades, tail rotor blades, fire control radars, seekers etc. of integrated weapon system like aircraft, helicopters, etc.. And these are manufactured by tier -1/2 supported by tier-3. These tier-ed companies are the likes of GE, Thales, Safran, UTC etc. And these are also very large companies in their own way. Establishing defence industrial system would mean collaborative and cooperative transfer of technology from the foreign OEM and their tier-ed companies to SP and all tier-ed companies of our defence industrial ecosystem. A tier-to-tier dialogue would be a necessity.

Caution here is that government support should not only facilitate chosen SP for ToT and IPR issues but should also create necessary environment for tier-to-tier
dialogue. Limiting only to SP may not meet the core objective of revitalising defence industrial system. This is very critical to success of this policy and merits a separate and very clear methodology for selection of tier-ed partners for each segment. This may follow post selection of SP and is recommended to be done with their due diligence with oversight from MoD. Market forces by themselves would not be able to create a viable ecosystem. Situations like DPSUs, wherein, DPSUs attempt to do everything by themselves may potentially occur in private sector too. Commercial imperatives may take precedence over prudence in this matter unless enforced by Government.

Another aspect which merits discussion is role and objective of ToT, which by itself is not a product. What we need is a defence industrial base that can take us to the path of self-reliance. We need to manufacture products that are either modules/sub-modules/sub-sub-modules. First level of self-reliance may mean that we are able to sustain our inducted fleet of aircraft, helicopters, submarines and armoured fighting vehicles with indigenous industry. Manufacturers do give ‘manufacturers recommended list of spares (MRLS)’ as part of RFP responses. Invariably, MRLS will also contain all items that are built around critical technologies. This list contains aggregates that are required to be procured and held in inventory of the user for upkeep, servicing and maintenance of acquired weapon system. Our desired list of ToT will definitely be a subset of manufacturing these MRLS items. We may impress upon foreign OEM to support respective tier company in manufacturing selected items from MRLS that have identified technologies within them. This, if fructifies, may become a game changer in creating defence industrial ecosystem.

What Next?
It is the firm belief that Indian public and private sectors can synergise their efforts and achieve the desired objective of self-reliance in defence weapon systems. We grew and broke the barrier of Hindu growth rate post liberalisation policy that commenced in 1991. SP policy is well heeled to unleash the power of Indian private sector if further fine-tuned to further address the twin issues:

Extension of SP policy’s coverage to protection of rights of tier-ed companies vis-à-vis selected SP companies to ensure continued order inflow from SP companies to them for their sustenance and survival. Any atrophy in this regard would beat the very purpose of creating vibrant defence industrial ecosystem. An enforcement policy with measurable yardstick would need to be set up for compliance by SP companies.

The ToT should be aimed to be achieved through modules/sub-modules/sub-sub-modules that are part of MRLS of acquired weapon system. This has the potency to not only enhance self-reliance but also sustain defence industrial ecosystem beyond the time horizon of induction of weapon system.