By Rohit Srivastava

In May 2017, Ministry of Defence (MoD) introduced a new chapter in the Defence Procurement Procedure (DPP) – 2016 titled as ‘Revitalising Defence Industrial Ecosystem through Strategic Partnerships’. It is better known as SP Model. Through this groundbreaking policy initiative, MoD aims to develop “the defence industrial eco-system in the country through the involvement of both the major Indian corporate as well as the MSME sector.”

The SP Model is envisaged to strengthen Prime Minister Narendra Modi’s ‘Make in India’ initiative of 2014. Defence production was one of the 25 segments selected for this programme. Expert opinion suggests that defence manufacturing provides the highest multiplier in terms of the creation of capabilities and jobs for the industry. India is currently the world’s topmost weapons importing nation. For the fourth largest economy of the world, this is not a very good status.

Recently, the Indian government has decided to push India defence products like LCA Tejas, BrahMos etc., into the global defence market. India’s aspiration to become leading weapons exporter is only possible if India is self-dependent in their production. The SP Model is central to this plan.

It is arguably the most forward-looking policy measure promulgated by the MoD. The intent of this policy was to bring-in enhanced private sector participation, as a system-of-system integrator for complete platforms like submarines, helicopters, fighter aircraft and armoured fighting vehicles.

Why SP?

The Indian industry especially the private industry continued to suffer from the gross non-level playing field with respect to the public sector as well as the Foreign Original Equipment Manufacturers (OEMs) competing for Indian acquisition programs.

The Defence Public Sector Undertakings (DPSUs) not only benefitted from nominated programs without competition but also received grants for capex, and compensation against inflation as well as forex risks. Therefore, despite several reforms over the years, the primacy of the DPSUs and Ordnance Factories for platform level system integration still continued.

The major platform level orders being nominated to the DPSUs often suffered inordinate delays in the scheduled delivery; this is the situation across all programmes, leading to cost over-runs. While Foreign OEMs were continued to be trusted on the basis of their government’s testimony, the MoD did not build mechanisms to trust Indian Private Sector, even after demonstrating superior performance and created multidisciplinary capabilities.

Thus on the advice of the Dhirendra Singh Committee (July 2015) report, the SP model was formally announced by the MoD in 2017.

Although the policy was welcomed by one and all. It was deemed difficult to understand.

Calling the strategic partnership a complicated way of doing simple things, Lt Gen P Shankar, (Retd) said, “DPP is a simple method of doing things. It had tremendous flexibility and it is evolutionary.”

“I doubt if the Services have the kind of expertise required to take the model forward. If they cannot handle it, then the entire Model comes as a cropper.”

“Lack of Simplicity in defence procurements is a major problem. The SP model complicates it. Every new procedure imposes a half a decade drag on the system,” he cautioned.

Since 2017, things have not moved forward as expected. In the last two years, this policy has been fairly criticised by sector experts.

One of the major concerns on the SP Model is the bureaucracy inhibiting speedy implementation of it. This stem primarily from their insecurity of losing the stranglehold on defence manufacturing in India. The bureaucrats run DPSUs which has primacy over the Indian defence industry. They do not want the status quo to change.

Further, there are apprehensions about the price discovery that would emerge as a result of the competitive bidding which would cast serious doubts on their propensity of favouring the DPSU through nominated orders. The MoD has been using the argument of the absence of cost benchmarks and avoids a single vendor situation in continuing with the practice of nominations to DPSUs.

The SP model is primarily meant for the private sector and is aimed at identifying technologically capable and financially stable private enterprises with a reasonable track record in the relevant segment, who could be trusted to develop products in India.  However, there is a move to permit the DPSUs participation in the bidding.

Speaking on the pricing, Lt. Gen Subrata Saha (Retd), member National Security Advisory Board, said, “Forces must undertake ‘price indexing of technology’ to be sure they get the technologies they require operationally.”

“Having operationally justified the technology required the deal must be optimised to get the best price incorporating life cycle and sustenance cost,” he added. 

Unlike DPSUs, the private sector is required to put in fresh investments in creating infrastructure, developing skills, pay for the required technology transfer in the process for bidding for these platform level opportunities.

If the MoD decides to permit the DPSUs to participate in the SP model and compete with the private sector, the MoD must ensure level playing field for private sector in such a competition by loading the cost of government-funded infrastructure, Transfer of Technology (ToT) paid for over the past decades and the associated learning curve benefits accrued on the price quoted by the DPSUs.  They can easily cross-subsidise their existing infrastructure and manpower for the bid.

Similarly, in the spirit of inclusiveness, the ground is being created for maximum participation. Given the nature of the defence industry, even in most advanced nations, there are only one or two entities entrusted with this onerous task.

However, the Expression of Interest (EoI) for the 111 Naval Utility Helicopter (NUH) explicitly mentions only the Private Sector can participate in this program, yet HAL has submitted two bids for the program. It is to be seen if the Request for Proposal (RFP) will be issued to HAL based on its responses.

On the pricing, experts feel, since the DPSUs have been awarded platform level programs at a reasonable cost over past decades, these by itself provides for requisite benchmarks. Also MoD has been procuring from global OEMs and thus the global price benchmarks are also easy to establish.

 Expressing concern over the dilution of the SP Model, Jayant Patil, Whole-time Director, L&T, said, “The Public Sector has been long term beneficiaries of financial grants to create assets, capabilities, skill development as well as multiple ToTs in the past. Allowing them to participate in SP programs on competitive basis will create a gross non-level playing field for the private sector, who are expected to make long term investments in manufacturing infrastructure, eco-system of suppliers, skilled human resources, R&D for modernization and upgrades as well as other capabilities while these are available to the public sector at no additional cost.”

“Government is entitled to nominate platform programs to public sector should their capacities be idling and the perception that it would be more cost competitive to do so, without resorting to competitive bidding under the SP policy,” he added.

Highlighting some of his concerns Lt. Gen. Shankar said, “The MOD itself might not have the bandwidth to handle it. That is evident in the fact that four years after the idea was mooted it is yet to see the light of the day. There are also concerns that the SP model could lead to monopolies and cartelisation.”

The new government at the centre must take cognizance of these issues and come up with a more realistic SP Model.