September 9, 2015

Task Force Formed To Set Parameters For Private Industry 'Strategic Partners'

India's Defense Ministry has formed a 10-member Task Force for formulating the parameters with which the government will identify "strategic partners" in the Indian industry for the military sector.
The Task Force, for which the notification was issued yesterday, will be headed by former Defense Research and Development Organisation (DRDO) chief Dr.V.K.Aatre, top sources said here today.
The panel has been given three weeks time to formulate the "parameters" based on which the strategic partners among the Indian industry would be identified, the "modalities" by which the so identified industry would be co-opted in defense manufacturing, and the "covenant" under which an understanding will be achieved between the government and the so-declared industry.
"The panel has technocrats, lawyers, cost accountants, chartered accountants, certification agencies, defense ministry and armed forces representatives as members," the sources said.
The new Task Force has been formed based on the recommendations of the Dhirendra Singh Committee report on changes to be made in Defense Procurement Procedure 2013 (DPP-2013), presented to Defense Minister Manohar Parrikar on July 23, 2015, just 45 days ago.
The Dhirendra Singh panel report had suggested that the matters raised by it be clarified at the earliest so that the strategic partnership could be taken forward. "Such a recommendation goes against the accepted grain of thinking which prefers competitive bids involving technical and commercial parameters. It is hence considered desirable that the committee's reasoning be spelt out in detail," it had said.
The idea of "strategic partners" in the Indian industry is a revival of the "Raksha Udyog Ratnas' or 'Defense Industry Jewels' as was proposed by the then Kelkar Committee report in the middle of last decade in the against the backdrop of the 1999 Kargil war and the 2001-02 'Op Parakram' to boost private industry participation in the the investment intensive defense sector.
Just to understand what the Dhirendra Singh panel had recommended in July 2015, here are the relevant portions of its report on "strategic partnership" for your quick reference:
"Having considered the nature of defense materiel and the configurations of defense industry worldwide we have come to the inevitable conclusion that if the strengths of private industry are to be harnessed then they must be done under well defined models depending upon the strategic needs, quality criticality and cost competitiveness. Whenever the vendor base is large and competition is feasible, the competitive bidding process must be followed. There are cases however where certain platforms are of strategic importance. For these, we are recommending the 'Strategic Partnership model' for creating capacity in the private sector on a long term basis. Such a capacity will be created over and above the capacity and infrastructure that exists in Public Sector units. This is expected to spur the sectors towards a more efficient and effective mode of operation. Likewise, there are cases where quality is critical and vendor base is very narrow. For these we are recommending a model of 'development partnership'. These models would depend upon the systems and products within the ambit of the requisite model.
Strategic Partnership Model
The Committee considers following projects that could be identified for long term partnership:-
1. Aircraft - fighter, transport and helicopters and their major systems
2. Warships of stated displacements and submarines and their major systems
3. Armored Fighting Vehicles and their major systems
4. 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.
5. Command, Control, Communication and Computers, Intelligence, Surveillance, Target Acquisition and Reconnaissance
6. Critical materials ( Titanium alloys, Aluminum alloys, Carbon composites, Nickel/Cobalt alloys, etc.)
In each of these segments, private sector Strategic Partners (SP) need to be identified through a well-defined protocol to create capacity in them over and above the capacity in the Public Sector in these segments. 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 is (i) their competence in system engineering; (ii) supply chain management to manage life cycle support; and (iii) 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.
SPs would be identified and then become partners with the MoD in their deliberations under Government to Government negotiations with foreign OEMs for collaboration in the production of items in the 6 segments identified above.
The selection procedure would obviously be the most crucial aspect of the Model.
It would incorporate the following parameters:-
1. Segmentation of Market – Select just one / two SPs in each segment.
2. Selection to be done through a well-defined and transparent process:
a) Financial Capability. Annual turnover, Profitability, Net worth, Risk Appetite, appropriate ratio of program size to annual revenues;
b) Financial Prudence. Credit ratings, quality of disclosures, No CDR status;
c) Technical Capability. Domain specific capabilities (range and depth), organisational processes, outside domain large program capability, Global reach / network;
d) R & D Capability Track record in development of technologies and products, R&D investments over past five years, R&D center certification and accreditations;
e) Capacity / Infrastructure - quality of infrastructure with regard to global benchmarks;
f) Executive Track Record – Delivery Track Record
g) Ownership Structure – Public / Private, Family / Professional, Promoter driven/widely held.
The selection procedure for such Strategic Partners is the most crucial element in operationalizing the idea. The entire scheme rests on it. What has been suggested above are broad parameters. A Task Force needs to be constituted to lay down the criteria in detail after studying best practices. We are aware that most such criteria are used for selecting the best offer in commercial bids. Our model stops short of commercial bids and would have as target companies those who may not have been involved in projects under the identified segments. This is not an insurmountable proposition. A rational, fair, scientific and transparent procedure can and should be worked out.
Lest there be lingering doubts on the compensation package to the SP ('taking the MoD for a ride') – a rigorous audit, including cost audit mechanism would be instituted. The contract would allow for inspection of books for the purpose. A strong data base needs to be generated. The U.S. and French models could be studied for the purpose where the system has been in vogue for quite some time.
There are other operational issues which would need to be clarified so that there is a clear understanding between the MoD and the SP. These may include:
1. Investment on the basis of assured orders;
2. Cost + mechanism of funding. Program specific Fixed / Variable cost models;
3. Risk sharing – Inflation correction, ERV, Taxes and duties change mechanisms;
4. Risk – Reward model for development and program implementation;
5. Hand holding by Collaborator / MoD- Joint Review mechanism, mechanisms to deal with unknowns and imponderables as they surface during the execution phase;
6. Prime contractors (SPs) to be mandated to develop tier-ized industries as partners, on the same principles, to accelerate program execution;
7. Encourage teaming agreements between prime contractors and tier-ized industry;
8. Encourage teaming agreements between SPs and DPSUs, because of the latter's head start;
9. Long term covenants between Government, Strategic Partners and tier-ized partners to guide not only the first contract (after determination of the segment and SP) but subsequent ones to follow, so that resources are utilized optimally over long periods of time.
10. Placed at Annexure II is an elaboration of this idea.
The Committee is conscious that its recommendations relating to the Strategic Partners which would be applicable to the 'Buy and Make' category, is of considerable import.
Such a recommendation goes against the accepted grain of thinking which prefers competitive bids involving technical and commercial parameters. It is hence considered desirable that the committee's reasoning be spelt out in detail. Although many issues relating to procedure would be dealt with in the next chapter, this matter needs to be clarified at the earliest.


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