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Strategic Partnership Model for Private Manufacturing Finalised

Discussion in 'Indian Defence Industry' started by Agent_47, May 20, 2017.

  1. Agent_47

    Agent_47 Admin - Blog Staff Member MODERATOR

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  2. Agent_47

    Agent_47 Admin - Blog Staff Member MODERATOR

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    Government finalises ambitious plan for private firms in defence manufacturing

    NEW DELHI: India is the world's largest importer of arms. That's going to change soon. The Defence Acquisition Council (DAC) chaired by Defence Minister Arun Jaitley today finalised the “broad contours” or the main principles of a policy that will allow the private sector to manufacture high-tech defence equipment in India.

    The Strategic Partnership model, as the new policy is called, is aimed at reducing India's dependence on defence imports. In this model, the defence ministry WILL partner with private companies which can tie up with foreign original equipment manufacturers (OEMs). Before it's implemented, the policy would need approval by the Cabinet Committee on Security.

    What is the Strategic Partnership model?
    The model proposes partnerships between the defence ministry and private companies. The private companies will create a three-tier defence ecosystem. Tier 1 will consist of the big companies and tier-2 and tier-3 will comprise smaller vendors and suppliers. The components made by tier-2 and tier-3 will be integrated by tier-1.

    How did it come about?
    For long, the private sector has complained that it is not provided a level playing field for defence deals. The government appointed the Dhirendra Singh Committee to look into the issue. The committee pointed out heavy dependence on the public sector for producing defence equipment. It said just one source of production could lead to cost overruns and shortcomings.


    The committee recommended the Strategic Partnership model. It outlined four segments for private-sector partnership:

    Platforms: Aircraft, warships, submarines and armoured fighting vehicles and their major systems.

    Weapons:
    Precision hits such as anti-ship and air-to-surface missiles.

    Networks: Command, control, communication, intelligence and surveillance.

    Critical materials.

    The committee also suggested that a private company chosen as a strategic partner for producing a military equipment should not be chosen for producing another to prevent monopolies.

    The government set up another committee as the Dhirendra Singh Committee recommended creating a task force for deciding the selection criteria for strategic partners. The Aatre Committee suggested broad parameters such as financial, technical and R&D capability for selecting strategic partners. It also suggested that a strategic partner should be an "integrator" of a military equipment. This could be achieved through an ecosystem of vendors and suppliers, including those from the Micro Small & Medium Enterprises (MSME) segment.

    What is the government doing?
    For putting the recommendation by the two committees to work, the defence ministry is finalising a new chapter of the Defence Procurement Procedure (DPP) 2016, ‘Revitalising Defence Industrial Ecosystem through Strategic Partners’. The DPP 2016 details the procurement procedure for the defence forces and is aimed at promoting growth of the defence industry.

    What does the chapter entail?
    The first draft of the chapter detailed several important issues. It mentioned that the strategic partner will not undertake entire manufacturing, but will be a system integrator. The selection will be based on a company's capacity and ability to create a network of vendors. A private firm must be an Indian company, meaning more than 50 per cent of its capital should be owned by Indians. So, the maximum foreign direct investment will be 49 per cent.

    Initially, manufacturing will be confined to four segments: single-engine fighter aircraft; helicopters; submarines; and armoured vehicles including tanks. There will be only one strategic partner per segment.

    The government will first issue an Expression of Interest to private companies. The companies will be evaluated on the basis of selection criteria. The top six companies will be selected for which the government will issue a Request for Proposal (a document detailing the government’s interest in procuring a product) for each military equipment. The best score will decide the strategic partner for each military segment.

    On May 15, 2017, Jaitley held a DAC meeting to finalise this chapter, but what came out was a second draft. The second draft is based on the recommendations of a May 11 meeting on the policy between the private sector and Jaitley and other internal meetings of the defence services. An important point in the second draft was that instead of having only one private company as a strategic partner to manufacture one military platform, there can be four companies. Having only one strategic partner per military segment is an issue for the private sector which says there are companies who have invested in varied fields of defence equipment.

    Soon after the second draft, the government came out with a third draft of the chapter, which was given for review to the defence services and the ministry.

    Today, the government announced that the policy is expected to be initially implemented in a few selected segments—fighter aircraft, submarines and armoured vehicles. Additional segments will be added in the future.

    What are the issues of private sector?
    Private companies do not approve of the clause that there should be only one strategic partner per military segment. They say companies such as Larsen & Toubro which have invested in different fields would stand to lose. Also, having only one company per segment could lead to a monopoly. What happens if that company fails in delivering? Having too few companies could also reduce competitiveness.

    At a meeting with Jaitley on May 11, a few private companies also demanded that those who have earlier worked with the defence services should be given benefits. The companies also want to have a reserved percentage for MSME in the policy.

    http://m.economictimes.com/news/def...efence-manufacturing/articleshow/58765082.cms
     
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  3. Agent_47

    Agent_47 Admin - Blog Staff Member MODERATOR

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  4. Agent_47

    Agent_47 Admin - Blog Staff Member MODERATOR

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    TOI was the first to report that the SP policy would be cleared by the DAC this month as a major step towards building a robust domestic defence-industrial base, the absence of which means that India still imports 65% of its military requirements and can be strategically choked by foreign powers in times of conflicts.

    The SP policy, which will now go to the Cabinet Committee on Security for final approval after the "smaller details" are worked out, is a clear message to the DRDO and its 50 labs, five defence PSUs, four shipyards, and the 41 factories under the Ordnance Factory Board (OFB) that they have largely failed to deliver the goods over the decades.

    However, due to the stiff resistance put up by the public sector lobby against the SP policy, defence PSUs, shipyards and OFB will also be eligible to compete with private sector companies for selection as SPs in the submarine and armoured vehicle segments.

    As per the SP roadmap, which will take almost a year to unfold, officials said only one company will be selected as the SP at a time in each of the four segments in "a transparent and competitive process" for the long-term partnership.

    The defence ministry will select the companies on the basis of adequate financial strength (Rs 4,000 crore in annual turnover over the last three fiscals, capital assets of Rs 2,000 crore etc), demonstrable manufacturing and technical expertise, existing infrastructure and the ability to absorb technology from their foreign partners. A company's record of "willful default, debt restructuring and non-performing assets" will also be taken into account by the defence ministry.

    The foreign companies or original equipment manufacturers (OEMs) will be selected, in a separate but parallel process, primarily on the basis of the "range, depth and scope" of the transfer of technology (ToT) they are willing to offer. Other criteria will include the indigenous content, eco-system development, supplier base and future R&D, among other things
    .

    "The policy is aimed at developing the defence industrial ecosystem in the country through the involvement of major Indian corporates as well as the MSME sector. It will give a boost to the `Make in India' policy and set the Indian industry on the path to acquire cutting-edge capabilities which will contribute to the building of self-reliance in the vital sector of national security requirements," said an official.

    "The Indian industry partners would tie up with global OEMs to seek technology transfers and manufacturing know-how to set up domestic manufacturing infrastructure and supply chains," he added.

    The SP policy was to be part of the new Defence Procurement Procedure (DPP), which came into effect in April 2016. But it could not be finalized till now, further delaying the proposed projects for a new fighter production line as well as the Rs 70,000 crore project to build six new-generation stealth submarines

    http://m.timesofindia.com/india/def...n-defence-production/articleshow/58767678.cms
     
  5. halloweene

    halloweene Major MILITARY STRATEGIST

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    So, in the end, was Dassault so wrong?
     
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  6. Agent_47

    Agent_47 Admin - Blog Staff Member MODERATOR

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  7. Agent_47

    Agent_47 Admin - Blog Staff Member MODERATOR

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    Govt clears policy for strategic partnerships in defence

    Union Cabinet on Wednesday "took note" of the Defence Ministry's proposed Strategic Partnership model for encouraging indigenous manufacturing in the field of defence, Union Minister Arun Jaitley said.

    Jaitley, who holds both the Finance and Defence portfolios, briefing journalists after a meet of the Union Cabinet said there has been an opinion for a long time that domestic manufacturing in defence should be pushed.

    "Cabinet took note of this proposal which deals with encouraging Make in India in relation to defence manufacturing," Jaitley said.

    He said since the government was the only buyer in the field of defence, surety of order is required to build capacity in the private sector in defence manufacturing.

    "You don't set up a manufacturing facility if you are not sure of an order, that is the rationale behind the model," Jaitley said.

    He also said it will "coexist" with capacity building in Defence PSUs.

    The Defence Ministry finalised the Strategic Partnership model at a meeting of the Defence Acquisition Council (DAC) on May 20.

    The policy envisages the establishment of long-term strategic partnerships with qualified Indian industry majors, wherein the Indian industry partners would tie up with global original equipment manufacturers, to seek technology transfer and manufacturing know-how to set up domestic manufacturing infrastructure and supply chains in defence manufacturing.

    Jaitley said four sectors have been finalised for the model at present - fighter aircraft, helicopters, submarines and armoured vehicles

    http://wap.business-standard.com/ar...c-partnerships-in-defence-117052401344_1.html
     
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  8. halloweene

    halloweene Major MILITARY STRATEGIST

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    Ok. Now you've set up a policy, apply it, don't waste times in redesigning it !
     
  9. Agent_47

    Agent_47 Admin - Blog Staff Member MODERATOR

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    All four partners will be decided in next 9 months.
     
  10. bharathp

    bharathp Developers Guild Developers -IT and R&D

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    problem with things like these.. as always.. is very succintly put in the folliwng line " the devil is in the details".

    as of now only "broad contours" are agreed upon.. nothing in detail.. and every new contract signed will throw up multiple issues. our system of democracy is simply not geared towards agility in deicion making. and in the current world of rapidly evolving technology, thats a major buzz kill.
     
  11. Agent_47

    Agent_47 Admin - Blog Staff Member MODERATOR

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    Strategic Partnership Model – formulation of the scheme a big challenge

    The Defence Acquisition Council (DAC) approved the broad contours of the Strategic Partnership Model (SPM) in its meeting held on May 20, 2017 under the chairmanship of the Defence Minister. It may be recalled that this model was recommended by the MoD-appointed Committee of Experts in July 2015. It has been under consideration since then.

    The press release issued by the Press Information Bureau (PIB)1 states that the policy is intended to engage the Indian private sector in the manufacture of hi-tech defence equipment in India. It also notes that the SPM envisages the ‘‘establishment of long-term strategic partnerships with qualified Indian industry majors through a transparent and competitive process wherein the Indian industry partners would tie up with global OEMs to seek technology transfers and manufacturing know-how to set up domestic manufacturing infrastructure and supply chain.”

    These contours are indeed too broad to form an opinion on the workability of the SPM. One cannot help but go back in time to the year 2006 when the ‘Make’ procedure was adopted by MoD with much fanfare to promote “development of systems based on indigenous research and design” with a view to providing “the requisite framework for increased participation of Indian industry in the defence sector.”2 More than a decade later, the first design and development contract is yet to be signed. Every time an effort is made by MoD to finalise a Make contract it runs into procedural difficulties.

    Attention to detail is crucial in translating good intent into a blueprint for action. Unlike the Make procedure which was probably adopted by MoD on its own, the SPM is likely to be taken to the Cabinet Committee on Security (CCS). And that means that it will first be examined by the Ministry of Finance (MoF). Given the nature of the scheme, it will not be surprising if it is also examined by the Ministry of Law (MoL) to make sure that it does not fall foul of the competition law. Such pervasive scrutiny should ensure that no loose ends are left untied but it would do no harm if MoD pay attention to the contrarian views on various aspects of the proposed scheme before forwarding the proposal for CCS approval.

    Going by the press release and other stories appearing in the media, MoD will kick start the process by selecting strategic partners for four segments, namely, fighter aircraft, submarines, armoured vehicles, and helicopters (but this does not find mention in the press release). In a separate process, MoD will also select the foreign Original Equipment Manufacturers (OEM) who could supply a particular platform required by MoD with transfer of the requisite scope, range and depth of technology for its manufacture in India.

    It is not clear whether it is these strategic partners who will tie up with the chosen OEMs and participate as prime vendors in the MoD tender or whether MoD would enter into a contract with the foreign OEM and nominate a pre-chosen strategic partner as the Indian Production Partner (IPP). In either case, much would depend on the process of selection. The process of selecting the platform would have to follow the same procedure as laid down in the Defence Procurement Procedure, which, among other things, entails lengthy field trials. It is doubtful if the adoption of SPM per se will lead to a hastening of this process.

    What may turn out to be more problematic is the process of selection of strategic partners. It is virtually impossible to adopt unchallengeable objective criteria for selection. These problems have been faced even in the context of a few ‘Make’, which, incidentally, continue to be a work-in-progress.

    At the present juncture, the SPM looks like a closed door club. Unless the scheme provides an entry route for new companies and Micro, Small and Medium Enterprises (MSME), the scheme may not be in tune with the competition law that aims to prevent practices that have an adverse effect on competition.

    The issue of whether one strategic partner (including its group companies) will be eligible for only one project poses a challenge. Such a provision may not be acceptable to the private industry. Logically, a one-partner-one-project policy should also apply to the Defence Public Sector Undertakings (DPSUs) and Ordnance Factories. But such a provision may have a large impact on DPSUs, especially defence shipyards, which, having been awarded one project in a particular segment, will be ineligible for any other project in the same segment.

    Price discovery is an important component of the scheme. While there may be a reasonable assurance of price discovery in the initial contract because of the competition among strategic partners or OEMs, as the case may be, the mechanism for price discovery for maintenance contracts over the life time of the platform and for upgrade projects will need to be evolved as these contracts will be negotiated with the sole strategic partner who had undertaken the initial project in an environment of a virtual monopoly. Unless MoD builds up capability in costing and audit of development projects, management of cost-plus contracts with strategic partners at a later stage for upgrades or manufacture of newer versions of the same platform could throw up an insurmountable challenge.

    The presumption underlying the SPM is that the OEMs will be happy to transfer technology to Indian companies or Joint Ventures (JVs) with Foreign Direct Investment (FDI) up to 49 per cent and that they will have no problem even if they are given no choice in selecting the Indian partner with which they could tie up. These are questionable assumptions. To top it all, there is the sensitive issue of Intellectual Property Rights (IPR), which is one of the reasons why foreign OEMs are generally reluctant to transfer technologies.

    There are several other issues which must be addressed before unveiling the scheme in its entirety. Some of these issues seem intractable from a distance. For example, binding a strategic partner through a long-term legal covenant lasting the entire life of a platform and its subsequent upgrade, which may spread over several decades, would be quite a challenge.

    Quite frankly, the entire rigmarole seems unnecessary. The same objective of promoting the Indian industry can be achieved in a simpler manner if after selecting the platform to be inducted – a process that will have to be gone through even under the SPM – MoD leaves it to the selected foreign OEM to tie up with the Indian company of its choice. This does not require formulation of a new scheme as the enabling provision for letting OEMs decide the IPA already exists in DPP 2016.

    Views expressed are of the author and do not necessarily reflect the views of the IDSA or of the Government of India.

    http://www.indiandefencereview.com/...el-formulation-of-the-scheme-a-big-challenge/

    @PARIKRAMA @Abingdonboy @Sancho
    Good read
     
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  12. Butter Chicken

    Butter Chicken Lieutenant FULL MEMBER

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    Good discussion(HINDI) on LS TV

     
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  13. Sancho

    Sancho Lt. Colonel Technical Analyst

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    Of course they were, since their major problem was not the (fake) workshare issue of HAL, but the guarantee and penalty clauses, which still remains in the DPP 2016 and would also apply to the SP model!

    In fact the SP model has made it even worse for Dassault now (if they had a chance to take part in the fighter tender), because the normal buy and make Indian category, gave Dassault the freedom to choose privat partners to divert production. That however might not be possible anymore, since the Indian SP is meant to get the major share, to attract privat players in the first place. So the winning OEM will be much more dependent on the SP's plans / management, then it would be the case now with HAL.

    Moreover, Dassaults prime partner RIL not necessarily will be chosen as the SP in the fighter sector, since TATA and even Mahindra already have better infrastructure and partnerships in place. Even if RIL is chosen now in the single engine fighter tender, it would be more useful for them to aim on higher orders of the winning fighter, than open a 2nd line for Rafale.

    Dassault basically had a flush in the hand and waited so long, till the opponent got a full house.
     
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  14. NKVD

    NKVD 2nd Lieutant FULL MEMBER

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    Great discussion Specially by CEO of TATA SED
    Wonder When Main stream media have such intellect to discuss such important Topics :dude:
     
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  15. Sancho

    Sancho Lt. Colonel Technical Analyst

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    The model is sadly flawed from the start, since the aim is to get as many Indian privat players to invest in the Indian defence sector, but not necessarily to chose the best suitable company.

    TATA for example is currently the best choice in the aircraft sector, but if slected, they can't participate in the armored vehicle sector anymore, which then would rule out their Kestrel IFV, which is the only Indian made IFV in the tender. We then would be forced to import a foreign IFV via licence production, rather than fielding an indigenously developed one in competition.
    Something similar could be the case for L&T which might end up without further howitzer orders, if they will be selected for the submarine sector.
    And as I said some weeks ago, the fact that the SP could have partnerships / JVs with one of the OEMs could invite bribes and inconsistencies in the tender.
    TATA for example has aircraft production partnerships with LM, which could lead to a more favourable joint offer of the F16, than with Saab for the Gripen.

    Let's see how the whole procedure will work out at the end and if the private industry will find it attractive enough, the first reports were not too enthusiastic.
     
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