By Commodore Anil Jai Singh (Retd)
On October 1, the Ministry of Defence superseded the existing Defence Procurement Procedure 2016 (DPP 2016) with the Defence Acquisition Procedure 2020 (DAP 2020). Taking into account the contemporary realities and with a focus on ‘Atmanirbharta,’ the latest Government initiative to enhance self-reliance, the document has grown to 657 pages from the 489 pages of its predecessor.
This document has incorporated many additions and alterations including higher limits of Foreign Direct Investment (FDI), additional categories of procurement including leasing of equipment, preferential treatment to foreign Original Equipment Manufacturers (OEMs) which are supported by their governments through G2G arrangements or Foreign Military Sales (FMS) mechanisms, revision in the definition of Indian vendors, additional support to Micro, Small and Medium Enterprises (MSMEs) through innovative schemes and many more. However, the Strategic Partnership (SP) model, which was first introduced as Chapter 7 in the DPP 2016 to develop additional capacity in the private sector in four core areas, remains unchanged.
Genesis of the SP Model
In August 2014, soon after assuming office the Prime Minister launched the ‘Make in India’ Initiative aimed at making India a globally competitive powerhouse. Defence manufacturing was identified as one of the key sectors. One year later in July 2015, the Dhirendra Singh Committee constituted by the Ministry of Defence (MoD) reviewed the acquisition process and one of its main recommendations was the concept of Strategic Partnership (SP) as a way to reduce India’s dependence on import of military hardware which, besides being a strategic vulnerability for a country aspiring to sit at the global top table, is also a huge drain on the country’s foreign exchange resources. After extensive deliberations involving a wide cross-section of stakeholders, the MoD finally introduced it in May 2017 as Chapter 7 of the DPP 2016.
Progressing the SP Model- Project 75(I) Submarines
Four key acquisitions have been identified under this model – submarines, helicopters, fighter aircraft and armoured combat vehicles/ tanks. Since Project 75(I) for the indigenous construction of six diesel-electric submarines based on a proven international design was already under discussion, this became the first programme initiated under this model. Subsequently, the Indian Navy’s requirement for 111 Naval Utility Helicopters (NUH) was identified as the second acquisition under this initiative, and is progressing concurrently with Project 75(I).
At the time of its introduction itself, various shortcomings and ambiguities were flagged by experts in various articles and analyses. However, the Chapter on Strategic Partnerships in the DAP 2020 remains unchanged leading one to believe that these were either too insignificant to merit attention or were simply not heeded. Hence, these continue to exist and will inevitably lead to difficulties in time bound implementation of these programmes.
In fact Project 75(I) itself as the first programme being processed under this model offers an interesting insight into the progress, or the lack of it so far of this model.
Shortlisting of the SPs
Subsequent to the approval of the Defence Acquisition Council (DAC) in January 2019 and the issue of Expressions of Interest (EoI) to aspiring Indian SPs and selected foreign OEMs in mid-2019, the MoD in January 2020 shortlisted five foreign OEMs and two potential Indian SPs; Mazagon Dock Shipbuilders Limited formerly called Mazagon Dock Limited, a Defence Public Sector Undertaking (DPSU) which is currently building the Project 75 submarines and Larsen and Toubro (L&T), the country’s leading engineering conglomerate in the private sector which has made considerable investments in the defence sector.
The shortlisting of Mazagon Dock as a potential SP questions the very raison d’etre for the SP model, as quoted in the DPP 2016 and reiterated in the DAP 2020 “… There is thus a need to institutionalise a transparent, objective and functional mechanism to encourage broader participation of the private sector, in addition to capacities of DPSUs/OFB, in manufacturing of major defence platforms.” Media reports indicate that the MoD is also keen to include Hindustan Aeronautics Ltd (HAL), another DPSU as one of the potential SPs for the 111 NUH programme. The inclusion of DPSUs therefore seems to be more the rule than the exception. Ironically, despite this major deviation in the very concept of strategic cooperation as outlined in DPP 2016, the chapter remains unaltered in SAP 2020 thus making the MoD’s claim to encourage private sector participation in addition to the existing capacity in the DPSUs ring rather hollow.
Non-adherence to timelines laid down in successive DPPs has been the bane of the defence acquisition process in the two decades that it has been in existence and the SP model seems no different. Defence acquisitions worldwide are lengthy procedures but the MoD’s insistence on unrealistic timelines not only questions the very credibility of the procedure but also leads to an increase in committed liabilities with consequential effects on budgetary planning and force level development. Added to that is the prevarication, indecisiveness and at times plain indifference of an unaccountable civilian bureaucracy lacking in both, domain expertise and an understanding of the implications of a capability deficit in combat preparedness. Project 75(I) seems to be no different. It has been on the anvil for over a decade, and is hopefully progressing now though it has been almost one year since the potential SPs were shortlisted (in Jan 2020) and the RfP which was supposed to follow within two months of that is still awaited. The reasons for this are not far to seek.
Complexity of the RfP Process
The RfP in the Indian procurement eco-system is carved in stone and requires 100 per cent compliance from the vendors at the time of the response itself. It therefore has to be foolproof at the very outset even against futuristic technologies. While this may work for simple equipment which is both proven and available, the complexity of putting together an RfP for as complex a system of systems like a future submarine is a daunting task. In this case, the RfP will also demand compliance to the depth and extent of ToT demanded by the MoD, the high percentage of indigenisation that is desired and the complex contractual and collaborative issues envisaged in the SP model which will further complicate the response. This places a high risk on the RfP failing to offer 100 per cent compliance which could then lead to its retraction and a further delay in the programme. Hence the reason for the delay in the issue of the RfP is not in the least bit surprising and further underlines the ignorance of the MoD in stating that it will be issued within a period of a few months.
This long awaited RfP once issued to the two potential SPs will then lead to them promulgating their RfP to the five foreign OEMs. This RfP will in addition to elements of the technical, commercial, contractual, and functional and performance parameters of the MoD-issued RfP also have to include the industrial model they wish to develop with the foreign OEMs.
Such an RfP will require tremendous attention to detail as there will be no room for ambiguity since every element would have cost and time implications. It will have to specify the nuts and bolts of the indigenisation process, cost and extent of ToT, work share between the entities, transfer of Intellectual Property, certification, quality control, lifecycle costing, delivery timelines and a host of other issues requiring deliberation and compliance, thus further adding to the time, the risk and consequently the cost. Only after each of the issues with each of the five OEMs is resolved, they will be able to bid for the programme.
Once the responses are received, each of the bids will be evaluated which in itself will be a gargantuan task requiring considerable resources that both these shipyards will be hard pressed to dedicate to this. This evaluation will also have to factor in the risk element since many of the technologies being demanded and the depth of ToT sought for these submarines are still under development. Hence the credibility of the participating OEMs committing their compliance to unproven technologies will also have to be factored because ultimately it will be the SP that will be responsible to the MoD for timely delivery of the platform. To cite just one example: one of the selection criteria is the fitment of a fuel-cell based Air Independent Propulsion (AIP) System. So far only one of the five OEMs in the fray has a proven system – all the others claim that they are developing theirs. Additionally, DRDO is developing an indigenous system which if ready may become the preferred choice. In that case each of the five OEMs will have to modify their existing design to suit the indigenous system and its performance parameters. This will have both time and cost implications.
Submarines are now moving towards using Lithium-ion batteries instead of the present lead-acid type. The JMSDF (Japanese Navy) is the first navy in the world to deploy these on its latest submarine. South Korea claims its next submarine will have Li-ion batteries. Germany, France and Russia are progressing with their own development of this technology. Given the present status of Project 75(I), the first submarine is unlikely to enter service in less than a decade from now by which time lead acid batteries could well be a thing of the past. If the IN decides on Li-ion batteries at a later stage, this will once again not only have cost and time implications (because of the design modifications that will be required) but also carry risk of the selected OEM being challenged in developing and delivering this technology in accordance with the requirements of the Indian Navy. In case it is included in the RfP at this stage the risk still remains because the OEMs will be giving compliance to a technology that is still at a nascent stage. This is just one of many such issues which will need to be factored by the OEMs in their bid and for the potential SPs to deliberate upon in their evaluation.
The inclusion of a DPSU in the competitive process skews the ‘level playing field’ considerably in its favour. A private sector enterprise is at a disadvantage from the very beginning as it requires raising money at high interest rates to make the necessary investment for submarine construction and will thereafter have to chart its own financial course, no matter how stormy it gets. The DPSU on the other hand, has the advantage of the state absorbing all or at least a part of its capital investment and the luxury of falling back on the state to bail it out should it face financial or contractual headwinds as has been the case in every shipbuilding programme to date. The P75 programme currently in progress is itself a case in point where the first submarine was delivered five years behind schedule and only two submarines have been commissioned in the 15 years since the contract was signed.
Another point of concern is that Chapter 7 does not provide the assurance that the selected SP be the automatic choice for future contracts and may only get extra weightage for the expertise developed. This uncertainty about the future is hardly adequate encouragement for developing a vibrant defence manufacturing capability. This could also have a detrimental effect on the programme for two reasons; firstly, the SPs willingness to make the capital expenditure required for such a large programme and secondly, the higher cost of the programme due to insufficient economies of scale for amortisation of the non recurring capital expenditure if restricted to just this one programme.
The one redeeming feature in the SP model is the option to develop a shared partnership between the SP and a DPSU if certain elements of the programme require it. In this case, MDL’s existing expertise could be helpful in enhancing the efficiency of the programme.
The Lowest Bid (L1) Syndrome
The L1 syndrome has been the bane of the defence acquisition process but the MoD continues to delude itself that this indeed reduces the cost. The SP model is no different and risks the very premise on which this programme is based – creating a self-reliant industry by acquiring deep Transfer of Technology (ToT). Critical and high end technology is expensive to develop and will not obviously be transferred at L1 (lowest bidder) cost. In Project 75(I) too, since the cheaper of the two bids will decide the winner and the final SP, it is patently obvious that the potential SPs will choose the cheapest bid from the foreign OEMs as their partner. The implications of this are obvious. There could be compromises in the promised level of ToT, unproven technologies could be underpriced leading to subsequent escalation in cost and perhaps the biggest risk associated with committing to unproven technologies in complex programmes such as these is that the OEM fails to deliver on time, within cost and of the desired quality, little can be done once the project is well underway. Hence the evaluation of the ability of an OEM to be able to deliver on its ‘under development’ capabilities needs to be assessed very carefully and the lowest cost cannot become the deciding factor.
User as Chooser
Perhaps the most glaring anomaly in the entire defence procurement/ acquisition process is the exclusion of the ultimate user, the Armed Forces, from the decision making process. This is definitely detrimental in complex and major programmes such as Project 75(I) which require very experienced and specialised domain knowledge which is available with the user but significantly absent at the later stages in the decision making process. In the P75(I) programme the MoD’s selection of the SP is going to be on the basis of L1, both the potential SPs will obviously choose to partner the cheapest foreign OEM to improve its own chances of winning the bid. As far as the SP is concerned, its responsibility will effectively end with the delivery of the platform. Thereafter it will be the user, the Indian Navy which will be operating this platform for the next four decades or so during which it will not only have to go to war with it but also win decisively. Hence it should be the Navy which should be the lead agency in deciding which of the five designs is best suited for its requirements. However, the irony is that instead of insisting on this, the Navy seems quite resigned to conceding decision making to the industry and the MoD.
Likely Programme Schedule
The complexity of the SP model when applied to P75(I) would make any estimation of the likely timeline at best an educated guess. However, from the very beginning it was obvious that MoD’s earlier claim of concluding a contract by 2021 was unfounded either through false expectation or sheer ignorance. The RfP due since early 2020 will take at least a few more months to be issued to the prospective SPs (Mazagon Dock and L&T) as highlighted earlier, there may even be the possibility of a work share arrangement between the two entities to enable capacity creation in the private sector without losing the expertise gained by Mazagon Dock in Project 75. A possible guesstimate on the timelines based on ‘D’ being this issue of the RfP would suggest the following:-
(a) D. Issue of RfP by MoD to the two potential SPs.
(b) D+3 months. Issue of RfP by the two SPs to the five foreign OEMs since both SPs would need to clarify various issues with the RfP arising out of the MoD RfP to ensure any major non-compliance does not derail the whole process.
(c) D+12 months. (give or take three months) It would probably take the OEMs a year or so to respond because of the multiple issues that would need to be resolved such as indigenisation, depth and extent of Transfer of Technology (ToT), the contractual model, setting up a Joint Venture/ Special Purpose Vehicle, the equity participation etc. The OEMs would need time to develop their indigenous supply chain; evaluate and certify Tier 1, 2 and 3 vendors and the costing of indigenised parts as that would have a considerable impact on their ultimate bid.
(d) D+18 months. Evaluation of the responses by the SPs based on the number they receive – there is a possibility that all five OEMs may not respond to each of the two because of the resources and effort required to prepare two simultaneous bids. A period of six months to evaluate these would be challenging unless the potential SPs are already favourably inclined towards one of the five which could make it quicker though not necessarily better. Any such pre-conceived preference would not bode well for the future of the programme and the MoD or the Navy would do well to discourage this.
(e) D+36 months. Once the SPs have shortlisted their preferences, the nitty-gritty of the price negotiation with the selected OEM and negotiating the contract between the SP and the OEM, the setting up of a Joint Venture/ Special Purpose Vehicle including work share, equity participation, ToT, IP issues etc. would follow. Adding to this complex matrix would be the contract with the MoD as laid down in the DAP 2020. Working out these details and negotiating the final price with a risk averse and cost-conscious MoD could take up to 18 months and only then would the final contract be signed.
Hence, even the most optimistic assessment, as has been outlined above, would indicate that it would take a minimum of at least three years for the contract to be signed from the date of issue of the RfP. However, given the track record of the MoD in concluding contracts of far less complexity, this author wouldn’t hold one’s breath on that. Translating this to the calendar, the earliest a contract for the construction of the six P75(I) submarines could possibly be concluded would be the middle of 2024. This incidentally would be the period of the national general election which could further complicate matters. However, that is still three years in the future and one should remain optimistic about the outcome.
Assuming the best case scenario, it will take at least eight years or more for the first submarine to be built and would therefore not enter service before 2032 at the very earliest. By this time, other than the six Kalvari class submarines, the remaining submarine fleet would be between 30 and 45 years old.
It would also be prudent to keep in mind that the reasons for the delay in the P75 programme being built at Mazagon Dock (in collaboration with Naval Group of France where the first submarine was delivered five years behind schedule and 15 years later, only two boats have been commissioned) are not repeated.
The widening deficit in India’s submarine capability is a matter of concern and in the emerging regional security calculus, it is imperative that the MoD/ IN makes the right choice and not the cheapest choice. In a technologically complex programme such as this, where domain expertise is a pre-requisite, the Navy must insist on taking ownership of the programme to ensure that it gets the maximum bang for the buck. The Chapter 7 of the DAP on the Strategic Partnership model is conceptually sound but riddled with ambiguities which need to be addressed to expedite the progress of this and other future programmes. The successful outcome of the P75 (I) programme is critical not only for the impact it will have on the future of India’s defence industrial architecture but also for the nation’s maritime security which is already wanting in the undersea warfare domain.
-The writer is a veteran submariner and presently the Vice President of the Indian Maritime Foundation. The views expressed are personal and do not necessarily reflect the views of Raksha Anirveda