On April 19, 2016, the Ministry of Defence (MoD) made public the report of the 10-member Task Force constituted under the chairmanship of V.K. Aatre, former scientific adviser to the defence minister.1 The Report, running into 120 pages, deals with the detailed criteria for selecting Strategic Partners (SPs) from within the Indian private sector, which will be given preferential treatment for executing certain types of high-value, strategic, defence items. The public release of the Task Force report, which comes barely three weeks after the MoD released a portion of the Defence Procurement Procedure-2016 (DPP-2016), is yet another bold attempt by the Modi government to push the ‘Make in India’ initiative in the defence sector.
Background of the Aatre Committee Report
The V.K Aatre-led Task Force was constituted in pursuance of the recommendation of the Experts Committee which was constituted under the chairmanship of Dhirendra Singh, former Director General (Acquisition), to suggest a policy framework for driving the Make in India initiative in defence and aligning it with the necessary changes in the provisions of the DPP. In one of its recommendations to promote private sector participation in defence production, the Experts Committee had suggested a “Strategic Partnership model for creating capacity in the private sector on a long term basis.” While recommending the same, the Committee had also suggested the setting up of a Task Force to “lay down the criteria in details for selection of SPs” in certain critical segments of military items in which the identified Partners would play a role equivalent to that of the Defence Public Sector Undertakings (DPSUs) and Ordnance Factory Board (OFB). The main rationale behind the Experts Committee’s recommendation on the strategic partnership model was the unique nature of defence materiel. The committee had reasoned that, given the high-cost and technology intensive nature of defence items combined with the sporadic demand and limited market access, the producers of major military items cannot be left to the vagaries of open competition without making a compromise on long-term capability creation. Based on the recommendations of the Experts Committee, the MoD had set up a high-powered Task force under the chairmanship of V.K. Aatre in September 2015. The Task Force submitted its report in December 2015.
An Overview of the Aatre Committee Report
The Aatre Task Force begins with a tweak of the recommendation of the Experts Committee, which had suggested one or two SPs each in six different segments, namely: 1) Aircraft – fighter, transport and helicopters and their major systems; 2) Warships of stated displacements, and submarines and their major systems; 3) Armoured vehicles and their major systems/weapons; 4) Complex weapons which rely on guidance systems to achieve precision hits, including anti-ship, air defence, air-to-air, air-to-surface, anti-submarine and land attack; 5) Command, control, communication and computers, intelligence, surveillance, target acquisition and reconnaissance (C4ISTR); and, 6) Critical materials (titanium alloys, aluminium alloys, carbon composites, nickel/cobalt alloys, etc.
The Aatre Task Force, on the other hand, has listed 10 segments in two groups from which SPs would be selected (see Table 1). One segment suggested by the Experts Committee but found missing in the Task Force Report is C4ISTR, for which the latter has suggested the Developmental Partnership model to create capability. As per the Task Force’s reasoning, each segment in Group-I is in the nature of ‘system of systems’, which is not the case with Group-II segments. What is crucial to observe is that for Group-I, the Task Force has suggested the selection of only one SP in each segment, whereas the number can go up to two in Group-II segments. In other words, the Aatre-led group visualizes a maximum of 13 SPs (seven in Group-I and six in Group-II).2 Incidentally, the number of SPs recommended for selection is the same as the number of companies identified under the Raksha Udyog Ratna (RUR) scheme, which was first suggested by the Kelkar Committee report of 2005 but never implemented due to political inertia.
For the selection of SPs in each group, the Aatre Task Force lays down a stringent three-step process, involving both financial and technical norms that the applicant companies must satisfactorily meet in order to be considered for final section. For Group-I, some of the financial norms include, among others, a consolidated turnover of Rs. 4,000 crore (approximately USD 612 million) for each of the previous three years, consolidated capital assets of Rs. 2,000 crore in the last financial year, and consolidated revenue growth of a minimum of five per cent in at least three of the previous five years. (For Group-II, the corresponding norms in regard to consolidated turnover and capital assets are Rs. 500 crore and Rs. 100 crore, respectively). In so far as the technical norms are considered, companies are required to be assessed on seven different criteria that include past performance, engineering and manufacturing capability, research and development culture, infrastructure facilities, human resource structure and practices, quality control system, and maintenance and life cycle support system.
In a move to insulate the SPs from foreign control, the Aatre Task Force has suggested a maximum foreign direct investment (FDI) of 49 per cent. This would ensure that the entities designated as SPs are owned and controlled by resident Indians with the CEO being an Indian citizen.
In what could possibly become a more radical measure from the point of view of defence acquisition, the Task Force has suggested the creation of an independent regulator and a specialised wing in the MoD to deal exclusively with the chosen SPs. These two measures, if found acceptable by the government, will end a major trust gap that has hitherto existed between the MoD and the private sector.
A Critique of the Report
Given the sensitivity and complexity involved, the Aatre Task Force seems to have done a reasonable job in formulating detailed criteria for the selection of SPs. It has, however, not addressed two fundamental concerns, which, if not addressed, would render the whole exercise less effective. First and foremost, the Task Force has not extended the principle of Strategic Partnership to the whole gamut of big contracts in which the private sector is supposed to play a major role. As initially suggested by the Dhirendra Singh committee, the Task Force has also limited the participation of SPs to ‘Buy and Make’ contracts involving transfer of technology. In other words, SPs are not supposed to get preferential treatment for executing the crucial ‘Buy and Make (India)’ and ‘Make’ contracts. Given that capability creation and its nurture under the latter two categories are more critical from the self-reliance point of view, it would have been prudent for the principle of Strategic Partnership to be extended to these as well.
Second, the SPs, in the present scheme of things, are not substitutes for the inefficient DPSUs and OFs; rather, they are visualised as poor cousins of state-owned entities. This is amply clear from the Task Force report, which gives liberty to the MoD to buy items from the DPSUs/OFB subject to their capacity constraints. In other words, only when the DPSUs/OFB are not able to deliver within a stipulated timeframe (because of their overflowing orders), SPs would be considered for contract execution. This is a highly inefficient way of protecting state-owned entities whose inefficiency and poor functioning have so far been the main reason for India’s poor record in attaining self-reliance.
Views expressed are of the author and do not necessarily reflect the views of the IDSA or of the Government of India.
2. It may be noted that 13 SPs may not necessarily be 13 different parent companies. As per the provisions of the Task Force report, two different companies under the same parent company can apply for strategic partnerships in two groups. This means that a maximum of ten different parent companies can obtain 13 strategic partnership status.
Strategic Partnerships: A Critical Overview of the Aatre Task Force Report
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On April 19, 2016, the Ministry of Defence (MoD) made public the report of the 10-member Task Force constituted under the chairmanship of V.K. Aatre, former scientific adviser to the defence minister.1 The Report, running into 120 pages, deals with the detailed criteria for selecting Strategic Partners (SPs) from within the Indian private sector, which will be given preferential treatment for executing certain types of high-value, strategic, defence items. The public release of the Task Force report, which comes barely three weeks after the MoD released a portion of the Defence Procurement Procedure-2016 (DPP-2016), is yet another bold attempt by the Modi government to push the ‘Make in India’ initiative in the defence sector.
Background of the Aatre Committee Report
The V.K Aatre-led Task Force was constituted in pursuance of the recommendation of the Experts Committee which was constituted under the chairmanship of Dhirendra Singh, former Director General (Acquisition), to suggest a policy framework for driving the Make in India initiative in defence and aligning it with the necessary changes in the provisions of the DPP. In one of its recommendations to promote private sector participation in defence production, the Experts Committee had suggested a “Strategic Partnership model for creating capacity in the private sector on a long term basis.” While recommending the same, the Committee had also suggested the setting up of a Task Force to “lay down the criteria in details for selection of SPs” in certain critical segments of military items in which the identified Partners would play a role equivalent to that of the Defence Public Sector Undertakings (DPSUs) and Ordnance Factory Board (OFB). The main rationale behind the Experts Committee’s recommendation on the strategic partnership model was the unique nature of defence materiel. The committee had reasoned that, given the high-cost and technology intensive nature of defence items combined with the sporadic demand and limited market access, the producers of major military items cannot be left to the vagaries of open competition without making a compromise on long-term capability creation. Based on the recommendations of the Experts Committee, the MoD had set up a high-powered Task force under the chairmanship of V.K. Aatre in September 2015. The Task Force submitted its report in December 2015.
An Overview of the Aatre Committee Report
The Aatre Task Force begins with a tweak of the recommendation of the Experts Committee, which had suggested one or two SPs each in six different segments, namely: 1) Aircraft – fighter, transport and helicopters and their major systems; 2) Warships of stated displacements, and submarines and their major systems; 3) Armoured vehicles and their major systems/weapons; 4) Complex weapons which rely on guidance systems to achieve precision hits, including anti-ship, air defence, air-to-air, air-to-surface, anti-submarine and land attack; 5) Command, control, communication and computers, intelligence, surveillance, target acquisition and reconnaissance (C4ISTR); and, 6) Critical materials (titanium alloys, aluminium alloys, carbon composites, nickel/cobalt alloys, etc.
The Aatre Task Force, on the other hand, has listed 10 segments in two groups from which SPs would be selected (see Table 1). One segment suggested by the Experts Committee but found missing in the Task Force Report is C4ISTR, for which the latter has suggested the Developmental Partnership model to create capability. As per the Task Force’s reasoning, each segment in Group-I is in the nature of ‘system of systems’, which is not the case with Group-II segments. What is crucial to observe is that for Group-I, the Task Force has suggested the selection of only one SP in each segment, whereas the number can go up to two in Group-II segments. In other words, the Aatre-led group visualizes a maximum of 13 SPs (seven in Group-I and six in Group-II).2 Incidentally, the number of SPs recommended for selection is the same as the number of companies identified under the Raksha Udyog Ratna (RUR) scheme, which was first suggested by the Kelkar Committee report of 2005 but never implemented due to political inertia.
For the selection of SPs in each group, the Aatre Task Force lays down a stringent three-step process, involving both financial and technical norms that the applicant companies must satisfactorily meet in order to be considered for final section. For Group-I, some of the financial norms include, among others, a consolidated turnover of Rs. 4,000 crore (approximately USD 612 million) for each of the previous three years, consolidated capital assets of Rs. 2,000 crore in the last financial year, and consolidated revenue growth of a minimum of five per cent in at least three of the previous five years. (For Group-II, the corresponding norms in regard to consolidated turnover and capital assets are Rs. 500 crore and Rs. 100 crore, respectively). In so far as the technical norms are considered, companies are required to be assessed on seven different criteria that include past performance, engineering and manufacturing capability, research and development culture, infrastructure facilities, human resource structure and practices, quality control system, and maintenance and life cycle support system.
In a move to insulate the SPs from foreign control, the Aatre Task Force has suggested a maximum foreign direct investment (FDI) of 49 per cent. This would ensure that the entities designated as SPs are owned and controlled by resident Indians with the CEO being an Indian citizen.
In what could possibly become a more radical measure from the point of view of defence acquisition, the Task Force has suggested the creation of an independent regulator and a specialised wing in the MoD to deal exclusively with the chosen SPs. These two measures, if found acceptable by the government, will end a major trust gap that has hitherto existed between the MoD and the private sector.
A Critique of the Report
Given the sensitivity and complexity involved, the Aatre Task Force seems to have done a reasonable job in formulating detailed criteria for the selection of SPs. It has, however, not addressed two fundamental concerns, which, if not addressed, would render the whole exercise less effective. First and foremost, the Task Force has not extended the principle of Strategic Partnership to the whole gamut of big contracts in which the private sector is supposed to play a major role. As initially suggested by the Dhirendra Singh committee, the Task Force has also limited the participation of SPs to ‘Buy and Make’ contracts involving transfer of technology. In other words, SPs are not supposed to get preferential treatment for executing the crucial ‘Buy and Make (India)’ and ‘Make’ contracts. Given that capability creation and its nurture under the latter two categories are more critical from the self-reliance point of view, it would have been prudent for the principle of Strategic Partnership to be extended to these as well.
Second, the SPs, in the present scheme of things, are not substitutes for the inefficient DPSUs and OFs; rather, they are visualised as poor cousins of state-owned entities. This is amply clear from the Task Force report, which gives liberty to the MoD to buy items from the DPSUs/OFB subject to their capacity constraints. In other words, only when the DPSUs/OFB are not able to deliver within a stipulated timeframe (because of their overflowing orders), SPs would be considered for contract execution. This is a highly inefficient way of protecting state-owned entities whose inefficiency and poor functioning have so far been the main reason for India’s poor record in attaining self-reliance.
Views expressed are of the author and do not necessarily reflect the views of the IDSA or of the Government of India.
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