Revisiting the SP Model

Kolkata Class and Dlehi Class destroyer of the Indian Navy

India has to be the prime contender when it comes to drafting policies and models. When they are documented, they provide the entire domain the hope of enhanced opportunities. One of the kind was SP Model, when introduced it was impressive. However, as the days passed the impact it created also shaded. Will there be any kick start to the model? Or will a new policy be drafted based on that?

As the high powered Defence Acquisition Council (DAC) cleared the much awaited SP Model on May 20, 2017, the country’s private sector beamed with confidence as the decks were cleared for their participation in the multi-billion dollar worth defence industry. SP model, part of the Defence Procurement Program (DPP) – 2016, is a policy framework that has been drafted by the Government to help incubate the capacity of India’s private sector in manufacturing cutting-edge defence technology. The SP model, which was proposed by a committee headed by former Director General of Acquisition Dhirendra Singh, was drafted to work as a system of systems integrator.

Part of DPP-16, the SP Model was drafted as a calibrated acquisition roadmap to provide the forces with strategically important platforms at the lowest possible timeframe. Every acquisition is slated to come packed with measures to help build the capacity of the industry to meet future demands.

Procedure for Selection of Indian Strategic Partners

In accordance to the policy a strategic partner will be selected through a two-stage elaborative evaluation process. For selection, the company interested in bidding has to be an Indian company as defined in Companies Act – 2013 and more than 50% of the capital has to be controlled by Indian citizens or Indian companies. A maximum FDI (Foreign Direct Investment) of 49% will be allowed.

Strategic partners in each segment will be shortlisted based on the recommendations of the Aatre Task Force. Companies before being nominated in the respective segment as strategic partners have to pass through two stages which have been classified as ‘Minimum qualification criteria’ and ‘Evaluation of Response’.

The Aatre Task Force had in its recommendations noted that each of the applying company has to be evaluated against a set of minimum qualification criteria wherein technical and financial capabilities form the bedrock for selection.

To meet the technical requirements the company has to show the capabilities of integration of systems of systems. Further, for making it through the financial gates, the company should have a minimum annual turnover of INR 4,000 crore over the last three fiscals and should further own capital assets worth over INR 2,000 crore. During the selection process, the evaluator will also take into consideration willful default, debt restructuring and non-performing assets.

The ministry will then evaluate the responses of the companies through on-site verification. During this second stage evaluation process, the financial and technical capabilities will carry an equal weight age of 50% each. On the technical front, the evaluator will take into consideration the completed, on-going and launched projects by the company in the current and last 5 Fiscal Years (FY). Also, the R&D budget against total turnover and success in these programs will be taken into consideration. The ministry based on the results of these evaluative process will then shortlist top six graded companies.

Selection of OEM (Original Equipment Manufacturer)

In accordance to the recommendations of the Aatre Task Force, the selection of OEMs will be mainly based on the level of Transfer of Technology (ToT) offered. The evaluation committee will review the range, depth and scope of ToT and shall also take into consideration the extent of indigenous content the company proposes to use aboard a weapon platform. The OEM will also be mandated to develop manufacturing eco-systems in the country through its strategic partner. The OEMs for downright selection will also have to meet the financial and staff requirements as laid down by the ministry in consultation with the forces. The ministry has preferred to dominate at least two or more OEMs per segment.

The Assembly Line of Apache Helicopters; Courtesy - Boeing India.
The Assembly Line of Apache Helicopters; Courtesy – Boeing India.

Formation of Strategic Partnership

Following the selection of Indian companies and OEMs, the ministry will issue RFPs to companies under the indicated segment. Each of the selected strategic partners (Indian Company) can interact with all listed OEMs, but shall provide a techno-commercial bid partnering with any one of the OEMs.

While the technical bid will clearly state the company’s willingness to meet mandatory requirements related to indigenisation roadmap, Transfer of Technology, skilling provisions and creation of R&D capabilities; the financial bid will be inclusive of PBL (Performance Based Logistics), setting up of testing and R&D facilities, lifecycle support and upgrades for a period of 10 years.

The ministry will downright select the most viable offer with 80% weight age for price bid and 20% weight age for segment specific technical capabilities. Following the selection process, the ministry will hold another round of final price negotiations with the Strategic Partner and the OEMs before signing the contract. Any subsequent acquisitions for the identified segment will be carried out through Indian companies and shall be handled under Buy (Indian Designed, Developed and Manufactured), Buy (Indian), Buy and Make (Indian) or Make categories.

The introduction of the SP model has not only hurdled a new era in India’s defence manufacturing industry but has also laid down a well charted acquisition roadmap. The imminent introduction of the policy is set to breathe life into the NDA government’s ambitious ‘Make in India’ policy even as the last missing piece in the ambitious and well thought out DPP-2016 falls into place.

The way ahead for procurement with SP Model in Place

Following the notification of the SP model, the ministry had revealed that the private sector will initially be engaged in manufacturing four strategically important defence platforms namely – Single-engine fighter aircraft, submarines, helicopters and armoured fighting vehicles. For years, the production of major defence platforms and equipment such as aircraft, submarines, helicopters and armoured vehicles in India were carried out solely by Defence Public Sector Undertakings (DPSU) and the Ordnance Factory Board (OFB). Private companies had for years pointed to the lack of a level playing field compared to DPSUs and Ordnance Factories (OFs).

While expert committees had noted that involvement of the private sector in the manufacturing of major defence equipment will have a transformational impact, the ministry has recently indicated that DPSUs may well be included in the SP model under certain categories. It is unclear as, to which of the categories will be opened for the DPSUs, but this comes within months of several OEMs raising concerns about the capabilities of the private sector. For instance, a top US aerospace manufacturer had in a recent event batted for the inclusion of HAL in the fighter contest.  

Experts quip that this may serve well to enhance competition, increase efficiencies, facilitate faster and more significant absorption of technology. As the private and DPSUs co-exist it promises to create a tiered industrial ecosystem, which ensures development of a wider skill base and promote increased participation in global value chains as well as exports.

Texas Air National Guard F-16s in Formation; Courtesy – Lockheed Martin.

Fighter Aircraft Acquisition

Indian Air Force (IAF), which is in-charge of guarding the country against aerial intruders, has been actively pursuing the prospectus of acquiring hundreds of single-engine fighter aircraft to replace the MiG-21 aircraft. Details about the existence of the program had emerged in November, 2016 following MoD’s letter to global aircraft manufacturers seeking their interest in jointly developing a fighter for the Air force.

Even though the Government had initially indicated that the program was confined only to the private industry, the program is now set to be opened for the PSUs following consultations with various expert committees. The RFI, which was floated recently, has made it clear that the Air Force has not confined the tender for a single-engine fighter. The foray of the twin-engine fighters has now increased the competition for the program.

The program had made great flutters in the global industry ever since the Government had forwarded an informal RFI (letter), with a scope for only yes or no reply, to several companies. Representatives of both Saab and Lockheed Martin had in Aero India – 2017 indicated that the ministry was pushing the program full speed ahead. A senior executive had quipped that “We are witnessing a new India here, it’s just not what we had witnessed in the past. We have a query every other week and this has assured us that the program maybe concluded sometime early next year.”

The introduction of SP model and eventual completion of DPP-2016 and now the inclusion of the twin-engine fighters has thus lifted all roadblocks for recreating another MMRCA, which is worth well over INR 80,000 crore.

P-75I Submarine Construction Program

Following the introduction of the SP Model, it was the Navy that had taken full charge of the modernization drives. In an effort to enhance it’s under-water capabilities, the Navy within months of the introduction of the SP model had issued a RFI for the INR 60,000 crore worth Program – 75I. Close to four OEMs and three Indian partners are now vying for the tender. While Saab has partnered Larsen and Toubro for the tender, Naval Group of France has chosen to continue its partnership with the state-run MDL for the tender. The Government, since the introduction of the SP Model, had maintained that the state-run DPSUs (Defence Private Sector Undertaking) such as MDSL and HSL will be allowed to bid alongside the private sector under the submarine construction segment.

The Navy under P-75I has been offered the Scorpene submarine by Naval Group and the Type-214 and A-26 conventional submarine by German-based HDW and Swedish based Saab respectively. Naval Group designed and MDSL built Scorpene submarine have a clear lead given the fact that it features a high-degree of indigenous content, as they are already under construction in India under P-75 program.

Helicopter Construction

One major concern that has been haunting the Navy for decades has been the unavailability of Naval Multi Role Helicopters (NMRH) aboard its frontline battleships. These helicopters are critical for effectively exercising Anti-Submarine Warfare (ASW) capabilities. Utilizing the momentum that existed following the notification of the SP Model, the Indian Navy had introduced a RFI for procuring 123 Naval Multi Role Helicopters (NMRH) and 111 Naval Utility Helicopters (NUH).

The Navy, now, hopes of seeing through a massive deal for NMRH which might be worth well over INR 20,000 crore. TASL which has a working partnership with Lockheed Martin leads the fray in absence of credible opposition.

The army has its share of burden as the force struggles to replace the aging Cheetah and Chetak Light Utility Helicopters (LUH). The forces together have a need for over a thousand helicopters of different class and the inclusion of the private sector promises to drastically reduce the procurement timeframe.

Armoured Fighting Vehicles

The armoured vehicles, which consist of tanks, infantry combat vehicles etc., form the core of army’s strike capabilities. Army is concurrently pursuing the Future Ready Combat vehicle (FRCV) and the Future Infantry Combat Vehicle (FICV) programs in an effort to modernise its strike corps. It is these strike formations which are in-charge of launching and sustaining attack against enemies.

While the FRCV program is being pursued to replace the fast retiring T-72 tanks, the FICV program has been launched to replace the 2500-odd BMP-2 infantry carriers. The ministry had in July, 2015 issued an EoI (Expression of Interest) to 10 Indian companies for the INR 65,000 crore worth FICV project.

The Kestral FICV that is being offered by Tata Aerospace and Defence; Courtesy - Tata Motors.
The Kestral FICV that is being offered by Tata Aerospace and Defence; Courtesy – Tata Motors.

India’s automotive giant Tata Motors and Bharat Force have partnered US based General Dynamics to offer a revolutionary FICV known as Kestral. This powerful consortium is facing stiff competition from the OFB designed Abhay FICV and also by the proposed FICV being jointly manufactured by Mahindra and Mahindra in partnership with BAE systems.

MoD is confident of sealing the FICV tender by the Fiscal Year end, as it has already accumulated a delay of over five years. With Tata’s powerful consortium comfortably leading the fray, it looks like India’s private sector will derail the monopoly of the state-run OFB in providing the army with armoured vehicles.

It has been a year almost since the Ministry of Defence notified the Strategic Partnership (SP) Model as part of Defence Production Policy (DPP) – 2016. While the introduction of the SP Model had been termed as the rise of a new dawn by several experts soon after its notification, there has been no solid progress except for the introduction of several RFIs. The RFIs themselves are the most primitive stage in the cumber procurement cycle. It is imperative that the Government makes due efforts to answer the concerns with the SP model and should further constitute steps to energize the acquisition programs.

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