Archive for May, 2017

Six Indian companies to be selected, orders worth $20 billion on offer.
The approval to the strategic partnership policy comes as a major boost to the private defence manufacturing sector, where a race has already begun among top Indian companies to get onto a select list of six that would be eligible for deals worth more than $20 billion on offer over the next year.The policy, which had been stuck for over 18 months due to differences within the bureaucracy, has been cleared after the intervention of defence minister Arun Jaitley and several rounds of meetings with stakeholders.

The private sector had been upset with a lack of orders by the defence ministry for the past three years, with several top companies complaining to the government about all big projects going to the public sector, as has been the norm for decades.

Jaitley, who holds charge of both finance and defence ministries, said the Union Cabinet was made aware of the strategic partnership policy in a meeting on Wednesday. Four sectors ­ helicopters, submarines, armoured vehicles and fighter jet have been identified under the policy for now, as ET reported on May 11. It is, however, unclear whether the policy would require a formal approval from the Cabinet Committee on Security or would now be rolled out by the defence ministry as a new chapter in its procurement policy. As reported by ET, a pool of six Indian companies will be created to accord a special status for defence manufacturing. The companies, selected on the basis of financial strength and technical expertise, would be given the opportunity to bid for mega defence production orders, expected to be worth over $20 billion.

The ministry will also initiate work to identify foreign partners for the four identified pro jects. An ambitious target of nine months has been set to select the Indian companies. This will be done based on technical evaluation and field trials.

Once the foreign vendors are shortlisted, the Indian pool would be invited to plan collaborations and present joint proposals that would be the basis of a final selection.

As per the policy, one Indian company would be allowed to participate in only one strategic partnership project, to avoid a monopolistic situation. With this model, the ministry is hoping to avoid questions on competitiveness and price discovery, given that a pool of both Indian and foreign vendors would be competing for collaborative projects.

RADICAL MILITARY REFORM Headed by management guru Pritam Singh, the committee has recommended the dismantling of the current system that is described as `diffused across the MoD and services’ and is prone to bureaucratic delaysTo be created within MoD, it will be responsible for policy, acquisition and exports.

Batting for a radical change to make military procurement’s more efficient and time bound, a high level committee, government appointed committee has recommended the setting up of an autonomous defence acquisition organization (DAO) within the defence ministry that will be in charge of formulating policy , planning and executing weapons purchases for the armed forces.Setting up a detailed road map for the creation of the new organization, the committee, headed by management guru Dr Pritam Singh has recommended the dismantling of the current system that is described as `diffused across the MoD and services’ and is prone to bureaucratic delays.

The report, prepared with a number of industry experts as well as senior defence ministry bureaucrats, is now being studied by the government, with defence minister Arun Jaitley keen to roll out reforms to unlock the potential of the defence sector.

The committee has recommended that the word acquisition be used instead of procurement for the new organization as it would cover a spectrum of activities, from policy making, planning and budgeting to execution.

The main objective of the DAO will be to provide a single point responsibility for acquisition of capabilities ­ combat platforms, systems and equipment as per plans and within the allocation of funds and the time agreed.

At present, acquisition is carried out within the defence ministry by a system that includes an additional secretary as the head, representatives from the services and several officials from the administrative services who move in and out from different ministries and sectors.

The idea, according to officials aware of the matter, is to create an organization that will not fall into the ambit of normal rules of the government. A long standing problem has been that officers and officials deputed to procurement hardly spend 3-5 years in the department before moving on to other unrelated duties, diluting a professional set up.

This issue has been addressed in the DAO by recommending a professional cadre that will man posts and will be independent of government rules on postings and deputation. “The normal rules will not apply . People will be able to have longer tenures and there will be a flexibility in hiring people, even from outside the organized cadres,“ sources told ET. To be headed by a CEO, who would nominally be equivalent to a Secretary , the DAO will have eight directors responsible for different areas of acquisition, including one with the critical responsibility of interfacing with the industry and governing exports. To make the organization autonomous, it has been recommended that it would be funded with a percentage of the funds that it utilizes every financial year. In the first year, this has been recommended to be Rs 400 crore.

While the committee has submitted a detailed roadmap for execution, the defence ministry will have its task cut out to roll out the reform, given that stiff opposition is expected from within the existing system on the radical changes recommended. Experts believe that it can take the plan two years to roll out ­ to both address the concerns of the system and create the systems required to set up the new organization.

Defence ministry to unveil new policy this week; move to render memoranda of understanding signed between Indian companies and foreign players over the last three years infructuous
The defence ministry has finalised its roadmap for the selection of private sector companies for mega military production orders, with an elaborate procedure spelt out in a new policy to be unveiled this week. Financial strength, technical capability and existing infrastructure will be the main criteria for selection of the Indian companies while foreign partners will be selected in a parallel process on technical and commercial grounds.ET has learnt that the defence ministry’s new strategic policy (SP) model will create a pool of six Indian companies that will be accorded special status. Once the pool is created, the companies will be given the opportunity to bid for mega defence production orders, expected to be worth over $20 billion.

As per the policy, in the first stage, the six Indian companies will qualify to bid for four upcoming projects ­ submarines for the navy, a single-engine fighter for the air force, helicopters and armoured vehicles for the army.

Interestingly, the new policy means that almost all memoranda of understanding (MoUs) that have been signed between Indian companies and foreign players over the last three years for these projects will be rendered infructuous, given the new model of selection.

“The defence ministry will shortly invite companies for the qualification process. The companies will be asked to give their priority preference for the four projects. A total of six companies will be selected based on financial parameters and capability,“ a senior offi cial told ET.

The ministry has an ambitious target of nine months to select the pool of Indian companies. The selection will be carried out in a fivestep process, starting with financial and technical evaluation that will have certain criteria, including a Crisil A rating and a minimum turnover of ` . 4,000 crore for the past three years.

Concurrently, the ministry will initiate work to identify foreign partners for the four identified projects. This selection will be based on technical evaluations and field trials. Once the foreign vendors are shortlisted, the Indian pool will be invited to plan collaborations and present joint proposals that will be the basis of a final selection.

As per the policy, one Indian company will be allowed to participate in only one strategic partnership project to avoid a mo nopolistic situation. With this model, the ministry is hoping to avoid questions about competitiveness and price discovery, given that a pool of both Indian and foreign vendors will be competing for collaborative projects. “Concerns that were raised from various quarters, including from within the ministry, have now been addressed,“ the official said.

While the industry is relieved that the stalled process ­ the SP model has been in the works for over two years ­ has got back on track, top executives said that they are waiting for the fine print of the policy that will contain details about the selection process.

Says govt will look at consolidating PSU banks and reduce its stake once stressed assets come down, rules out taxing farm income
Finance and defence minister Arun Jaitley said foreign companies need to be incentivised to set up defence manufacturing bases in India, adding that policies have to be in sync with reality. Companies, he added, will establish manufacturing units only if there is a likelihood that they will get business.The government has liberalised rules as far as investment is concerned and Indian companies, both in the public sector and the private sector, have already started entering into arrangements with international firms to establish manufacturing facilities in India, even “outside FDI limits“.

“In the context of defence, government is the only buyer and, therefore, people will establish units only if there is a likelihood of them getting business and, therefore, our policies have to be tuned to this reality,“ he said in an interview. “Our policies have to be tuned so that we are able to incentivise people (so) that it is worthwhile to set up manufacturing bases in India… Some discussions are on,“ he added, without disclosing details.

His statement assumes significance as defence ministry is set to decide on strategic partners in the private sector for equipment soon.

Jaitley, who met the Japanese de fence minister on Monday , said Tokyo is looking at business-to-business ties and is keen to make in India. “They would like to be considered both for the purposes of India buying and any possibility of India domestically manufacturing with their technologies,“ he said.


The government will look at consolidating public sector banks and reduce its stake in them to 52% once non-performing assets (NPAs) decline, Jaitley said. “The equity can be brought down (to 52%) only at a time when the values are there. The stress period is hardly the best time to go to the market. So, let us improve their health and then we will do it. Once their health improves, as far as consolidation is concerned, in some cases, we are looking at the matter. I won’t give the details as yet,“ he said. A new ordinance gives the Reserve Bank of India increased powers to recover bad loans. He said NPA resolution will take time but the process has to be pushed by the banks.

“RBI itself has come out with some guidelines. Some management changes have taken place. Now the next stage is that through the JLF (joint lenders’ forum) mechanism, the resolutions should start and we do expect the banks to cooperate in making the JLF mechanism a success,“ he said.


Reiterating that the government is not in favour of taxing farm income, the minister said the agriculture sector is in distress and it ne eds to be supported instead of getting further burdened.

“The (land) holdings are very small in size. The rich farmer is a very rare institution. It is not the norm. It is only a rare exception and, therefore, at a time when you need to support agriculture because of the distress, this is hardly the time to deflect the issue and start taxing agriculture,“ the minister said.

While the Centre has no say in the matter, none of the states would do it either, he said.

“In any case, the central government has no power,“ he said. “It is the power of state governments and my own view is none of the states is going to do it.“

(The correspondent is in Tokyo at the invitation of the Confederation of Indian Industry)

Industry reps called for meeting on strategic partnership model tomorrow; PMO keeping close watch
The defence ministry seems to have unlocked the strategic partnership (SP) logjam with a firm push from the Prime Minister’s Office and sustained focus by defence minister Arun Jaitley, setting up the private sector to play a major role in the production of weapons systems for the armed forces.A tussle within the bureaucracy over what rules the SP model would follow had resulted in a stalemate within the ministry since February 2016, frustrating leading private sector companies that were expecting to get mega production orders for aircraft, submarines and land systems, a traditional stronghold of the public sector.

Sources have told ET that a seri es of meetings, particularly one held in the PMO last week, have given the last-mile push to the initiative. Top private sector representatives from three industrial bodies have now been invited by the defence ministry for a meeting on Tuesday , where the go vernment is expected to unveil progress made.

It is expected that four projects will be taken up in the first phase of the strategic partnership project -new submarines, a naval utility helicopter, a single-engine fighter aircraft for the air for ce and armoured vehicles for the army. The armed forces, the navy in particular, are keen to move fast on the concept to meet urgent requirements and address the equipment deficit. “There is no doubt that involving the private sector in this way is the best way forward.Most of the issues have been resolved and the initiative needs to be started on a `yesterday’ basis -there is no time to be lost,“ a senior armed forces officer involved in the discussions on the matter told ET.

Contentious issues, including objections from a certain section of the bureaucracy on how to ensure competitiveness after choosing a certain private sector player as a strategic partner for a specific role like, say , shipbuilding, has resulted in rules not being framed, despite the policy being announced as an integral part of India’s defence procurement policy since early last year.

Officials said a middle ground has been found on most issues, the driving force being specific directions from the PMO that the private sector needs to get a significant chunk of military orders, given that the current model being followed, to push most orders to the public sector, has not been yielding the desired results.

“There are ways to resolve issues. The objection on the longterm covenant for example cannot hold as anyone making a sy stem like submarines or fighter jets will have to be involved for a 20-25-year lifetime of the product,“ a senior government official said.

Though initially a divided house on modalities of the SP model, the private sector too is now on board with the government’s new push. Several industry leaders that ET spoke with said on condition of anonymity that the principle was always accepted but now issues like the selection process and division of work have been resolved.

A formal selection process is yet to begin but internal deliberations indicate that six major Indian companies interested in the sector will be able to qualify on financial grounds to be chosen for the strategic partnership model. This includes the re levant units of Larsen & Toubro, Tata, Mahindra & Mahindra, Reliance Defence, Bharat Forge and the Adani Group.

Projects worth several billion dollars are expected to be unlocked for the private sector, analysts said.

“Through SP policy, programmes estimated to be in excess of $20 billion will open up and an attempt will be made to bring the private sector on par with DPSUs (defence public sector units) in terms of opportunity,“ said Ankur Gupta, vice-president, EY India. “Post policy rollout, the private sector has to make necessary investments to leverage this bold government initiative and deliver on the large-ticket programmes.“

As per the current plan, only one company will be allowed to undertake one strategic project and would not qualify to compete for others. This has thrown up a unique challenge for companies such as Tata and L&T that have diversified interests in the field. Tata, for example, could want to compete for the armoured vehicles project through its Tata Motors subsidiary and for the naval helicopter contract through Tata Advanced Systems (TASL). More clarity is expected on the matter at Tuesday’s meeting.