Strategic Partnership Policy: Opportunities and Challenges

The 21^st century poses a set of emerging opportunities and challenges for India, both internally as well as globally. India’s bid to become a regional power entails the prerequisites of a strong and stable economy and a defence power which is capable of ensuring peace and security in the South Asian region. India’s national security policy has been undergoing transformation since the last two decades and the latest Defence Procurement Policy (DPP 2016)witnessed some major reforms recently. One such reform that has caught the attention of the strategic community is the policy on Strategic Partnerships (SP). 

On 31 May 2017, the Defence Acquisition Council (DAC), chaired by Defence Minister ArunJaitely approved the SP policy that will allow domestic private companies to enter into strategic partnership agreements with overseas Original Equipment Manufacturers (OEMs) to bid for the procurement of big-ticket military platforms. The initial programmes would include major systems like single-engine fighter aircraft, helicopters, submarines and armoured vehicles. The SP policy was first introduced in the DPP-2016 released at the DefExpo in Goa in February 2016 with an aim to ensure indigenization and enhance India’s self-reliance index.A significant amendment in the procurement policy has been that the selection of the companies will be based on inherent capability and capacity to undertake the project, in contrast to the practice of nomination of DPSUs followed earlier. This is a crucial reform because it not only enables the equal participation of private companies on the basis of capability and costs, but also highlights the change in the philosophy of defence procurement.

The policy was first recommended by the Dhirendra committee in 2013 which was later refined and introduced by the VK Aatre task force in September 2015. Top Indian companies, particularly private sector are in the run-up to get shortlisted based on financial strength and technical capability, to be eligible for defence deals worth USD 20 billion over the next one year. The policy is expected to support the government’s landmark Make in India initiative. Essentially, the policy has been introduced to enable a robust and dynamic defence industrial base in India envisaged 30 years ago. The policy was long due and would serve as a major catalyst for the private sector which was initially allowed to enter the defence sector in 2001, however, was not able to bag substantial defence deals ever since. The SP policy is hoped to increase the transfer of technology (ToT), a critical requirement for boosting the indigenous defence manufacturing base. Considering that development and production of weapons is a time consuming process, the idea was to ensure that a long term strategic partnerships could be established among industry players – both domestic and foreign OEMs. According to the DPP guidelines, the applicant company applying for strategic partner must be owned and controlled by resident Indians,with the objective to keep decision making and intellectual property rights (IPR) in the control of resident Indians.

India’s defence sector has been criticized for huge time and cost overruns and slow performance of the public sector which had a majority share in large portion of defence deals. The SP policy brings in a change in terms of moving away from complete dependency on public sector undertakings (PSUs), Defence Research and Development Organisation (DRDO) and Ordnance Factories (OFs) to a more balanced approach between the public and private sector. The policy will also lay the ground for the Micro, Small and Medium Enterprises (MSMEs) to grow and flourish. The vision of the policy is to designate a few private players as Strategic Partners that would not only become system integrators but also contribute to the defence industrial complex by making long-term investments in R&D and manufacturing infrastructure, nurturing a pool of skilled human resources, and ensuring technology absorption and indigenous production. This policy would enable bridging the gap between the Indian private sector and the government which has so far been perceived to be in favour of the public sector units.

Although the vision of the policy is positive and forthcoming, there remain challenges that need to addressed. The evaluation of technology transferred and the criteria for the same remains vague and complex. The same measurement and evaluation criteria for different kinds and critical levels of technologies will make it difficult for OEMs to transfer the technology. Rigidity in terms of Foreign Direct Investment (FDI) limits, indigenous content, and ToT evaluation may cause hurdles in timely execution of projects. The process forselection of six strategic partners may lead to internal conflict within the domestic defence industry vying for the defence contracts. There is a long way to go before the strategic partnership policy culminates into the development of a reliable domestic defence industrial base. As per the defence experts, it may take more than 2 years before a contract is awardedor a deal is signed under the new policy. It takes considerable amount of time to complete field trials and environment testing. The bureaucratic and procedural hurdles have led to major delays and cost overruns in the past. Bridging the gaps during the execution phase will be an essential element in determining the success of the SP policy. The foreign OEMs have been reluctant to part with crucial technology as sensitive IPR is an issue. The US-India Business Council remarked that control of proprietary technologies is a major consideration for all companies exploring public and private defence partnerships. Industry associations on behalf of foreign companies also opposed the clause that held foreign firms jointly responsible for the quality of the platforms provided to the Defense Services, recommending that the Ministry of Defence affirm that foreign OEMs will not be liable for defects outside their company’s control. Bridging the gaps in the execution will be essential elements in determining the success of the policy.

The author is a political and security analyst based out of New Delhi.