http://defenceaviationpost.com/2016/04/ ... atilsenio/
The New Defence Procurement Procedures (DPP) Policy –that was announced recently by Defence Minister Manohar Parrikar on March 28th at the DefExpo India 2016 in Goa– has helped usher in a new confidence amongst domestic and global investors. For the first time in the country’s history, the defence sector – that was earlier considered to a closed one with major participation coming essentially from the government owned PSUs, is currently witnessing big investment announcements from the private sector including leading global players in line with the Centre’s Make in India plans. Along with these dozens of new entrants waiting to make a dent in the sector, India also has a handful of established big players in the defence sector like Larsen and Toubro (L&T) who have been operating in the sector for nearly three decades.
L&T has delivered various successful projects for the Armed Forces and DRDO and its defence equipment manufacturing facilities, across the country leverage the latest design and manufacturing technologies.
The man steering L&T’s defence capabilities is its Senior Vice President, Head of Defence & Aerospace, Jayant D Patil. In a free-wheeling interview with the DefenceAviationPost.com, Patil—an Alumnus of IIT, Powai spoke in detail on the new DPP and its implications for the new and existing players.
Patil is responsible for the entire defence and aerospace strategic business sectors of L&T. He is also member of the Board of L&T Heavy Engineering as also Member of the National Executive of FICCI and Chairman of FICCI’s National Defence Committee.
Q: What is there in the New DPP that was missing in the previous one? The present document has clearly been able to boost investment sentiments and industry’s interest. Your thoughts?
A: I want to congratulate the Defence minister, Manohar Parrikar and his team for this excellent and forward looking piece of policy document. The Government’s initiative of due and detailed consultations with all stakeholders to understand and address shortcomings and diligently simplifying processes is clearly visible in the immensely improved new DPP. Some of the bureaucrats who had been earlier cold to many problems of the Industry, seem to have also been now brought aboard as visible in the new policy stipulations.
First and foremost, is the inclusion of Indigenously Designed, Developed and Manufactured (IDDM) with precedence over all other categories. The merit driven acquisition is the next, which I had mentioned earlier. There is clear articulation in the policy on this merit-driven sourcing. So it says, there are Essential Parameters and then there are Enhanced Perfromance Parameters (where we can do better than the specification). If in all these EPP parameters, we surpass the requirements, we get a 10 % price preference by multiplying our bid price by 0.9 (for the purpose of L1 calculations). Thus MoD will pay premium for superior equipment by changing the evaluation process that would make evaluated price lower to the extent of superiority of the equipment.
This is phenomenal step that is completely objective and merit driven, and the game is no longer a pure L1 game. Now with L1, technical superiority will count. I believe that this will genuinely create force multipliers. The same quantum of money that the government spent will deliver extra capability because each equipment so sourced will have extra performance capability. This is undisputedly a very major change in the policy.
The other major changes are in the “Make” category where Parrikar ji has shaped an improved “Make” procedure. Earlier it used to be 80:20 cost share between the Government and the companies partnering in development. As our Make model has been taken from the US DARPA (The Defence Advanced Research Projects Agency of the U.S. Department of Defence responsible for the development of emerging technologies for use by the military), it does not recognise the cost of capital at the hands of the development partner. This is not a big deal in US as cost of borrowing is less than 0.5% and thus weighted cost of capital to corporates would be below 4-5%.
In India, the weighted cost of capital of corporates is 14 % to 16 %. Now, If you spent and government paid you later, all through the program, it would culminate in to additional cost of 20-30% (as borrowing cost) into your books. So while the government said that we give you 80 and you spend 20, we would actually end up spending 40-50. This was brought out to the attention of the minister and he understood and appreciated the extra cost and made necessary changes in the new DPP by changing cost share to 90:10, with 20% advance. This would ensure that the working capital issue would be well addressed and eliminated.
Another significant change in Make procedure is towards commitment to buy expeditiously. If “Make” program user trials are completed and the buy RFP is not issued within two years, the development partners would be refunded back the 10% investment made by them. So interpreting the document we can hear the Defence Minister saying that Industry got in to the development program as risk sharing partners and If we (Govt) are delaying acquisition or If we (govt) do not make timely decisions, we (Govt) will refund the investments the Industry made. So if RFP is delayed beyond 12 months, the 10% that we spent, would be refunded. This is an amazingly empathetic solution to a complex problem. So the modified “Make” procedure comes with some great facets: One is Advance, then the 10% additional cost share (80 to 90%) and commitment to return investments made for Governmental delays. This last stipulation will certainly drive decision making.
Then there is something more. Option clause in acquisition contracts used to be limited to 50% of contracted quantity. Thus when you did well and made a good system the government bought 50% additional numbers by exercising the option without having to go through a lengthy process of acquisition. This “Repeat order” clause can now be for yet another 100% numbers. The option contract can be placed within defined time limits of the start of original contract virtually without any time lost in protracted negotiations. This grants the Government the right to buy twice the quantity at same terms when exercised within the tenure of the original contract, subject to the User needing that equipment. So even two-three years later, as long as the original production line is still producing, the government can exercise right to double the contracted numbers at the same basic price. This helps both the parties… because of the scale it helps the industry maintain prices inspite of inflation if produced concurrently. The government gains on sourcing it at the same price without losing say three years in negotiations and all the associated processes.
Then the Defence Minister has targeted making the process much faster and focussed. Involving Industry in PSQR process will help cutting cycle times as well as cost of acquisition as what is achievable will start getting factored in to requirement formulation. Past has shown that just one requirement for no real tangible requirement can throw the acquisition cost out of proportion. Minimising the acquisition related approval levels to just two levels and asking RFP to be ready when User HQ proposal comes up for an AON… will actually make AON to RFP time limit of six months happen. This is again a very subtle grass root level but extremely positive change. What the new DPP clearly tells the User community, loud and clear, is that if the you have not made up your mind what you want, don’t come to DAC for an AON. You cannot have AON granted and then look for what is to be specified and be included in RFP’s… you asked DAC to issue an AON, Govt makes a commitment to buy and after that you cannot say I need time.
To top it up, the new policy allows Resultant Single Party clause getting extended to bidding stage as long as the RFP was issued to many (based on RFI responses). Such cases need to be approved by the DAC with appropriate justification by the User. This will save huge time in acquisition cycles, as experienced during the past decade.
The minister has included a Strategic Partnership chapter as a commitment to make that forward looking process happen with appropriate approvals. This initiative will make Private Sector system integrators happen to add to what the DPSUs can integrate and enhance indigenisation by cutting imports. This will help tierisation in Industry and with multiplier effect in the economy, add significantly to the GDP and jobs creation.
Very subtle but far reaching change by the Minister is that the DAC can invoke Fast Track Procedure anytime and not only at the times of war. This will help exigent situations at the hands of the User that he can justify to the DAC to invoke the fast track acquisition during peace time.
Having categorised 80-90 % AONs over past one and a half year in favour of various categories of procurement from Indian companies, the Minister has relaxed and made Offset mandatory for contracts in excess of 2000 Cr. Such offsets are to be specifically directed towards building India’s Military-Industrial-Complex.
These are the few significant new beginnings that I would say are very very bold steps taken by the RM. The preamble to the DPP, to me is like the 0th Law in physics. It addresses something fundamental to existence of the process, the basic fibre of the DPP, that it should facilitate (not deny) building self-sufficiency through intelligent use of the acquisition process and vice a versa. To me, these steps can truly compress time frames and make it far more beneficial for all the stakeholders, the User community, the Industry, and the government. That’s where I see genuine effort to create a win-win-win all the ways.
Q: With the new DPP, we see many new entrants and established corporates walking into the Defence sector? L&T has already been in this space for almost 30 years and an established track record. While the new entrants are announcing some big tie-ups with leading global players, can we actually call the latter arrangement as the true “Make in India” way?
A: As I see from the past experience, whenever a new sector opened up, there is a honey moon time that gets in many new entrants. Aviation sector is one such glaring example to point. All new entrants will use high pitch, try and create differentiators but they will have to eventually deliver promises through building shear track record through physical delivery on a sustained basis. There one needs to have far more than stating as to what my partner can do. Today the government’s policies are quiet clear that as an Indian Defence Company, you can’t just be a “front” and must build skills and capabilities to enhance indigenous content.
I am also acutely aware that there indeed are some serious players and to me they will create capabilities in the JV’s they set up as centres of excellence to enhance not only the indigenous content but gradually built sustainability through geographic spread of markets in a calibrated way. This is welcome as the Indian requirements are diverse and technologies constantly move with time needing fresh inputs in technology all the time. Our FDI norms will thus need to watch out for the real intents and the encumbrances on the technology flow through export controls and denial regimes to make Make-in-India a success.
Q: So how would those of you, who can offer a higher indigenous content, be treated vis-à-vis these new entrants?
A: That’s where it is logical that players capable of delivering far higher indigenous content should get a purchase preference. Although MoD has not yet done that in DPP, the Tier1 sourcing by DPSUs have begun this with a threshold of 20% lower import content to invoke purchase preference within defined limits. If one of the bidder is offering 60-70% indigenous content while others are 50% or below, there is a case for sourcing from him on a preferential basis. This purchase preference can be looked at two ways. One is that order will still be placed at L1 price or, secondly it can always be placed at some premium for creating jobs and paying taxes and duties (total of all Taxes paid) at far higher percentages in India and for doing so at far higher cost of capital that emanates from Govt policies. Now what is favour of this argument is that you need to incentivise Indian Industry for having spent the contract money in India as its multiplier effect contributes towards growing Indian GDP.
Q: So it is purchase preference, or price preference ?
A: Both. Firstly it is purchase preference that the Govt can do forthwith, followed by price preference which is an involved subject needing a lot of dialog and consultations. Logically speaking, notifying purchase preference does not grant any favours as Military buying is all about protracted trials and buying only qualified and proven equipment. So if two of us are bidding and you are 20% lower in import content than me, (if I am at the threshold of 40% as per policy and, you offer <32%) you get the order. The thresholds for price preference can be higher.
Q: In that case as L&T’s indigenous content is so far the maximum, you should be getting all the orders ?
A: No player can be efficient and play across all sectors and L&T won’t be an exception. L&T certainly has differentiators in some of them having spent as many as three decades in R&D, partnering with DRDO and inhouse R&D across select critical needs of the armed forces from weapon systems to sensors to engineering systems to platforms. We have developed and built 200+ systems and you can track it that we have unique breadth in weapon system development–from a Missile to Rocket to Torpedo launchers. All these we developed and make here with a differentiated indigenous content. Now, each of these capabilities didn’t come free. Lot of R&D has gone into it.
Post opening up of the Defence sector in 2001 and licensing it in 2002 we evolved from product development to serial production while continuing to build indigenous products of our own as well as in co-development mode. We invested the past decade in serialising a number of our products. We produce 17 systems today in serial production and the number is growing. We are today capable of building a system of system–say for instance, a submarine, a ship, complete communication solution; or a battle tank with a whole lot of weapon turrets. While we do that we work with all the DPSU integrators in Tier 1 mode on weapon and engineering systems.
Having built the knowledge and skills and centre of excellence over the years, we believe we have requisite capability and track record to build the conventional submarines with availability of basic design from a partner. With decades spent and nature of programs, we partnered with DRDO, complimented through inhouse R&D. I can say that we are already among the few ships and submarine builders that continue to evolve with differentiated indigenous value addition (through in-house efforts).
Over the years we built delivery capacities by investing in to multiple dedicated Defence Production facilities. So what I have been saying is that if we came ahead 10 steps and so have few Indian Private Defence Majors, it awaits to be leveraged especially when the Govt’s focus is to build indigenisation & self-reliance.
Q: Who all are you competing with in this FICV segment ?
A: The FICV EoI was issued to ten Indian players and some six responses, including ours have been received by the user. I would say, by and large, we are the solo respondent with completely indigenous solution. We understand and believe in the “Make Program” principles and chose to build an indigenous solution over offering a legacy solution leveraging foreign partner’s existing product and modernising it to evolve an FICV. We did the same in 2010 when the last EoI was issued and did well in the evaluation through a differentiated indigenous solution.
Our team continued to work and built much evolved solution over the interim period. The FICV solution we have offered is displayed right here in Defexpo. We have today created a state-of-the-art turret and hull, and what you can see are a complete set of GenNext software driven solutions. L&T has been the longest and largest player in building tracked hydraulic excavators for mining and off highway use since 1966. We leverage this heritage to add mobility solution to complete our FICV offering that is ours. It is an Indian solution with drive-by-wire technologies that are completely indigenous and home-grown. Consequently we expect to have completely differentiated indigenous content in our FICV offering, as other systems we build.
Q: But what about Tata’s and Mahindra’s, they are also focussing on FICVs?
A: Yes they are and we welcome competition. It only pushes everyone to do better in customer offering. Among serious private players, we see Tata Motor Bharat Forge have teamed up and are offering a solution with General Dynamics. As per media articles we understand that their solution integrator is General Dynamics. Tata Power has teamed up with Titagarh Wagons as a partner and offered a Korean solution from Doosan. Mahindra’s are offering a BAE solution. OFB seem to have teamed up with their traditional partner from Russia. OFB has been nominated as a development partner already subject to fulfilling all the EoI conditions. In addition, the evaluation process would short list two Private Players as development agencies.
Q: So how you view this period of ties being announced by new entrants shaping into concrete set ups?
A: My personal experience is that many JV’s have been negotiated and inked, but all of these don’t succeed till you have a definite program at hand (realised contracts within 2-3 years). Incidentally, we do have lots of partnerships and teaming arrangements but entered into just one JV. In fact, some other old timers in Indian market also entered into JVs without a program at hand and all such JVs exist but have remained dormant awaiting placement of contract to begin execution. Today new entrants are announcing JVs without even basic wherewithal on ground, but experience indicates that unless you have a program and facilities on ground, there won’t be any major investments on ground. Also in absence of nominated buying through long term contracts, combined with export control limitations by foreign Governments, little tangible results would be visible on ground in near term.
Q: Your thoughts on India’s sub-marines programme and Your capability in this respect? Does the new DPP address any issues in respect of such crucial programs?
A: Indian Navy needs submarines badly as the operational fleet is aged and depleting. We used to have an operational fleet of 18 submarines. What is operational now is much smaller fleet. Off these at least four + two need to get into medium refit and life extension. So we see a further dwindling with fewer left in operational fleet. Six submarines being built by Mazagon Dock Lmited (MDL) will be gradually inducted from 2017 to 2022, and even this will not build fleet size to bare minimum levels.
The need for a two lines of construction, which the cabinet had approved one and a half decade back is yet to be implemented fully. The first step was revival of the line at MDL in 2005, well over a decade back. The next steps have remained in Government files and debates even with committees after committees recommended way ahead. Implementing these needed bold decision making and a policy framework and has now been included in the new DPP. We hope and wish that the same is expeditiously cleared and implemented to harness indigenous capabilities built through Indian investments.