By Kamal Shah
In a wide-ranging interview with J D Patil, Whole-time Director & Senior Executive Vice President (Defence & Smart Technologies), Larsen and Toubro we essentially discuss the way forward for the private sector to be deeply involved in military programmes and initiatives as well as elaborate on how L&T is setting the pace for the arming of army, navy, air force and allied services.
Q. First of all, how do you see the just-announced union budget from the defence industry point of view?
Ans: The budget reflects the Government’s commitment to strengthen the Atmanirbhar Bharat Mission. The Defence capital allocation has been increased by about 13%, although a shade lower than the long-term commitment of 15% YoY as enshrined in the Draft Defence Production and Export Promotion Policy (Draft DPEPP). It is satisfying to note a significant increase in the allocation for indigenous acquisition from 58% to 68% of the capital budget which augurs well for the growing Private sector in Defence. This delivers a right message to Indian Defence Industry that the Govt is walking the talk on increasing the share of Defence acquisition from Indian Industries, in line with Atmanirbhar Mission.
Opening of Defence R&D for Private companies, startups and academia and reserving 25% R&D allocation towards them is a watershed reform and much awaited measure. After the withdrawal of weighted tax incentives for R&D by Industry, the Defence Sector has been seeking R&D funding support from the Govt to fuel R&D by the Industry. Also, the SPV model of developing new products with DRDO will facilitate development of large ticket programs. Both these will help create intellectual property, within the country, that will not only cut cost of indigenously developed and manufactured Goods and solutions (saving of ToT and License fees to FOEMs for Make in India with Foreign IP) but also facilitate exports. With these reforms in Defence R&D we look forward to more and more Make-1 programmes taking off over the coming year onwards.
I must commend this forward-thinking initiative of the Govt and this would certainly prove to be a gamechanger in positioning India to emerge as a dominant player in the world defence industry who not only becomes Atmanirbhar but also builds robust export markets. I am hopeful of its expeditious implementation leveraging the available acquisition processes.
Q. One of the major highlights in the budget was Govt’s R&D focus with the specific 25% earmarked for engagement of the industry, start-ups and the academia. We have seen a few similar steps taken by the earlier governments in 2006 and 2010. Your comments on it from the need of consistency in the same direction, implementation & utilisation of this R&D focus allocation points of view.
Ans: It is evident from progress made by all the developed countries, that the private sector engagement and investments in R&D by the Govt is large. This is seen to have reduced lead time for commercialisation of new technologies and differentiated capabilities. The Aerospace & Defence sector thrive on cutting edge technologies that grant force multipliers to our User to confer crucial edge over adversaries. As stated earlier, the current move by the Government to focus on R&D is unprecedented reform and heartily welcome.
The policy directives currently in vogue for promoting R&D efforts in the private defence industry are limited to only two operational initiatives, namely the iDEX and Technology Demonstration Fund. iDEX strives to encourage innovation and R&D by startups with a maximum grant in aid as seed money capped at Rs.1.5Cr per initiative and entire funding provision of around Rs.500 Cr. Technology Demonstration Fund (TDF) on the other hand seeks to provide funding for pursuing mid-size initiatives in product development/technology innovation capped at Rs.10Cr. However, it would be pertinent to cite that TDF is also routed through DRDO and not directly to the Private Sector. While both these schemes are positioned for startups/MSME companies, they cannot address the need for larger developmental programmes involving major equipment, systems, system of systems/platform development without which we can hardly cut import dependence. While MoD is preferentially putting more and more programmes into Make-II (fully Industry funded developmental programs), it is overlooked that Make-II was created to develop major equipment/subsystems and building blocks for major systems of systems/platforms.
The Make-I with joint funding by MoD and Industry with MoD bearing the lion’s share was enabled and introduced in DPP2006 remains ignored and while three acquisition cases were initiated under Make-1 category, not one single platform/system of systems programme has seen the light of the day till date. It is relevant to quote from DPP2006 preamble “A procedure for the development of systems based on indigenous research and design, categorized as ‘MAKE’, has now been formulated. This bridges a critical gap that existed hitherto, and would provide the requisite framework for increased participation of Indian industry in the defence sector”. The evolution from DPP2006 to DAP2020 continued enabling funding of Indian Industries under Make-I Category. The MoD funding share continued remain be 80% in successive DPPs, and increased to 90% in DPP2016 (as interest on work in progress was not admissible as cost of development and Industry was in effect bearing 20% and additional 20% cost on account of interest, thus making sharing ratio 80:40 or 2:1 instead of 80:20 or 4:1). The same was reduced to 70% in DAP2020.
Q. What are your views on the SPV mode for R&D budget?
Ans: DRDO has made stellar contributions to Defence R&D and especially in strategic and complex programmes that are systems of systems/complete platforms in nature. The missile cluster, fighter aircraft segment, Combat Vehicles and Armament segments are shining examples of successful developments under the aegis of DRDO. It is to the credit of DRDO that they engaged with a large number of Industry partners both Public and Private as development partners over the past four decades. With this hand holding, early development partners of DRDO gradually matured and became capable of undertaking development of complete equipment, systems and platforms in the tactical domain. Such matured partners can today create assured successes in development of newer equipment, systems, platforms leveraging their track record but may not get selected as development partners under the L1 based tendering of R&D projects/programmes that DRDO must follow whether under normal route or currently under DcPP route. Thus, process limitation ends up selecting a non-matured development partner and we go through delayed development time frames and added uncertainties in the development cycle.
The SPV route for R&D with the DRDO as announced by the Finance Minister is a very positive and welcome step in this direction. Leveraging this, the DRDO and Industry Partner in an SPV would target and achieve accelerated development of newer products/platforms. As of now there is not enough clarity on the modality of collaboratively pursuing R&D between DRDO and Industry under the SPV route. However, it can be argued the SPVs remain non-legal entities (un-incorporated) such as a Consortium or Teaming Agreements etc. to enable programme specific relationships with pre agreed work and funding share including sweat equity. An incorporated SPV will create related party transactions issues between the SPV and parents, add costs as well as inefficiencies cutting agility.
All development under the un-incorporated SPVs will have to honour the Joint IP ownership recognising the contributions made by both DRDO and Industry partner irrespective of the work share & funding ratio and grant exclusivity for serial production orders and exports thereof on successful development & user trials.
Q. What are your upcoming plans, projects, platforms & proposals for the Indian Army, Navy, Air Force & Coast Guard, respectively?
Ans: Major programmes we look forward to including those where we have already responded, segment-wise are:
Army: Armoured systems – Light Tank, FICV, FRCV; BMP-2 Upgrade, Combat Engineering Systems – Mobile Bridging Equipment (at PNC stage), Air Drop Platforms, Artillery systems – K9 Vajra, Towed Gun Systems, Pinaka, Air Defence Systems – Akash Launchers, MRSAM Launchers, L70 Successor (CIWS) Program
Navy: P 75 (I) Conventional AIP Submarines (SP Program), Multi-Purpose Vessels, Cadet Training Ships (both in Contract finalisation phase), Landing Platform Docks (LPD), New Generation Corvettes, New Generation Front line Warships, Range of Anti-Submarine, Anti-Ship, Land-Attack Weapon Systems, Platform Specific Engineering Equipment & Systems, Platform management systems, and Naval Radars.
Air Force: Long Range Surveillance Radars (user trials completed), Air Defence Weapon systems: Akash Missile Launchers and CIWS systems (user trials completed).
Coast Guard: Fast Attack Crafts, Interceptor Boats,
We also continue to invest in development of Autonomous Underwater Vehicles (2 classes), ROVs (2 classes – one under development trials), Autonomous Surface Vessels (under developmental trials) and Naval UAVs as also our own inhouse designed SOV 400 Midget Submarines. Our teams are also looking forward to initiatives and prospects on Through Life Cycle Support such as Maintenance, upgrades and other Refit programmes.
Q. How is L&T positioned for the P-75I submarine project? What type and share of work does the company expect from this tender? How do you see the SP model progressing?
Ans: The RfP for P75(I) was issued by MoD under the SP model in July 2021 to the two shortlisted companies including L&T. In anticipation we have been regularly interacting with the Foreign Collaborators shortlisted by the MoD. We, at L&T, have been preparing for this programme since the CCS clearance for construction of 24 conventional submarines indigenously for enhancing and maintaining the strength of Naval underwater fleet and producing these in two lines of production. Phase 1 of this ambitious programme was ordering the P75 submarines in 2005, followed by Phase 1(a) of this programme by issuing P75(I) RFI in 2008. Given our impeccable track record in the domain we have been extensively engaging with relevant stakeholders in the domain.
L&T entered the defence sector in the mid-eighties in keeping with our ethos of being a Nation Builder across strategic sectors besides core sectors of economy. Leveraging our value systems and corporate R&D, we remained focussed on a few major segments of the defence sector with a vision to be a complete system of systems and platform builders. We invested into technological capabilities, infrastructure and built a track record across focussed segments, the prime one being submarine construction in which we are invested for more than three decades to acquire exceptional capabilities in Detailed Engineering & construction of strategic platforms. In fact, L&T’s competencies, infrastructure in this field are unique in the country, especially in the facets of detailed design, distortion free fabrication, system integration including QA/QC, life cycle documentation, leveraging digital processes across value chains. Being aware that the build philosophy for the P75(I) submarines would be modular, L&T would leverage our Shipyard’s track record in this domain and matured through Warship construction, and augment some of our existing infrastructure in consultation with the Foreign Collaborator (FC).
The P75(I) programme is aimed to become Atmanirbhar in Submarine design and building and P75(I) being the last programme to buy ToT from Foreign OEMs in this domain. This augurs well with L&T’s Vision, having made investments for decades towards realising this prospect. Thus, L&T would be diligent to absorb the ToT in Functional Design, Detailed Design, Construction, Maintenance during Programme execution and emerge to be self-reliant. It is pertinent to note that L&T is fully capable of undertaking the construction of these submarines leveraging inhouse track record without dependence on the Construction ToT. Also, our own inhouse funded initiative towards development of our own Midget submarine and having completed the basic design and midst detailed design stage augurs well towards building end to end capabilities. The P75(I) for us is not just a programme but part of a larger Vision towards Atmanirbhar Bharat.
The requirement of AIP became a part of the P75(I) programme and the shortlisted FCs have been well aware of the same. Given maturity of AIP technology with few and emergence of advanced fuel cells as well as hydrogen generation processes evolved by the FC’s today, integration of AIP is not seen as a hurdle. It is also relevant that DRDO proactively took up development of indigenous AIP solution and L&T associated with the DRDO lab as prime integrator for the same. Our own AIP is thus shaping well and has already done endurance trials with land based full scale prototypes. “Marinisation” of the same and incorporation in the P75 submarines is being pursued through collaboration between DRDO, L&T and MDL as builders of P75 submarines during the forthcoming refit cycles over coming years.
Q. Could you paint a picture of the type of operational and tactical advantages L&T’s multirole submarine, SOV400, would provide to a Navy? Also, SOV400 has shown strong signs of global outreach and aim. What are L&T’s plans for SOV400?
Ans: The SOV400 is conceptualised to be a special ops diesel-electric midget submarine, inhouse designed and developed by L&T leveraging track record built in this segment over the past three and a half decades. SOV 400 integrates features that offer best value for money, particularly for small navies with limited defence budgets, and provides credible deterrence capability when pitted against powerful hegemonic neighbours. Few of the operational and tactical features of the SOV400 are:
A multi-role submarine, SOV400 is primarily meant for deployment and recovery of special forces while remaining dived at special operations depths. Its uniquely designed lock-in/lock-out system enables quick release and recovery of marine commandos, while submerged. Two 4-men Swimmer Delivery Vehicles carried on either side of the submarine can inject the divers deep inside enemy coastlines. In lieu of the SDVs, the submarine can carry ammunition and special equipment in two commando containers.
It is fitted with twin torpedo tubes that can launch heavyweight torpedoes for attacks in shallow waters or in self-defence. It is also fitted with a conformal array sonar and advanced radio-electronic sensors for detection, surveillance, communication and interception which provide tactical information for the command through an integrated combat management system. The submarine is designed to operate with a lean crew of 12 through an integrated platform management system.
Being considerably small for a conventional diesel electric submarine, SOV400 has very low target strength. Normal diving depth of 125m enables undetected operations underwater. The SOV400 has a streamlined external form that has been optimised for least resistance and flow noise using CFD software.
Hull structures (designed of indigenous submarine grade DMR 249 steel), equipment and piping are designed to comply with the safety standards as per DNV GL rules for classification of naval submarines. All critical-for-safety systems have been designed to be fail-safe, ensuring uninterrupted functioning even after failure of a single component. Smoke detection and fire alarm systems, gas monitoring systems, nitrogen-based fire-fighting systems, SEIE Mk-11 suits and means for emergency escape and rescue (either through the main access trunk or through the aft escape hatch) offer adequate degree of safety and survivability of the platform and its crew.
Since the SOV400 is a fully home-grown product, the design can be customised to suit specific requirements of the user. The L&T team is exploring global markets for supplying this unique system and we look forward to exporting them in the near future.
Q. L&T has been actively involved all along in the missile domain except the integration part, which is primarily done by BEL & BDL. Any future plan of L&T to extend its capabilities and role in the missile domain?
Ans: L&T has been among the longest partners to DRDO’s missile cluster of labs across almost the entire range of Missile programmes in various capacities. We contributed to the engineering, manufacturing technologies, production of structural parts, airframes and launch as well as storage canisters for multiple programs. However, as a company policy, we stayed away from any kind of hot integration of missiles and handling and integration of explosives. We do not envisage this role in future as well.
Today BDL among DPSUs and two private sector players produce and integrate explosives. Also, BDL/BEL have always remained as overall system integrators for complete missile programmes given the policy environment in which we operate. This is also another segment we are happy being the Tier 1 partner to the Missile Systems integrators (BEL/BDL) with across the range offerings like Weapon launchers, Command Control systems, Fire control and target acquisition systems.
Q. Unmanned solutions have been the talk of the town in the last few years across the world., especially in the defence and strategic areas. For the benefit of our readers, could you please explain a bit in detail what are L&T’s plans for the unmanned solutions especially drones, anti-drones, UAVs & rotary wings in logistics etc and how is L&T planning to develop these further?
Ans: L&T has been providing Indian Armed Forces with state-of-the-art equipment and services for nearly 4 decades. We have also remained in sync with emerging technologies so that our products reflect the latest and the most useful technologies to empower our soldiers and ease their operational roles during peace and at war.
Information, knowledge and automation are quintessential parameters that ensure the superiority and sovereignty of a country in today’s world. L&T has been working for the last decade to develop autonomous and intelligent systems that can provide cutting edge force multipliers to our armed forces and at the same time reduce the risk our soldiers are subjected to.
On land, we were first to evolve the communication link and controllers to convert a BMP-2 into a driverless combat vehicle more than a decade back, almost the same time we developed our own transparent armour solution and offered it as part of indigenously designed FICV solution. Today, our equipment offerings range from small UGVs which carry multiple payloads for ISR, Mine detection and close-combat to large UGVs which act as mules for logistics with 300 kg payload capacity, do advance reconnaissance or carry remote-controlled weapon systems (RCWS) to launch an offensive. The small UGVs can be carried by a soldier in a back-pack. A throw-bot is capable of being lobbed into a closed building through a window and transmitting real time video of the surroundings. Both tracked and wheeled UGVs are capable of traversing rough terrains.
In underwater and surface sea domains, we can provide autonomous kits to make small ships or boats unmanned and AUVs ranging in depth of operation from 300m to 6000m. Our product offerings can be used independently or in combination for applications like ISR, Mine CounterMeasures, Sea-bed survey, Anti-submarine Warfare, targets or decoys for training etc. The man-portable “Maya ” is a versatile AUV that can be used with different payloads to act as a target for weapon/sonar training or as an ISR vessel to do advance reconnaissance. The 1000m depth survey class “Amogh” is also capable of Mine detection and ISR. Of similar function is the “Adamya” AUV which has the unique feat of being designed to be launched from a torpedo tube. Our ROVs can help with EOD or with underwater inspections.
In the air domain, we have integral solutions that can enhance the range of surveillance and communication for conventional and unmanned platforms. We have developed a Maneuverable Expendable Aerial target capable of peak speeds of 400kmph to test our air defence capabilities. We have the capability to design tactical and strategic UAVs that can work in tandem to provide a swarm advantage. Besides, we are working with DRDO for development across a few MALE and HALE programmes such as Rustom, Abhyas, Archer, UCAV.
Building with in-house capabilities in the realm of intelligence algorithms and data processing ensures our unmanned systems are protected from hacking and cyber-attacks. We endeavour to build modular platforms that can play multiple roles with just changing payload, thus bringing economy and efficiency. Our core strength of systems integration and track record in conventional platforms ensures that we provide the end user with integrated solutions.
Q. Now, let’s talk about some policy aspects… Make In India and ‘Aatmanirbharta’ has been the underlying theme for the last few years in the defence sector. As one of the biggest leaders in the industry, in your opinion, what remains to be improved in govt policies to further enhance Make In India and ‘Aatmanirbharta’?
Ans: The Government of India and MoD have brought forth significant amendments and initiatives in recent years under the Make in India and Aatmanirbhar mission. On tangible side Govt has over the years enhanced AONs granted under indigenous acquisition categories, increased actual orders placed as well as indigenous percentage of enhanced budget allocation for capital equipment, published two positive indigenization lists, enhanced indigenous content across acquisition categories, and formulation of draft Defence Production and Export Promotion Policy (DPEPP) awaiting EGOM and cabinet approval, to name major ones. In the recent budget the Govt also granted 25% of Defence R&D allocation to Industry, startups and academia against a long standing demand of the Industry that Govt must fund R&D in this monopsonic sector.
While the incremental evolutions of the acquisition procedures and policies are steps in the right direction, more needs to be done to implement the policies in the right earnest for India to become Atmanirbhar in Defence.
Some of the challenges to focus are:
- For building long term indigenous capability we need a much higher focus on Make Projects that help Industry build IP. Own IP alone grants us freedom to Export, besides becoming self-reliant. Towards this, while we see a good traction in Make-II (Industry funded projects) in recent years, the Make-I (joint funding by MoD and Industry) is yet to take off nearly 15 years since its incorporation in the DPP. It is noteworthy that Make-II programmes were conceptualised for development of subsystems and building blocks or small systems/equipment and the same is being over exploited by the User and MoD for large number of complete systems/large number of deliverables (smaller products) obviating need to acquire these under normal processes that take time and entirely at the cost of Industry. This has been the unfair aspect of Make-II especially given the clamour of large numbers of Industry players spending money on the development with just one of them eventually winning the competition being L1 and ending with others having to write off their own expenses and eventual exit from the sector after multiple such experiences.
- Make-I programmes can help India build platform capability and thus grant ability for unhindered large ticket exports. However, this is yet to see traction in spite of MoD of leadership assertions after FY21-22 budget to initiate at least five Make programmes during the year and every year thereafter. It is our sincere hope that the recent grant of R&D funding to Industry will go a long way in furthering the Make-1 programs.
- The Non-level playing field between Private and Public sector needs to be addressed urgently. While some in this direction has been implemented in the policies, implementation has been far from wanted as also observed from two steps forward and one backwards. These include issues like continued preferential treatment to DPSUs to nominate contracts, Customs Duty exemption on imports, provision of corporate bonds in place of collateral bank guarantees against advances, contract performance bond/warranty PBGs, exemption against Integrity pact bank guarantees. It defies logic, that MoD with a mandate to look after Public as well as Private sector does not cognise and address the fact that DPSUs enjoy usage of Govt funded assets for competitive programmes without a capital charge while Private Companies must invest in asset creation as well as incur servicing costs. All the above can be repeatedly seen to have granted Govt owned Industries an ability to underbid the Private sector to kill competition over time. One more area that needs to be harmonised is the trial evaluation/FET for NCNC programmes that have time and again seen favourable considerations towards FOEMs and the Public sector, especially in grant of repeat trials even after repeated failures while in the NCNC trials the Trials teams reject Private Industry players with just one single failure to compliance, unless others also have non-compliances to allow confirmatory trials.
- The sanctity of highest preference for indigenously designed, developed and manufactured systems/platforms (i.e. IDDM Projects) need to be unconditionally upheld even if one single partner from the Private sector has the capability to realize the same. While this is enabled in DAP2020, the same has not been implemented as also not implemented are enhanced parameters that were included in DPP2016. The current acquisition practices strive to have multiple competing agencies to allow price discovery and thus the IDDM capability gets ignored to promote competition and select an L1 among multiple bidders even if that means diluting the categorisation to Buy Indian or Buy and Make Indian with bought out design or licensed production with ToT. However, this single party IDDM can be seen to have been diluted for DPSU offerings that get referred to categorisation committees as nominated cases without calling for industry presentation. Suitable processes need to be instituted where a Private sector entity can be allowed on par with DPSUs for single party categorisation under IDDM.
- Strategic Partnership model: After several years of deliberations the SP model was implemented in DPP2016. While this was intended for inclusion of Private Sector in system of systems and platform projects, in addition to the existing DPSUs, DPSUs are also being permitted to participate in SP programmes with clear advantages against Private Sector (quantifiable but ignored by the MoD), as brought out in the point above on non-level playing field. As brought out, the usage of Govt funded infrastructure and assets with nil charge enables DPSUs to easily outbid the Private industry, who must invest in asset creation as well as their service. This dilution in SP defeats the entire purpose of inclusion of the Strategic Partnership model given the L1 methodology for award.
- Govt of India has recently advocated the QCBS (Quality cum Cost Based Selection), the same does not automatically apply in Defence Acquisition without appropriate amendment in the DAP2020 and institutionalising the processes and worksheets to implement the same. This needs to be done expeditiously as is seen across acquisition by GoI in other sectors especially technology and solutions driven ones and the limit of 10 Cr acquisition under QCBS need to be widened.
- The DPP2016 enabled the User to include Enhanced Parameters to prefer acquisition of superior products. Unfortunately, no RFP of significance has yet been implemented the same as the acquisition process remains L1 based. The new QCBS process being already implemented across Govt Departments for placement of EPC/turnkey contracts, needs to be institutionalised in Defence with Enhanced parameters becoming one of the major basis for differentiating the bids in value terms and not cost alone.
- Higher Indigenous Content needs to be Incentivised given GoI’s focus on Atmanirbhar, especially for quantitatively higher indigenous content delivered by the Contractor. This can be included in the QCBS system, upfront and graded for incentivising far higher indigenous content (60%, 70%, 80%, 90% or higher) over the stipulated (50%) under the DAP2020.
- Having built capabilities and capacities, through decades of partnership with DRDO, Industry needs to be enabled through policy reforms to undertake Technology and Product development in domains it is capable of and DRDO mandated to undertake development of technologies and products that the Industry cannot do. On the other hand, even after 15 years of institutionalising the MAKE (recently named MAKE-I) category and stipulating joint funding of such programmes with major share of funding coming from the MoD (80:20 funding ten raised to 90:10 in 2016 and further revised to 70:30 under DAP2020), no programme has yet been placed under the MAKE-I category. In the process Private Industry has been effectively denied access to R&D funding for major platform technologies/programs. We sincerely hope that the recent Union budget declaration of over 25% of funding of R&D expenses being reserved to the Private Industry, Startups and Academia takes off and is monitored closely to create early successes.
- Since the defence industry in India is a monopsony, there is hardly a room for long-term sustained investments by Private Angel investors into startups. Realising this, MoD has implemented initiatives like the iDEX and the Technology Development Fund targeted at MSMEs/SMEs. However, it is pertinent that the funding limits are small with a result that limit development of subsystems or mere innovation of known technologies than serious technology and product development to build scale and system of systems to not only become self-reliant but to export them, with control over IP enabling the same.
- Need for low cost working capital credit for Defence Exporters is often felt when facing direct competition with certain countries that sizeably provide incentives to exporting Industries to make them competitive. GoI needs to look at facilitating the same by leveraging a small part of direct foreign exchange reserve against USD receivables against foreign defence contracts.
Q. A detailed analysis and comparison of government’s tendering, selection and ordering process in the shipbuilding area suggests that private Indian shipbuilders don’t get a level playing field as compared to the PSUs shipyard, in addition to the other factors like differential customs duty on export. How does it impact the Indian private industry & What should ideally be done to benefit the armed forces and country, in your opinion?
Ans: Defence Sector opened up for Private Sector participation, however, all major frontline Warship programmes have been contracted to the DPSUs on nomination basis over the last two decades. This is visible from the fact that 95% of contracts by value during 2001 to 2010 and 85% between 2011 to 2020 have remained nominated to the Govt owned sector. First competitive RFP to the private sector came in 2005 and they won all the 5% contracts tendered out during 2005 to 2010. The story is not the same over 2011-2020 during which out of the 15% programmes by value were tendered out competitively, just 5% were won by Private Yards and balance 10% were won by DPSUs underbidding the Private yards leveraging deployment of free assets for competitive programmes and massive order books through nominated contracts.
While we have seen a significant change since 2015 and multiple RFPs have been tendered out in competitive mode, these have been all for auxiliary vessels with only one weaponised class (NGMV) of ship. While this is a big positive for the shipbuilding sector as competition drives efficiency and price discovery, an impartial level playing field for fair competition is yet to be accorded to Private Sector Yards. Multiple Shipyards which have gone bankrupt due to lack of orders and consequent idling of capacity leading to non-performance/debt trap being unable to service the investments in assets created over the past decade. Resultantly the banking system and eventually people of India have borne the losses eventually. On the other hand, the Govt owned yards put together continue to have growing order books that will last them between 11 to 16 times current revenues. With continued non-level playing environment L&T Shipyard is the only Private yard that is surviving currently, albeit with the backing of the parent L&T group.
Few of the challenges that continue to create a non-level playing field in the Shipbuilding domain are as follows:
- Shipbuilding Chapter (section A) in the DAP2020 for nomination of shipyards has still been maintained as in the past DPPs. While the words ‘DPSU shipyards’ have been replaced with ‘Indian industry’ in the DAP2020, the selection criteria (technical as well as financial) tacitly rule out participation by Indian Private shipyards for weapon intensive platforms (such as Frigates, Destroyers and Aircraft Carrier programs) indicating that such high value programmes would remain nominated. This resembles the classical chicken and egg syndrome w.r.t to qualification criteria by limiting participation in weapon intensive platforms only if one has a track record in the next lower class that have also historically remained nominated. Unless competent Private Yards are allowed to participate in such platforms, as enabled in the DPP2016 amendments of 2019 as also DPP2020, they can never build a track record. This amounts to denial of opportunity to private shipyards but also distortion of the competition in all other smaller defence shipbuilding projects, which are tendered and awarded on competitive basis, enabling PSUs win them leveraging nominated order book and non-level playing issues sighted above.
- Over the years, the MoD has periodically allocated funds (through budgetary support or through provision included in nominated contracts) to the Govt sector companies for creation of infrastructure as well as asset upgradation & modernization. These Nil cost assets without asset servicing costs (Depreciation and interest on funds employed in creating the assets) provides them a free hand to leverage monopolistic position to undercut the competition in competitive programmes by leveraging strong order book position, free assets funded by the Govt, duty free imports, surplus cash pool in the book against nominated orders.
- Large nominated orders provide the Govt owned yards with cost compensation as well as attractive payment terms and cover their entire operating costs for nominated contracts over the contracted period. This allows them to load nil fixed operating costs besides Nil asset servicing costs (depreciation and interest) while bidding for competitive contracts.
- The private sector, on the other hand, has to invest own/borrowed funds for the creation of Production facilities and their debt servicing, upkeep & up-gradation and have to load these expenses in their bids which makes them non-competitive. Also relevant is that the Private Sector can participate only in Fixed Price contracts. Until 2014 even Foreign exchange rate variation (applicable to DPSUs all along) was disallowed to Private Yards while FOREX rates have changed significantly during contract tenure forcing the private yards to bear losses.
- These aspects can be seen to have resulted in a series of contracts won by DPSU shipyards in past five years as also bankruptcy of three of the four major Private Shipyards that bid low prices in desperation during the previous decade to win a few contracts just to keep their yards at least partially occupied to survive.
- The DPSUs are exempted from payment of Customs duties on the premise that they are delivering to Armed Forces. The same is denied to the Private Sector Companies who also deliver to the Armed Forces. This however is relevant for domestic sale and not for Exports where the imports can be exempted against advanced license.
These challenges need to be impartially addressed to bring forth a level playing field in the shipbuilding sector so that with indigenous track record Industry can enter export markets aggressively.
Q. The last question is on your new inning as the first Chairman of the newly formed ISpA. The USA has already formed a Space Force. Many countries are rapidly developing their capabilities in this domain. With the experience of an immediate past president-SIDM, how do you see ISpA taking shape and how will it play a role in India’s Defence & Strategic domains?
Ans: Indian Space Association (ISpA) aspires to be the “Apex Space Industry Body,” created to be the collective voice of the Indian Space industry. ISpA will undertake Policy Advocacy and Engage with all stakeholders of the entire Indian Space domain, including the Government and its Agencies, to make India self-reliant, technologically advanced and a leading player in the Global Space arena. Having led SIDM and partnered the GoI and MoD for reforms in the Defence sector, I foresee ISpA playing the key role in representation as the Unified Voice of Indian Space Industry for Enabling Policy Framework with DoS, ISRO, DoT, NSIL, IN-SPACE, TRAI, Government departments, International Regulatory Bodies and Industry; and subsequently energize business growth, to make India the global hub of Space industry.
