Strategic partnership model: Why it makes sense to ‘Make in India’ defence equipment at higher cost than buy from abroad. Ankur Gupta of EY explains

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Updated: May 29, 2017 9:37:50 PM

Narendra Modi government's new strategic partnership model to promote private participation in the defence sector will be a gamechanger, feels Ankur Gupta, Vice President - Aerospace and Defence at EY India.

Strategic partnership model, defence, Make in India, india defenceStrategic partnership model: The knock-on effects of indigenisation are far higher and outweigh the initial higher cost, says Ankur Gupta of EY India.

Narendra Modi government’s new strategic partnership model to promote private participation in the defence sector will be a game-changer, feels Ankur Gupta, Vice President – Aerospace and Defence at EY India. “The strategic partnership model should be a game-changer for the defence industry. The policy needs to be rolled out, there are some aspects that still need to be frozen. I believe the private sector will finally get the opportunity to shine and come on par, if not exceed the levels of the defence public sector,” Ankur Gupta tells FE Online in an exclusive interaction. “Once that happens, there is no question that along with the big business houses the medium and small enterprises will also benefit greatly,” he adds.

Recently, a report in Mail Today suggested that the cost of the Kamov ‘Make in India’ choppers is 2.5 times the original cost, if procured from Russia. So, what about the criticism related to the cost of making weapons and equipment in India? Does it make sense to set up extensive facilities here? Yes, says the EY India defence expert. “This is a pure business case,” he explains. “There is the option of direct imports that we have been exercising. Now we are telling the private sector and the foreign OEMs that there is a need to set up the facilities in India. There is a cost involved to setting up a facility, developing an ecosystem, finding the right partner etc. All these costs will undoubtedly be built into the cost of the platform. So today, if we see the cost of a platform that could be manufactured in India, viz a viz one that is manufactured abroad, I am sure there will be a significant difference,” he says.

“That is a judgement call that we as a nation will have to take. In the larger national interest and indigenisation, it makes sense. Secondly, if the initial procurement cost of a platform is Rs 100 crore, over the lifecycle of the platform, you will be spending Rs 300-400 crore. If my fly away cost is high, but my lifecycle cost is competitive, in 20 to 30 years, I have spent lesser amount as compared to directly buying it from abroad. Employment creation, high levels of indigenisation are the benefits. And going forward, if I want to buy the same platform or an advanced version of it, I can do so at a more economical cost,” he substantiates. “The knock-on effects of indigenisation are far higher and outweigh the initial higher cost,” Gupta adds.

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The Defence Acquisition Council, led by Defence Minister Arun Jaitley, recently finalised the broad contours of the strategic partnership policy. The policy was then cleared by PM Narendra Modi-led Cabinet. “The policy is expected to be implemented in a few selected segments to begin with, namely, fighter aircraft, submarines and armoured vehicles. In future, additional segments may be added,” says a Ministry of Defence release. The partnership model broadly involves creating two separate pools of Indian private companies and foreign OEMs, floating a tender for programmes and allowing the Indian companies to tie up with a foreign OEM to bid competitively.

Talking about it in detail, Ankur Gupta says, “At the time of execution, we have 4 programmes, there is a pool of half a dozen Indian business houses and in anticipation approximately 8 or more foreign OEMs. Then the government will take out a tender in favour of the Indian pool. So let’s say that the first tender released is for the single engine fighter jet, in that tender the government will list out the two or more foreign OEMs who had qualified in the selection process and the Indian business houses will be free to negotiate terms and conditions with those respect foreign OEMs. Every Indian business house can submit only one offer, so you cannot have one Indian OEM tying up with multiple foreign OEMs and doing multiple offers. This will be competitively done, and whoever wins the programme will become the strategic partner for that particular programme.”

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According to Gupta, the advantage of the model is that the private sector will not have to compete with the public sector and will be given an opportunity to come at par with them. “It is a policy that is evolving – we are in a unique situation, we have to protect our borders, we have to modernise our armed forces, which means that we are one of the largest importers of defence equipment in the world right now…there is a huge opportunity to create employment and high technology within the country.”

So is the policy good enough in its current form? “This policy will slowly but surely get refined. But, if we don’t roll it out today, we will keep waiting and this will also have a negative impact on the armed forces. Their programmes and demands will get delayed, which is something that India as a nation should avoid. The private sector would have wanted some changes, they would not want to be restricted to one programme, but then with the equipment that we need and the time that we have, we feel this is a good solution,” he says.

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And, when will the armed forces get the weapons? “Let me give you a realistic example. Today, if India were to not implement the strategic partnership policy, and right now we sign up for a programme with a foreign OEM, the earliest the arrival of the first platform into the armed forces will not be before 3-4 years. This is not a time delay, but a characteristic of the sector. Now let’s say that with the strategic partnership model, a pool (Indian and foreign) is optimistically created by the first quarter of next year. Post that a tender will be released and a contract could potentially be signed within the next 2.5 to 3 years. Then the production facilities will need to be set up, however it may well be possible that the initial lot of platforms come in a fully finished condition from abroad, while the facilities are being set up here. So we should see action on the ground in 36 to 48 months,” he concludes.

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