VK Aatre task force recommendations on strategic partnership model in defence sector

The Union Defence Ministry has appointed a committee under VK Aatre, former DRDO chief, to look into all aspects of the ‘strategic partnership model’ (SPM) in defence sector and suggest measures on how to implement it. The task force has submitted its recommendations in January, 2016.

Summary of the recommendations

• The task force suggested comprehensive financial, technical evaluation process for selecting private sector partners for ‘strategic projects’ over Rs.10,000 crore.
• The task force has identified ten eligible segments for strategic partnerships. The ten segments are divided in to two groups.
  • The Group-I includes seven segments viz. aircraft, helicopters, aero-engines, submarines, warships, guns (including artillery guns) and armoured vehicles including tanks.
  • The Group-II includes three segments viz. metallic material and alloys, non-metallic material (including composites and polymers) and ammunition including smart ammunition.
• For Group-I segments, each private company should be restricted to a single partnership only i.e. one company cannot become strategic partner for multiple sectors. For Group-II segments, up to two partners can be allowed.
• The eligibility conditions for a Group-I segments partner are: it must have Rs.4,000 crore turnover for last three years; capital assets of Rs.2,000 crore; should have grown at least 5% in three of last five years; credit rating at least CRISIL/ICRA “A”; and no default on loans, or declared non-performing assets.
• The eligibility conditions for a Group-II segments partner are: it must have Rs.500 crore turnover for last three years; capital assets of Rs 100 crore; should have grown at least 5% in three of last five years; credit rating at least CRISIL/ICRA “A”; and no default on loans, or declared non-performing assets.
• The task force has identified five critical segments out of the ten for immediate strategic partnership in the first phase. The five segments are aircraft, helicopters, submarines, armoured fighting vehicles and ammunition.
• To ensure that only Indian companies can be a strategic partner, norms have been laid down. Applicants cannot have a composite foreign direct investment (FDI) of over 49 per cent, including all types of investments and the chief executive must be a resident Indian.
• The task force has recommended a committee consisting of defence sector experts for identifying a suitable private player as strategic partner by following a three step selection process.
• The members of the selection committee include Chairman with sector experience, financial advisor, two experts from DRDO or military, and a Ministry of Defence member.
• The first step in the selection process would be composite entry gate based on technical and financial parameters. The second step would be verification process. The third step would be selection of the players based on technical and financial parameters.
• The selection process has to be completed within nine months after verifying the financial records of the company that has applied for a partnership.
• In case of non-performance by a strategic partner or in extreme situations like war, the government would have rights to take over control of the strategic partner.
• It recommended for setting up of an independent regulator, a new audit wing and a special strategic partnerships wing in the defence ministry.
• The minimum lock-in period for a strategic partner should be 20 years.

Industry experts feel that the Aatre process would benefit only the big firms. The big five of the Indian private sector defence industry could corner around 80% of the business and this could result in return of “crony capitalism”.