Whatever be the outcome of the now in-jeopardy RFP, navy continues to lose precious time
Shrikumar Sangiah
In 2001, to speedily end dependence on imports, defence manufacturing in India was opened up for private sector participation. Previously, private sector participation in defence supplies had been seen as being prejudicial to national security. However, despite the opening up of the defence sector for the past two decades no contract of any significance has been awarded to the private sector.
The government’s efforts to enhance private sector participation in defence manufacturing are principally motivated by three reasons. The first being the inability of state-owned enterprises to fulfil the equipment requirements of the armed forces. despite the extended, virtually monopolistic run given to them. Second, in the relatively short time since 2001, when defence manufacturing was opened up to the private sector, the private sector has proved itself capable of assimilating the technologies involved. Third, defence manufacturing is characterised by the requirement of large investments. The private sector has demonstrated its ability to raise capital and to make substantial investments in essential assets, resources, acquisitions, JVs, and other capabilities required to undertake defence production.
The RFIs/ RFPs issued by the ministry of defence for the supply of 111 Naval Utility Helicopters (now shelved after the entry of HAL into the fray), 110 fighter jets for the air force (currently on hold), and the RFP for the construction of conventional submarines, Project P-75(I) (now in a state of uncertainty with four of the five OEMs who had been approached expressing an unwillingness to bid) under the ‘Strategic Partnership’ (SP) model had infused in the private sector a sense of optimism and heightened expectation.
The provisions of the SP model outlined in the Defence Acquisition Procedure 2020 (DAP-2020) were first promulgated by the government in 2016 in the Defence Procurement Procedure-2016 (DPP-2016). The SP model aims to spur indigenous production of defence equipment by encouraging private sector participation.
When the RFP for P-75(I) was issued, it was widely expected that it would be the first project to be undertaken under the SP policy. The optimism and hope have, unfortunately, been belied. But despite the tardy progress of the P-75(I) project, the prevailing sentiment is one of optimism and even a sense of resignation that such tardiness is typical for projects of this significance and value. Everyone expects that the P-75(I) project will eventually be back on track.
Strategic Partnership model
Before getting in deeper into the P-75(I) project, an overview of the SP model is in order. It envisages, initially, the selection of SP only in the following segments:
- Fighter aircraft
- Helicopters
- Submarines
- Armoured Fighting Vehicles (AFVs) & Main Battle Tanks (MBTs)
The Indian firm that is selected as the SP is required to tie up with the shortlisted foreign Original Equipment Manufacturer (OEM) for the manufacture of equipment belonging to one of the above segments.
To enable wider participation of the private sector and to ensure that the SP maintains focus on its core area of expertise, only one SP will be selected per segment. Defence Public Sector Undertakings (DPSUs)/Ordnance Factories (OFs) are also eligible to be considered for selection as the SP, depending on their order book position and price competitiveness.
The principal criteria for the selection of OEMs are the conformity of their products’ capabilities with the services’ Staff Qualitative Requirements (SQRs) and the OEM’s commitment to providing transfer of technology together with an initial period of hand-holding to enable technology assimilation by the SP to maximise indigenisation.
To maintain transparency in the process, the selection of the SP and the foreign OEM partner would be undertaken in parallel through a competitive bidding process. The Indian SP would need to meet minimum requirements related to infrastructure, technical capabilities and financial strength. The shortlisted Indian SPs would be issued RFPs along with a list of the potential OEMs. The Indian SPs are required to coordinate with the OEMs and submit a response. Field trials would then be undertaken for the equipment that meets the technical requirements specified in the RFP.
The commercial bids of the firms, whose equipment qualifies field trials, would then be examined to identify the lowest (L1) bidder—who would qualify to be designated as the ‘Strategic Partner’ for that particular segment. The DAP-2020 chapter on SPs additionally clarifies that a firm selected as the SP in a particular segment would not be the automatic choice for future contracts. However, the firm during future competitive bidding processes would be accorded due weightage for the expertise developed during the execution of the earlier contract under the strategic partnership model.
The SP model is expressly intended to catalyse indigenous capability in the manufacture of major defence equipment. The DAP-2020, therefore, stipulates that the designated SP should be an Indian company owned and controlled by resident Indian citizens. The stipulations also require that the majority in the SP’s board of directors, including the CEO, should be resident Indians and that a minimum of 51 per cent of the SP’s equity must be held with resident Indians.
It is hoped that the SP model will enable self-reliance and self-sufficiency through the assimilation of technology and the development of an ecosystem of Tier I, II & III partners. The partnership will require the private sector entity to make necessary long-term investments in manufacturing infrastructure, creating an eco-system of suppliers and developing a pool of suitably trained & skilled personnel. The partner will also be required to invest in in-house R&D capability.
For the Indian private defence firms, the SP model provides the assurance of a level playing field that will help them overcome any reluctance to commit large investments in capital-intensive defence manufacturing, due to a widely prevalent perception of the government’s bias toward DPSUs/OFs and awarding them contracts through nomination or long-term purchase arrangements. The government through the SP model expects that the greater profit orientation of the private sector will spur firms to constantly improve upon the technical capabilities acquired and the infrastructure developed to stay competitive in the area of their expertise. The provision of the DAP-2020, which stipulates that future orders would not be awarded automatically to the SP will help discourage complacency.
The chapter in DAP-2020 on Strategic Partnerships declares that ‘fostering a constructive partnership with the Indian private defence industry is considered not just a sound economic option but a strategic imperative to minimise dependence on imports and infuse self-sufficiency in defence manufacturing.’
For the SP model to succeed, the government, the private sector and the DPSUs/ OFs/ MSMEs will need to work in concert to realise India’s self-reliance goals in defence equipment.
SP Concerns
Several foreign firms have flagged concerns with certain provisions of the SP policy. The OEMs believe that the provisions of the policy place disproportionate responsibility on the OEMs for delivering on project performance without granting them commensurate control. This concern of the OEMs is not without basis. It is reasonable for the OEMs to expect greater agency in the discharge of the contract if they are to be accountable for the final product quality and project schedule.
Domestic and foreign defence firms have often suggested that Indian policymaking could do with a dose of pragmatism. Ambiguities in policy provisions result in avoidable delays arising from the time spent on dispute resolution. Policymaking should guarantee mutual benefit and aim to elicit willing participation. Policies that aim to coerce collaboration are unlikely to succeed.
Submarine Project
In April 2022, the government announced the third negative list of defence equipment. The 101 equipment on the ministry of defence’s third negative list can no longer be imported and would henceforth, need to be procured only from domestic manufacturers—private sector defence firms and the DPSUs. The first negative list was announced in August 2020 and the second in March 2021. The first list included 101 items and the second list included 108 items for the import embargo.
The negative lists are an adjunct to earlier policy initiatives rolled out by the government over the past several years. Collectively, the policies aim to accelerate India’s objective of attaining self-reliance in defence needs.
‘Conventional submarines’ are listed at serial 80 of the first negative list. The RFP issued in July 2021 for the approximately USD 7 billion contract for the construction of six, new-generation conventional submarines, at an Indian shipyard, under the P-75(I) project in collaboration with an overseas OEM was a part of this larger self-reliance drive. The RFP for the project was issued to two Indian shipyards already selected as ‘Strategic Partners’ for the construction of conventional submarines—the DPSU Mazagon Docks Ltd (MDL) and the private sector shipbuilder L&T.
The Mazagon Docks Limited (MDL) and Larsen & Toubro (L&T) can choose to collaborate with one of the five overseas OEMs shortlisted for P-75(I)—Rubin Design Bureau of Russia, Naval Group (NG) of France (formerly DCNS), Navantia of Spain, Thyssen Krupp Marine Systems (TKMS/HDW) of Germany and Daewoo Shipbuilding & Marine Engineering (DSME) of South Korea.
The Rubin Design Bureau offered the Amur 1650 submarine, Naval Group the Scorpene AM-2000, Navantia the S-80-class submarine, TKMS its HDW class 214, and Daewoo the KSS-III.
In August-September 2019, the Swedish firm Saab AB was the first to withdraw from the P-75(I) project after having initially responded to the request for Expression of Interest (EoI). Saab contended that a rethink was required on certain provisions of the strategic partnership policy. Saab AB sought greater clarity on the criteria under which 100 per cent FDI with government approval would be permitted.
Subsequently, Navantia, TKMS, NG, and Rubin also pulled out of the project citing their inability to comply with the stipulations contained in the RFP. This leaves DSME as the only OEM remaining in the fray and the ministry of defence/ Indian Navy is now presented with a single vendor situation. Faced with these withdrawals, the government has extended the deadline for responding to the RFP twice, from the original November 2021 to December 2022.
An essential requirement in the RFP stipulates that the chosen OEM should have a functional, sea-proven, fuel cell Air-Independent Propulsion (AIP) system installed on an operational submarine.
Although TKMS, Germany has a sea-proven fuel cell AIP system, it withdrew from the bid citing concerns with other RFP clauses relating to indigenous content and the onerous liabilities required to be borne by the OEM without commensurate control over project execution.
Navantia and Rubin do not have sea-proven fuel cell AIP systems. NG has a sea-proven AIP system but based on the closed-cycle steam turbine (MESMA) design. In addition, Rubin, the Russian design agency, pointed out that a submarine, matching the capabilities contained in the RFP, is currently not operational with any of the navies. Rubin also pointed out that a submarine built to the specifications in the RFP, would be the first of its type and the ab-initio construction of a new class of submarine was not possible in the time frames envisaged in the RFP.
Air-Independent Propulsion
An AIP system allows a conventional, diesel-electric submarine to stay submerged for longer without having to raise its snorkel mast to access atmospheric air. Diesel-electric submarines need to access atmospheric air to run their diesel engines that in turn run generators to charge the submarine’s batteries.
A diesel-electric submarine is most vulnerable to detection when it is charging its batteries. During battery charging, the snorkel mast is raised above the water surface and the submarine runs its diesel engines. The snorkel mast can be detected by radar and a sonar can detect the noise from the diesel engines.
Diesel-electric submarines, when dived and propelling using their propulsion motors, are quieter and stealthier than nuclear submarines. Reactors on nuclear submarines require pumps to circulate the reactor coolant. This generates considerable acoustic noise that can be detected by an adversary’s sonars.
In contrast, conventional, non-nuclear submarines, running on batteries or AIP, are extremely silent. Undoubtedly, nuclear submarines possess clear advantages in having greater submerged endurance, higher speeds, longer operating ranges, and greater operating depths. However, the smaller, but stealthier, non-nuclear diesel-electric attack submarines are extremely effective in coastal waters against the noisier and less-manoeuvrable nuclear submarines.
The AIP system is installed in a submarine as a source of auxiliary power. The AIP system is used for charging the submarine’s batteries for powering a low-speed propulsion motor and for handling the submarine’s hotel load (lighting, ventilation, etc.). The AIP system is not intended to replace diesel-electric propulsion. It is installed to extend the submarine’s submerged endurance.
The Pakistan Navy operates three French Agosta-90B submarines with AIP capability. In addition, the PN is set to acquire eight Type-039 AIP-capable submarines from China by 2030. The PLA Navy operates fifteen of the Type-041 AIP-capable submarines. The other major navies in the Indo-Pacific, Japan and South Korea, also operate AIP-equipped submarines. All of this makes the case for an Indian AIP-capable submarine compelling and urgent.
In India, the DRDO’s Naval Material Research Laboratory (NMRL), together with L&T and Thermax, has developed a 270KW phosphoric acid fuel cell (PAFC). The Indigenous PAFC AIP system is currently undergoing development trials on the test bed. The indigenous AIP is planned to be installed on the Indian Navy’s Scorpene class submarines (P-75) whenever they become due for upgradation.
Project P-75(I)
Even before the RFP was issued, the ministry of defence/ Indian Navy was presented with some tough choices and difficult questions in selecting the most suitable SP-OEM combination from among the available options.
The MDL has, over the last three decades, invested heavily in building infrastructure and expertise for the construction of conventional submarines. It has previously built for the Indian Navy two conventional submarines of Type-209 design of HDW, Germany.
The MDL is currently winding up the construction of six Scorpene-class submarines under Project P-75, executed with assistance from Naval Group (of the six submarines contracted, four have been delivered to the Indian Navy and the remaining two are scheduled for delivery in December 2022 and March 2024). The delivery of the sixth and final submarine in 2024, although delayed, will almost certainly still be completed before the award of the contract for the new P-75(I) project. On average, it takes two-and-a-half to three years after the issue of an RFP for a contract to be awarded. For a contract of the value envisaged for P-75(I) and with the current complications, it is certain to take longer.
The MDL and NG have tied up to jointly bid for the P-75(I) contract. Awarding the P-75(I) contract to the MDL-NG pairing will potentially enable the most effective utilisation of the infrastructure and expertise developed during the ongoing Scorpene submarines project. Also, MDL-NG, are certain to have developed a robust working relationship which will benefit their partnership if it is awarded the contract for the P-75(I) project.
If the MDL-NG partnership fails to win the P-75(I) contract, the infrastructure and expertise developed for the Scorpene project will, for the most part, lie idle and at best be grossly under-utilised. Undoubtedly, Scorpene submarines will need to sail to MDL for repairs, refits and modernisations. However, it will still be sub-optimal utilisation of the infrastructure and expertise acquired by MDL at great cost.
Perennial Peeve
Private sector defence firms have for long railed against the government’s practice of awarding contracts to the DPSUs through arbitrary nomination. This government tendency, real or perceived, to privilege the interests of the DPSUs over those of the private sector has engendered in the private sector a hesitation to commit large investments in capital-intensive defence manufacturing.
In a welcome and laudable departure from this mindset, L&T over a decade ago commenced investments in raising a modern shipbuilding and ship repair yard at Kattupalli near Chennai. The shipyard is capable of designing, building, repairing and modernising large warships, submarines, specialised ships for the merchant marine (tankers, container ships, car carriers etc), and offshore rigs/ installations for the oil industry. L&T has already executed several shipbuilding orders for the Indian Navy, the Coast Guard and the commercial shipping industry. Even so, the facilities at L&T shipyard lie under-utilised and the yard is eager for more orders.
L&T entered into a contract with the Rubin Design bureau to jointly bid for the P-75(I) order. L&T built India’s first nuclear submarine (INS Arihant) and is currently building the follow-on submarines of the class. These submarines were designed with substantial Russian assistance and also contain several Russian-origin equipment. Although many of the competencies required for the construction of nuclear and conventional submarines are vastly different, many of the fundamental design and construction principles are identical. Adapting the skills acquired while building nuclear submarines, to build conventional submarines, will not pose any challenge to L&T. L&T’s familiarity with Russian submarine design and construction philosophy will decidedly benefit the L&T-Rubin partnership if it is awarded the P-75(I) contract.
HDW/Navantia/Daewoo designs
If the SPs tie up, bid, and win the P-75(I) order with one of the other three shortlisted OEMs (Navantia, Thyssen Krupp/HDW, Daewoo), it will throw up an entirely different set of difficult challenges. An MDL-HDW pairing will be able to leverage the capabilities and infrastructure already existing at the MDL after necessary upgradation/ modernisation at a minimal cost. An L&T-HDW arrangement would require the establishment of a production line at L&T, for HDW submarines, ab-initio requiring fresh investment.
On the other hand, if one of the possible, MDL/L&T, Navantia/Daewoo pairings, goes on to win the contract, the navy will then be required to operate an entirely new class of submarines of unfamiliar design and operating philosophy.
In such a scenario, the navy will end up operating four different classes of conventional submarines (Kilo-class, HDW, Scorpene, Navantia/Daewoo) and will have to deal with the many problems associated with operating and maintaining a very diverse fleet.
The Indian Navy barely copes with having to operate the current three classes (Kilo, HDW, Scorpenes) of conventional submarines. Its dockyards and materials organisations are stretched to near breaking in providing repair and logistics support. In fact, owing to inadequate domestic repair capacity, many of the Kilos over the last two decades, have been sent to Russian shipyards for major refits, at exorbitant costs, to enable the maintenance of required force levels.
Adding a new class of submarines will also require the addition of concomitant support infrastructure. Creating the additional infrastructure will add further to the already high cost of the project.
Splitting Contract
After the identification of the L1 bidder, awarding the contract to either of the two shortlisted SPs will leave the other SP saddled with enormous unutilised capacity.
Might it be advisable, therefore, to split the order equally between the two SPs? Splitting the order will ensure that the capacities of both the SPs are utilised and two production lines are established for P-75I.
Historically, all warship/ submarine construction projects in India have slipped schedules by several years and overrun allocated budgets. A case could therefore be made that introducing competition between the two SPs, by splitting the order, would help improve their performance with regard to project schedule and project cost.
However, this approach introduces the risk of receiving submarines of variable quality from the two SPs. Kilo submarines, currently in operation with the Indian Navy, were constructed by two different shipyards in Russia—to a common design. Despite the established capabilities of the Russian yards, there was a marked variance in the quality of construction and overall performance of the submarines built by the two Russian yards.
Is splitting the contract between the two SPs even feasible? The policy on Strategic Partnerships, as it exists, does not permit splitting the contract between SPs. For the sake of argument, even if contract splitting was to be permitted—it would cause an unacceptable escalation in project cost—each OEM will be required to provide ToT to two SPs and each SP, in turn, will need to develop separate sets of Tier-I, II and III partners at two different locations. This will clearly be a wasteful expenditure of effort and resources.
Way Forward
The ministry of defence and Indian Navy are now in a quandary over what would be the best way forward. Also, the current situation raises several questions that remain unanswered. Were the platform’s capabilities and other contractual clauses specified in the RFP and now being debated/ discussed, not included in the RFI? Did the OEMs, at the RFI stage, not indicate their inability to match/ fulfil the capabilities/requirements sought? If they did (as suggested in some media reports), what was the rationale for the inclusion of these contentious capability requirements/ contractual clauses in the RFP?
Should the navy now water down its requirements and settle for the best that the OEMs have to offer? Should the navy insist on non-dilution of the platform’s capabilities specified in the RFP, treat the project as a new design, and accept extended timelines for completion? Should it proceed with DSME, South Korea’s offer? Or should the AIP option be completely abandoned, and Li-Ion batteries be considered instead? Li-Ion batteries do not provide the submerged endurance of fuel cell AIP systems (they, however, provide greater endurance than the lead-acid battery configuration), but their greater power density enables higher propulsion speeds.
It is not clear what the navy’s decision is likely to be. Although seemingly, the navy has multiple potential solutions to its quandary, it is presented with a Hobson’s choice. The only prudent route for the navy to take would be to confer with the strategic partners and the OEMs, in a spirit of openness and pragmatism, to arrive at (a) an AIP submarine design and a construction timeline that most closely matches the navy’s requirements specified in the RFP, and (b) a mutually acceptable resolution to the contentious contractual clauses.
Thereafter, the project for the construction of P-75(I) submarines, under the strategic partnership model, could be processed afresh and brought to a speedy conclusion. Whatever the outcome of the P-75(I) RFP, and whatever the SP-OEM combination that is finally awarded the contract, project P-75(I) will be a test of India’s resolve to develop indigenous capability in the design and manufacture of major defence equipment. The direction in which India steers the denouement to the P-75(I) project will determine how India fares in its twin goals of Make in-India and Atmanirbharta in defence.