New warship plans stalled by Ministry's JV freeze

Last Updated: Mon, Oct 17, 2011 19:42 hrs

Planning has stalled for building new indigenous warships for the Indian Navy. This after Defence Minister A K Antony, rattled by protests from private shipbuilders, scuttled a proposed joint venture (JV) on September 26 between public sector shipbuilder, Mazagon Dock Ltd, Mumbai (MDL) and the private Dahej-based Pipavav Shipyard; and announced a freeze on warship building JVs until a formal policy was formulated.

That effectively places all new warship projects on hold. Senior MoD (ministry of defence) officials point out that, with defence shipyard capacities already filled by ongoing warship projects, JVs were intended to create fresh capacities by coupling the public defence shipyards’ expertise and experience, with the large unutilised capacities of India’s new private sector warship builders. But with these JVs now on hold, at least until a new policy is finalised, no Indian shipyard has both the capacity and expertise to build a new line of warships.

“We cannot just hand over a contract to build major capital warships to a private shipbuilder with no track record; there are tens of thousands of crore rupees at stake in such projects, and potentially years of delay. Nor can we give any more contracts to public sector shipyards; their order books are full for years to come. Until we finalise the new JV policy, any new warship project will go by default to a foreign builder,” a top MoD official told Business Standard.

Stuck in the pipeline are at least two major warship projects: Project 15B, which involves building four 6,800 tonne destroyers for Rs 29,325 crore; and Project 75I for building six conventional attack submarines for an estimated Rs 20,000 crore. Also potentially threatened is Project 17A for building seven stealth frigates.

Nor is the government clear about who will formulate the new policy on warship-building JVs. While the public sector defence shipyards are owned by the MoD, the Ministry of Shipping and the Ministry of Heavy Industry also have jurisdiction over the private shipyards.

At the heart of this logjam is the government’s decision last year to speed up warship construction through public-private partnership. When the MoD was processing the financial sanction last year for MDL to build four destroyers under Project 15B, the ministry of finance (MoF) objected. Commenting on the draft note being prepared for the Cabinet Committee on Security (CCS), the MoF noted MDL’s time and cost overruns on all its recent projects and pointed out that the same was likely to happen in Project 15B.

A Comptroller and Auditor General (CAG) audit report in March pointed to MDL’s delays of 4-5 years in constructing the first ship of various projects. The CAG report also highlighted a cost overrun of 226 per cent on Project 15A, the predecessor to Project 15B, for which sanction was being processed.

The MoF, therefore, suggested that an overloaded MDL adopts the public-private partnership (PPP) model for building Project 15B. The risk of delay, the MoF opined, could be minimised by co-opting a suitable private sector shipyard with idle warship building capacity. MDL, it was suggested, should select a private shipyard and form a JV that could build Project 15B.

This was an unpalatable suggestion for the Department of Defence Production (DDP), which oversees the MoD’s four public sector shipyards — besides MDL, there is Garden Reach Shipbuilders and Engineers, Kolkata (GRSE); Goa Shipyard Ltd (GSL); and the recently acquired Hindustan Shipyard Ltd (HSL). The PPP model meant sharing profits with a private sector shipyard. But rather than turn down the MoF’s recommendations and risk having it oppose the sanction of Project 15B in the CCS, it was decided to cater for the MoF’s concerns. In late 2010, the MoD’s acquisitions head instructed MDL to select a suitable private sector shipyard as a JV partner.

Accordingly, MDL approached a range of private shipyards for expressions of interest (EoIs) “for synergising efforts of MDL in shipbuilding”. It asked shipyards for “a business plan and a joint collaborative strategy to meet challenging timelines in order to liquidate the order book of MDL”. This was published in major national dailies in March. In a follow-up letter (PRO/3001/2011-12/26 dated May 11, 2011), MDL asked for EoIs to be submitted by May 31, 2011. Candidates were invited to visit MDL “to gain first hand appraisal of the infrastructure, processes and procedures of the Yard”.

Eventually, after an MDL team visited private sector candidate shipyards to evaluate their strengths and capabilities, a short list was drawn up of four shipyards: Larsen & Toubro, ABG Shipyard, Pipavav Shipyard and Bharati Shipyard. Final presentations were made to MDL’s board on August 23, with shipyards presenting their joint collaborative strategy. Two days later, MDL asked for more details but, on September 9, before those could be presented, MDL selected Pipavav Shipyard as its JV partner.

The resulting flurry of protests from the other three private shipyards triggered the defence minister’s personal decision to set aside this selection until a policy on JVs was formulated.

MoD and MDL sources strongly defend Pipavav’s selection, arguing that its location and facilities make it a shoo-in as MDL’s partner.

Says a top official intimately involved in the decision-making, “Pipavav Shipyard met MDL’s strategic requirements: it is located on the west coast, close to MDL; it possesses a dry dock for constructing large warships, which matches MDL’s method of building in a dry dock. In any re-evaluation, Pipavav will emerge the natural choice.”

Business Standard has learned that Pipavav’s bid was also the most aggressive. Contemplating a JV with a paid up capital of Rs 50 crore, Pipavav volunteered to contribute Rs 49 crore, with MDL contributing Rs 1 crore. On the board, however, there would be equal representation and MDL would have the effective right to nominate the chairman.

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