Sunday, April 29, 2018

Shipyard news-why Indian public shipyards are overlooking the $2 billion search for amphibious warships?

The independent auditors of Anil Ambani-led Reliance Naval and Engineering (the erstwhile Pipavav Defence) have raised doubts over the company’s ability to “continue as a going concern”. The audit report shows a net loss of Rs 956.09 crore in 2017-18 compared to Rs. 523.43 crore in the previous year.

These numbers, and Reliance’s cloudy future, are important in the broader context of a much-delayed $2-billion (Rs 20,000 crore) defence project for four landing platform dock (LPDs). An LPD is an amphibious warfare ship designed to transport troops into a war zone by sea.

This project, whose acquisition process has largely favoured India’s private sector as the government put out newer versions of its defence procurement policy, now effectively has only one bidder whose financial strength is not in doubt.

In early 2011, a request for information(RFI) was put out for the construction of LPD class of ships for the Indian Navy. It was invited based on the ‘Buy and Make-in-India’ criteria mentioned in the 2011 defence procurement policy. This essentially meant that the RFI was for Indian players and that Indian ship building facilities were free to tie-up with foreign entities that had relevant technical know-how.

In November 2013, India floated a tender to four domestic shipbuilders, three of which were private players – L&T, Pipavav Defence and Offshore Engineering Company Limited and ABG Shipyard Ltd.

The winner of the bid had to construct two landing platform docks (LPDs). Another two would later be built by defence PSU Hindustan Shipyard Ltd (HSL) using the design and knowledge of the winner of the tender.

For the deal, Larsen & Toubro inked a deal with Spain’s Navantia, Pipavav had tied up with France’s DCNS, and ABG with US company Alion. Interestingly, the Indian Navy shot down a proposal from Cochin Shipyard Ltd (CSL) to participate in the tender along with HSL, saying the then ongoing work of the INS Vikrant at CSL would be affected. CSL sent a request to reconsider the decision and based on that the-then defence minister A.K. Antony put the tender process on hold to ask for expert opinion.

However, in September 2014, the Modi government denied permission to CSL by saying the tender was open only for private companies. CSL’s argument back then – which was that by the time the tender would be awarded, the work on the INS Vikrant would also be over – has since been proven to be correct.

Out of the three private Indian ship-builders selected by the Navy and the defence ministry, ABG Shipyard Ltd (ABGSL) was in financial trouble and could not restructure its debt. Latest media reports indicate that the insolvency and bankruptcy process will see the private shipyard, which is in the hole for over Rs 18,000 crore, liquidated due to a lack of high-value bids.

The Controller of Warship, Production & Acquisition, Integrated Headquarter, MoD also didn’t approve ABGSL’s participation in the tender (financial strength) for the same reason.

This left only two private sector options: Pipavav and L&T.

However, Pipavav, while not as bad as ABG Shipyard, was also in poor financial health. By mid 2014, the largest private shipyard in India with a licence to make warships had accumulated almost Rs 7,000 crore in debt and was under severe pressure from its creditors led by IDBI bank to go in for a corporate debt restructuring programme (CDR), to which Pipavav management was not interested. Any CDR might have devalued the company.

They had two other options. One was to infuse more funds, something they couldn’t do because they didn’t have any. The second option was to bring an investor that would pacify lenders and clients in one go while giving more credibility to the company.

In February 2015, Anil Ambani-led ADAG informed SEBI of the formation of three new subsidiaries by the group under Reliance Infrastructure Ltd – Reliance Defence Systems Pvt. Ltd, Reliance Defence Technologies Pvt. Ltd and Reliance Defence and Aerospace Pvt. Ltd with an aim to enter in to defence business.

On March 4, 2015, the announcement came – Reliance Group took 18% stake in Pipavav and an additional 26% would be taken over through open offer which effectively gave the management control of Pipavav to Reliance Infrastructure.