Thursday, 21 June 2018

Apache “copter scam” is fake news: allegation of overpricing, even before price fixed


By Ajai Shukla
Business Standard, 21st June 18

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Caught in the rotor blades

·      The deal to buy the AH-64E Apache is a particularly complicated one: the basic helicopter, including the airframe, is a direct commercial sale (DCS), which New Delhi has negotiated directly with Boeing

·      However, the engines, fire control systems and radar, key avionics and weapons and missiles are being bought under foreign military sale (FMS) category, which is negotiated with the Pentagon
 

·      The sale amount the US government notifies to the US Congress is a “not to exceed” estimate, while the contract is almost invariably signed for a significantly lower amount

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Washington’s June 12 notification to the US Congress informing it that the US government is proceeding with the sale of six Apache attack helicopters to India for an estimated $930 million dollars has evoked allegations of wrongdoing.

Noting that this amounts to $150 million for each Boeing AH-64E Apache helicopter, National Herald wrote that Israel paid less for its F-35A fifth generation fighters. Observing that the price “seems outlandish”, the newspaper wrote: “In 2017, Boeing and US Army signed a $3.4 billion contract for 268 AH-64E Apache helicopters at a unit cost of about $13 million per chopper, albeit remanufactured with a few newly built.”

On June 13, activist Prashant Bhushan tweeted: “Modi gov[ernmen]t to buy 6 Apache 64E [heli]copters for 930M$ (Rs 1000Cr each). US army bought 35 of the same helicopters 3 yrs ago for 691M$ (Rs 120 Cr each). Modi pays 8 times market price and sends >5000Cr of our money down the drain! Kickbacks?”

Business Standard has investigated these allegations around the Apache purchase and found that the uproar stems from a lack of understanding of the way America processes foreign arms sales.

Such sales fall under two main categories: In the Foreign Military Sales (FMS) category, the US Department of Defense (the Pentagon) acts on behalf of the customer, negotiating costs with the US vendor, usually benchmarked at the price the vendor last sold the equipment to the US military. Very often, the foreign customer gets the equipment cheaper than the US military did, since the production line would have been amortised earlier.

For impending FMS sales, the Defense Security Cooperation Agency (DSCA) – a branch of the US State Department – must notify Congress, giving the legislature the opportunity to question the sale.

The second category is Direct Commercial Sales (DCS), in which the foreign customer negotiates directly with the US vendor company, with the permission of the US government. No Congressional notification is required for this.

The case of the AH-64E Apache is a particularly complicated one: the basic helicopters, including the airframe, is a DCS, which New Delhi has negotiated directly with Boeing. However, the engines, fire control systems and radars, key avionics and weapons and missiles are being bought under FMS.

The DSCA’s notification to the US Congress, therefore, relates to only half the Apache helicopter – the parts that come under FMS.

That should make the $930 million estimation for six helicopters even more outrageous, because it relates to only the FMS portion of the Apache – effectively, just half the helicopter.

In fact, the figure the DSCA puts forward in the Congressional Notification is seldom what the international customer pays. Instead, it is the most expansive of estimates, which one US official describes as the “not to exceed” cost of the equipment being cleared. The eventual contract price, which the customer signs with the Pentagon, is almost invariably lower.

Interestingly, the customer often pays less than even the contract price. The Pentagon monitors the cost at which the equipment is manufactured, driving down prices continually to keep its industry efficient. The customer eventually pays a “cost plus” price, which is very often less than the contracted price.

There are numerous examples of this. In 2010, the DSCA notified Congress about the sale to India of 22 AH-64D Apache helicopters (only the FMS portion) for $1.4 billion. In 2015, when the contract was finally signed, India paid only $900 million for the FMS portion of the contract. With the DCS portion contracted for an additional $900 million, the entire sale cost India $1.8 billion – or $80 million per Apache, inclusive of large stocks of weapons and missiles.

Once all 22 Apaches are delivered, India might end up paying less than that.

Similarly, the DSCA notified the US Congress about the sale to India of ten C-17 Globemaster III transport aircraft for $5.8 billion. Eventually, India paid $4.1 billion for those aircraft.

The complexity of the data about prices paid by other buyers – especially by the US government – sometimes causes misapprehensions that India has paid a higher cost.

For example, the National Herald data – that the US government bought 268 Apaches in 2017 for $3.4 billion, or less than $13 million each – glosses over the fact that 244 of those helicopters were “remanufactured”. That means they were overhauled and upgraded earlier model Apaches.

Last August, India’s defence ministry cleared the purchase of six additional Apaches for an indicative price of Rs 4,168 crore – which Washington notified the US Congress as a $930 million sale. But that too is a “not to exceed” estimation, which also includes a large amount of weaponry and training equipment. Once India signs the contract for these helicopters, a more exact figure will be available.



Wednesday, 20 June 2018

Solar Industries India partners EURENCO for major artillery tender

The two firms will bid jointly for a forthcoming multi-billion dollar Indian tender to manufacture artillery propellants

By Ajai Shukla
Business Standard, 20th June 18

On Tuesday, Solar Industries India Ltd (hereafter Solar), one of India’s fastest growing companies in defence manufacturing, announced a strategic tie-up with EURENCO – the European leader in high-energy materials – for explosives and propellant technologies.

Announcing the partnership at the EUROSATORY 2018 defence exhibition near Paris, the two firms said they would bid jointly for a forthcoming multi-billion dollar Indian tender to manufacture artillery propellants, called the bi-modular charge system (BMCS).

“We have built a strong relationship with Eurenco and are working on a collaborative approach to set up infrastructure facilities under the 'Make in India' program of the Government of India to fulfill the needs of the Indian Army”, said Solar’s chief executive, Manish Nuwal.

The Nagpur-headquartered Solar, India’s largest manufacturer and exporter of explosives and initiating systems, is highly regarded by the defence ministry. In January, Defence Minister Nirmala Sitharaman handed it technology to manufacture solid propellant boosters for the Indo-Russian BrahMos cruise missile – a favour normally bestowed only on defence public sector undertakings (DPSUs).

Solar’s ambitious growth plans in the defence sector rest on the military’s increasing requirement of ammunition and propellants. Besides needing to make up a large shortfall in war reserve ammunition stocks, the military requires warhead explosives and propellants for indigenous weaponry like the Pinaka rocket launcher, the Akash, Nag, Astra, BrahMos and LR-SAM missiles, indigenous artillery guns like the Dhanush and the Advanced Towed Artillery Gun System (ATAGS), and a range of new artillery gun systems entering service, such as the M777 ultra-light howitzer.

India currently imports 35 solid propellant boosters annually for the BrahMos cruise missile. In addition, the IAF will be inducting large numbers of BrahMos as an air-launched cruise mssile (ALCM), mounted on the Sukhoi-30MKI fighter. Solar would benefit directly from these orders.

In July 2016, Eurenco and Solar signed a preliminary agreement to “evaluate various cooperation options”. On Tuesday, that was translated into a “strategic partnership” for supplying “propellants, bombs, ammunition filling and modular charges technologies under the ‘Make in India’ policy for the private sector”, according to a Solar press release.

“This partnership agreement is at the heart of our strategy in India which is today one of the key markets that we aim for as part of our global export policy in Asia”, said EURENCO chief, Dominique Guillet.

Solar said today it “is willing to build dedicated infrastructure facilities with the technical assistance of EURENCO on its explosives and propellant facilities in Nagpur, India.”

Besides Nagpur, Solar manufactures at 24 locations in India and six locations abroad – in South Africa, Turkey, Zambia, Nigeria, Australia and Ghana – for a significant portfolio of American and European customers.

Since it was established in 1995, Solar has built facilities to produce sophisticated, military-grade explosives such as HMX, RDX and TNT. Solar also builds composite propellants, rockets, warheads, mines, tank ammunition, bombs and electronic fuzes.

Besides serving defence requirements, Solar also manufactures explosives for the mining and infrastructure sectors, serving Coal India Limited, Singareni Collieries, Vedanta, Reliance, Jindal and other companies.

Thursday, 14 June 2018

Policy viewpoint: Govt decision to give up on “Make 1” defence projects is flawed


By Ajai Shukla
Business Standard editorial
13th June 18

Private defence firms with ambitions to be platform developers, rather than mere manufacturers, are disappointed at the defence ministry’s decision to step away from reimbursing the cost of developing complex, high technology defence platforms. An existing “Make” procedure for developing such systems involves the ministry paying back 80 per cent of the development cost, but its unease with this category was already evident. After having hailed the “Make” procedure as a vital driver of indigenization, only three “Make” projects have been initiated over the preceding decade: the Tactical Communication System (TCS), the Battlefield Management System (BMS) and the Future Infantry Combat Vehicle (FICV). In the first two projects, after lengthy tendering and evaluation, the winning “development agencies” (DAs) were announced, but no order was placed. The BMS is close to being scrapped, since the army has unwisely declared it does not want to spend the money on such a “futuristic system” and save it for rifles instead. The FICV makes for an even more depressing story: After issuing two abortive tenders, the defence ministry has failed to select the DAs. Instead, the ministry has now declared that “Make” projects would be progressed under the “Make 2” category, promulgated in 2016, in which industry itself pays the development cost. This saves the ministry money and also the fraught responsibility of selecting DAs.

To expect “Make 1” -- as the government renamed the “Make” procedure in 2016 -- to be subsumed by “Make 2” is unrealistic and self-defeating. “Make 1” requires government funding because it costs heavily to develop futuristic, cutting-edge defence platforms incorporating multiple technology domains. In contrast, “Make 2” has a smaller scope, primarily targeting “import substitution”, or indigenising systems or sub-systems already in service. Crucially, “Make 1” contracts demand that DAs import specified critical technologies from their foreign partners – something that is enforceable only in large, expensive projects. All this would hold back a “Make 2” FICV from being a next-generation platform that brings in critical technologies.

In this strange decision for defence indigenisation, none of the protagonists has covered itself with glory. Companies that were eliminated during FICV project evaluation approached the ministry, offering to develop this complex, multi-dimensional platform at their own cost. It is unlikely that any firm would take on the Rs 800-2,000 crore (Rs 8-20 billion) burden -- going by the bids submitted -- of developing an FICV prototype, especially since the “Make 2” procedure provides neither for assured orders, nor for reimbursement of full development costs if an order is not forthcoming. Rather, this was a “dog in the manger” tactic to scupper a tender from which they had been eliminated and hope they would fare better in whatever came in its place. None of these spoilers could have anticipated such fulsome success wherein the government would throw out not just the FICV project, but the “Make” procedure itself.


Private firms, in their fratricidal competitiveness, have been scuppering a vital defence project and providing ammunition to those who oppose a larger role in defence for private firms. Defence ministry decision-makers have proven yet again that confronted with a difficult decision, they will back away. The gainers from this will be the public sector, which has been granted a reprieve from private sector competition in developing new weaponry. 

Wednesday, 13 June 2018

Industry responds to MoD’s draft policy on “defence testing infrastructure”


By Ajai Shukla
Business Standard, 13th June 18

Indigenous aerospace and defence manufacturers have responded to the defence ministry’s draft policy on establishing defence testing infrastructure (DTI). 

The ministry, which promulgated the draft policy last month, had sought feedback by June 8.

The new policy draft notes that “Defence Testing Infrastructure is often capital intensive, requiring continuous upgradation and it is not economically viable for individual defence industrial units to set up in-house testing facilities.” 

It proposes setting up DTI as a government-funded platform, especially in two “defence industrial corridors” already planned in Tamil Nadu and Uttar Pradesh. 

The scheme envisages six-to-eight DTI clusters, to be set up with an assistance grant of Rs 400 crore (Rs 4 billion). The defence ministry will fund 75 per cent of the project cost of each DTI unit.

The private sector has welcomed the DTI Scheme, given that even large defence firms cannot afford to set up testing infrastructure needed for validating their products. 

DTI includes properly instrumented firing ranges for missiles, artillery and small arms, and facilities to test “ruggedisation” of military equipment. It also includes laboratories for testing electro-magnetic interference/compatibility (EMI/EMC) of radar and telecommunications equipment, and facilities for testing unmanned aerial vehicles (UAVs) and building specialised test-driving tracks.

Tata Power (Strategic Engineering Division) spent over Rs 150 crore (Rs 1.5 billion) to create its own EMI/EMC laboratory to validate its telecommunications equipment. But many other firms cannot afford this, given the lack of assured orders from the services.

The defence ministry has proposed implementing the DTI Scheme either directly, or through a Special Purpose Vehicle (SPV) that would establish, operate and maintain testing infrastructure and collect user charges from the industry. 

The draft policy proposes that at least seven firms that are potential users of the proposed DTI must be part of each SPV. 

“The industry units benefitting from the SPV should hold at least 51% equity and no single unit shall hold more than 25% of the share capital of the SPV”, states the draft policy.

However, large private defence firms have proposed an alternative to the SPV route. They say that, with at least seven industries participating, and the participation of major industry restricted to 25 per cent, there would be too many decision-makers, resulting in poor execution.

“It would be better if major industries, whether public or private sector, located in the proximity of the DTI, act as ‘anchor units’, responsible for operations and maintenance. These ‘anchor units’, with tier-ised eco-systems build around them, can allow other firms, including micro, small and medium enterprises (MSMEs) to use the DTI”, says Jayant Patil, head of L&T’s defence and heavy engineering verticals.

“Funding for the DTI can be from the central/state government to the extent of 75 per cent, as the draft policy states. With capital costs funded, industry can avail of the facility for a nominal fee”, says Patil.

L&T proposes that the “user charges” collected by the anchor units be displayed on a government website. The anchor unit would submit a quarterly statement to the government on the testing carried out and the recoveries made.

However, MSMEs like Alpha Design Technologies say that government-funded DTI should be created “primarily for use by MSMEs and start-ups. “Only nominal charges should be levied for use of the testing infrastructure, says Colonel (Retd) HS Shankar, who heads Alpha.

The private sector, in its feedback to the defence ministry, pointed out that tens of EMI/EMC laboratories are needed in India, given the proliferation of electro-magnetic emitters in defence equipment. One company says that German communications giant Rhode & Schwarz has cheaply built dozens of such facilities for China’s defence industry, under pressure from Beijing.

Rahul Chaudhry, Chairman of Defence Innovators and Industry Association, points out that creating DTI is not enough. The defence ministry would simultaneously have also to create the standards and compliance infrastructure essential for using it optimally.

Puneet Kaura, who heads Samtel Defence Systems, calls the DTI Scheme a “good step”, but says: “The defence ministry needs to speed up implementation so that industry can reap its benefits quickly.”

Separately, the MoD intends to promote the creation of DTI through an amendment to its offsets policy, a draft of which was released for public comments in May. The draft amendment proposes permitting vendors to claim offset credits for setting up new DTI for Indian defence industry.

Multipliers between two-to-three have been proposed for DTI, with higher multipliers allocated to test infrastructure in the recently-announced defence industry corridors in Tamil Nadu or Uttar Pradesh. A multiplier of three means an investment of $100 million would gain offset credits of $300 million.

Tuesday, 12 June 2018

Meghalaya police DG resigns over appointment of BJP-linked “security advisor”

Meghalaya DGP Swaraj Bir Singh (right), receiving the Sahitya Akademi Award in 2016

By Ajai Shukla
Business Standard, 12th June 18

Three months after the Bharatiya Janata Party’s (BJP’s) political coup in Meghalaya, when the party leadership – with just two representatives elected to the new assembly – cobbled together a government led by the National People’s Party (NPP), Chief Minister (CM) Conrad Sangma is discovering the costs of the BJP’s support.

On Monday morning, in Shillong, the state’s Director General of Police (DGP) Swaraj Bir Singh submitted his resignation to Sangma over the proposed appointment of BJP-linked former police officer, Kulbir Krishan as “security advisor” to the state government.

Singh, who the Sangma government gave an extension of service as DGP in April, is learnt to have refused to work with Krishan, and not even meet him.

Kulbir Krishan is regarded in police circles as “controversial”. In the early-2000s, then Intelligence Bureau (IB) chief, Shyamal Datta, posted him out of the bureau over allegations relating to his personal life. Later, abortive attempts to appoint Krishan IB chief foundered after resistance from the organization.

In 2013, when Krishan was DGP Meghalaya, the Election Commission ordered him moved out before elections.

In contrast Singh is well respected in the service and is regarded as having performed creditably as DGP since his appointment in December 2016. Sangma has not accepted his resignation and urged him to continue.

Contacted by Business Standard, Singh declined to comment on the issue.

“The post of “security advisor” to the government is a superfluous one that undermines the DGP, in order to accommodate political appointees”, says Patricia Mukhim, the well-respected editor of the Shillong Times.

It remains unclear why Meghalaya requires a “security advisor” at all. It has not had one since Rajiv Mehta left two years ago. Especially now since militancy has been officially declared as over.

Mehta was appointed at the time of growing militancy in Meghalaya’s Garo Hills region. However vigorous counter-insurgency operations, conducted by the state police under Singh, had practically quashed armed militancy by early-2018.

Further, Singh is regarded as having handled the confrontation in Shillong in May between Khasi tribal groups and the Sikh Mazhabiya settlers with tact and sensitivity. While the complex issue continues to simmer, locals appreciate the police for ensuring no lives were lost. 

Meghalaya is one of the most sensitive states of the north-east, with a complex tribal matrix and a sensitive border with Bangladesh. It includes three ethnicity-based regions: the Khasi Hills, Jaintia Hills and Garo Hills.

Meghalaya was a part of Assam until 1970, when it was designated an Autonomous State. It was upgraded to a full-fledged state in early 1972.

Meghalaya has enjoyed broad political stability since 2003, with the Congress forming the government throughout, except for a year in 2008. In March, after a close state election, in which the Congress emerged the largest party with 21 seats in the 60-seat assembly, the BJP brokered an alliance that brought together 34 legislators. 

On March 6, Conrad Sangma was invited to form the government.

Friday, 8 June 2018

Russian S-400 missile purchase is a “done deal”, US looks to calm waters


 By Ajai Shukla
Business Standard, 8th June 18

Senior defence ministry officials say India’s purchase of five units of Russia’s S-400 Triumf mobile surface to air missile system (M-SAM) is “a done deal”.

“All that remains is to decide whether the deal should be signed when Prime Minister Narendra Modi meets President Vladimir Putin later this year”, said one official who is closely involved in the negotiations.

On Tuesday, Defence Minister Nirmala Sitharaman was only marginally more circumspect when she said in a press conference in New Delhi: “It (the S-400) has been for a very long time in negotiations. We have reached a final stage in the S-400 negotiations.” 

With the time-consuming hurdle of cost negotiations crossed, only the Indian cabinet’s concurrence remains for the deal to be ready for signing. 

In 2015, the Defence Acquisition Council (DAC) had cleared the purchase of five S-400 units for an indicative price of about Rs 30,000 crore ($4.5 billion). However, the ministry is keeping a tight lid on the price finally agreed.

For President Donald Trump’s administration, New Delhi’s determination to buy the S-400 is a significant problem. A law passed by the US Congress last year – titled “Countering America’s Adversaries Through Sanctions Act” (CAATSA) – binds the administration to impose sanctions against countries that engage in “significant transactions” with Russian, Iranian and North Korean defence and intelligence entities.

Given close US-India defence ties, and recognition by US officials that India’s predominantly Russian arsenal prevents New Delhi from abruptly severing ties, American officials are asking Congress for a waiver from CAATSA for key allies like India.

New Delhi has dug in its heels. “We have very clearly explained how India and Russia’s defence cooperation has been going on for a very long time. It is a time-tested relationship and India has got quite a lot of defence assets from Russia. [In] assets, spares and servicing, we have a continuous relationship with Russia [and that] has to be recalled. Therefore CAATSA cannot impact on us”, said Sitharaman on Tuesday.

Senior Indian government officials are reportedly upset at this “lack of American understanding”, after India last year scuttled the project to jointly develop a Fifth Generation Fighter Aircraft (FGFA) with Russia.

Senior US officials complain that the US Congress displayed a “lack of nuance” in passing CAATSA. Intending primarily to tie down Trump to a hard line against Russia, Congress inadvertently placed the US administration at loggerheads with valued partners like India, Indonesia and Vietnam, who field large Russian-origin arsenals.

Behind the scenes, both governments are searching for a solution. Secretary for Defence James Mattis, who has argued before the US Congress for a CAATSA waiver for key allies, is working with New Delhi on the wording of an acceptable waiver. 

Defence ministry sources say New Delhi has rejected at least one draft, while also declaring that India has no obligation to respect CAATSA, which is an American law.

Separate from the CAATSA imbroglio is Washington’s concern over technology security. US officials say they will not allow the F-35 Lightning II – their latest, hugely expensive and secretive fighter aircraft – to operate alongside the S-400. 

Given the IAF’s growing interest in the F-35, this concern could significantly impact any such plans. 

Echoing technology security concerns, the US House Armed Services Committee chairman, Mac Thornberry, told Indian journalists that if India bought the S-400, inter-operability between the Indian and US militaries would be undermined.

Underlining US sensitivity over the S-400 – which China could well buy in the future – is Washington’s growing confrontation with Turkey, a North Atlantic Treaty Organisation ally that is pushing to buy the S-400. Turkey is an F-35 partner country, but US officials say it could well be denied that fighter if it bought the S-400.

The S-400 Triumf (NATO designation: SA-21 Growler) can detect an incoming ballistic missile (perhaps carrying a nuclear payload) from 600 kilometres (km) and shoot it down when it is still 230 km away, and 185 km above the earth. It can shoot down fighter aircraft at ranges out to 400 km.

Wednesday, 6 June 2018

In a blow to private defence firms, govt will not subsidise development of new weaponry



By Ajai Shukla
Business Standard, 6th June 18

The “Make” procedure, in which Indian defence firms design “high technology, complex systems”, with the defence ministry reimbursing their costs, has been officially declared dead.

At a press conference on Tuesday, ironically convened by Defence Minister Nirmala Sitharaman to highlight the achievements of her ministry, it was revealed that development projects being processed under the “Make” category would be moved to another category – “Make 2” – in which defence firms bear their own costs.

Affected immediately is the long-delayed project to develop a Future Infantry Combat Vehicle (FICV), which has already been tendered twice in 2010 and 2015. With the lowest bid in the FICV tender understood to be about Rs 800 crore, this substantial costs would now have to be shouldered by private defence firms.

On Tuesday, the defence ministry’s Secretary (Defence Production) Ajay Kumar stated: “Several people (companies) who had earlier expressed interest in ‘Make 1’ projects are now coming forward and saying they would like to do these projects under ‘Make 2’.”

Based on multiple conversations with executives and officials involved in the FICV process, Business Standard has learned that the firms volunteering to do the FICV project at their own cost are primarily those who were eliminated during evaluation of the FICV bids.

In 2015, the ministry issued an Expression of Interest (EoI) to ten companies for developing the FICV under the “Make” procedure. Six firms/consortia responded, including: Larsen & Toubro, Tata Motors with Bharat Forge, Mahindra with BAE Systems, Tata Power (SED) with Titagarh Wagons, Reliance Defence and Rolta.

Reliance Defence and Rolta were eliminated, as they didn’t meet the qualifying gate. Tata Power (SED) was subsequently rejected, leaving only the first three firms on the shortlist, of which two were to be selected as “Development Agencies” for the FICV.

With competition tight, Mahindra complained to the ministry that Tata Motors was ineligible. If the profits earned by Jaguar Land Rover – a foreign company -- were discounted, Tata Motors had posted a net loss over the preceding three years, thus violating financial criteria. Furthermore, the chief executive of Tata Motors, Guenter Butschek, was a foreign national, said Mahindra.

With this complaint dogging the process, then acquisitions chief, Smita Nagaraj, endorsed comments on file that a view be taken on the financial criteria. Now, with officials reluctant to bell the cat, the easy solution is to transfer the project to the “Make 2” category – where there are no financial implications.

These difficulties in the FICV “Make” process were indirectly referred to by Kumar, who stated: “Some issues crept up… either in terms of significantly higher project costs or in terms of some difficulties which have led to progress not being made.”

“So now… we are taking steps to examine these [‘Make 1’] projects and process them under ‘Make 2’ as well”, he stated.

Asked if all on-going “Make” projects – which, besides FICV, include the Tactical Communications System and the Battlefield Management System – will go into the “Make 2” category, Kumar stated: “If there is interest, we can take ‘Make 2’ specifications and now any project under ‘Make 1’ can go into ‘Make 2’. In case there is industry interest, we can migrate there.”

Industry analysts, however, point out that companies have absolutely no interest in paying their own development costs. “This is simply a move by losing participants to scuttle the contract and start it afresh”, says one analyst.

Jayant Patil, who heads L&T’s defence and heavy engineering vertical, points to the loss of credibility of the ministry, and of Indian defence firms with their foreign partners, in changing track after having pursued ‘Make 1’ for over a decade.

“ ‘Make 1’ is a process for indigenous development of major platforms with multiple critical technologies being either developed or brought into the country for building self-reliance in the long term. ‘Make 2’ is for smaller, import substitution projects that involve far less cost. Moving projects from ‘Make 1’ to ‘Make 2’ would dilute these long-term aims”, says Patil.

‘Make 1’ also has clauses that require DAs to ensure specific critical technologies are brought into the country as part of the project. Shifting these projects to ‘Make 2’ would eliminate this benefit.

Industry analysts further point out that, unlike ‘Make 1’, the ‘Make 2’ category does not bind the defence ministry to buy a product on which the DA would have spent large amounts.

The “Make” procedure dates back to 2005-06, when the seminal Kelkar Committee first proposed it as a driver of strategic self-reliance in major platforms like tanks, warships or digital communication grids. The “Make” process involves selecting two Indian firms/consortia, as “development agencies” (DAs) to design and develop complex platforms, with the government reimbursing 80 per cent of their costs.

The latest Defence Procurement Procedure of 2016 (DPP-2016) expanded the “Make” category. The existing category was designated “Make 1” and the reimbursement was increased to 90 per cent of the DA’s costs. A second category, “Make 2”, has the DA funding its own projects, which are aimed at import substitution. A third category, “Make 3”, which involves projects under Rs 3 crore, is reserved for micro, small and medium enterprises (MSMEs).