By Ajai Shukla
Business Standard, 4th Aug 15
Incompetence dogs the defence ministry’s plan to harness Indian defence companies to develop a “future infantry combat vehicle” (FICV) --- an armoured battle-taxi for the infantry to keep pace with tanks. The ministry started out well by deciding to buy the FICV in the “Make” category of the defence procurement procedure, under which Indian companies are funded to develop “high technology, complex systems”. In this case, two vendors were to design and develop separate FICVs, with the defence ministry reimbursing 80 per cent of their costs. The better one would be mass-produced to replace the army’s 2,600 BMP-2 vehicles that are now obsolescent.
A fine plan, but the ministry has failed twice in evolving a model for selecting the two “development agencies” (DAs), the vendor consortia who will compete to build the FICV. In 2012, the defence ministry cancelled the Expression of Interest (EoI) it had issued two years earlier to four vendors --- Larsen & Toubro, Tata, Mahindra and the Ordnance Factory Board (OFB). The reason: after the companies submitted their strategies and plans, a defence ministry official observed that the EoI had omitted to specify the methodology for deciding the two winners. Anticipating that the losing vendors might approach the courts, the ministry scuppered the EoI and started afresh.
It took another three years to formulate selection criteria and issue a fresh EoI, but the ministry finally managed it on July 16. As this newspaper reported (July 17, “After 5-year delay, tender issued in Rs 50,000-cr Future Infantry Combat Vehicle project”) EoIs were issued to ten Indian companies --- Mahindra; Bharat Forge; L&T; Punj Lloyd; Tata Power; Tata Motors; Pipavav Defence; Rolta India; Titagarh Wagons, and the OFB. They have been asked to build a tracked vehicle that would carry a crew of three and also eight combat-kitted infantrymen. While the FICV’s weight is not specified, it must be amphibious and so can be no heavier than 18-20 tonnes. It must be air-portable in the air force’s IL-76 and C-17 aircraft. Finally, it must fire anti-tank guided missiles out to ranges beyond 4,000 metres.
While this is not an insurmountable technological challenge, there remain lacunae in the evaluation methodology that the EoI lays out for selecting the two DAs. There is insufficient incentive to indigenise, which should be the primary objective in a “Make” project. And the ministry’s unfailing urge to support the OFB has resulted in skewing the evaluation criteria to favour large companies with enormous installed capacities, rather than lean organisations oriented towards high-tech innovation.
The EoI specifies that vendor responses will be graded in four categories, each having a certain weightage. These four criteria are: commercial assessment (26.08 per cent); technical capability assessment (34.24 per cent); critical technology assessment (31.37 per cent), and technical specification assessment (08.31 per cent). To answer the perfectly legitimate question of how each criterion was allocated such pinpoint weightage, the ministry declares that these were “arrived at by using a complex method called the Analytical Hierarchical Process (AHP) model.”
Beyond the jargon, we learn the best vendor response in each category will be allocated full marks, with the rest scoring lower in proportion to the merit of their bids. A Business Standard analysis, however, finds problems in the grading process.
Take the first parameter, the “commercial assessment”, with a weightage of 26.08 per cent. In this, the defence ministry has asked for four parameters: the company’s/consortium’s annual turnover, profit after tax, net worth and fixed assets. There seems little reason to set so much store by company size, especially since the defence ministry gave this zero weightage in the “Make” category EoI for the Tactical Communications System (TCS); and only 10 per cent weightage in the EoI for the Battlefield Management System (BMS). In the FICV EoI, it might seem as if L&T would score highest in this segment, but the defence ministry has shielded its wayward child, the OFB, by mandating that the ministry would mark the OFB in this segment at its own discretion. Meanwhile, Tata Motors, which should logically be a strong candidate for building an FICV, will score poorly here due to its large loss last year. This might make other companies --- including group company, Tata Power --- reluctant to join a Tata Motors consortium.
The second evaluation criterion is “technical capability assessment” with 34.24 per cent weightage. This evaluates the R&D capability of a company/consortium across its entire spectrum of activity. In the TCS and BMS evaluations, credit was given only for R&D capabilities in areas directly related to the project. Now, broad-based credit would allow Tata Motors and Mahindra to benefit from R&D in their small car projects, even if that has little “carry-over” to building an FICV. Similarly, L&T would benefit from R&D expenditure in L&T Infotech. Meanwhile smaller companies with higher R&D spends in percentage terms might lose out because their absolute R&D spends are lower.
In this same category, the EoI favours vendors with large fixed capacities in brick-and-mortar manufacturing. It asks for minute details of bending and cutting machines installed, while no credit is given for electronics and system integration capabilities. Here again, the OFB stands to benefit as a vertically integrated organisation with large capacities installed at taxpayer’s expense. Says a private sector chief executive: “I may wish to outsource a range of machining activities, while retaining high-tech design and electronics for myself. Why should an EoI discriminate against such a business model? In a project that is going into a development phase, why is the defence ministry looking for production facilities?”
The third evaluation criterion is “critical technology assessment”, with a weightage of 31.37 per cent. It requires companies/consortia to offer as many “core technologies” and “critical technologies” as possible, specifying some 40 technologies, of which almost half relate to engines and transmissions. Vendors need not develop technology. Credit can be obtained simply by signing a Memorandum of Understanding (MoU) with a foreign technology partner, who undertakes to provide the rights and licences for manufacturing a specified product in India. Since a foreign vendor can provide MoUs to multiple Indian companies, theoretically all ten FICV bidders could submit an MoU from the same foreign vendor.
The fourth and last criterion of “technical specification assessment” carries a tiny weightage of 8.31 per cent. This involves proposing specifications for the FICV. With the ministry specifying some capabilities and demanding certain technologies, this assessment largely writes itself.
A betting man could make good money on the outcome of this EoI. It is structured to ensure that the OFB emerges as one DA. The second will most likely be L&T, with its size, installed capacities and engineering capability. The gamble really centres on what consortia these two will assemble. The OFB would probably tie up with Russia’s Kurganmashzavod, which it has earlier partnered in building the BMP-2 in Medak. Its other likely partner would be Bharat Forge, which has a tie-up with Israeli electronics firm, Rafael, which would supply the FICVs missile, night vision and sighting systems and active protection systems. This consortium’s offer will essentially be another Russian vehicle with Israeli electronics.
The other likely DA, L&T, could partner Tata Power (Strategic Engineering Division); a tried and tested consortium that has emerged tops in the first two “Make” projects. This consortium might also suck in BAE Systems, which had earlier tied up with Mahindra, a partnership that came unravelled.
But, first, to make a good choice, the defence ministry needs to get its evaluation criteria in order.
Graphic: Criteria for comparing vendors in TCS, BMS and FICV projects:
Commercial assessment: vendors’ turnover, profit, net worth, fixed assets. OFB to be arbitrarily assessed by MoD
Technical capability assessment: vendors’ R&D record and infrastructure, patents filed, manpower. In TCS and BMS projects, R&D abilities were assessed only in relevant technology areas. In FICV project, marks obtainable for R&D capability in irrelevant areas.
Relevant project experience. In the FICV, Mthey also demand production infrastructure. No space for business models that include outsourcing of production/machining.
Critical technology assessment. Vendor's approach to meeting the technical requirements (No marks for this in FICV because specifications given)
Access to critical technologies (including through MoUs)
Indigenous content, through ownership of IP (provides control over crucial technology)
Technical specification assessment criteria
Source: Defence ministry Expression of Interest (EoI) to vendors