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). 

5 comments:

SharaV said...

It is worthwhile to consider following points Mr.Shukla before coming to conclusion on this and insinuating about government killing 'Make'.
1. For government to bear development costs, firms have to part away with their IP to MoD which many of firms may not be interested in. Without IP it is prodn cost which govt bas to bear, which they will even it is Make2.
2. Nature of Make 1 projects requires govt. to pay to two shortlisting DAs for prototypes when only one to be selected for final delivery. This is a collosal waste in case of complex big projects.
3. Emphasis should be to indigenise equipments , software which is being imported by bringing under Make1 for which budget outlay will also be less. Giving complex systems under make does not guarantee indigenisatin as min. reqmt hovers from 30-40%.

Anonymous said...

What a joke the MoD has become.

Anonymous said...

So essentially, this means Firms will make their own hardware and sell it to the Indian Armed Forces. That's BUYing isn't it? Why would they sell to India (and be forced to surrender their IPRs) when they can sell it abroad? I guess there are one/two companies which would be able to act as conduits to us now?

Anonymous said...

Ok , is this what you say ?
1. The compay should fund its own R&D
2. Complete all trials in all 4 seasons, all 4 directions of indian and all altitudes from 0 to 23000 ft.
3. No confirmed timeline when order will be placed
4. No confirmed volume of order being placed
5. No policy to order spares.

This policy should be applicable to all companies public sector and private sector.

Anonymous said...

with less than a year to go this is terrific news. Now all that needs to be done is to hand over the project to OFB!! meanwhile there is speculation that P75(i) will go to MDL, so all that we need is to continue giving large contracts to DPSU's and give small piecemeal projects to private players....