You got it! Now deserve it

by Ajai Shukla

Business Standard, 10th Aug 10

Three Indian private companies with ambitions in the defence sector won a major battle when they were invited to compete, on level terms with the public sector, in developing a Future Infantry Combat Vehicle (FICV) for the Indian Army. In the FICV project, the Ministry of Defence (MoD) has conceded almost everything that the private sector has demanded since it was allowed into defence production in 2001. The MoD will fund 80% of the development cost of the FICV. And, with the army looking to buy in quantity, economies of scale are guaranteed during production.

For those who did not read yesterday’s Business Standard, four Indian companies --- Tata Motors; the Mahindra Group; L&T; and the MoD-owned Ordnance Factory Board (OFB) --- will submit proposals on 25th August for designing and building 2600 new-generation FICVs. Two vendors with the best proposals will be invited to develop a prototype each, contributing just 20% of the expense. Then, after the army chooses the better design, the winner will build 65-70% of the army’s requirement of FICVs; the runner up will build the rest.

In this welcome decision the MoD has followed the American defence procurement model, in which the Pentagon funds a development competition between two or more private companies for each new weapons system. So far New Delhi has usually nominated the Defence R&D Organisation (DRDO) to develop such systems and the OFB to manufacture them.

But with big changes come high expectations. Having granted the private sector its wish list, the MoD and the Indian Army will carefully observe how the private vendors handle their first-ever development contract. Any shorfalls will reinforce long-held MoD prejudices. “We told you so!” will go the chorus in South Block, “Only the public sector has the skills and the commitment needed for defence production.”

The comparison may even be directly tested, since the OFB --- potentially in partnership with the DRDO --- is in contention to develop the FICV.

There are three pitfalls that the private sector must avoid. Firstly, the selected vendor(s) must not fall short of the army’s expectations, or in providing users with a development experience that contrasts tellingly with past experience with the DRDO and OFB. In this, a draw would be a loss; only an innings victory would suffice.

Secondly, the private sector must not front for foreign partners, who seek to bring in existing products by the back door. As the debutante private vendors step into the FICV arena, the spotlight will play unkindly on those clutching the arm of a muscular foreign partner.

Global arms majors have figured that a risk-free way of cracking India’s difficult procurement procedures is to partner an Indian company in a “Make” contract, and pass off existing products under the rubric of “joint development”. A top manager in one of the private companies vying for the FICV contract recounts, “I have received more partnership proposals for the FICV than I ever received for any other weapons platform.”

Reflecting this trend, private companies worry that the OFB is about to join hands with Russian export controller, Rosonboronexport, to “jointly develop” a variant of the tested BMP-3 ICV. To circumvent such a possibility, the private vendors must accept the developmental risk of proposing an FICV that is technologically beyond anything on the market today. They have been asked to develop a Futuristic-ICV. The specifications they submit on the 25th must go well beyond avant-garde.

Thirdly, when history is written, the FICV will be less about who built it or how much profit was made. This chapter will be more about whether India’s private sector used this heaven-sent, MoD-funded opportunity to build its technological capability. Private sector managers argue that each technology decision --- whether to develop or buy --- should be treated as a business case. But this irreproachable commercial logic misses the significance of this turning point. The private sector’s success in grabbing the moment will be measured in the currency of technologies that were developed along with the FICV.

Certain technologies that will go into the FICV are presently beyond the vendors, e.g. an indigenous engine, or transmission system. If a technological breakthrough seems impossible during the FICV’s development, a foreign partnership is a better option than holding the project hostage. But there are many achievable technologies and sub-systems --- e.g. in electronics, ballistic computation, night-vision devices, fire control systems, and gun control systems --- that can realistically be achieved by putting more money into R&D. If the MoD is unwilling to go beyond what was tendered, private vendors need to loosen their purse strings. At the end of the FICV project, the private vendors must be able to point out key technologies that they developed in-country.

The MoD’s “Make” procedure mandates that 50% of the FICV must be indigenously produced. This is easily achieved by producing low-and-mid-end systems and components like the armoured hull and turret, the suspension system, the electricals and the basic electronics. A more convincing measure of success for the private sector would be an ability to claim that it met that 50% requirement in components that were developed and refined during the course of the FICV project.