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).