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.