MoD shuts out private firms from fuse purchase

Please read Electronics Corporation of India Ltd's clarification at the end of the article

Controversy surrounds the Ministry of Defence’s Rs 800-crore procurement of artillery fuses, tiny electronic devices that cause artillery shells, fired from guns like the 155mm Bofors, to explode when they reach their target. Forbidden by a Lok Sabha committee from ordering fuses on a single-vendor basis from the Electronics Corporation of India Ltd (ECIL), and to ensure multi-vendor competition instead, the ministry has structured the tender in a manner that excludes private bidders.

Simultaneously, proceeding on a single-vendor basis, the ministry has ordered 400,000 fuses, worth over Rs 200 crore, from ECIL, citing urgent military needs.

ECIL is not a defence public sector undertaking (PSU); it functions under the Department of Atomic Energy. But a close relationship with South Block, which terms it “the sole approved supplier”, has long given ECIL automatic rights over 80 per cent of the army’s requirement of fuses.

That near-monopoly status has been questioned by a stream of MPs, the Central Vigilance Commission (CVC), the Lok Sabha Standing Committee on Defence, and the Lok Sabha Committee on Petitions (in its 43rd Report, tabled on November 8, 2008).

The questions raised against ECIL include its dependency on South African company, Fuchs Electronics, the main supplier of fuses to blacklisted South African armaments company, Denel. Critics have pointed out that ECIL merely assembles fuses from components supplied by Fuchs. The main components — a safety and arming device (S&A), the battery and an electronic timer kit — all come from abroad.

Despite that, ECIL has flourished with its key buyer — the Indian Army’s artillery branch — on its right side. Army headquarters admitted to a Lok Sabha committee that its former director general of artillery, Lt Gen Charanjit Singh, joined ECIL as an advisor immediately after he retired. The army’s justification: “ECIL had been appointing several retired defence officers as their advisor (sic).”

ECIL has not responded to an emailed questionnaire on these issues.

But the most serious charge against alleged defence ministry-ECIL collusion is the ministry’s alleged doctoring of its tender (request for proposals, or RfP, in the ministry terminology) for the supply of some one million fuses, a contract worth some Rs 600 crore. The RfP has lumped together three different kinds of fuses: Point detonation, timed and proximity fuses. A vendor either supplies all three types, or supplies none. Private companies like Hyderabad-based HBL Defence Electronics, and Delhi-based Micron Instruments Pvt Ltd, all manufacture one or the other type of fuses, the stipulation that vendors must provide all three fuse types effectively rules them out of contention.

Artillery experts say that each type of fuse involves different technologies.

Lumping the three types together would exclude companies with excellent capabilities in, say, timed fuses, simply because it was not manufacturing proximity fuses.

Small, high-tech companies which are bidding for the contract argue that the ministry would benefit by diversifying its sources of supply, rather than remaining dependent on one large PSU. The Defence Procurement Policy of 2008 (DPP-2008) encourages the cultivation of diverse suppliers.

The defence ministry has not responded to an email questionnaire on the subject.

The tender for one million fuses is also characterized by a high degree of tolerance for ECIL’s dependency on imported fuse components from Fuchs. The RfP specifically allows import duty exemptions for fuse components up to 70 per cent of the value of the contract. Considering that the contract value includes a profit margin of about 15 per cent, the 70 per cent exemption clause effectively allows vendors to import 80 per cent of the fuse.

“This is hardly indigenous production”, points out Jagdish Prasad, CMD of HBL Power Systems Ltd, which claims a far higher percentage of indigenous components in its fuses. “Importing 70 per cent of the fuse and assembling the components in India does not wean our military off foreign dependency.”

This tender, floated on April 2, 2009, and opened on August 27, 2009, is currently hanging fire.

Defence ministry sources say that objections from MPs, and from government vigilance organisations, have held back the ministry from ordering trials and awarding the contract.

Before electronic fuses were invented, artillery shells were exploded by mechanical fuses that detonated on impact with the ground. Birla group company, VXL Technologies, was India’s primary supplier of mechanical fuses. Three decades ago, the Bhabha Atomic Research Centre first produced electronic proximity fuses; the production licence for the famous VT-8A fuse was given to ECIL.

When that became obsolete, ECIL’s failure to absorb technology, and to conduct research and development on fuses, took it to Fuchs. That great dependency continues today.

ECIL CLARIFIES
Electronics Corporation of India Limited (ECIL) has clarified that two public sector undertakings and two private firms have submitted their bids for the Rs 800-crore tender for procurement of artillery fuses.

Responding to a report published in Business Standard on February 13 (MoD shuts out private firms from fuse purchase), ECIL has clarified that it does not agree with the critics' comment in the report that the company merely assembles fuses from components supplied by Fuchs, a South African company. Similarly, it says the report's reference to Fuchs as a company supplying fuses to blacklisted South African armaments company, Denel, is not relevant.

The Business Standard report was on the favourable treatment accorded by the ministry of defence (MoD) to ECIL in ordering artillery fuses for the Indian Army. The article noted that the MoD made a practice of ordering fuses from ECIL on a single vendor basis until objections from the Central Vigilance Commission (CVC) and two parliamentary committees; despite that, the MoD cited urgent military need to hand ECIL another single-vendor order worth Rs 200 crores; that ECIL routinely hands out consultancies to senior military officers after they retire; and that the MoD has framed its ongoing Rs 800 crore tender for fuses in a manner that excludes private bidders.

ECIL’s response remains silent on all these issues mentioned in the BS report. However, the state-owned firm under the department of atomic energy has said the defence ministry has not doctored the tender for the supply of one million fuses. The defence ministry's requirements, borne out of operational needs, were clearly spelt out in the pre-bid meeting, it has stated.

ECIL has further noted that the tender for fuse procurement was issued under the government's policy specifying a minimum 30 per cent indigenous content. However, this does not mean the balance 70 per cent will be imported, it has said. "In fact, our import content is far lower than the alleged 70 per cent," the company has stated in a communication to Business Standard.

Also, ECIL's policy has always been to synergise the in-house research and development with technology reputed R&D institutes and tie up with suitable original equipment manufacturers for technolgoy transfer and gradual indigenisation under a phased manufacturing programme.

ECIL's comments on these issues had been sought by Business Standard before the report's publication on February 13. The company responded to them only on March 20. Business Standard learns that the two private companies, which ECIL says have submitted bids,        have done so for only a part of the contract. ECIL’s technology partner, Fuchs', relationship with blacklisted company, Denel, highlights the business environment in which ECIL operates. The ECIL clarification on indigenization is silent on how long it takes to absorb technology, and also on what specific technologies that the PSU has indigenised.