Dissuasive Features of Indian Defence Procurement Regime

Major General Mrinal Suman (IDR March 2009)

Withdrawal of US helicopter manufacturer Bell from participating in India’s tender for 197 light utility helicopters (LUHs), citing difficulties in complying with the offset clause, has come as a surprise to the Government. The tender had been re-floated on the express request of Bell who had raised questions regarding the fairness of the evaluation procedure followed earlier. As regards the Indian offset policy, Bell has always been fully aware of it. Even the earlier aborted tender for LUH had the same mandatory provisions and Bell has been contemplating setting up a maintenance, repair and overhaul facility in India with an investment of up to 100 million dollars. Additionally, Bell is not new to fulfillment of offset requirements. According to the reports appearing in the press, Bell has entered into 17 offset programmes in 10 countries during the past two decades with the total value of offsets provided being more than one billion dollars. Apparently, the real reasons for Bell’s withdrawal lie elsewhere.

Earlier, both Boeing and Bell had withdrawn from bidding for Air Force’s tender for 22 combat helicopters, reportedly due to problems with India’s defence procurement procedure, thereby dealing a severe blow to India’s quest for procuring the best machines in global competition. Only AgustaWestland's AW129, Eurocopter's Tiger, Kamov's Ka-50 and Mil's Mi-28 are left in the fray. The Government is in a quandary. It would like to break the impasse and get Boeing and Bell back on board as they have incorporated some unique cutting-edge technologies in their machines.

It has been the endeavour of Indian Ministry of Defence (MoD) to generate maximum competition and promote transparency in defence procurements. A number of noteworthy policy initiatives have also been included in Defence Procurement Procedure - 2008 (DPP-2008). Therefore, withdrawal of major helicopter manufacturers has been causing consternation to the Government. What has forced them to decline to do business with MoD? Are their any irritants and dissuasive features of Indian defence procurement regime which need attention?

Detailed interaction with foreign vendors reveals that they are appreciative of Government’s resolve to have a transparent and impartial procurement process but are wary of procedural impediments, complex decision making process, bureaucratic mindset, condescending attitude and frequent questioning of vendors’ credibility. Some of the specific issues raised by them are discussed below.

Poorly Formulated Services Qualitative Requirements (SQR)

SQR are evolved by Service Headquarters (SHQ) to define minimum performance attributes, corresponding to the task/tasks to be performed by the system. Thus, they have to be need-based, spelling out users’ requirements in terms of functional characteristics in a comprehensive, structured and concrete manner. Through SQR vendors are told upfront as to what is being sought. They are also provided a well set bench-mark for subsequent inter-se appraisal of equipment on offer.

The current dispensation suffers from major inadequacies. All SQR are classified ‘essential’ and carry equal importance. Non-compliance of any SQR renders equipment unfit for procurement as no deviations are allowed. In an earlier case of procurement of helicopters, SHQ had laid down over 200 essential SQR and every vendor had to be fully compliant with all, their inter-se criticality not withstanding. An excellent system surpassing all vital performance parameters can get eliminated because of its non-compliance with some inconsequential SQR. This is a most bizarre way of carrying out procurement.

Additionally, there is a tendency to spell out SQR in imprecise, immeasurable and indeterminate language leading to multiple interpretations and subsequent acrimony. In many cases, poorly evolved SQR have resulted in non-fructification of major acquisition proposals. Once major flaws and infirmities come to notice, tender documents have to be retracted and the complete process reinitiated with reformulated SQR. Although India does suffer cost over-runs and delays, foreign vendors find the whole exercise to be wasteful in time and resources. They get disheartened and wonder whether their further participation would be worth the effort and expense.

Limited Time for Submission of Proposals

India had issued RFP for combat helicopters in May 2008. Proposals were to be submitted within a period of three months by 23 August. Boeing sought extension of two months to prepare and submit fully SQR compliant proposals. The Acquisition Wing, however, granted an extension of four weeks only - that is the maximum extension it can allow under its powers as per DPP-2008. Expressing its inability to submit its proposals in the given time frame, Boeing withdrew from the said deal.

Whereas the Government’s own way of working is highly laid back and bureaucratic with total lack of any urgency, it always gives inadequate time to vendors to submit their technical and commercial proposals. It can waste years vacillating, but once a procurement proposal is cleared it wants equipment straight away. Preparation of proposals is a highly deliberate, laborious and time consuming task especially for complex systems. Some of the major issues involved are as follows:-

· Most major arms producers are systems integrators. They procure systems and sub-systems from sources across the globe. Therefore, to prepare credible proposals, they have to obtain details of performance characteristics, costs, delivery schedules and export restrictions, if any. These have to be matched with SQR to ensure full compliance. Considerable communication flows between different entities before a cogent proposal emerges.
· RFP containing transfer of technology provisions for subsequent manufacture of equipment in India require detailed interaction with Indian technology recipient. Scope and extent of technology to be transferred have to be determined and costing finalised.
· In all major procurement cases, the Government is insisting that technology for maintenance be transferred to one of the companies specified in RFP. It implies that every foreign vendor has to interact with each entity mentioned in RFP to select the most suitable one and sign an agreement with it, including pricing norms.
· In cases entailing offset obligations, vendors are given a minimum period of three months to submit their offset proposals. However, as offsets imply a cost penalty, vendors have to do detailed preparatory work to factor it in their commercial quote which remains firm and fixed. This can be done only after selecting methodology of offset fulfillment and Indian partners.

As seen above, adequate time must be given to vendors at the very outset to enable them to do their home work deliberately and submit meticulously prepared proposals. Most foreign vendors get surprised at Government’s insistence on tight time frame and find it highly irksome to seek frequent extension of time for submission.

Unscientific Methodology of Evaluation of Equipment

Under the current policy all equipment that meet laid down SQR have to be considered at par and the lowest bidder is to be awarded the contract. With a view to preventing emergence of single-vendor situation at a later stage, there is a tendency amongst the services to pitch SQR at base levels. Thus, the twin conditions of low levels of SQR and according parity to all compliant vendors, act against the vendors whose equipment possess much higher performance parameters. It is indeed a strange way of buying defence equipment where the primary thrust is on competition. Nature of technology on offer and equipment’s superior potential mean little. For example, if a helicopter manufacturer has developed a high performance machine with latest avionics and night vision capabilities, its cost has to be more. But in India’s scheme of things, he would have to compete with much lesser machines and yet quote lowest price to bag the contract. Vendors find it strange that Indian Government takes no cognizance of cutting-edge technology and accords no weightage to it. It is one of the most unfair and dissuasive provisions. It deters leading manufacturers from participating in bids.

Ad-hoc Determination of Fair Price and Prolonged Negotiations

Determination of fair price has to be carried out prior to the opening of commercial bids of technically successful vendors. It is a complex and painstaking task, especially with rapidly developing new technologies. Due to secrecy shrouding all arms deals, prevalent market prices are not available as guidelines. Determination of precise fair price cannot be done by applying a factor of inflation to earlier procurements of similar equipment. As there is no set methodology, every country has to develop its own skills based on data base compiled.

Unfortunately, India has no exhaustive data base of past contracts. For that matter, as pointed out by Comptroller and Auditor General during his audit, the three services do not share details of their procurements with each other. Such a state of affairs results in ludicrous situations where they buy the same equipment from the same vendor at different rates, totally oblivious of each other. Apparently methodologies adopted by the three services to fix fair price vary. Most foreign vendors find the Indian way of determining fair price ad-hoc, naïve and unscientific as it ignores real value of new technology and market dynamics.

Although DPP-2008 mandates that in multi-vendor cases no price negotiations should be carried out with the lowest bidder if his bid falls within the fair price determined earlier, this provision is rarely adhered to. Almost all Commercial Negotiation Committees (CNC) insist on further price reductions. After having emerged as the winning vendor after a long and complex evaluation procedure, they consider it to be an arm-twisting ploy. Prolonged discussions result in undue delays, upsetting planned production schedules. Foreign vendors find this practice to be highly unfair and exasperating.

Dissatisfaction with Indian Offset Policy

As per the Indian offset policy, all defence contracts where the estimated cost of the proposal is Rs 300 crore or more will attract a minimum offset obligation of 30 percent of the estimated cost. Higher percentage may be prescribed by Defence Acquisition Council. In recent high value cases, offset percentage has generally been fixed at 50 percent. Offset obligations can be fulfilled through one or combination of the following routes:-

(a) Direct purchase of defence products and components manufactured by, or services provided by Indian defence industries.
(b) Direct foreign investment in Indian defence industries for industrial infrastructure for services, co-development, joint ventures and co-production of defence products and components.
(c) Direct foreign investment in Indian organisations engaged in research in defence
R & D as certified by Defence Offset Facilitation Agency.

MoD feels that the Indian offset policy is very liberal and vendor friendly – vendors can choose methodology and Indian partners as per their preference. However, foreign vendors find compliance of offset clauses to be a daunting task and are wary of defaulting. Bell Helicopters cited this as the main reason for withdrawing from the deal for LUH.

As seen above, India does not accept either indirect offsets or transfer of technology against offsets. Additionally, FDI cap at 26 percent makes the policy highly unattractive. Thus, it implies that offset fulfillment will be totally dependant on export of defence goods and services. Presently, Indian defence exports amount to a meager 50 million dollars annually. Therefore, foreign vendors are unconvinced that Indian defence can absorb offsets worth billions of dollars - export potential cannot be increased multi-fold in a short span of time.

Since 2006, foreign vendors had been demanding permission to generate potential offset credits through programmes undertaken prior to the award of main contract, for banking them for discharge against subsequent offset obligations. The Government acceded to their request and allowed offset banking in DPP-2008, albeit with many restrictive provisions. First, banked credits are non-transferable except between the main contractor and his sub-contractors within the same acquisition programme. Secondly, if not utilised within a period of two years, banked credits would automatically lapse. The new policy has fallen far short of expectations and disappointed most.

Attitudinal Problems

Indian officialdom is known for its haughty and pretentious attitude. Though called public servants, most officials consider themselves to be rulers and behave accordingly. Additionally, as awarders of high value contracts, they assume the role of dispensers of favours. They look at businessmen as seekers of wealth and tend to look down upon them. Indian business community has got used to such an equation and is reconciled to playing subservient role.

In developed countries, entrepreneurs are considered as partners in national progress and drivers for technological advancements. They are respected for their skills and excellence. Therefore, foreign vendors find overbearing behaviour of Indian officials to be highly gratuitous, insulting and exasperating. Communications remain unacknowledged and unanswered. Appointment for personal meeting are granted as a great favour after repeated requests.

“With our experience in the field and technological prowess, we can assist India in configuring defence systems for Indian requirements optimally. For that, we must be taken on board and treated as reliable and long term partners. Unfortunately, most officials are overly uncommunicative and reluctant to share even innocuous details with us. Despite repeated assertions to the contrary, Indian officials prefer to function at buyer and seller equation only. Every suggestion is suspected of ulterior motive and dismissed,” was the frank opinion of a major vendor in a seminar in London recently. Most other participants agreed. Condescending, pompous and supercilious attitude of Indian officials appeared to be a highly dissuasive factor.

The Way Forward

Undoubtedly, India has come a long way from the days of the ad hoc procurement procedure of pre-Kargil War period. A number of creditable policy initiatives have been instituted to streamline the procedure. However, reforms are a continuous process.

India must spell out SQR in the form of performance range and adopt matrix system of technical testing wherein equipment with better performance parameters (albeit within the specified range) gets credit in inter se evaluation. In such a methodology, minimum parameters in all characteristics are laid down. Through a well defined system of assigning relative weightage, performance excellence is duly rewarded. It will also help India in getting latest equipment with best value for money.

Time for submission of proposals should be liberal enough to cater for all activities. Recommendations can be sought from major vendors as regards time they would need to prepare their proposals. There is no sense in keeping it tight initially and granting piecemeal extensions later on.

As regards the procurement procedure, India has to expedite decision making. Most foreign vendors get put off by Government’s prolonged vacillation over every issue. Notes are prepared and files moved while vendors await decisions. Vendors are called for repeated presentations and clarification by different agencies involved in the procedure. At times, one agency sends a letter of rejection while the other seeks clarifications regarding equipment performance. Vendors do not know whom to approach for directions.

As mandated in DPP-2008, price negotiations should be banned in cases where the lowest bid falls within the previously calculated fair price. This single step will improve credibility of the system and reduce delays in finalizing contracts. Offset provisions have to be liberalised by way of allowing indirect offsets and transfer of technology. Similarly, trade in banked offset credits must be allowed to let vendors recover their cost of generating excess banked offsets by selling to needy vendors. Additionally, the period of validity of banked credits should be increased to 5 years.

In any trade transaction, both the buyer and the seller must feel comfortable. Their equation must be based on understanding and long-term affiliation. Both should be considered equal partners. Just because businessmen seek returns for their investments does not make them unscrupulous schemers who should be shunned. They must be treated with respect and made partners in long term mutually beneficial relationship. In case India wants to buy the best defence equipment available in the world market in maximum competition, procurement functionaries have to change their bureaucratic mindset and make the defence procurement regime vendor-friendly by removing all irritants.

Appendix A: Frequent Changes of Priorities

Capital procurement process consists of two different activities – planning and acquisition. Planning entails acceptance of necessity (including scaling and quantity vetting) and provision of budgetary support.

Planning commences with the formulation of 15 years Long Term Integrated Perspective Plan (LTIPP) by Headquarters Integrated Defence Staff (HQ IDS) in consultation with the Service Headquarters (SHQ). LTIPP is based on the Defence Planning Guidelines. Thereafter, HQ IDS prepares Five Year Defence Plans to include Services Capital Acquisition Plan (SCAP). SCAP lists out equipment to be acquired by the three services, keeping in view operational exigencies and the likely availability of funds. LTIPP and SCAP are approved by the Defence Acquisition Council (DAC). Annual Acquisition Plan (AAP) is a subset of SCAP and includes approved schemes.

Each SHQ prepares its own draft AAP as a two-year roll on plan, consisting of two parts. Part A comprises of carry over schemes from AAP of previous year and schemes approved during the year. Part B includes new proposals planned to be initiated in the forthcoming year. The Defence Procurement Board (DPB) approves AAP. Part A thus, becomes the working document. Schemes from Part B can be upgraded to Part A only after they are approved by the competent authority. Proposals not listed in SCAP can only be processed after due approval of DAC. Requirement of funds is prepared based on committed liabilities on account of ongoing schemes and proposed new schemes.

As the allotment of funds never matches the requirements projected, schemes included in AAP have to be prioritised. It has normally been seen that funds allotted are insufficient even to finance all schemes graded priority one. Thus, schemes on lower priority remain of academic value only but sponsoring directorates remain hopeful that their schemes may fructify in case any scheme on higher priority gets aborted and funds become surplus. In order to be ready to exploit such an eventuality, they go through the complete gamut of activities like calling prospective vendors to obtain information about latest equipment, indicative cost and allied issues. Foreign vendors, ignorant of the low priority allotted to a scheme, get deeply involved and invest considerable time, effort and resources to remain engaged. When the scheme fails to get progressed, they feel frustrated.

Additionally, DPB may carry out amendments to AAP on account of national security objectives, operational urgencies, budgetary provisions or any other exigency. There have been cases where procurement proposals have been aborted at commercial negotiations stage (after detailed technical evaluation) due to need for diversion of funds for schemes with revised higher priority. Understandably, foreign vendors find the whole exercise wasteful and resent it.

Appendix B: Retraction of Request for Proposals

Interestingly, the Government issues all Requests for Proposals (RFP) with the clause – “This RFP is being issued with no financial commitment and the Ministry of Defence reserves the right to withdraw the RFP and change or vary any part thereof at any stage.” In other words, the Government wants to keep the option of retracting RFP should developments so demand. Non-availability of adequate funds can understandingly be one of the reasons.

Additionally, Defence Procurement Procedure – 2008 (DPP-2008) cites the following conditions under which RFP should be retracted:-
· In case during the paper evaluation of technical proposals, Technical Evaluation Committee (TEC) finds a single vendor to be fully compliant with Services Qualitative Requirements (SQR), RFP should be retracted on approval of Director General (Acquisition). Further, a review of the acquisition scheme is required to be carried out by TEC to identify causes for the same to enable reissue of fresh RFP after reformulating SQR.
· If no vendor is found to be fully SQR-compliant during field evaluation, the case has to be foreclosed. No deviation to SQR is permitted, howsoever insignificant it may be. The whole case has to be progressed afresh with revised SQR.

Technical Oversight Committee (TOC) is required to check that selection of vendors, trial methodology adopted and trial evaluations for compliance to SQR are as per the laid down procedure. An adverse ruling by the committee would mean ‘no go’ and the Defence Secretary would have no other option than to abort the case by retracting RFP.

The affected foreign vendors find the above provisions highly dissuasive. For example, if a vendor emerges as the only SQR-compliant bidder by TEC, it is unfair to fault him for that. Why should he be penalized for other’s inability to submit technically compliant proposals? Similarly, minor deviations noticed during field trials should not result in the termination of a case, thereby wasting considerable resources of the Government and vendors. Finally, functionaries should be held accountable for any infirmity noticed by TOC in the procedure followed. Cancellation of a deal at that stage punishes the successful vendor rather than the defaulting functionaries. With so many riders and uncertainties, foreign vendors wonder if participating in Indian defence tenders makes good business sense and worth the risk.