Procurement Dilemma – Competition versus Technology

Major General Mrinal Suman, AVSM, VSM, PhD

Procurement of defence equipment in open, free and impartial competition is one of the stated aims of the defence procurement procedure (DPP). To achieve that, a well defined process has been prescribed in DPP. To start with, all eligible vendors are invited to submit their technical and commercial proposals in separate sealed envelopes to the Acquisition Wing. Vendors whose technical offers are found to fully comply with the specified Services Qualitative Requirements (SQR) are asked to field their equipment for field trials to validate performance claims. Finally, commercial offers of technically acceptable vendors are opened and compared to identify the lowest compliant bidder for the award of the contract.

It is a rational method and should have succeeded in expeditious procurement of all requirements of the services. Unfortunately, the experience of the last eight years has been highly disappointing. India has been unable to conclude a single major contract in a competitive environment as mandated in DPP. Take the case of artillery guns. It has been dragging on for close to a decade now without any result. As a desperate measure, India has been forced to approach the US for emergent supply of 145 M777 155mm Light-Weight Towed Howitzers under the US Foreign Military Sales programme. It will again be a single vendor deal.

Most knowledgeable observers were not surprised at the above development. In his report covering the period January 2003 and March 2005, the Comptroller and Auditor General had pointed out that 66 percent of all procurements had been carried out on single vendor basis during the period under review. Although a number of reasons are commonly cited for India’s inability to procure equipment in multi-vendor competition, the root-cause has unfortunately remained overlooked. It lies in the provisions of DPP that impose restrictions on the nature and level of technology the services can demand.

No Cutting-edge Technology for the Services

Despite MoD’s claims that it aims to ‘equip Indian armed forces with equipment, weapons systems and platforms that provide an edge to them over our potential adversaries’, provisions of DPP effectively rule out procurement of technologically advanced defence systems.

Equipment is always sought by the services for the performance of designated operational functions. For that, the equipment must possess required performance attributes. These attributes define essential functional characteristics which are spelt out as SQR. They express the user’s requirements in terms of capability desired with minimum required verifiable functional characteristics in a comprehensive, structured and concrete manner.

Formulation of SQR is really the start point of every procurement proposal. Usually, it takes 4 to 5 years for a major contract to be concluded, another 2 to 3 years for the equipment to start getting inducted and a further 3 to 5 years for all the supplies to arrive. This implies that the normal time lag between the formulation of SQR and commencement of supplies may stretch between 6 to 8 years while it may take 9 to 13 years for induction of the contracted quantity.

In order to generate multiple responses, DPP mandates that SQR should be of ‘contemporary technology widely available in the world/indigenous market’. It stands to reason that any technology that is ‘contemporary and widely available’ at the time of making SQR will invariably be approaching obsolescence by the time its induction commences and would certainly be close to becoming obsolete when the final deliveries are received. Thus, DPP’s stipulation of ‘contemporary and widely available technology’ effectively rules out modern equipment for the Indian armed forces.

Further, all vendors whose equipment are found to be fully SQR-compliant are considered fit for award of contract. Better performance gets no extra consideration. In other words, no merit list is prepared to prioritise equipment as per their demonstrated performance. All of them are considered at par and the cheapest one is procured. As better performing equipment would invariably be based on more sophisticated technology and will always be more expensive than mediocre technology, the services get deprived of the latest equipment.

The services have realised that they would never be able to get high-tech equipment under the provisions of DPP and would have to remain reconciled to receiving cheapest ‘common place technology’. Therefore, whenever they want the most modern equipment, they approach MoD to invoke single vendor provisions. Phalcon AWACS, Smert rocket system, Sukhoi aircraft, Javelin missiles, Hercules aircraft, radars and electronic hardware are some of the recent examples of one-to-one deals outside the purview of DPP.

The Way Forward

In special circumstances, it may be in India’s interests to negotiate deals on one to one basis without open tendering. State-of-the-art defence equipment and platforms that are not available openly in the world arms market can only be got from a willing friendly nation. However, single vendor procurements suffer from major limitations and should be resorted to in exceptional cases. In the absence of comparative quotes, single vendor dictates costs, exploits buyer’s dependence and provides indifferent after sales support. Even the environment views single vendor procurements with suspicion and skepticism.

Importance of technology in warfare is well recognised. As service life of major weapon platforms extends up to 30 years, it is essential that equipment procured for induction is of latest genre of technology so that it does not become obsolete prematurely. India must make its procurement procedure more responsive to the needs of the services as regards need for cutting-edge technology.

For that, instead of SQR, a performance range with minimum inescapable and maximum acceptable limits should be prepared. Thereafter, various performance parameters should be assigned differential weightage as per their criticality. After technical evaluation, a matrix should be prepared to identify top performers within the permissible range, thereby giving due credit to better technology. Commercial proposals of three best performing equipment should be opened and their inter-se commercial appraisal carried out to determine the most cost-effective option.

Need for generating competition cannot be disputed but it must not be at the cost of saddling the services with run of the mill equipment. Therefore, India should adopt the above mentioned system of preparing performance matrix in a scientific and transparent manner. It will facilitate procurement of technically superior equipment in a competitive environment ensuring best value for money.

India Needs a National Offset Policy

Major General Mrinal Suman, AVSM, VSM, PhD

Offset policy of every country is always in consonance with its national economic objectives – offsets are sought either to fulfil an emergent economic need or to fill a critical technology gap, or both. Therefore, all governments carry out an exhaustive exercise to decide areas in which they should obtain offsets for optimum gains. As every country faces different challenges, objectives are always country specific to satisfy its own needs.

A large number of countries like Austria, Belgium, Czech Republic, Finland, Greece, Holland, Poland and Spain seek upgradation of their technological and industrial base. They have prepared their offset policies accordingly. Bulgaria demands dual-use technologies and products. Finland wants development of its SMEs. Generation of additional employment opportunities is the objective of many developed countries like Austria, Czech Republic, Holland and Poland.

On the other hand, countries like Britain, Holland, Hungary Italy, Poland, Portugal and Spain seek to use the leverage of offsets to enhance competitiveness of their indigenous defence industry by improving key skills and export potential. Austria, Bulgaria, Hungary, Portugal and Britain also seek new markets for their defence products and want to become a part of the supply chain.

Need for a National Offset Policy

As offsets carry considerable cost penalty, every country strives to draw maximum benefits from them. For this, a detailed national offset policy is prepared as a part of the overall economic-cum-industrial endeavour with explicit objectives spelt out in definite terms. As it is not the quantum and type of offset but its relevance that matters, buyer nations take great pains in identifying areas in which offsets can prove most advantageous. It is a very crucial decision. The success of any offset programme primarily depends on proper selection, detailed planning, close supervision and regular monitoring. Therefore, an offset policy can be effective only if it is exhaustive and encompasses the complete gamut of offset activities.

Unfortunately, India has no national offset policy. Procedure for defence offsets is a standalone initiative of the Ministry of Defence (MoD). This is its biggest weakness as well. It is time the Ministry of Commerce issues a national policy to cover all facets of offsets. Policy on defence offsets must flow from the national policy. For example, it can be laid down that offsets in respect of contracts with indicative value of more than 1000 crore rupees be handled at the national level while contracts of lesser value be managed by MoD.

The policy should have well-evolved, clearly spelt out aims and objectives. It should be pragmatic with long term applicability but with sufficient inbuilt flexibility to cater for changing situations. The policy should contain directions for apportioning weightage to direct and indirect offsets along with norms for fixing offset threshold and offset percentages. As poorly chosen programmes invariably prove highly wasteful, detailed guidelines for their proper selection must be laid down. It should also lay down guidelines for approving, validating, discharging and measuring offset contracts. A broad structure for monitoring and evaluating offset programmes should also be specified. Instructions regarding offset banking and trade in offset credits should be unambiguous.

National Offset Authority

The policy should also cater for the creation of a National Offset Authority (NOA) as an overarching body at the national level. It should be chaired by a Minister of State under the aegis of the Ministry of Commerce. It should be a multi-disciplinary and well represented body with members drawn from different ministries dealing with large scale imports. Director General Foreign Trade, Director General Technical Development and representatives of Indian industry (both public and private sectors) should also be closely associated. Experts from various fields can be co-opted on requirement basis.

The primary task of NOA should be to oversee smooth implementation of the national offset policy, issue clarifications in case of doubt and grant ‘in principle approval’ to offset packages for all import deals over 1000 crore rupees. It should meet at regular periodicity to prioritise areas and fields in which offsets should be sought and apply multipliers accordingly. While discussing specific import proposals, it could debate and fix offset threshold and offset percentage on case to case basis. NOA should also develop a reliable system of receiving regular feedback for evaluation and course-corrections. A credible data bank will prove immensely helpful to NOA in carrying out appraisal of strengths and weaknesses of the regime and recommend changes in the policy.

Defence Offset Facilitation Agency

As stated earlier, the defence offset policy should flow from the national offset policy and be in consonance with the directions issued by NOA from time to time. It should be duly approved by the Defence Acquisition Council. Defence Offset Facilitation Agency (DOFA) should continue to function under the Department of Defence Production at MoD. However, its charter of duties needs to be enlarged. It should become the nodal implementing agency and provide a single window interface for all defence offsets related issues. For this, it needs to be strengthened and be delegated additional powers.

DOFA must be headed by an Additional Secretary level officer with no other encumbrances. It should be adequately staffed to undertake allotted functions. Expert advice from non-governmental sources should be made available to it when discussing specific programmes.

In addition to the existing duties, DOFA should identify areas for defence offsets; evolve and issue guidelines for fixing offset thresholds and offset percentages; and prioritise various offset programmes by assigning differential weightage to them through multiplier values. In cases where technology is sought, DOFA should consider the level of technology to identify the most suitable recipient – whether a public or private sector entity.

DOFA should also develop necessary skills to negotiate offset contracts and sign them. An effective mechanism for appraisal, oversight and monitoring should be evolved. Need for an exhaustive data bank cannot be over-emphasised.

Conclusion

More than 130 countries are demanding offsets in one form or the other. They all have well-considered offset policies and empowered central bodies to oversee offsets in their entirety. India stands out as an odd exception. It neither has a national policy nor a central body to handle offsets. Management of offsets worth billions of dollars has been left to MoD which is ill-equipped for the task.

As regards India’s defence offset policy, it has been framed in a highly amateurish and slapdash manner. Normally, every policy document starts with duly specified objectives at the outset. The whole policy, thereafter, lays down detailed methodology to achieve them with a broad roadmap for guidance and periodic stock-taking. Unfortunately, India’s defence offset policy is bereft of any objectives and is truly a directionless document, wherein foreign vendors have complete freedom to choose programmes and partners. Indian government has abdicated all decision making powers in their favour – they choose programmes that are easy to implement and cost the least. Worse, India does not accept transfer of technology against offsets, thereby wasting a potent tool for illusory and transitory countertrade gains.

Purchase of Howitzers: Grant of Deviations to Qualitative Requirements

Major General Mrinal Suman, AVSM, VSM, PhD

Recent media reports of the army seeking deviations to the Services Qualitative Requirements (SQR) in respect of BAE M777 155mm Light-Weight Towed Howitzers have raised many questions as regards the advisability of the proposal. Indian army has been enduring critical deficiencies in its field artillery inventory. Since the procurement of 410 Bofors Howitzers in 1986-87, no new asset has been inducted. As per reports appearing in the press, India possesses barely 200 pieces of 25-year old Bofors in serviceable condition at present. This shortage has been a matter of serious concern

A number of attempts have been made to procure artillery guns in an open multi-vendor competition over the last one decade. Unfortunately, due to the inability of the defence procurement regime to deliver, all efforts have proved futile. In the meanwhile, the current holding of serviceable medium guns has slipped to an alarmingly low level. As an interim measure, India has decided to procure 145 M777 howitzers from the US to meet its emergent requirements for mountainous terrain. The package, costing close to 647 million dollars, includes Laser Inertial Artillery Pointing Systems, associated parts/equipment, training and logistical support.

It is certainly a desperate move as the howitzer had failed to comply with SQR during the field trials. Procurement is being carried out on single-vendor non-competitive basis from the US under the Foreign Military Sales (FMS) route. The move militates against the underlying spirit of the much touted Defence Procurement Procedure (DPP) which mandates that all defence purchases be made through competitive bidding on the basis of diligently-evolved SQR.

The Mismatch

Indian armed forces seek equipment for the performance of precise and well-identified operational functions. SQR specify minimum essential military requirements, corresponding to the task or tasks to be performed by the system. Therefore, SQR form the basis of all military procurements and are required to lay down user’s requirements in a comprehensive, structured and concrete manner. In addition, SQR must express the said requirement in terms of capability desired with minimum required verifiable functional characteristics. In other words, parameters mentioned in SQR are considered inescapable for the equipment to perform its envisaged operational role. By implication it means that any dilution of SQR would amount to compromising operational exploitation of equipment and adversely affect its potential to provide required service fully. Therefore, DPP lays considerable stress on the sanctity of SQR and categorically rules out grant of any waivers after the issuance of Request for Proposals.

On the other hand, FMS contracts are government-to-government deals under which the US government offers for sale those items which have already been inducted into its own armed forces. Defence Security Cooperation Agency of the Pentagon either procures them afresh from the manufacturers or supplies them from its existing reserve stocks. The process starts with a Letter of Request from the aspiring buyer to the US government. In case the US government is amenable to the sale, it sends a Letter of Offer, containing detailed terms and conditions. The buying government has to indicate its unconditional and total acceptance of all conditions of sale through a Letter of Acceptance (LAC) along with initial advance. It needs to be reiterated here that the US government accepts no change in the draft contract and it is a ‘take it or leave it’ option for the buyer nation.

Needless to say, equipment inducted in the US forces would have been developed as per the parameters laid down by them to meet performance requirements stipulated by them. Formulation of operational parameters is always country-specific and is a function of the following factors:-

· Own design of battle and operational doctrine.

· Capabilities and tactics of likely adversaries in short, medium and long terms.

· Terrain and climate.

· Compatibility with existing defence equipment and systems.

· Technological advancements.

· Cost-affordability analysis.

Being the sole super power, the US forces require military systems that are considerably different than those required by the Indian armed forces. Further, there is a huge technology gap. Whereas the US is a technology powerhouse, Indian forces are still struggling to graduate from second to third generation technology. Thus there is a significant mismatch.

Failure to Comply with Key Parameters

As seen above, SQR contains a set of essential parameters. Although no inter-se priority is accorded to them, some parameters are always of key importance. As per press reports, during the field trials held in actual terrain conditions to validate performance claims, M777 howitzer failed to meet Indian SQR with respect to the following aspects:-

· Direct firing trials both during day and night.

· Compatibility with the firing tables drawn by the Indian army.

· Air transportation, para-dropping and helicopter underslung mode.

· Night vision sighting system.

· Inbuilt communication system.

· Barrel life, minimum range and anti-skid mechanism.

It must be stated at the outset that M777 is a proven field artillery system and its failure to meet Indian SQR is in no way a reflection of its worth and utility. It is just that it has been developed on the basis of a different set of SQR. Under FMS route, India has to accept the equipment as it exists and its own parameters become inconsequential. Hence, before initiating requests under this route, India must be fully convinced of the usefulness of the equipment being sought.

M777 howitzers are made of titanium and are ultra light in weight and cost considerably more. Non-compliance with key Indian SQR raises serious doubts about its utility in Indian environment. As India is procuring the howitzers for employment in mountainous terrain, air transportability (for speedy deployment and switching of locations) and direct firing capability become obligatory criteria. The Kargil War has proved that field artillery can become a battle winning factor in direct firing role in mountainous terrain. Unfortunately, M777 has failed to satisfy Indian standards in both the capabilities. Indian decision makers have to consider this critical shortcoming before finalising the deal. Can M777 perform the desired operational tasks? If the answer is in the negative, should India make a compromise and accept equipment that delivers sub-optimal performance?

Flouting DPP Provisions

It is being claimed that Section 71 of DPP allows procurements from friendly foreign countries, based on mutually agreed provisions between the governments of both the countries. Government-to-government deals are certainly permitted but with the rider that such deals should be ‘necessitated due to geo-strategic advantages that are likely to accrue to our country’. It is agreed that FMS procedure does fall under ‘mutually agreed government-to-government’ category but no geo-strategic advantages can be cited to be accruing from the deal. Failure to procure equipment in an open competitive multi-vendor environment cannot be enough justification for invoking provisions of Section 71.

Press reports also indicate that the sanction of the Defence Minister is being sought under Section 75 to deviate from the prescribed procedure. Section 75 is an overarching provision that should be used in the rarest of the rare cases as it implies failure of DPP. Strangely, India is reported to be resorting to post validation of operational requirements. It is an ill-advised move. Many non-US arms manufacturers are already alleging that most US contractors are hard selling their equipment through FMS route, thereby eliminating all competition and piggyback riding on the US government facilitation.

According to reports emanating from the US, no offsets are being sought in the deal. India has apparently decided to forego offset benefits worth 200 million dollars (30 percent of 647 million dollars package). This may be due to the fact that the requirement is emergent and India does not want slippages on account of offsets.

Conclusion

Undoubtedly, FMS route offers unique benefits. In addition to fixed prices and sovereign guarantees, the buyer nation is saved considerable effort as the procurement is carried out by the US government. Further, the US Government shares its experience with respect to logistics, training and exploitation. As regards India, the greatest plus point is that there can be no middlemen in FMS deals. On the minus side, buyer has to accept the equipment as it comes and as per the US draft contract. FMS route is also more expensive as US Government charges the purchaser for sales negotiations, case implementation, contract negotiation, contract management, financial management and allied expenses.

Dilution of SQR is a major compromise and should be made only as a last resort and that too, after considering effects of equipment’s inability to perform key operational functions. In the case of M777 howitzers, India must weigh all factors thoroughly before arriving at a decision. In case procurement through FMS is considered inescapable, it would be better to reformulate SQR accordingly and then proceed ahead. Post validation of SQR will set a wrong precedent and is fraught with dangers of getting the whole process mired in unsavory controversy.