Time to Perfect the Defence Procurement Regime

Major General Mrinal Suman, AVSM, VSM, PhD

After the breakup of the erstwhile Soviet Union, a need was felt to have detailed policy guidelines for carrying out defence procurements in a multi-vendor environment. As a result, Defence Procurement Procedure – 1992 (DPP-1992) was formulated in February 1992. However, it was found to be wanting in many key aspects. Commercial bids were sought after technical trials thereby allowing successful vendors to quote unreasonably high price. Further, the procedure neither catered for long duration projects like ship-building nor for emergent requirements. Transfer of technology was also a major grey area. Worse, no dedicated organisation was set up to handle procurements as officers were asked hold multiple responsibilities, thereby dividing their attention and efforts.

Consequent to the recommendations of the Group of Ministers on National Security, constituted in the wake of the Kargil War, a new defence procurement procedure for ‘Buy’ cases, commonly referred to as DPP-2002, was promulgated in December 2002. Soon its scope was enlarged in June 2003 to include ‘Buy and Make through Imported Transfer of Technology’ cases as well. A major review of the procedure was carried out in 2005. It resulted in the inclusion of procedure for indigenous warship building, standard contract document and offset policy.

With a view to incorporate recommendations of the Kelkar Committee, the procedure was revised once again in 2006. Main thrust of DPP-2006 was to give a boost to indigenous development of defence equipment, normally referred to as ‘Make’ cases. Signing of an Integrity Pact was made mandatory for all procurements over Rs 100 crores. Most importantly, a Fast Track Procedure for emergent procurements was included. The next revision took place two years later and DPP-2008 introduced measures to increase transparency in technical evaluation wherein it was made mandatory to indicate the complete trial methodology upfront in Request for Proposals (RFP) itself. In November 2009, MoD decided to share the future needs of the armed forces with the industry through a public version of the perspective document.

DPP-2011 is the latest version of the procedure. It came into effect on 01 January 2011 and contains two major changes. One, shipbuilding process has been split into two sub-categories – nomination and competition. Two, the scope of offset activities has been enlarged to include civil aerospace sector, internal security sector and training within the ambit of eligible products and services for the discharge of offset obligations.

Nearly 10 years have passed since the promulgation of the current genre of DPP in 2002. Even with considerable experience and five major reviews, DPP continues to flounder in bureaucratic labyrinth. It has neither been able to expedite the procurement process nor acquire much-needed credibility. Time and cost overruns have become the hall marks of India’s procurement regime.

Ten years is a long gestation and learning period. The country cannot wait indefinitely for MoD to streamline the system to make DPP deliver. The armed forces are carrying deficiencies of critical equipment for unduly long periods, thereby raising serious doubts about their operational preparedness. It is time MoD understands that major reforms are needed to streamline the process – minor tinkering through periodic reviews will not help. Key issues that warrant urgent attention have been discussed hereunder.

Perspective Planning

According to the policy, all procurements should be carried out as per the approved plans. 15- Years Long Term Integrated Perspective Plan (LTIPP) is considered to be the mother plan and is based on Defence Planning Guidelines and 15-Years Defence Capability Plan. It is prepared by Headquarters Integrated Defence Staff (HQ IDS) in consultation with the Service Headquarters (SHQ) and approved by the Defence Acquisition Council. 5-Years Services Capital Acquisition Plan and Annual Acquisition Plans are drawn from LTIPP.

As seen above, timely finalisation and approval of LTIPP is critical for planned acquisitions as all other equipment procurement plans flow from it. Unfortunately, not adequate attention is paid to this aspect. Even Comptroller and Auditor General (CAG) was constrained to fault MoD for delayed approval of LTIPP. In the absence of duly approved plans, unplanned procurements are resorted to. Most infirmities that afflict the procurement regime can be attributed to such ad-hoc procurements. Therefore, it is of utmost importance that all perspective plans are evolved and approved in a time bound manner.

Centralised Notification of Impending Procurements

There are over 150 procurement agencies under MoD. In the absence of a system for centralised notification of all defence procurement tenders, prospective vendors have to learn about impending tender enquiries by maintaining direct contact with all procurement agencies, which is a tall order. Most tenders get limited publicity as they are published only in local papers. Many medium and small sector companies possessing required manufacturing competence do not get to know of the tenders prior to their issue. They lose by default as DPP does not allow addition of new vendors once a tender is issued.

As is done in most advanced countries, MoD should issue a monthly a Defence Procurement Communiqué in print and electronic forms. The objective should be to provide all required inputs to prospective sellers to help them take informed business decisions. In addition to information about latest procurement policies, developments in offsets and progress of various acquisition cases, the Communiqué should act as a single-point official source of all business opportunities for companies desirous of entering the defence sector. It should contain details of all impending tenders to provide advance information to enable prospective vendors to get their names included in the approved vendors’ list, if they so desire.

Adoption of Performance Matrix for Technical Evaluation

Presently, SHQ are tasked to formulate Qualitative Requirements (QRs) before floating RFP. QRs specify minimum performance attributes, corresponding to the task/tasks to be performed by the equipment under procurement. All QRs are essential and no deviations are allowed after the issuance of RFP. Such a provision has a major disadvantage – an excellent piece of equipment surpassing all vital performance parameters can get eliminated because of its non-compliance with some inconsequential QR.

Another strange provision is that all equipments that satisfy laid down QRs have to be considered at par and the vendor who quotes the least gets the contract. Needless to say, the cheapest equipment will never be of cutting-edge technology as high-tech equipment can never cost less than a mediocre one. Such an unfair provision not only dissuades vendors from fielding their latest equipment but forces the armed forces to accept run-of-the-mill equipment which just about meets the specified performance parameters.

It is time India discards the current archaic system of procuring equipment by laying down QRs. Instead, matrix system should be adopted for technical evaluation wherein equipment with better performance parameters (albeit within the specified range) gets credit in inter se evaluation. Such a system will allow MoD to select the equipment that it considers best-value-for-money.

Separation of Technical and Commercial Functions

Presently, the complete acquisition process is controlled by MoD officials. Neither HQ IDS nor the SHQ have been given any powers whatsoever. They have been reduced to doing secretarial work for MoD. Every issue has to be referred to MoD for decision. In other words, bureaucrats of MoD have made the whole system totally captive to their dictates, thereby delaying conclusion of procurement proposals.

Acquisition process consists of two distinct functions – technical evaluation and commercial evaluation. Technical evaluation is a purely user oriented activity and MoD has little to contribute as most functionaries in MoD do not possess even elementary knowledge of defence equipment or its exploitation in operations. Therefore, the complete gamut of activities relating to technical evaluation of competing systems should be assigned to the armed forces.

However, approval of acquisition plans, categorisation of proposals, budgetary allocations, commercial evaluation and signing of contracts should continue to be under the direct control of MoD, as at present. Defence Acquisition Council, Defence Procurement Board, Defence Production Board and Defence R&D Board should continue to function as at present. The recommended division of responsibility will not only expedite decision making but also impart much needed professionalism to the process. HQ IDS possesses sufficient spare capability to assume additional responsibility.

Promotion of Indigenous Production

Despite repeated assertions by the Government of its resolve to develop indigenous defence industry and reducing dependence on imports, India continues to import more than 70 percent of its military equipment. Worse, indigenous production is limited to the assembly of certain equipment under licence and manufacture of certain low-tech items (sub-assemblies and components). Inadequate attention has been paid to self-reliance in DPP. Like an afterthought, an innocuous sentence “the goal of achieving self-reliance in defence equipment will be kept in mind” has been added at the end of its statement of objectives.

MoD needs to take the following two steps if it is serious about promoting indigenous defence industry:-

a) a) Preferential treatment of the public sector must be stopped. A level playing field must be provided to the private sector. Despite frequent promises, private sector companies are yet to be given a fair chance to compete. Disturbingly, they appear to be losing patience and appear to be suffering from the fatigue factor due to unending wait. For example for warship building, no orders should be given to the public sector shipyards by nomination. Let the most efficient shipyard, public or private, bag orders. Similarly, private sector companies should also be eligible to receive technology for maintenance.

b) Categorisation of procurement proposals specifies the route chosen for their further progression. It is a critical process and needs to be rationalised. There are nine different categories specified in DPP. The number of categories should be reduced to three – ‘Buy and Make’, ‘Buy (Global)’ and ‘Buy (Indian)’. ‘Buy and Make’ should continue to imply purchase of part requirement from a foreign vendor and production of the balance quantity under licence in India. ‘Buy (Global)’ should cover all cases involving outright purchase of the complete requirement from foreign or Indian vendors. All other cases should be categorised as ‘Buy (Indian)’ with the stipulation that the indigenous content should be more than 50 percent. It should be left to Indian vendors to determine whether to develop the equipment by themselves or to join hands with foreign partners for technology infusion. MoD should be happy as long as the equipment performs as per the required parameters and is supplied in time. In both the cases, indigenous technological competence will get a boost.

Development of ‘Strategic, Complex and Security Sensitive Systems’ should continue to be undertaken by Defence Research and Development Organisation as per their procedure and funding norms, as hitherto fore.

Upgradation of Human Resource

Howsoever perfect the policies and the procedures may be; the results achieved depend on the level of competence and diligence of the functionaries implementing them. As pointed out by CAG, defence acquisition is ‘a cross-disciplinary activity requiring expertise in technology, military, finance, quality assurance, market research, contract management, project management, administration and policy making’. It is a well recognised fact that a defence procurement regime needs expertise in over 22 disciplines.

Unfortunately, MoD has totally neglected this vital aspect by following a system of posting non-specialist personnel for three-year tenures. The acquisition functionaries are drawn from the three services, the civil bureaucracy and the defence finance. They are not selected for any particular expertise or qualifications or displayed flair. For them, acquisition duties are like any routine assignment. Worse, they are given no special training. Most unfairly, they are expected to ‘learn on the job’ by trial and error method. In the absence of necessary competence, most functionaries are wary of taking decisions and consider it prudent to play safe by letting the matters drift.

MoD must pay attention to improving the quality of the acquisition staff by meticulous selection, proper training and longer tenures. Further a system of accountability should be introduced to make the functionaries liable for their acts of omission and commission in the performance of designated duties. As defence procurements affect country’s defence preparedness, no laxity and misdemeanor should be tolerated.

Reforms in Offset Policy

The defence offset policy was first incorporated in DPP in 2005. Although it has undergone a number of changes since then, the basic contours of the policy remain unchanged. MoD has been repeatedly claiming that it wants to move cautiously and hence is wary of making radical changes. Seven years is a long period to gain experience and fine-tune the policy. Any further delay is going to prove detrimental to Indian interests as the current dispensation has failed to take full advantage of India’s huge leverage to kick-start development of indigenous defence industry.

While keeping the offset threshold at the current levels of Rs 300 crores, offset percentage should be increased from the current 30 percent to 100 percent, as is the trend world-wide. Even the European Defence Agency accepted an upper cap of 100 percent in the voluntary Code of Conduct on Offsets adopted at Brussels on 24 October 2008. Transfer of technology should be made the preferred mode of fulfilling offset obligations. Multipliers must be introduced to provide incentive to foreign vendors to offer offsets in the areas of India’s choosing. Simultaneously, the present policy on Foreign Direct Investment (FDI) in Indian defence sector (with 26 percent cap and numerous restrictive provisions) needs a relook. FDI cap should be technology-centric and flexible in its application.

The Way Forward

A defence procurement system is a management process by which a nation provides effective, affordable and timely defence systems and equipment to its armed forces. However, there are no standard templates. All countries have different threat perceptions, geo-strategic objectives, state of indigenous industry, dependence on imports and availability of resources. Therefore, they have to evolve their own distinct procurement systems. India is no exception. It must strive to perfect its system for optimum results.

The Defence Minister has been publicly expressing his concern at the non-performance of the current procurement regime and repeatedly urging for major reforms. The primary objective of India’s defence procurement regime should be to ensure that the armed forces get ‘the latest equipment in the required time frame and at best value for money’. This implies technology, speed and cost-effectiveness. The stated objective cannot be achieved without carrying out radical reforms and injecting professionalism in the whole process.

All procurement cases of the last ten years, both successful and aborted, should be diligently documented, studied and key findings extracted for collation and drawing lessons. An endeavour should be made to identify the following:-

• · Impediments that inhibit procurements through open competition and ways to remove them.

• · Factors that hinder expeditious progress of procurement proposals and measures needed to overcome them.

• · Steps needed to boost indigenous defence production.
  

Finally, defence procurements cost a country dear, as considerable resources have to be diverted from social welfare schemes to defence. Therefore, it is incumbent upon all functionaries to ensure that the defence funds are expended most diligently and efficiently. It is commonly said that an efficient acquisition system can affect a saving of up to 15 percent of the capital expenditure. With India’s shopping list of close to 120 billion dollars in the next few years, the savings could be of the order of 18 billion dollars – a whopping amount by all standards.