Doing Business with India: Challenges Faced by Foreign Vendors

Doing Business with India: Challenges Faced by Foreign Vendors

(FORCE February 2013)

Major General Mrinal Suman

It was in 2002 that the Government took major policy decisions to streamline the defence acquisition system. New structures/organisations were put in place and a comprehensive defence procurement procedure was issued.  Over a decade has passed but none of the stated objectives have been achieved. Defence Minister Antony has publically admitted – ‘despite our best intentions and earmarking huge budgets and allocating money, the modernisation efforts have not borne the desired results’. With a continuous stint of seven years, Antony is the longest serving Defence Minister of India and should know the true state of affairs.  

Amongst many reasons for the current defence acquisition regime’s inability to deliver, India’s failure to recognise and exploit the potential of the foreign manufacturers is a major one. Criticality of this failing becomes apparent when viewed in the light of the fact that India depends on foreign vendors for more that 70 percent of its defence requirements. 

Whereas in developed countries, entrepreneurs are considered as indispensable partners in national endeavour for technological excellence and respected for their skills, Indian bureaucracy looks at businessmen as self-seekers of wealth. Worse, being awarders of high value contracts, officials develop an arrogant and disdainful attitude towards all businessmen. Every suggestion made by them is suspected of ulterior motive and dismissed out of hand. 

Most foreign vendors understand India’s security concerns and constraints relating to the sustenance of its public sector. While appreciating India’s resolve to evolve an efficient acquisition process, they seek a more approachable, receptive and responsive regime. Five major concerns of the foreign vendors have been discussed in this article.  

Rescinding of Acquisition Proposals Midstream 

Based on the acquisition proposals approved in the Services Capital Acquisition Plan, each Service Headquarters prepares its own Annual Acquisition Plan (AAP). Although AAP is approved by the Defence Procurement Board as a two-year roll on plan, allotment of required funds remains uncertain. Therefore, proposals have to be prioritised. It has normally been seen that funds allotted are insufficient even to finance all proposals graded priority one. Yet, a large number of proposals are progressed so as to be ready to utilise additional funds, if allotted at short notice.   

Unfortunately, foreign vendors are not aware of the above uncertainty. They are unable to differentiate between high and low priority proposals and respond to all communications with equal diligence. In the hope of competing for valued orders, they invest considerable time, effort and resources to remain engaged. When such a low priority proposal fails to fructify, they feel trick and frustrated. At times, even high priority proposals are dropped midstream on account of operational exigencies or budgetary constraints. Foreign vendors find it to be a highly wasteful exercise and resent it.    

Although the Government reserves the right to withdraw any Request for Proposals (RFP), it is expected that such a step would be taken in extremely unavoidable circumstances. Unfortunately, the procedure mandates that RFP should be retracted if the paper evaluation of technical proposals shows a single vendor to be fully compliant with the Services Qualitative Requirements (SQR). Further, in case of high value proposals of Rupees 300 crores and above, if the Technical Oversight Committee finds any material deviation from the laid down procedures, the case gets aborted midway. 

The affected foreign vendors find the above provisions to be highly dissuasive. They consider it to be highly unfair to penalise a vendor if he happens to emerge as the sole SQR-compliant bidder. Similarly, minor procedural deviations should not result in the termination of a case, thereby wasting considerable resources of the Government and the participating vendors. Cancellation of a deal at an advanced stage due to procedural infirmities punishes the successful vendor rather than the defaulting functionaries. 

Dissuasive FDI Policy

The Government permitted 100 per cent equity with a maximum of 26 per cent FDI component, both subject to licencing in May 2001. As per the current policy, the applicant company has to be either an Indian company or a partnership firm with management control in Indian hands. The Chief Executive has to be a resident Indian. A licensee can produce only the licensed products and in the sanctioned quantity – he can neither diversify nor enhance production. The policy directive further stipulates that arms and ammunition will be primarily sold to the Ministry of Defence (MoD) and their sale to other security organisations in the country will be with the prior approval of the Government. Similarly, their export will also need prior sanction. Non-lethal items may be sold to non-Government agencies but with the concurrence of MoD. 

Unlike many other sectors, FDI in defence sector is technology-centric, in that, a foreign company is expected to share its closely guarded technologies and proprietary know-how with the local partner. Hence, every foreign investor wants to have a controlling stake. He wants minimum 51 percent holding. 

Foreign vendors find India’s policy to be highly dissuasive – a foreign investor is expected to invest his resources in a venture where he has no significant control, strict capacity/product constraints, no purchase guarantee and no open access to other markets (including exports). Resultantly, there has been a total lack of enthusiasm on the part of foreign vendors to invest in the Indian defence sector.

Offset Conundrum

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. MoD feels that the Indian offset policy is very liberal and vendor friendly as the vendors are allowed to 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. 

Some of the major issues that worry them are as follows:-

• ·Every country that accepts banking of offsets allows their trading as well. Both are considered complementary. As no vendor can ever be sure of winning future contracts to utilise his banked credits fully, he wants an avenue to recover his costs through selling them. As per the Indian policy, banked credits are non-transferable except between the main contractor and his sub-contractors within the same acquisition programme. They lapse if not utilised within a period of seven years. Therefore, the concern of the foreign vendors is understandable.

• Despite repeated demands for a single empowered authority to approve, validate, discharge and measure offset contracts in a predictable, efficient and transparent manner, the Government has decided to split offset functions between two agencies. Whereas the Acquisition Wing under the Department of Defence evaluates offset proposals and signs offset contracts, newly created Defence Offsets Management Agency under the Department of Defence Production has been tasked to oversee efficient management of offsets.  

• Instead of having a single policy for the transfer of technology to all Indian entities, MoD has promulgated guidelines that have woven a complex web of conflicting and confusing provisions that are bound to lead to multiple interpretations and squabbling. Even the methodology of calculating offset credits for transferring technology to government enterprises remains vague.

• The list provided by DRDO of the technologies that it seeks is highly imprecise. These are open-ended descriptions of vast arrays of related technologies. It has been left to the vendors to choose the technology they wish to offer and submit proposals accordingly. In case TAC rejects the technology offer due to redundancy or the indicated cost, vendor will have to rework his entire offset proposal afresh.

• Application of multipliers has been made usage-based and not as per the degree and exclusivity of technology infused. Consequently, vendors will have no incentive to offer high-end technologies.

Unduly Prolonged Commercial Evaluation Process and Negotiations

Although well-evolved guidelines have been specified in the procurement procedure, every Contract Negotiation Committee (CNC) charts its own course. Resultantly, the whole process becomes ad-hoc and unduly prolonged. 

CNC is required to determine fair and reasonable price before opening commercial bids of technically successful vendors. Undoubtedly, it is a challenging task. No benchmarks are available as all arms deals in the world are shrouded in secrecy. Further, costing of rapidly developing new technologies remains indeterminate, forcing all nations to acquire expertise in the use of appropriate analogy estimates, parametric estimating and software simulations. Unfortunately, India has neglected this aspect totally. Every CNC has to evolve its own methodology. Most foreign vendors find such an approach to be unscientific, irrational and ad-hoc. Worse, it consumes considerable time and the vendors have to keep extending validity of their commercial offers.

Adoption of ‘life cycle cost’ to determine the lowest bidder has added to the complexities of the process. Various interrelated financial disciplines like earned value analysis; concepts and methodologies needed to develop operating and support cost estimates; total ownership cost reduction studies; and available management decision making tools have to be integrated.

Although the procurement procedure mandates that in multi-vendor cases no price negotiations should be carried out with the lowest bidder if his bid falls within the fair and reasonable price determined earlier, this provision is rarely adhered to. Every CNC resorts to protracted negotiations to extract further price reduction. As members of CNC lack necessary technical and financial knowledge, they have little faith in the accuracy of their own working of fair price.

Foreign vendors find this practice to be highly unfair and exasperating. A vendor who emerges successful as the lowest compliant bidder after a long and complex evaluation procedure considers it to be an arm-twisting ploy. Prolonged discussions result in undue delays. Vendors have to bear additional cost of finance and their production schedules remain uncertain.  

Lopsided Probity Provisions

India’s defence acquisition regime has been under attack for allegedly unethical and corrupt practices. MoD has been trying to introduce measures to ensure probity in all defence deals. All bidders are warned not to resort to any unethical practice to influence the decision makers. 

A pre-contract ‘Integrity Pact’ (IP) has been made mandatory for all acquisition schemes exceeding Rupees 100 crores. The bidders are required to sign and submit it along with their techno-commercial offers. It is a binding agreement in which the procurement agency promises that it will not accept bribes during the procurement process and the bidders promise that they will not offer bribes. It also includes an undertaking by each bidder to disclose all payments made in connection with the contract in question, including agents and other middlemen as well as family members of officials. 

While signing the final contract, every vendor (irrespective of the contract value) is required to give an undertaking that he has not given, offered or promised to give, directly or indirectly any gift, consideration, reward, commission, fees, brokerage or inducement to procure the contract.

In case any violation by a bidder is established, the Government retains the right to punish the errant bidder through denial/loss of contract; forfeiture of bid security and performance bond; recovering liability for damages to the principal and the competing bidders; and debarment of the violator by the principal for an appropriate period of time. Should the Government desire to ascertain if any unauthorized payments have been made, a vendor has to allow inspection of his account books. 

Foreign vendors are appreciative of Government’s efforts to rid the acquisition process of existing malpractices and are ready to extend their support. However, they feel that they are being treated unequally as both the policy provisions and their implementation are lopsided. They highlight the following issues:-

a)    The onus of keeping all transactions clean should be of the officials and not the vendors. No bidder wants to incur additional expenditure by way of bribes. They do not offer bribes of their own volitions but are arm-twisted to do so. Further, in every corrupt transaction, there are always two parties – the bribe giver and the bribe taker. Action must be taken against both and in equal proportion. It is unfair to apportion the entire blame to bribe givers and take no action against those who demand and extract bribes.

b)    Punishment should be commensurate with the degree of misdemeanor. Outright blacklisting without giving adequate opportunity to the accused bidder to explain the matter in question is highly unfair. The Government must not act on the basis of media reports as most of them are subjective, biased and even planted to sabotage a deal. There must be irrefutable proof that a major breach of probity provisions has taken place.

c)  An aggrieved vendor has no credible avenue available to him to seek redressal of his grievances. He has to submit his complaint to the Acquisition Wing. It is for the Acquisition Wing to decide whether to refer the complaint to the Independent Monitors or dispose it off summarily. In case it is referred to the Independent Monitors and their report is received, it is again the prerogative of the Acquisition Wing to take the final decision. In other words, though IP is a bilateral agreement between the Acquisition Wing and the vendors, the former has abrogated the right to receive complaints (against itself and its associated elements) and decide their final disposal.  Being an involved party, it can never act impartially.

d) Strangely, only complaints with regard to violation of IP are to be referred to the Independent Monitors for their comments/enquiry. There is no mechanism in place for vendors to raise other issues pertaining to unfair, prejudiced and non-transparent practices. 

The Way Forward

All developed countries recognise defence manufacturers as indispensable partners in their quest for building defence capability. They are admired for their technological excellence and are kept co-opted at all stages of equipment planning. They are treated with due courtesies and respect. It is time Indian bureaucracy realises that seeking returns for their investments does not make businessmen dishonorable people.

In addition, India has failed to draw benefit from the experience of the foreign vendors. They must be taken on board and treated as reliable and long term partners. An institutionalised arrangement should be put in place for regular exchange of views with them. Lack of communication invariably results in misapprehensions and gives rise to doubts about the transparency and fairness of the process. 

All efforts should be made to ensure that every procurement case results in a deal. A procurement case should be aborted midway only if the gravity of procedural infirmity renders redemption unjustified. Every cancellation deprives the services of the urgently needed equipment and costs the nation dear due to escalation of costs. Foreign vendors resent wastage of their resources, time and effort. 

A change in India’s FDI policy is overdue to remove all dissuasive provisions. The policy has to be attractive enough for foreign companies to make business sense. Further, it should be made flexible and technology-centric, with the upper cap being determined on the basis of nature, level, depth and exclusivity of the technology involved.

 

As mandated in the procurement procedure, 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 finalising contracts. The offset policy needs further fine-tuning to remove all ambiguities. 

Finally, MoD must try to allay the misapprehensions of the foreign vendors but considering their suggestions with an open mind. They must be made comfortable with the functioning of the acquisition system and their interaction should be free of irksome issues. It is only then that they can be enthused to deliver. As India’s dependence on foreign manufacturers continues to be near total, they play a decisive role in the modernisation of the Indian armed forces.