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Defence Procurement Procedure – 2008

Defence Minister AK Antony released the much awaited updated version of the defence procurement procedure at New Delhi on 01 August 2008. The new procedure was claimed to be a major step in government’s endeavour to make the process of defence procurements more efficient. Called Defence Procurement Procedure – 2008 (or DPP-2008 in short), it was applied to all cases where the Request for Proposals (RFP) was issued after 01 September 2008.

Although DPP-2006 was a well evolved and an exhaustive policy document, it failed to address many critical issues. First, far too many procurement cases continued to result in single vendor deals despite the government’s repeated assertions that it wanted to promote competition. Even Comptroller and Auditor General of India during performance audit of import contracts for the Army between January 2003 and March 2006 noted with concern that 66 percent cases were single vendor buys.

Secondly, India’s trial and evaluation methodology was faulted for lack of transparency and adhocism. Most vendors felt that inter-se assessment of competing equipment lacked objectivity due to the ingress of extraneous factors. They also wanted to be kept informed of the performance of their equipment at every stage. Thirdly, formulation of Services Qualitative Requirements (SQR) was considered over-ambitious, impractical, imprecise and unverifiable. Although DPP-2006 mandated that user requirements should be comprehensive and given in terms of functional characteristics, it was felt that the functionaries continued to prepare SQR like a wish-list with total disregard to the equipment available in the market.

Another major concern expressed by foreign vendors related to the provisions of the newly introduced offset policy. They felt that the Indian defence industry was not developed enough to absorb anticipated quantum of offset inflows. As offset obligations had to be fulfilled co-terminus with the main contract, they were apprehensive that default by Indian partners could adversely affect the implementation of the main contract. They wanted the government to allow offset banking under which foreign vendors could undertake offset programmes in anticipation of future obligations. Acceptance of indirect offsets (in sectors unrelated to defence) and transfer of technology against offset obligations were other major demands.

Fifthly and finally, it was felt that the provision of seeking commercial quotes at the outset with 18 months validity was unrealistic and loaded against the vendors. In almost all cases, technical evaluation process took two to three years. Resultantly, the vendors were asked either to extend validity of their quote or withdraw from further participation in the case. Most considered it to be a highly unfair provision. After having invested considerable resources in technical evaluation regimen, it was a tough call to take for the vendors.

When DPP-2006 came up for review, the government sought suggestions from a large number of entities. Indian defence industry participated enthusiastically in all interactions and put across its view point. The US India Business Council and the Defence Manufacturers Association of the UK provided useful inputs as regards their expectations. A number of public and private sector enterprises also gave constructive feedback.

Salient Aspects of DPP-2008

The government deliberated over all the recommendations. It felt that the basic configuration of the procedure continued to be sound, warranting no major reconstruction. Hence, an attempt was made to further rationalise the procedure and make it more credible. Some of the significant policy changes introduced in DPP-2008 have been discussed hereunder.

Promotion of Transparency

The primary thrust of DPP-2008 was on promoting transparency in technical evaluation process so as to convince the environment of its impartiality and objectivity. First, the complete trial methodology was required to be given upfront in RFP itself so that all vendors knew at the time of submitting proposals regarding the parameters against which their equipment would be assessed and the methodology thereof. Secondly, trial directive issued by Service HQ had to be based on the previously declared trial methodology. No new aspects could be added to it. Thirdly, during field trials, debriefing of all vendors had to be carried out in a common meeting after each stage of trials as regards performance vis-à-vis SQR compliance, preferably at the trial location itself. Moreover, all verbal communications with the vendors had to be confirmed in writing within a week and also placed on file for record. Going further, the Technical Oversight Committee was tasked to oversee whether trial methodology followed was in consonance with what was given in RFP. Finally, and most importantly, reasons for disqualification had to be intimated to the vendors at every stage.

Avoidance of Single Vendor Buys

With a view to generate maximum competition and avoid emergence of single vendor situation, a number of innovative measures were introduced with built in checks. Right at the time of formulation of SQR, a compliance table was required to be prepared showing SQR vis-à-vis technical parameters of equipment available in the world market, to ensure that SQR formulated were such that a number of manufacturers could meet them. In case during the paper evaluation of technical proposals, it emerged that only one vendor appeared fully compliant, RFP had to be compulsorily retracted and reissued with reformulated SQR. Besides, Technical Evaluation Committee was required to identify reasons for such an outcome and initiate corrective measures for future cases.

Introduction of Offset Banking

Acceding to the demand of the foreign vendors, the government allowed them to generate and accumulate offset credits by undertaking duly sanctioned programmes in anticipation of future obligations. Offset credits so acquired could be banked for discharge against future contracts. Proposals for undertaking offset programmes for banking purposes were required to be submitted to the designated Joint Secretary in the Ministry of Defence (MoD) for allotting a unique Project Identification Number to each sanctioned proposal. In cases where offset banking was done by way of investment in Indian defence industry and R&D, related foreign investment had to remain valid and active throughout the duration of MoD contract in relation to the concerned RFP.

Selection of Recipient of Imported Technology

Accepting representations made by the Indian private sector, the government agreed in principle that the selection of recipient of imported technology should be made more broad-based and not limited to the public sector only, as done earlier. The government assigned the task of selecting recipient to the Defence Acquisition Council (DAC); and the company best suited to absorb technology could be nominated.

Enhancement of Financial Powers

With a view to expedite grant of Acceptance of Necessity, the government delegated enhanced powers as the then existing financial powers were considered grossly inadequate. This single step was expected to go a long way in speeding up sanctions. Only cases over 100 crore rupees were required to be submitted to DAC. The new powers were as follows:-

An Appraisal

Despite having introduced a number of major changes in DPP-2008, the government missed an opportunity to make the procedure more responsive and dynamic. Some of the major issues that had been left unaddressed were as under.

Absence of Mid-course Re view of C ommercial Process

DPP-2002 had introduced scrutiny of technical and commercial processes of all major contracts by independent experts. In a surprising move, review of commercial process was done away in DPP-2005. For that, the government came under considerable flak. Commercial review was meant to provide pre-contractual process and procedures audit. Most knowledgeable observers had been expecting the government to reintroduce this review to strengthen its claim of promoting probity, but were disappointed.

Extension of Validity

In a major policy change, the government decided to allow vendors to submit fresh commercial proposal in case the validity of their commercial proposal submitted earlier expired before the acceptance of the staff evaluation report. It appeared that the government introduced this provision without studying its implications. India follows single-stage two-bid system to prevent inflation of commercial quote by the technically successful vendor. The new provision effectively nullified it. As MoD had to intimate results of every stage of trials to all vendors in a common gathering at the trial location itself, it would be common knowledge as to which vendors remained in contention. Thus, at the time of preparation of staff evaluation report, in case a single vendor emerged successful, he would be well aware of it. The winning vendor would invariably opt to submit a revised and inflated bid, comfortable in the knowledge that he was the sole winner and could call the shots.

Intimating Reasons for Rejection to Vendors

With a view to promote transparency, the new policy stipulated that every vendor must be apprised of reasons for his rejection at every stage. It was a well-intentioned policy change. However, it had the potential to drag MoD into rancorous inquisitions and protracted adjudication process. Rejected vendors were likely to challenge their ouster. It would become well nigh impossible for the acquisition organisation to convince and placate all unsuccessful vendors, especially at the stage of staff evaluation which is a complex and multi-dimensioned process. The government’s intentions were laudable but practicality remained suspect.

Competition at the Cost of Technology

DPP-2008 mandated that SQR of the equipment to be procured should be of a contemporary technology widely available in the world/indigenous market. Thus, the services were forced to pitch SQR at a base level to ensure that there were multiple producers of the equipment. It was a highly skewed approach. Whereas all governments try and provide the latest equipment to their armed forces, the Indian government, in its misplaced enthusiasm to appear above-board, decided to encumber the Indian armed forces with equipment which may be close to becoming obsolescent. Undoubtedly, prudence demands that India acquires cutting edge technology, even if it is available from a handful of sources.

Restrictive Features of Offset Banking

As per the Indian policy, banked offset credits were not transferable except between the main contractor and his sub-contractors within the same acquisition programme. Additionally, such credits lapsed unless discharged against tenders issued within a period of two financial years. Generation of bankable offsets required considerable infusion of resources. As no vendor could be assured of a contract within the stipulated time period, he needed a suitable exit option to recover his costs. Therefore, whenever offset banking is allowed, trade in offset credits has to be accepted. Both are intrinsically and mutually contingent. The new policy neglected this aspect.

Conclusion

India is one of the largest buyers of weapons and defence equipment in the world. It was essential that India had a dynamic and responsive procedure in place to ensure expeditious procurement by optimally utilizing allocated budgetary resources. An environment of confidence and faith in the system can be built only through probity and public accountability.

Management of offsets is a highly intricate and complex task. As regards development of high-tech complex systems, not a single project had taken off in the previous two years as the ‘Make’ procedure was highly skewed. Additionally, the Defence Research and Development Organisation should have been made accountable through external audit. DPP-2008, unfortunately, failed to correct this infirmity.