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India’s Defence Procurement ProcedureUnderwent Radical Transformation after theKargil War

A defence acquisition system is a management process by which a nation provides effective, affordable and timely defence systems and equipment to its armed forces. Core contours of every defence acquisition system are shaped by the nature of tasks envisaged for the armed forces during the planned period, level of prevailing excellence in defence technology, state of indigenous industry, dependence on imports, need for synergy of equipment with allies and availability of funds. Consequently, every country has to evolve its own distinct system that suits its national strategic aims and is in consonance with the prevailing geo-strategic environment. However, the primary objective of all acquisition systems remains the same – to ensure delivery of the defence equipment sought by the services in the required time frame and with the best value for money. Hence, every nation strives to perfect its system to achieve optimum returns.

Procurement of new weaponry and equipment in all countries is a long, complex, arduous and time-consuming process. Multiple agencies have to perform vital functions, both concurrently and sequentially. A large number of inter-dependent variables have to be factored in to provide required equipment to the armed forces in an expeditious and cost effective manner. The average time taken for major acquisitions may extend up to 6 years. The problem gets compounded for India where the majority of critical equipment is procured from the foreign sources. Additionally, field trials have to be carried out in varying terrain and diverse climatic conditions.

All major Indian defence deals have been regularly coming under public scrutiny for the lack of transparency and inordinate delays. The Ministry of Defence (MoD) has been getting flak for not putting a proper system in place to ensure that the armed forces get the required equipment expeditiously. Various other issues also get raised to highlight the inadequacies of the procedures in vogue.

Prior to 1990, procurement of defence equipment was carried out as per the normal rules governing all government purchases. No separate procedure for the procurement of defence equipment was evolved. One of the major reasons for that was the fact that most of the imports during that era were from the erstwhile Soviet bloc and were always on ‘government to government’ basis. Peculiarities and complexities of defence equipment were first appreciated when an environment of open competition and procurement of equipment from diversified sources got introduced after the breakup of the Soviet Union. Public interest in defence deals also got intensified, with the result that all major deals elicited critical comments.

As the complete acquisition process involves a series of major functions by different organs of the government, it has always been felt that detailed guidelines should be in place to facilitate decision-making and eliminate ad-hocism. A detailed and well-structured procedure helps to ensure expeditious procurement and provides a template to the environment against which all procurement activities by different functionaries can be judged.

The Public Accounts Committee (PAC) also expressed similar concerns in its 187 ^th Report (1989). It recommended to the government that detailed guidelines be framed for defence procurements.

Defence Procurement Procedure 1992

Consequent to the recommendations of PAC, Defence Procurement Procedure – 1992 (DPP-1992) came into being in February 1992 when MoD issued detailed guidelines to that effect. Certain modifications to it were carried out over a period of time with the experienced gained. DPP-1992 laid down instructions for the steps to be followed for the complete gamut of the procurement process. It was a very praiseworthy and in a way, a path-breaking effort which achieved its stated aim to a great extent. However, as it always happens with the first attempts, it suffered from some major deficiencies, which affected its implementation.

First of all, there was no dedicated organisation structured specifically to handle the delicate and complex task of defence procurements. All officials held multiple responsibilities thus, dividing their attention and resulting in a lack of focus. They worked in watertight compartments with blinkered mindsets. No holistic view was taken. In the absence of clear-cut responsibilities, there was a complete lack of accountability. Consequently, decision-making became a casualty. Moreover, no single agency was designated as the nodal entity or the central monitoring authority.

Secondly, the procedure itself was not complete in all respects. It primarily dealt with outright purchases. It did not cover the cases involving transfer of technology. That proved to be a major shortcoming as most of the major procurements invariably have transfer of technology option. And most importantly, DPP-1992 did not cater for emergent requirements of the armed forces.

Thirdly, Acceptance of Necessity (AoN) had got mixed up with the acquisition process resulting in confusion and delays. Many times the procurement process preceded AoN, causing embarrassment all around. Most importantly, Defence Research and Development Organisation (DRDO) was necessarily given the first opportunity to develop every required equipment. Procurement action from other sources could not be initiated till DRDO gave the green signal. This resulted in prolonged delays.

Finally, there was no inbuilt mechanism of checks, balances and mid-course appraisals. Mistakes committed came to light either at the final stages of the process or during the post contract reviews. Very little could be done at that point to rectify the infirmity. The government had a difficult choice to make – either accept the flawed process or abort the case to reprocess it ab-initio with resultant delays and cost over-runs.

Recommendations of the Group of Ministers and New Acquisition Set-up

In the aftermath of the Kargil War, India attempted to streamline the entire acquisition system. The Group of Ministers on National Security, in their report submitted to the Prime Minister on 26 February 2001, observed that the then existing system for procurements had led to ‘sub-optimal utilization of funds, long delays in acquisition and slow progress in the modernization of the armed forces’. The Group opined that the prevailing methodology suffered from lack of integrated planning and implementation. It suggested the creation of a separate and dedicated institutional structure to undertake the complete gamut of procurement functions to inject a higher degree of professionalism and reduce delays.

Consequent to the acceptance of the Report of the Group of Ministers, a new set-up was established in MoD in October 2001. Broad guidelines for the formulation of a new procurement procedure were also issued. Need to achieve self-reliance was emphasized as well. The new acquisition set-up is shown at the Illustration.

Illustration: Defence Acquisition Structures

As can be seen, a Defence Acquisition Council (DAC) was constituted under the Defence Minister. This overarching body gives approval in principle to 15 Years Long Term Prospective Plan of the defence services at the beginning of a Five Year Plan period. It also approves all capital acquisitions and identifies them as ‘Buy’, ‘Buy and Make’ and ‘Make’ cases. In other words, it decides whether equipment is to be bought outright, or is to be bought along with technology transfer for subsequent manufacture within the country; or is to be indigenously developed through homegrown research and development route.

Defence Procurement Board, Defence Production Board and Defence Development Board have been constituted to implement the decisions flowing from DAC. Defence Procurement Board functions under the Defence Secretary and has three Vice Chiefs of the services amongst others as members. It executes ‘Buy’ and ‘Buy and Make’ decisions of DAC. It approves the Annual Acquisition Plan and confirms/modifies the inter-se and intra-se priorities of the acquisition proposals of the services. It also recommends procurements on ‘single vendor’ basis. It has the powers to invoke rules governing emergency purchases and forward its recommendations to the Defence Minister. Monitoring of all major procurement cases is one of its important responsibilities.

Defence Production Board has been constituted under the Secretary (Defence Production). Its primary task is to produce the required defence equipment indigenously after receiving technology either from abroad under ‘Buy and Make’ or under ‘Make’ from DRDO. The third board is Defence Research and Development Board, which functions under the Secretary (Defence Research and Development). Its main task is to progress, monitor and report on all indigenous research and development programmes flowing from ‘Make’ decisions of DAC. It also recommends suitable evaluation and assessment processes.

A new integrated set-up called the Acquisition Wing has been created under a Special Secretary with members from the civil services, defence services and finance. It functions under the Defence Procurement Board and is the main instrument for implementing all procurement decisions. This wing was also assigned the responsibility to evolve a new procurement procedure for defence acquisitions.

Consequently, a detailed procurement procedure covering all aspects of ‘Buy’ decisions was put into effect on 30 December 2002. Later, its scope was enlarged to include ‘Buy and Make through Imported Technology’ cases as well. The new procedure was called Defence Procurement Procedure – 2002 or DPP-2002 in short. It covered all steps involved in the complete acquisition process i.e. formulation of Services Qualitative Requirements (SQR), solicitation of proposals, technical examination of offers, field trials, staff evaluation and commercial negotiations.

The aims set by DPP-2002 were as follows:-

To ensure expeditious procurement of the approved requirements of the armed forces in terms of capabilities sought and time frame prescribed by optimally utilising the allocated budgetary resources.

To demonstrate the highest degree of probity and public accountability, transparency in operations, free competition and impartiality.

To keep the goal of achieving self-reliance in defence equipment in mind.

Formulation of SQR has always been viewed critically as it is really the start point of the complete process. Over-ambitious, ambiguous, sketchy or impractical SQR can prove to be counter-productive and make the whole process infructuous. Therefore, DPP-2002 stressed that SQR be given out in terms of functional characteristics and their formulation should not prejudice technical choices by being narrow and focused. In addition, SQR should be verifiable and not abstract. Importantly, SQR were divided into essential and desirable categories. Only the Defence Minister, on the recommendations of the Defence Procurement Board, could give waivers for any deviation to essential SQR after the issuance of the Request for Proposals (RFP).

DPP-2002 mandated that RFP be issued only to original equipment manufacturers, authorized vendors and government sponsored export agencies. In case transfer of technology was being sought, ability to provide requisite technology for licensed production was essential. RFP had to be comprehensive in nature and explicit in requirements, as ambiguities could lead to misunderstandings and vitiate the environment. It was also mandated that all vendors be apprised of the evaluation criteria being applied. They must be made aware of the matrix against which their equipment would be judged.

Field trials were conducted under the aegis of the user service as per the trial directive issued by the Service Headquarters. The trial directive had to specify the fundamental aspects against which validation of ‘essential’ features was to be carried out. Evaluation of the support system and maintainability of the equipment were to be carried out simultaneously. Field trials were normally conducted on ‘No Cost No Commitment’ basis. Representatives of the vendors were permitted to be present at the trials, provided security concerns were taken care of.

With a view to promote competition, the Acquisition Wing was tasked to build up a data bank of prospective vendors. Confederation of Indian Industries (CII) was also requested to compile data of prospective Indian vendors who had the necessary infrastructure and potential in different fields. All these steps were expected to enlarge the vendor base.

As stated above, the previous procedure of 1992 had no provisions for inbuilt checks or mid-course reviews. DPP-2002 rectified this flaw with periodic reviews of the process. For all major procurements, there were provisions to constitute independent bodies to scrutinize the entire process. A Technical Oversight Committee consisting of a senior service officer, a scientist from DRDO and an official from a defence public sector undertaking had to be constituted to go through the entire technical process from the selection of vendors to the final evaluation of the competing equipment. It was only after this committee’s clearance that the commercial process could commence. The second check was activated after the commercial negotiations were over. An Eminent Persons Group was to be constituted to critically examine all commercial aspects including the determination of the lowest bidder. The contract was signed only after receiving ‘go-ahead’ from this group. These provisions were introduced to ensure that the procurement process remained free from all irregularities and timely corrective action could be taken, where required.

Earlier, commercial offers were sought from the vendor whose equipment performed the best during technical evaluation. At that stage, the successful vendor always quoted a highly inflated price knowing well that he was the sole successful vendor. It invariably became a ‘take it or leave it’ situation for the government. This major flaw was also sought to be rectified in the new procedure. Hence, a ‘single-stage two-bid’ system was introduced. This implies that all vendors had to submit their technical and commercial proposals at the initial stage itself, albeit in two separate sealed envelopes. Only technical proposals were opened initially while the commercial proposals remained sealed. It was only after the technical evaluation that the commercial offers of the successful vendors were opened to determine the lowest bidder. No change in the commercial offer submitted earlier was permitted under any circumstances. Thus, the commercial offer was always competitive in nature, as at the time of submission of offers no vendor was certain that he would be the sole successful vendor.

DPP-2002 did not make any distinction between foreign and Indian companies or between private and public sectors. It only aimed at generating maximum competition by providing equal opportunities to all and to obtain best value for money for the defence forces. As a result, the Indian companies woke up to the immense potential and business opportunities existing in the defence equipment sector. MoD and CII jointly undertook many concrete steps to accelerate the process.

Fast Track Procedure

With a view to facilitate emergent acquisitions, a need was felt to have a fast track procedure which could be invoked in times of crisis, albeit with inherent checks to avoid its misuse. The government in September 2001 promulgated a Fast Track Procedure (FTP). This procedure could be adopted only for the requirements, which related to an imminent operational situation or a crisis without warning. Its need had to emanate from the Service Chief and the proposal had to be put up to the Defence Minister with the recommendations of the Defence Procurement Board.

As the time is of essence in such procurements, FTP was limited to items, which were likely to be available within the laid down time frame. Long lead cases were to be avoided. It really implied that the items should already be in service or had already been trial evaluated. In exceptional cases, provisions permitted sending of trial teams to the manufacturers’ premises for quick evaluation.

Conclusion

It is not that the reforms of 2002 made the system an ideal one. It was just the beginning and a lot of work was yet to be done. Procedures for shipbuilding, upgrades and system integration were yet to be formulated. Standard contract documents, which should protect government interests, were still under preparation. Lack of an integral legal set up in MoD hampered progress in this field. MoD was also seeking an arrangement for external audit of all procurement cases before the contracts were signed.

And finally, the potential of the Indian private sector had not been fully exploited, Progress in this direction had been rather disappointing. However, it was apparent that a serious and determined effort had been made to usher in reforms to streamline the entire acquisition process.