Defence Procurements Sans Competition

By Major General Mrinal Suman, AVSM, VSM, PhDNovember 2011

First published March 2009

The Government of India has been repeatedly stating that one of the objectives of the defence procurement procedure is ‘to demonstrate the highest degree of probity and public accountability, transparency in operations, free competition and impartiality’.However, the position in actual practice is totally different. Since the signing of 1.4 billion dollar contract with AB Bofors on 24 March 1986 for the supply of over 400 howitzers, India has not been able to successfully conclude any high value deal during the last 30 years in an open competition. Every endeavour had to be aborted mid way. Cancellation of helicopter deal for Eurocopters and 155 mm gun deal with Denel are recent examples.

All major procurements during the last few decades have been on single vendor basis. Sukhoi aircraft, Smert rocket system, T-90 tanks, Gorshkov aircraft carrier and a number of naval vessels have been purchased from Russia. Israel is supplying Phalcon AWACS, RPVs, radars, missiles and electronic equipment. Trainer Hawk has been purchased from the UK. The US, though a late entrant, has already contracted to supply Weapon Locating Radars, landing ship Trenton and Hercules aircraft. The above list is indicative and not exhaustive - all the above deals were finalised in one-to-one negotiations and not in open competition.

Comptroller and Auditor General of India (CAG) carried out performance audit of the defence procurement regime with respect to 37 import contracts for the Army worth Rs 3,201 crores signed between January 2003 and March 2006 and submitted its report to the Parliament in May 2007. CAG faulted the acquisition organisation for resorting to single vendor procurements in a majority of the cases – a whopping 66 percent. Thus, single vendor procurements have become a rule than an exception and freecompetition has been consigned to small value purchases like bullet proof jackets and binoculars.

Promotion of Competition

The procurement procedure carries a number of provisions to generate maximum competition and carry out procurements in multi-vendor situations. Defence Procurement Procedure – 2008(DPP-2008) mandates the following:-

(a)Formulation of Services Qualitative Requirements(SQR). SQR have to be broad-based, realistic and must express user’s requirements in terms of functional characteristics and its formulation must not prejudice the technical choices by being narrow and tailor made. They should be formulated in such a manner that a multi vendor situation is ensured.In case there is a likelihood of a single vendor situation emerging, reasons for the formulation of such SQR must be recorded. Such cases would be debated and approved by the Defence Acquisition Council or the Defence Procurement Board, as applicable.

(b)Maximum Publicity. Wherever possible, keeping the security and other related aspects in view; appropriate publicity is required to be given to the proposed procurement.Case specific advertisements have to be placed on the internet and in the print media. Even vendor registration should be carried out through internet.

(c)Retraction of Request for Proposals (RFP). If at the stage of technical evaluation of proposals, only one vendor is found fully complying with SQR, RFP has to be retracted on approval of Director General (Acquisition) and a fresh RFP issued after suitably reformulating SQR. However, as per the CAG Report, this provision has never been invoked.

(d)List of Vendors for Issuance of RFP. Although the initial list of vendors for the issuance of RFP is compiled by the services, the Acquisition Wing is empowered to add more vendors to elicit maximum response and bids.

When Single Vendor Procurements are Judicious

On the other hand, there are occasions when single-vendor procurement may be the most prudent or the sole option available. This fact has also been duly recognised in DPP-2008. Some of the major contingencies mentioned are as follows:-

(a)State-of-the-Art-Equipment. It is a well accepted fact that the market for state-of-the-art defence equipment and platforms is circumscribed by denial regimes. Such equipment may be available to India from a single source. In case such equipment is considered essential to establish qualitative edge over an adversary, a single vendor procurement may be resorted to after due diligence. Procurement of Phalcon AWACS from Israel and Weapon Locating Radars from the US fall in this category.

(b)Geo-strategic Considerations. In certain acquisition cases, imperatives of strategic partnerships or major diplomatic, political, economic, technological or military benefits deriving from a particular procurement may be the principal factor determining the choice of a specific platform or equipment on a single vendor basis. Such procurements would be based on mutually agreed provisions by the Governments of India and the seller’s country. They should not be viewed in isolation as they form part of a complex milieu of inter-related issues that govern strategic equations. Deal for the aircraft carrier Gorshkov can be considered as a part of an overall package.

(c)Foreign Surplus Equipment. There may be cases where a very large value weapon system / platform, which was in service in a friendly foreign country, is available for transfer or sale. Such procurement would normally be at a fraction of the original cost. The cost of its acquisition and its repairs/modifications expenses would be negotiated based on an Inter-Governmental Agreement.Recently, India acquired landing ship USS Trenton from the US after it was declared surplus to their requirements.

However, some of the major disadvantages of single vendor procurements are:-

  • Cost becomes indeterminate as the buyer has no comparative inputs and the seller can demand the price he wants. As per reports appearing in the Israeli press, Israel contracted to sell three AWACS to India for 1.1 billion dollars, whereas it had earlier agreed to sell the same to China for 358 million dollars. India ended up paying a whopping 742 million dollars extra. Similarly, in the infamous coffin case, India allegedly paid an inflated price.
  • A seller can exploit purchaser’s vulnerability by reneging on contractual commitments with impunity during the currency of the contract. We are witness to the recent Russian charade of asking for an increase in annual cost escalation from 2.25 to 5 percent for Sukhoi fighters in clear violation of contractual obligations. Refurbishment of aircraft carrier Gorshokov is another current case. After having negotiated its sale to India for 1.5 billion dollars, Russia has no inhibitions in demanding a mammoth 2.0 billion dollars extra. Director General of Sevmash dockyard dismissed the mattercasuallyby stating that the Russian experts made a mistake in assessing the costs of the work and that their mistake was worth billions of dollars.As the mistake was committed by the Russian experts, contractual ethics demand that Russia bears the loss. But Russia knows fully well that India has no alternative except to give in. By entering into a single vendor contract, India had virtually closed all other options.Instead of the promised delivery deadline of 2008, Gorshokov is now not likely to be delivered to India before 2015, leaving India in a quandary. Seven valuable years have been lost. Same is the case with AWACS whose delivery has also been delayed.
  • Another related issue is the quality of after sales support. It has been seen that in single vendor cases, the seller hardly feels obliged to ensure life cycle technical and spares back-up. The buyer thus remains at the mercy of the vendor during the entire service span of the equipment. India has been pleading with Russia for the supply of spares for the Soviet equipment for over a decade now. Russia, to say the least, has been grossly indifferent and unresponsive. It is only now that it has initiated some action in the fear of losing future orders as India is diversifying its procurement sources.

Reasons for India’s Inability to Conclude Multi-vendor Deals

Despite all assertions made by the Government with respect to the exhaustiveness of its frequently revised defence procurement procedure, it has singularly failed to conclude major deals in competitive environment.Some of the major reasons for this failure are as follows:-

(a)Lack of Advance Planning.

DPP-2008 lays down that procurements should be carried out as per the approved 15-Year Long Term Integrated Procurement Plan (LTIPP) and 5-Year Services Capital Acquisition Plan (SCAP). Annual Acquisition Plan has to be derived from LTIPP and SCAP. As per the CAG report, SCAP for the period 2002-2007 had not been approved while the CAG audit continued in 2007.A massive43 per cent of the capital budget was expended on unplanned items in 2005-06.

As unplanned procurement proposals are included at the last moment,there is little scope for detailed advance planning. Additionally, such proposals are invariably classified as operationally emergent and inescapable. With urgency as the overriding criteria, a pre-identified vendor is invited and the case progressed accordingly. This is true of almost all single vendor cases.

(b)Organisational and Procedural Inadequacies

The Group of Ministers on National Security, in their report submitted to the Prime Minister on 26 February 2001, faulted the then existing system governing defence acquisitions for an absence of a dedicated and professionally equipped procurement structure with sufficient expertise to oversee complete gamut of acquisition activities. Although the Government has taken many major initiatives since 2001, they have been found to be grossly inadequate. Even CAG has commented adversely, stating that the task is beyond the capabilities of the current organisation.

Additionally, the current procurement procedure is so time consuming and complex that it takes a minimum of 36 months even for a routine procurement to materialise. As regards major procurements, technical evaluation and field trials of competing equipment may extend over four to five years to ascertain their performance in different climatic and terrain conditions. This is too long a period during which operational requirements and even technologiesundergo major changes. Repeat trials and prolonged negotiations add to the time gap between the initiation of the proposals and receipt of equipment. The services become wary of receiving outdated technology and tend to revise SQR. A number of proposals have been abrogated on this account.

(c)Trial and Evaluation Infirmities

Trials and evaluation (T&E) are conducted to obtain, verify, and provide data for evaluation of performance and operational capability of systems, sub-systems and components to enable ascertainment of their potential for mission accomplishment.AlthoughT&Eis by far the most critical activity in a multi-vendor scenario, inadequate attention is paid to it. The process is gone through in a routine and nonchalant manner.No comparative matrix is prepared. Trial directives contain unspecific and unverifiable parameters.

Trials are carried out by units who are ill-equipped for the purpose and consider it an additional bothersome chore. Trial reports contain subjective inferences. There is hardly a trial report that does not get embroiled in controversy and result in an impasse. Failure to select the most suitable equipment in inter-se T&E is perhaps one of the primary reasons for India’s inability to conclude deals in multi-vendor environment.

(d)Inadequacies of Procurement Staff

Functionaries are posted to key acquisition appointments in routine. They lack academic education to comprehend military technologies involved and their evaluation. Additionally, no training is imparted to them to prepare them for acquisition assignments. Their level of ignorance can be gauged by the fact that out of 11 deals examined, CAG found that parameters spelt in four cases were unavailable anywhere in the world. It indicted the Army for wrong formulation of parameters reflecting neither its own requirements, nor the reality of the market.

Similarly, tender documents prepared by SHQ and issued by the Ministry of Defence (MoD) contain ambiguities which later lead to multiple interpretations. Finally, negotiations are carried out by people who have little knowledge of international trade, foreign exchange trends and resultant cost benefit analysis. Their ignorance results in a lack of self-confidence and reluctance to take decisions. Their propensity to play safe results in vacillation. They consider it prudent to let matters drift into uncertainty and ultimately die down.

The Way Forward

It is understandable that many high-tech procurements will continue to be on Government-to-Government and single vendor basis. Efforts should, however, be made to minimise their frequency and the current ad-hoc functioning must be replaced by a well formulated procedure for such cases. It could well be on the lines of the current Fast Track Procedure. Once procurement of specific equipment on single vendor basis is considered operationally inescapable, the said procedure should be invoked and the case progressed accordingly. It will impart much needed transparency with in-built checks.

MoD has displayed a rare resolve to reform and streamline the complete gamut of procurement activities. Attention needs to be paid to remove impediments that inhibit competitive procurements.

  • Planned Procurements.Long term procurement plans must be finalised well in advance and strictly adhered to thereafter. Allunplanned procurements must be considered akin to fast track proposals and therefore, their requirement must emanate from the Chief of the service concerned and debated in the Defence Acquisition Council.
  • Commercial Oversight. The earlier stipulation of review of the commercial process by Eminent Persons Group was meant to provide pre-contractual process and procedures audit as regards determination of the lowest bidder and commercial negotiations thereafter. Surprisingly, this provision was done away with in 2005.It must be reintroduced to help speedy conclusion of multi-vendor contracts.
  • Expediting Procurement Process.Sanctions must be accorded in one go rather than in a piecemeal manner. All activities must be time-bound with effective monitoring mechanism in place. Proclivity for deferring decision making must be curbed strictly.
  • Independent Trial Regime. As seen earlier, most multi-vendor cases get derailed during the trial phase due to the inherent flaws in the current system. It is essential that an independent and fully equipped agency be assigned this task. The trials must be fair, objective and thorough. Most importantly, the trial regime must enjoy total credibility.
  • StaffingImprovements.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 thereafter observed that the existing system of defence acquisitions being handled by unspecialized personnel posted for three-year tenures was simply not adequate.The Government must pay attention to the staffing requirements on priority. The quality of the acquisition staff must be improved by meticulous selection, proper training and longer tenures.

Inability to make major procurements in multi-vendor competitive environment is a major failure of the current defence procurement regime. As every high value deal is negotiated from a single source, DPP-2008 has been relegated to small value procurements of peripheral importance. Indisputably, frequent resorting to single-vendor procurements not only invites accusations of playing favourites but also proves detrimental to national interests. The country loses benefits of acquiring the latest technologies at the most competitive prices. Moreover, dependence on a single source makes the country totally dependent on vendor’s assiduousness. It also renders India vulnerable to subsequent arm-twisting by an unscrupulous vendor.The whole process needs a thorough review and necessary reforms undertaken.

About Author – Major Gen Mrinal Suman is India’s foremost expert in defence procurement and procedures and offsets. He heads Defense Technical Assessment and Advisory Services Group of CII.