Indian Defence Review

Institutionalising the RFI Process

DPP-2016 has institutionalised the request for information (RFI) process, which was followed in not so a disciplined manner under the earlier DPPs. Although the new measure has increased the number of procurement steps involved in ‘Buy’ and ‘Buy and Make’ schemes by one more to 12, it has nonetheless brought about much needed clarity in the vital step of procurement, which has a far reaching implication on the source of procurement, indigenisation, the degree of competition, and more importantly, the timeliness of procurement. Besides articulating the objectives and format of the RFI process, it also stipulates the specific inputs that the procurement authorities would seek through the institutionalised step. In addition, in a departure from the past, the RFI is now required to be formulated by the concerned SHQ in consultation with other relevant stakeholders, including DRDO, DDP and HQ IDS (earlier the SHQs were solely responsible for preparing the RFI). This would ensure that any alternative views that the other stakeholders might have on a particular proposal would be taken into consideration at the very beginning of the procurement stage, rather than leaving these to later stages and thus causing unnecessary delays.

Introduction of L1-T1 Methodology for Award of Contracts

In a clear departure from the past, DPP-2016 has, for the first time, introduced what is widely known as the L1-T1 methodology for selecting the supplier of military goods under the ‘Buy’ and ‘Buy and Make’ schemes. The new methodology, in essence, means that the final bidder would not necessarily be selected on the basis of lowest price quoted by the technically-compliant vendors (the so-called L1 methodology), but by a combination of price and superior technology offered by qualified vendors. The new methodology is intended to buy equipment with Enhanced Performance Parameters (EPP) – a newly introduced feature – which are a notch higher than the Essential Parameters required to be mandatorily met by all the suppliers participating in MoD tenders, in order to stay in competition. The new methodology is also intended to provide an additional incentive to equipment suppliers who would otherwise be reluctant to participate in the bidding process because their products are much superior and, therefore, expensive and uncompetitive vis-à-vis the ones fielded by rival bidders with no EPP.

As per the DPP-2016 provisions, for the purpose of evaluation of the final bidder, vendors offering approved EPP would get an additional credit score of maximum 10 per cent, with each parameter not exceeding a score of three per cent. In other words, the commercial quote of a vendor offering EPP would be suitably deflated by a credit factor ranging between ≥ 0.9 and < 1.0, to arrive at the bid selection. As an illustration, if a vendor quotes USD 1.0 billion for a product with EPPs attracting a maximum 10 per cent credit score (or a credit factor of 0.9), the commercial quote for the purpose of the L1 evaluation would be USD 900 million (1.0 billion x 0.9). The vendor would, however, get USD 1.0 billion if it wins the contract.

The above illustration, while showing certain merits of the new methodology, also, in some way, shows, some drawbacks of the L1-T1 methodology, which have been the main reasons why the MoD has so far been reluctant to adopt it despite repeated demands from several quarters. Apart from the complexity and the implementation-related challenges that the new methodology invites, it has also a clear financial ramification. The new methodology, in a crude sense, allows certain war equipment with more features than the minimum inescapable parameters (best captured in the EPs) required to fight and win a war. Because of this, the MoD would now be forced to pay more for some features which are not critically important to wage a war. Moreover, by keeping the new methodology open to foreign companies, the MoD would also incur extra foreign exchange outgoes at a time when its procurement budget is under a great deal of pressure because of a hefty increase in manpower costs. (In 2016-17, the capital procurement budget has witnessed a drastic 9.4 per cent fall). Given this, it would have been prudent to limit the new methodology for the selection of bids to the local industry only. The benefits, at least in terms of incentivising local companies with superior products, would have been confined to the domestic industry, which is at the centre of the ‘Make in India’ programme.

Provision for ‘Single OEM, Multiple Bids’ and ‘Multiple Bids by Single Indian Vendor’

Accepting the uniqueness of defence procurement, DPP-2016 has incorporated two provisions – ‘single OEM, multiple bids’ and ‘multiple bids by single Indian vendor’ – in which although the bids are single-vendor in nature they would not be retracted because of lack of competition. The first case is likely to arise in ‘Buy and Make (Indian)’ category in which a single foreign original equipment manufacturer (OEM) offers the same product through multiple bids in collaboration with a number of Indian companies. In such a situation, the new provision allows the authorities to continue with the procurement process, provided that the Defence Acquisition Council (DAC), the highest decision-making body of the defence ministry, decides that changes in the RFP condition will not invite participation of any more foreign vendors.

The second case is likely to arise under the ‘Buy and Make’ procurement category in which one Indian company submits multiple bids in collaboration with a number of foreign vendors. Such a case is now acceptable under the new DPP. The main argument for accepting such a case as not a single vendor situation is that the technical and commercial arrangement of one foreign vendor would vary from that of others.

Provision of Procurement in Single Bid Situation

In a major departure from the earlier DPPs, DPP-2016 has allowed the procurement process to continue in certain situations where only one bid is received in response to an RFP. The continuation of the process is, however, subject to the approval of the DAC, which must certify that there is no scope for change of the RFP conditions.

Reduced Validity and Sanctity of AoN

In a move to cut down the procurement time frame under the ‘Buy’ and ‘Buy and Make’ schemes, the new DPP makes two subtle changes, one by reducing the validity of the AoN from the earlier one year to six months, and the other by making the validity period sacrosanct. The reduced validity of AoN would mean that the RFP has to be issued within six months (from the date sanction of AoN), failing which the SHQ would “re-validate the case and seek fresh AoN with due justification for not processing the case in time.” Making the AON validity sacrosanct, the new provision makes it mandatory for the SHQs to re-issue any retracted RFP within the original validity of AoN. Earlier, the validity of AoN for the re-tracked RFP was increased by one year from the date of retraction, causing unpredictable delay and lack of accountability in the procurement process.

Essential Parameters A and B

In a move to increase vendor participation, DPP-2016 has divided into two parts (A & B) the non-negotiable Essential Parameters (EP) that the armed forces want a particular equipment to possess. As per the new provisions, the EP-A would capture some of features of the “contemporary equipment available in the market, and form core of Services Qualitative Requirements (SQRs)” for the purpose of testing and validation at the crucial Field Evaluation Trial (FET) stage. The EP-B, on the other hand, may not be available at the time of FET (hence won’t be tested/validated at that stage), but can be developed/achieved by the vendor after entering into a contract. To ensure that a vendor does not renege from its commitment of meeting the EP-B, it is required to provide an additional bank guarantee of up to 10 per cent of the contract value. It is important to note that EP-B, whose inclusion in the RFP is necessarily to be approved by the DAC, must be met prior to the commencement of delivery of the contracted item. It is also important to note that the incorporation of the EP-B will not be part of the RFP if at least two vendors claim to possess the same at the RFI stage.

Definition of Indian Vendor

Providing clarity as to who is an Indian vendor, DPP-2016 defines the same as an Indian entity (which could include incorporation, ownership model, and proprietorship, among others) that is established under the Companies Act or any other applicable regulations. The definition does not, however, mean that all Indian vendor are eligible to participate in all types of defence tenders. Bringing further definitional clarity, the DPP divides Indian vendors into two categories: one for defence products requiring industrial licence (IL) and the other for not requiring IL. (The Department of Industrial Policy and Promotion (DIPP) has already announced a list of defence products that are subject to IL). What this division means is that companies in the first category could participate in almost all defence tenders (subject to certain restrictions under the ‘Make’ procedure), whereas companies falling under the second category can participate in tenders involving non-licensable items only.

The critical point to note here is that the definition of Indian vendor paves the way for JVs, in which the FDI component can go up to 100 per cent (up to 49 per cent through automatic route and beyond that through the Foreign Investment Promotion Board (FIPB) route), to be treated as Indian vendors. However, as explained earlier in the context of the ‘Make’ procedure, the JVs in which foreign equity is more than 49 per cent would not be eligible to participate in the ‘Make’ programme which is reserved for entities in which the majority stake is to be controlled by resident Indians.

Hike in Offset Threshold Limit

In a surprise move, DPP-2016 has raised the offset threshold limit to Rs. 2,000 crore (approximately USD 305 million) from Rs. 300 crore. Although the reasons for the hike in the threshold is not clarified, it is assumed that the MoD’s difficulty in implementing the existing offset contracts could be the main factor. Nonetheless, the hike is untenable not only from the point of view of the practices followed by other countries, but also in view of the ‘Make in India’ initiative. With regard to international practices, it may be noted that the offset threshold is as low as USD 5 to 15 million in many counties including Israel, Malaysia, Turkey and UAE. Moreover, countries generally lower the offset threshold over a period of time based on the experience gained.

The hike in the threshold would mean that fewer arms import contracts would now be eligible for offsets. This would be a big setback to the local industry, particularly the manufacturers of parts and components which have exploited the existing offset policy for boosting their export performance, and in the process have set up capability that could have been further exploited for the ‘Make in India’ initiative.

Other Provisions

In addition to the above mentioned provisions, DPP-2016 also includes the following new provisions:

Provision for Equipment Policy Committee (SEPC) to hire experts including from academia and industry for the purpose of “review, rationalisation and finalisation of SQRs.” (The list of experts is to be maintained by HQ IDS and the SHQs). This is likely to help expedite the procurement process, particularly of the Army which often suffers from delays in acquisition due to deficiencies in SQR formulation, among other major reasons.

No IC requirement from Indian companies in a ‘Buy (Global)’ contract if offset is waived off. This is intended to provide a level-playing filed between foreign OEMs and Indian companies.

Provision for change of name of vendor in any stage between RFI and execution of contract to enable un-hindered progress in procurement

In certain cases specifically stipulated in the RFP, the cost of low-value items is to be reimbursed to vendors qualified in the FET stage. This is intended to incentivise wider participation, especially by the smaller companies which may have reservations due to the high cost of participation in extensive filed trials.

The cost of Buyer Nominated Equipment (BNE) procured from the Ordnance Factory Board (the departmental production agency under the DDP) would not be taken into consideration for the purpose of selectin of L1 vendor. This is intended to insulate the L1 vendors from an arbitrary hike in price by the OFB post submission of the commercial bid.

In certain ‘Buy and Make’ programmes, in which foreign OEMs are allowed to select their Indian Production Agency (PA), the RFP would stipulate the eligibility criteria for selection. This would bring transparency in the selection process.

The scope of Fast Track Procedures (FTP) is expanded to apply to items “where undue/unforeseen delay, due to reasons beyond the control of acquisition set up, seem to be adversely impacting the capacity and preparedness of the regular and special forces.”

An Assessment

The introduction of ‘Buy (Indian-IDDM)’ procurement category, the revamped ‘Make’ procedure, structural change in the AAP, and higher and flexible indigenous content requirement in certain procurement categories are some of new provisions in DPP-2016 that are likely to deepen the involvement of the domestic industry in defence production. At the same time, the reduced validity of AoN and its sanctity, together with the measures to undertake procurement in single-vendor situations, are likely to arrest some of the delays in the acquisition process. However, much of the effectiveness of these changes would depend on how the new measures are implemented by the SHQ, MoD, DRDO and HQ IDS, which, together, constitute the larger procurement set up. In this respect, DPP-2016 has done little to strengthen the current institutional mechanism which is now more than 15 years old. Despite some notable successes, the procurement set up has been constrained to own up responsibility and drive procurement at the desired pace. The biggest issue that the procurement machinery faces is its decentralised nature, resulting in lack of coordination, diffused accountably and delay. Given this, it would have been prudent if the new DPP had reflected upon some of the structural changes necessary in the procurement set up to complement the changes made in the procedures.

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Courtesy: http://www.idsa.in/specialfeature/dpp-2016_lkbehera_120416