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For example, if RFP allows an advance of up to 15 percent, no vendor can demand 50 percent advance. However, no change in price quote is permitted. Should a vendor insist on unacceptable terms, CNC may eliminate him by declaring his commercial offer to be conditional and non-compliant.
Comparative Statement of Tenders
Once compliance is established, CNC starts the process of determining the lowest acceptable offer (L1 vendor). A Comparative Statement of Tenders (CST) is prepared. It is a highly intricate and protracted process as multifaceted aspects having commercial implications have to be factored in. Discounted Cash Flow (Net Present Value) method is used, where applicable.
Existing Gaps and Infirmities
As stated earlier, India’s commercial evaluation process has been criticised both by domestic and foreign participants for subjectivity due to a complete absence of well-evolved guidelines. Every CNC charts its own course. Lack of standard evaluation criteria makes the whole process ad-hoc, with the result that the environment tends to lose confidence in the credibility and fairness of the system. Major infirmities have been discussed below.
Fixation of Reasonable Price
Establishment of an acceptable price bracket needs expertise in holistic treatment of varied interrelated financial disciplines in acquisition that include 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 like ‘Cost as an Independent Variable’ management process.
Although there is no universally accepted standard method to determine fair price of defence equipment, use can be made of a number of scientific techniques that are commonly available. Countries develop expertise as they gain experience and a scientific methodology is evolved through appropriate analogy estimates, parametric estimating, software simulations and technology costing. Production costs (including development overheads) have to be estimated and marked up with reasonable profit. For that, a great deal of data has to be collected and collated. Further, CNC has to consider market dynamics to include extent of competition and degree of desperation of the vendor to sell.
It is obvious that a great deal of proficiency is required to perform the above functions thoroughly. In India, constitution of CNC is purely representative-oriented and not expertise-based. Consequently, CNC are fully devoid of any required qualities. Chairman is nominated due to his official position and not for any special qualifications or skills. As a matter of fact, not a single member of CNC possesses required knowledge and competence. The whole process is ad-hoc and illogical – old files of previous procurements of similar systems are dug out and a standard inflation factor is applied to it. Thereafter, foreign exchange variations are factored in to arrive at a broad acceptable price range. Needless to say, the above methodology is totally unscientific in evaluation, arbitrary in value and subjective in nature. The whole exercise becomes a wasteful sham.
Ascertaining Lowest Bidder
As every major military system has long service life, cost of sustaining it is invariably many times the cost of acquisition. Life cycle cost (LCC) is considered to be the most prudent and realistic way to determine long term cost of ownership. LCC analysis calculates the cost of a system or product over its entire life span in service. It is also called as ‘cradle-to-grave’ or ‘womb-to-tomb’ analysis. It is a tool that helps to choose the most cost-effective alternative available.
LCC consists of acquisition costs and sustaining costs. Both are not mutually exclusive. Deterministic costs (cost of acquisition/development) can be firm but estimation of probabilistic costs (cost of operation, maintenance and failures) requires great deal of understanding and training. Probabilistic costs of defence equipment also depend on degree of exploitation of equipment in actual operations, war games and field exercises. Knowledge of likely deployment pattern of equipment is essential to be able to estimate long term effect of different types of terrain and climatic conditions. Data regarding past performance of similar equipment provides useful inputs for making realistic assumptions.
Lack of objective professionalism is the main cause for all ToT contracts getting mired in controversies”¦
Availability of extensive teaching aggregates and simulators helps in reducing load on main equipment for training purposes, with resultant lower maintenance costs. Sustaining costs also depend on the quality of engineering support and expertise acquired by indigenous maintenance agencies. Cost implications of actual or planned modifications, upgrades or life extensions are also required to be factored in. In case subsequent indigenous production is planned with technology transfer, LCC analysis has to be tailored accordingly.
Despite repeatedly avowed intention to apply LCC analysis to all major deals to identify lowest bidder, India continues to bank on acquisition costs. As no effort has been made to acquire the necessary expertise, LCC continues to be a statement of intent and nothing more. Not a soul in the whole acquisition regime has mastered the LCC technique. Every CNC follows the easy path of tabulating and totalling initial procurement costs of main items, training aids, spares, tools and test equipment to arrive at the cheapest option. Invariably, India is taken for a ride by smart vendors who quote low for the main equipment in their commercial quotes but hike up cost of follow up support to unreasonable levels.
Further, fair comparison of commercial offers demands that different payment terms, including advance payments and progressive stage payments to the vendors be brought to a common denomination. Discounted Cash Flow (DCF) method with a discounting rate in consonance with the existing government borrowing rate is considered to be an ideal vehicle for the same. DCF method is also useful in cases where entering into AMC for period in excess of one year is part of the required bid. Unfortunately, India has to still master DCF technique. Consequently, DCF method is rarely applied and initial quotes are evaluated by all CNC.
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