qtech_logo_t

WHY DO DEFENCE ACQUISITIONS GET STUCK?

The cumbersome buying procedure of Indian Ministry with no assurance of a positive outcome is a worried situation.  The main problem does not seem to be so much with the multiple steps but with the complexity of the actions required to be taken at each step to push the case from one stage to the next. The author analyses—

Going by the time frame given in the Defence Procurement Procedure (DPP) 2016, the entire procurement process should be completed within 86 to 126 weeks from the time a proposal is accorded Acceptance of Necessity (AoN). In reality, it takes much longer, with no assurance of a positive outcome. Many proposals fall through at some stage or the other during the long journey from AoN to conclusion of the contract. What accounts for this?

Is it because the procurement cycle comprises as many as twelve stages/steps? The question is moot for the procurement procedure has been reviewed several times since the first DPP was promulgated in 2002 but these steps have remained unaffected. A Committee of Experts set up by the Ministry of Defence (MoD) in 2015 for streamlining the procedure also did not suggest doing away with any of these steps. Surely, the dispensability of one or more of these stages would have come to light during one of those reviews or pointed out by the committee.

It does not mean that all these steps are an essential part of the procurement cycle in every case. But it cannot be denied that each of them serves a very useful purpose. This does not prevent some steps being combined, taken simultaneously instead of sequentially, or being given a pass in a particular case if those steps are not needed. Possibly, simultaneous action is already being taken in a limited way but more thought needs to be given to the possibility of combining various steps and activities being carried out in parallel or even being doing done away with completely when not required in the context of a particular acquisition programme.

Let us consider a hypothetical programme involving acquisition of single-engine fighter aircraft where MoD is starting from a scratch. Since it is known that there are a very few manufacturers in the world, the acquisition process could possibly start with an open invitation to the manufacturers, instead of an elaborate Request for Information (RFI) or Expression of Interest (EoI), to confirm that they would be interested. Even this invitation may not be required if MoD can put in place a dynamic system of vendor registration.

The companies which evince interest can then be asked straightaway to submit their technical and commercial offers provided the aircraft being offered is capable of meeting the operational, inter-operability and other requirements, such as transfer of technology for local manufacture, specified in the Request for Proposal (RFP). The RFP could also indicate the schedule for carrying out the flight and other tests. The technical evaluation can also be done away with because ultimately the acceptability of the aircraft will depend on its performance in the air and not on paper.

The purpose of obtaining the technical offer will largely be to elicit technical information required by the users, maintenance agencies, etc., and to hold the supplier to the specifications given in the technical offer and other claims made therein concerning the life cycle parameters, etc. The trial report can be subjected to a combined staff and technical oversight evaluation, followed by opening of the commercial offers of the suppliers who qualify at this stage and contract negotiation with the lowest bidder, if considered necessary. The contract can then be signed after obtaining the consent of the competent financial authority. This could considerably reduce the time taken to finalise the deal.

The model suggested above is not a cut and dried blueprint of an alternative acquisition procedure. Indeed, this model will require many loose ends to be tied and even then it may not be suitable for all situations. There could possibly be other alternatives also. The idea here is only to indicate that there is a possibility of creating alternative procurement paradigms, some of which already exist in the form of the Fast Track Procedure, Foreign Military Sales programme and other country-specific Inter-governmental Agreements. If some of the steps can be combined or done away with when resorting to procurement under the Fast Track procedure with a lot of power being wielded by the Empowered Committees, there is no reason why a similar approach cannot be adopted for the normal procurements.

But compressing or doing away with some of the steps may not be enough. If one looks closely, the main problem does not seem to be so much with the multiple steps through which a procurement proposal must pass as with the complexity of the actions required to be taken at each step by the procurement personnel to push the case from one stage to the next. This progression is not always smooth because the processes to be followed at each stage are not always very clearly spelt out in the DPP or elsewhere.

Take, for example, the contract negotiation stage. As per the provisions of the DPP, the Contract Negotiation Committee (CNC) is required to fix a benchmark price before opening the commercial offers. The benchmark price is very important because the reasonableness of the quoted price is assessed with reference to it. However, the manner in which the benchmark price is to be fixed is not clearly explained in the DPP. For that matter, nor is the method to be adopted for initial cost estimation. Consequently, cost estimation and benchmarking continue to be the weakest link in the entire chain.

To illustrate, one of the methods is to fix the benchmark with reference to the Last Purchase Price (LPP). The problem is that the LPP is not available in all the cases. Even where it is available, it may pertain to a contract signed a long time back, in which case the price has to be adjusted to account for increase/decrease in prices since the contract was signed. This is also the case when the equipment proposed to be procured is an upgraded version of the same equipment for which the LPP is available.

The DPP provides no clue as to how the price is to be adjusted in such cases. In fact, various approaches to fixing the benchmark and the methodology to be adopted for doing that is not elaborated in any document The resultant uncertainty is one of the reasons for the delay in conclusion of the contract negotiations.

Considering that such ambiguities exist in regard to most of the stages in the procurement cycle, it is not surprising that each stage takes longer than the time prescribed in the DPP, though this is not the only reason. At some of the stages, the proposal has to move through various levels/committees which also adds to the total time taken to cross those stages.

This is best exemplified by the AoN stage. The Statement of Case (SoC) prepared by the SHQ concerned after formulation of the SQRs and obtaining all necessary inputs from various agencies is first submitted to the Services Capital Acquisition Plan Categorisation Committee (SCAPCC) which is a part of the Headquarters Integrated Defence Staff (HQ IDS).

From SCAPCC, every proposal goes to the Services Capital Acquisition Plan Categorisation Higher Committee (SCAPCHC) which is competent to accord AoN for all proposals up to Rs 150 crore. This committee can also send a proposal back to the SCAPCC for re-examination. The SCAPCHC forwards all proposals that fall between Rs 150 crore to Rs 300 crore to the Defence Procurement Board (DPB) and those above that limit to the Defence Acquisition Council (DAC) for AoN. The DPB and DAC can also return a proposal if the deliberations reveal that certain issues have not been addressed in the proposal.

While the first two committees work as a filter, the DPB and DAC are basically AoN according bodies. There is a need to examine the feasibility of combining SCAPCC and SCAPCHC into one committee, enhancing the financial power of the combined committee to accord AoN, and divesting DPB of its AoN-according power. In any case, it makes little sense that cases between Rs 150 to Rs 300 crore go to the DPB for AoN. Divested of the responsibility to accord AoN, the DPB can play a more meaningful role in monitoring the progress of the procurement proposals and giving directions to deal with any problems that those proposals may be encountering.

The examination of procurement proposals by the Ministry of Finance (MoF) after these have been examined by the Finance Division of the MoD is also often cited as an example of redundancy. The truth of the matter is that only those cases go to the MoF which are beyond the financial powers delegated to the Defence Minister (Rs 2,000 crore). Beyond this, the financial power to sanction the proposals is exercised by the Finance Minister (up to Rs 3,000 crore) and the Cabinet Committee on Security (CCS) thereafter.

One cannot question the FM's prerogative to have the proposals examined in MoF before sanctioning them or where the proposal has to go to the CCS, of which FM is a member. The question, however, is whether there is duplication of effort in examining the proposals in the MoD and the MoF. It is also often pointed out that in many cases MoF makes very mundane or irrelevant observations or raises issues which may have already been examined in depth by the MoD, including its Finance Division.

While it is possible that in some cases, unwarranted or superfluous issues were/are raised by the MoF, in principle the prerogative of the MoF to make observations or raise issues cannot be questioned if it feels that those issues have not been examined at all or inadequately by the MoD. At any rate, a case cannot be made out for eliminating the role of the MoF in the absence of hard facts which support the view that the proposals referred to the MoF invariably get delayed or stalled because of duplication in examining them.

What can, however, be done is to seek more powers for the Defence Minister which will reduce the number of cases to the FM or the CCS. (Incidentally, the Defence Minister presently enjoys full powers under the revenue segment.) In addition, there is a need to see if the checklists mutually prepared by both the ministries several years back to make sure that the basic issues that MoF is particular about are addressed by MoD while sending the case to the MoF requires to be updated. This mechanism had brought about a significant improvement in the past. There is no reason why continuous improvement in the checklist should not bring in greater efficiency.

Efficacy of the system also depends on two other factors: simplification of the procurement framework and a greater professionalism on the part of the procurement personnel. Of the two, simplification of the present procurement framework requires immediate attention. Proliferation of the procurement categories has clogged the framework. It may be recalled that the first DPP promulgated in 2002 had only one procurement category: 'Buy'. Currently there are six, including the 'Make' category, which is further split into two-sub-categories.

What complicates the matter is the overlap between the 'Buy (IDDM)' and the 'Buy (Indian)' categories as evident from the defining attributes of these categories given in the DPP. Arguably, both these categories also overlap the 'Make' category. And, to add to the confusion, the Strategic Partnership (SP) model, adopted with much fanfare in 2017, also seems to overlap with the 'Buy and Make (Indian)' and 'Buy and Make' categories. There is a need to explore easier ways of achieving the same outcome which is presently sought to be achieved through a very wide array of overlapping procurement categories.

Under the SP model, for example, an Indian company, selected by the MoD through a competitive process, is required to tie up with a foreign company which makes a platform selected by the MoD through a parallel exercise and make that platform in India with Transfer of Technology (ToT) from the foreign manufacturer. The same outcome could be achieved more easily by entering into a contract with the foreign manufacturer by permitting that manufacturer to tie up with an Indian company of its own choice under the 'Buy and Make' category. The terms and conditions on which such contracts are signed could be the same as envisaged under the SP model.

It is no secret that the personnel involved in capital (as also revenue) procurements do not possess the requisite professional skills. Lack of professionalism, which should not be confused with earnestness and dedication of the personnel, impacts various important functions, such as formulation of the SQRs, cost estimation, life cycle costing, commercial negotiations, and contracting just to name a few. This is in sharp contrast to the USA where the procurement personnel get trained in the Defence Acquisition University and other institutions. France too has a dedicated Directorate General of Armaments to handle acquisitions.

There is no such arrangement in India. Whatever skills the procurement personnel have are generally acquired on the job. It is not surprising, therefore, that many proposals fall through because of issues relating to crucial aspects of acquisition such as formulation of the SQRs, cost estimation, life cycle costing, commercial negotiations, and contracting, all of which require special skills. Efforts made in the past to start training programmes did not succeed for a variety of reasons. These efforts must be revived.

Every procurement programme throws up unique problems which need to be addressed as soon as they arise but MoD's track record of handling such situations, much less anticipating them or giving specific directions as to how to overcome the roadblocks, is not very encouraging. Frequent retraction of the RFPs is a testimony to this inadequacy.

The responsibility for the entire procurement process is also presently shared by the MoD, SHQs and other agencies. It will bring about a significant improvement in the system if the entire process is brought under a single authority. Setting up of a semi-autonomous Defence Acquisition Organisation run by skilled professionals with longer tenures, as suggested by a committee set up by the MoD last year, could provide an answer to these woes.

Article published in Magazine issue “Mar-Apr 2018 “

No Comments Yet.

Leave a comment