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Viable Alternatives Required to Replace Existing Procurement Procedures

Mr Amit Cowshish is a former Financial Advisor (Acquisition), Ministry of Defence and former Distinguished Fellow, Manohar Parrikar Institute for Defence Studies and Analyses, New Delhi. Click here for Detailed Profile
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  • August 10, 2021

    The Army Chief MM Naravane recently criticised the current process of procurement of defence materiel for the armed forces in no uncertain terms. Speaking at an event organised by the Delhi-based United Service Institution, he said the process had not kept pace with time and the need of the hour was a revolution in bureaucratic affairs.1

    He added that many procedural lacunae had crept into the acquisition process due to the overbearing nature of rules and regulations, leading to a ‘Zero Error Syndrome’ and that the focus must be on faster decision making. Calling for a systemic metamorphosis, he suggested that perhaps the concept of L1 (lowest bidder) should be done away with altogether.2

    Most of what the Army Chief said is valid, but it begs the question why the procedural lacunae – none of them new – could not be addressed while revising the Defence Procurement Procedure 2016 (DPP 2016). It was only last October that, after extensive consultations with all the stakeholders, including the industry and think tanks, DPP 2016 was replaced by the Defence Acquisition Procedure 2020 (DAP 2020).

    The Services were an integral part of this exercise, which was overseen by an 11-member committee constituted by the Ministry of Defence (MoD) in August 2019 under the stewardship of the Director General (Acquisition) with the following terms of reference,3 which subsume the concerns expressed by the Army Chief: 

    1. Revise the procedures as given in DPP 2016 and DPM 20094, so as to remove procedural bottlenecks and hasten defence acquisition
    2. Align and standardise the provisions in the DPP 2016 and Defence Procurement Manual DPM 2009 (DPM 2009), wherever applicable, to optimise life cycle support for equipment
    3. Simplify policy and procedures to facilitate greater participation of Indian industry and develop a robust defence industrial base
    4. Wherever applicable, examine and incorporate new concepts, such as life cycle costing, life cycle support, performance-based logistics, ICT, lease contracting, codification & standardisation
    5. Include provisions to promote Indian start-ups and research & development
    6. Any other aspect which will contribute towards refining the acquisition process and support the ‘Make in India’ initiative

    In turn, this MoD committee set up many sub-committees to examine various aspects of the procedure laid down in DPP 2016 and DPM 2009 and after more than a year of deliberations – during which a draft manual was also released inviting comments from the interested parties – the final 681-page document was approved by the Defence Acquisition Council (DAC) and released by Defence Minister Rajnath Singh. All Service Chiefs, Chief of Defence Staff, and Secretaries of various MoD departments are members of the DAC.

    In the foreword to DAP 2020, the Defence Minister claimed that it “introduces a slew of conceptual, structural and procedural reforms in the acquisition procedure to create a climate in which the industry can thrive while meeting the security and operational needs of the Services” and that the document’s focus is on “ensuring that contemporary technology based equipment is made available to the Services in a time bound manner, to further expedite the modernisation of the armed forces”.5

    It is difficult to imagine what constraints the committee might have faced in making procedural improvements to address the problems that the Army Chief mentioned in his address. The fact is that within the broad principles of public procurement laid out in the General Financial Rules, 2017 (GFR 2017), the MoD is free to evolve a procedure that addresses the peculiarities of defence acquisitions.

    This would be evident from a comparison of GFR 2017 and the Manual for Procurement of Goods, 2017 issued by the Ministry of Finance (MoF), and their earlier versions, with the several versions of the DPP issued between 2002 and 2016, and the latest DAP 2020. There is a marked difference between the procedure followed by the MoD and other civil ministries though the basic principles underlying the procurement architecture remains the same.

    It is possible that the Army Chief was hinting at the need for changing one or more of these fundamental principles of public procurement. One gets this impression from the Army Chief’s suggestion to do away with the L1 concept altogether. Considering that a section of the strategic community has been castigating this concept for a long time, it is surprising that the MoD-appointed committee and its sub-committees either did not take up this issue or were unable to offer an alternative.

    Be that as it may, four points need to be made regarding this L1 business. One, though L1 is among the fundamental principle of public buying, there are exceptions to it as in the case of single-source procurements. In fact, most of the MoD’s single-source negotiated acquisitions from the Indian vendors or under the government-to-government or inter-governmental agreements are not based on the L1 concept. Procurements made from the United States (US) through the Foreign Military Sales (FMS) route are a case in point.

    Two, the L1 system does not require the Services to blindly pick up the cheapest equipment. The L1 bidder is determined through a rigorous process of elimination. This process starts with the Request for Information (RfI) to gather information about the available equipment that meets the Services’ operational requirements and to formulate the Services Qualitative Requirements (SQRs).

    The SQRs are formulated by the Services – at times warranting some modifications in the available equipment to meet their requirement – and approved by the Services Equipment Policy Committee (SEPC).

    The detailed SQRs are mentioned in the Request for Proposal (RfP) and the bidders’ responses are technically evaluated by the Services to shortlist the vendors whose products meet their needs. The shortlisted vendors are then asked to bring their equipment for extensive field trials, wherever considered necessary. These trials constitute the second filter to shortlist the vendors based on the actual performance of the equipment.

    At the last stage, the commercial offers of only those vendors, whose product fully meets the requirements of the Services, are opened and L1 determined. Conceptually, L1 is identified from among the bidders whose product is certified by the Services as being suitable for performing the intended operational role. Seen in this perspective, the L1 system seems fair and equitable, but if it is not, it should indeed be modified, if not junked altogether.

    Three, it is permissible to specify Enhanced Performance Parameters (EPP) in addition to the SQRs, enabling the vendors to offer a product that is more advanced than the one based on the SQRs. The vendors meeting those EPPs get a weightage up to 10 per cent while determining L1.

    In simpler words, if the price quoted by a vendor for the product meeting the EPPs mentioned in the RfP is Rs 100 and full weightage of 10 per cent is applicable as per the terms of the RfP, the quoted price is reduced to Rs 90 for the purpose of comparison with the price quoted by other vendors. And if, with reference to the depressed price, such a vendor emerges as L1, the contract is awarded to him/her at the quoted price of Rs 100. This is a departure from the conventional L1 concept.

    When introduced in 2016, this feature was lauded as a progressive step that would address the real or perceived rigours of the L1 system to a considerable extent. Going by the Army Chief’s statement, however, the excitement was misplaced.

    Lastly, if none of the systems mentioned above is working well and has become a hindrance in acquiring state-of-the-art defence materiel expeditiously, a case needs to be made out based on demonstrable drawbacks of the existing system and, more importantly, a detailed blueprint of what system should replace it. Prejudicial condemnation of the L1 system, or other aspects of the existing procedure, is of little help.   

    Views expressed are of the author and do not necessarily reflect the views of the Manohar Parrikar IDSA or of the Government of India.