1. In the need of a balance

In the need of a balance

The suggested procurement methodology in the current form is very broad and requires umpteen clarifications and hand-holding from the government to create a conducive policy environment for its successful implementation.

New Delhi | Published: July 21, 2017 4:14 AM
As per the policy, the procurements shall be undertaken through SP route in the following manner.

After multiple committees and many rounds of deliberations, the ministry of defence (MoD) finally released the Chapter-7 of DPP-2016 laying broad contours of the policy on ‘Strategic Partnerships’ (SPs). The policy is an important cornerstone in the defence procurement procedure entailing a shift from imports to ‘Make in India’ and likely to set the trend for many upcoming procurements.

The policy envisages the establishment of long-term strategic partnerships with Indian private defence majors through a transparent and competitive process, wherein they would tie up with global Original Equipment Manufacturers (OEMs) to seek technology transfers to set up domestic manufacturing infrastructure and supply chains. Such Indian players shall be referred as ‘Strategic Partners’(SP) for a particular segment/platform and it shall be expected that they develop the requisite capabilities and supply chain for future in-country manufacturing of such segments/platforms.

As per the policy, the procurements shall be undertaken through SP route in the following manner.

* The government shall issue an Expression of Interest (EOI) to the Indian private industry to short list Indian companies and simultaneously shortlist OEMs for each platform/segment.
*  Request for Proposal (RFP) will be issued to the shortlisted Indian companies. A list of shortlisted OEMs shall be annexed to the RFP so that Indian companies could engage with OEMs to submit the techno-commercial offer.

*  An Indian company can negotiate with all shortlisted OEM’s but has to submit its techno-commercial offers with one OEM (two in the case of diverse platform).
*  Technical offers shall be evaluated and field and staff evaluation shall be conducted if necessary.

*  Opening of commercial offers of companies qualifying the technical stage.

*  Selection of the LI bidder. Indian entity submitting the lowest bid to be designated as the SP.

*  Negotiation, finalisation and signing of the contract.

In the initial phase, SPs will be selected in the following segments, viz. fighter aircraft; helicopters; submarines and armoured fighting vehicles (AFV)/main battle tanks (MBT). Gradually, the government may add more segments/platforms or further sub-divide the platforms as it may deem necessary.

At the outset, it is imperative to note that only one SP shall be selected per segment/platform. The Indian companies can contest to become SPs in the following manner:

* The MoD shall issue an EOI to Indian private companies for selection of SPs in defined segments. The companies shall be required to comply with specified ownership and control related conditions and ‘Minimum Qualification Criteria’ (MQC) comprising of financial, technical and segment-specific parameters.

*  Evaluation of companies based on MQC and segment wise verification of segment specific criteria.

*  Companies qualifying the criterions shall be eligible to receive the RFPs for the respective segment/platform.

In addition, the capability and credentials of applicant company shall be considered while shortlisting the companies. However, acknowledging that Indian companies have limited experience in defence manufacturing and even lesser in respect of final integration of complex defence systems and sub-systems, the policy provides that:

Besides any experience in defence manufacturing, potential SPs will be identified primarily based on their experience and competence in the integration of a multi-disciplinary functional system of systems, engineering and manufacturing.

Flexibility is provided to the applicant company to rely upon group company(ies)’s experience in that particular segment.

Further, the process of shortlisting of OEMs shall be parallel to shortlisting of Indian companies as detailed hereunder:

*  Issuance of Request for Information (RFI) to potential OEMs.

*  Formulation of Services Qualitative Requirements (SQRs) covering aspects of the platform as well as weapons required, wherever feasible.

* Based on SQR and information collected, EOI shall be issued to OEMs – To be responded within two months.

*  Undertaking TEC (field and staff evaluation).

*  OEMs meeting TEC (‘Technical Evaluation committee’) requirements to be shortlisted.

On the flip side, the policy provides that even if one OEM is shortlisted, the process of evaluation shall be completed. This is a welcome move, by doing away with the legacy practice of scrapping the tendering process in the event of a single vendor situation. As Transfer of Technology (ToT) is one of the main factors in the selection of OEM, the quantum and scope of technology being offered for transfer by the OEM will be a primary consideration in the selection procedure.

The policy on SP is an important policy change which is likely to set a new normal in procurement methodology, with greater participation of domestic private sector. With release of this policy and with the pressing requirement of procurement from the forces it is likely that some of the long awaited RFPs (such as light utility helicopter, naval multi-role helicopter, reconnaissance and surveillance helicopter, fighter aircraft, future ready combat vehicle, Project 75I, etc.)1 may see the light of the day through the SP route.

The industry expected the government to lay down a clear and comprehensive policy with all details penned down to the last detail (as suggested by both committees). However, in the fine print, many aspects (such as qualifying criterions, ToT expectations, indigenisation blueprint, etc.) have left to be clarified in the EOIs, RFPs, etc. Having said this, it is a start to a new beginning.

*  Contrary to the proposition of the Aatre committee, the policy does not prohibit Indian companies/industrial groups to bid for more than one segment. This move shall help large houses having multi-disciplinary infrastructure and credentials to bid in more than one segment.

*  The final selection of bids shall be purely on L1 basis contrary to a weighted methodology of cost and technology as proposed by the committees. Considering the huge impetus on ToT and indigenisation, this move is not in sync with the intent of the policy.

*  10-15% of the platforms may be allowed to be manufactured at the OEM’s premises for the purposes of training and skill development of SP manpower. This move shall help the forces get equipment delivered for immediate usage. Also, this is a pragmatic step acknowledging that there is a gap in the current manufacturing infrastructure and time shall be required to bridge the gap for complete in-country systems manufacturing.

*  Unexpectedly, the government refrained to spell the thresholds/benchmarks for qualification for Indian companies and left the same to be defined in the EOIs. A detailed policy would have helped the Indian companies prepare and move towards the desired benchmarks.

*  While there is a clear impetus on ToT and indigenisation, however, no express guidelines have been provided in the policy. One had expected some guidance on the quantum and extent of indigenisation and more details on the evaluation criterions for OEM selection on account of ToT.

*  There is less clarity on any commitment from the government to the SPs or OEMs for any future procurement. While initial tendering for upcoming RFPs could be under the SP route, there is no commitment on any subsequent procurements within same segments from such SP’s.

*  The segment of procurement has been widened from ’single engine fighter aircraft’ to a broader segment ’fighter aircraft’ expanding the ambit of procurements to be undertaken through the SP route.

All said, one of the most important roles shall be of the government being the pragmatic policy maker and customer. The suggested procurement methodology in the current form is very broad and requires umpteen clarifications and hand-holding from the government to create a conducive policy environment for its successful implementation.

– By Gaurav Mehndiratta is partner-tax, while Rajat Duggal is associate director, KPMG in India

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