The process leading up to the decision by the Indian Ministry of Defense to issue invitations to eliminate four of the six companies in the contest to win the Indian Air Force (IAF) tender for 126 Medium Multi Role Combat Aircraft (MMRCA) has large holes in its standard of diligence.
Only the the French Dassault’s Rafale and the European Eurofighter Typhoon were invited to extend their commercial bids, with the Russian MiG-35, the Swedish SAAB’s Gripen, Boeing’s F/A-18 Super Hornet and Lockheed Martin’s F-16, all left out of the contest.
While much has been written about this decision, the news of which was first broken by StratPost, questions have surfaced in the subsequent two weeks, that show crucial gaps in the diligence of the process followed by the ministry. Many of the issues arising from these questions have been earlier reported and analyzed by StratPost.
The tender process entailed the examination of the aircraft on offer on three key aspects. Firstly, the IAF was required to conduct a technical evaluation of the six aircraft, the report for which it submitted after completion last July.
And while the two selected aircraft may have performed the best according to the IAF’s report, at the end of a process which the IAF chief of staff Air Chief Marshal Pradeed Vasant Naik has often said he would like to have patented, Ajai Shukla has reported in the Business Standard that the Technical Oversight Committee, mandated to audit the evaluation process conducted by the IAF, still has to complete its work.
Unfortunately, this is not the only part of a tender process that has been subject to shortcuts or simply left incomplete. There is much more that remains to be desired from the process followed by the ministry, to qualify the decision as one that is strategic and the result of due process.
The defense procurement process is constructed to be strategic in nature. Not only does it look at the technical aspects of weapons and equipment, it also takes the issue of creation of indigenous capabilities for defense production into account. Considering the value of the order, the idea here, was, as much, to expand existing capabilities and get the best value for money.
This decision mandated an assessment of all aspects of the proposed procurement before the elimination that took place a little more than two weeks back. While the IAF test drove all six aircraft and submitted its assessment of their capabilities, it was the ministry’s responsibility to examine two key aspects of the proposed order: the issue of offsets and that of transfer of technology.
The 50 per cent offset requirement of the tender requires the winning vendor to plow back half the value of the order into Indian defense industry. This is important as it has the potential to boost domestic industry beyond the capacities of the existing virtual monopolies exercised by government-owned defense companies, better known as Defense Public Sector Units (DPSUs).
The six vendors had originally submitted their offset proposals in July, 2008. And there the matter rested, until the IAF submitted its technical evaluation report, last summer.
It was only after that, in September, that the ministry woke up to the need to evaluate the respective offset proposals and decided to inform all the vendors of inadequacies in their proposals, for which prescriptions were promised. But even after repeated rescheduling, the ministry continued to dither on stipulating requirements for fresh offset proposals from vendors.
With the date of the expiry of the commercial bids looming once again, it attempted to cut-short the offset evaluation process by revising the Defense Procurement Procedure (DPP), to enable itself to issue invitations to offer offsets proposals to only those vendors validated as technically qualified by the respective service, and qualified to be invited for the opening of their respective commercial bids. To be able to apply it to the MMRCA tender, which is governed by the DPP of 2006, the ministry also intended to get approval from the Law Ministry to apply the changes with retrospective effect. This, however, did not transpire successfully.
Then, perhaps as result of pressure from Air Chief Marshal Naik, it suddenly gave the vendors two weeks to resubmit their offset proposals in the first week of April, something with which all six vendors complied.
But a day before the commercial bids of the six vendors were to expire, news broke of the decision to invite only two of the six vendors to extend the validity of their bids. The ministry says this decision was based purely on the technical evaluation report conducted by the IAF, submitted nine months back. If the four vendors failing to make the shortlist did so on the basis of the technical evaluation report, it remains unclear as to why the IAF and the ministry waited until a day before the expiry of the commercial bids to invite only two vendors to extend the validity of their bids. It seems obvious, this was done to present them with a fait accompli.
Presumably, the fresh offset proposals submitted by the six vendors at the end of this gestation period had no bearing on the decision. It seemed at the time that the ministry was planning to complete the offset evaluation process in two weeks, something it had failed to do in almost three years. It is now apparent that the request for the resubmission of offset proposals was a mere formality, intended to get the offset resubmission issue out of the way, since, it was a prerequisite for opening the commercial bids, it was required of all the vendors according to the DPP, and since knowledge of all of this was in the public domain.
After the decision was announced, the ministry said ‘offset negotiations’ were underway. This obviously questionable timing and the apparent bad faith of this act notwithstanding, the business of negotiating offsets is difficult to understand. The ministry has to evaluate the respective offset proposals and decide them to be compliant with the stipulated requirements, or otherwise. There is little to negotiate here.
Transfer of Technology
At the same time, a day after the decision was reported, the ministry also said that proposals for transfer of technology would be examined after the opening of the commercial bids.
Once commercial bids are opened, the lower of the two remaining bidders will be the evident winner of the order. It is difficult to be sure that the winner’s proposal for transfer of technology will be acceptable to India. Further, once the winning bid is apparent, the winner will have no incentive to provide competitive terms for transfer of technology.
Technology transfer is important as it is meant to ensure India gets access to the latest of combat aircraft technologies. Naturally, this transfer of technology and intellectual property will come at a cost. In the absence of any competition on the issue of technology transfer, with the lowest bid determined, the winner will have no incentive to either acquiesce to reasonable costs for the transfer nor have any reason to show any great readiness to transfer as much technology as India requires.
The deficit of logic in the process followed by the ministry is apparent. Even if we assume that the offset proposals of the two selected vendors will be found compliant, it is difficult to be sure that wranglings over costs and level of transfer of technology will not ensue after the opening of the commercial bids. There is no question it would have been wiser to assess the proposals for offsets and technology transfer before the announcement of the de facto shortlist.
There is one other issue that could create problems for the ministry. The Contract Negotiation Committee (CNC) has to arrive at a benchmark of a reasonable price, internally, before the opening of commercial bids. This process will have to reconcile the funds cleared under the demand for grants approved by the Standing Committee on Defense of Parliament, after the Acceptance of Necessity for the MMRCA procurement, with the estimated costs of the two selected fighter aircraft, acknowledged to be the most expensive of the MMRCA-6. How the CNC intends to define reasonable remains unclear.
With the prospect of India being left with a Hobson’s choice on several counts, the soundness of the April 28th decision is in question. Even if the IAF completed its mandate as required and rendered its assessment, the absence of due process with respect to offsets and technology transfer will leave other stakeholders like Indian defense industry and research establishments short-changed and India with less than the best deal.
One hopes, naturally, this is not left to providence. But as things stand now, the decision shows a clear abdication of responsibility by the Ministry of Defense in completing due process that may have compromised the integrity and purpose of the tender.