IDSA COMMENT

Role of the Services in Capital Acquisition

February 22, 2013

The systems and procedures for capital acquisitions, introduced by the Ministry of Defence (MoD) in 2001-02 in the wake of the Kargil war, provide a decisive, if not the final, say to the Services, including the Indian Coast Guard. The Services play a crucial role at every stage, right from identification of the requirement to induction of the equipment. In fact, capital acquisitions are an area that presents a unique paradigm of integration between the civilian and military bureaucracy within the MoD. Any impression that the Services play a limited or peripheral role would be contrary to the system so assiduously developed by the MoD in the last 10 years since the Defence Procurement Procedure 2002 was promulgated.

A proposal for acquisition of a capital asset – be it a weapons system, ship, submarine or aircraft - can be initiated only if it forms part of the Annual Acquisition Plan (AAP) of the Service concerned. The AAPs are two-year roll-on plans culled out from the Services Capital Acquisition Plans (SCAP), which are a part of the five-year defence plan. The five-year plan, in turn, emanates from the 15-year Long Term Integrated Perspective Plan (LTIPP). The LTIPP and the five-year defence plan are consolidated by Headquarters Integrated Defence Staff (HQ IDS) on the basis of inputs from the individual Services. These plans are prepared by the Services without any interference from the civilian bureaucracy. While the LTIPP and SCAP are approved by the Defence Acquisition Council, the Service-specific AAPs are approved by the Defence Procurement Board. The LTIPP for 2012-27 and the five-year defence plan for 2012-17, which includes SCAP, were approved by the Defence Acquisition Council on April 2, 2012. The AAPs are regularly approved by the Defence Procurement Board every year. Such is the sanctity of these plans that if some equipment that does not figure in the AAP is to be procured, the Service Headquarter (SHQ) concerned is required to seek the specific approval of the DPB for its inclusion in the AAP for processing the proposal.

The planning process provides full opportunity to the Services to identify their requirements and include them in the plans. More importantly, it places on them the responsibility of deciding when to include a proposal in the AAP as a precursor to initiation of the procurement proposal.

The second crucial role the Services play concerns formulation of the Services Qualitative Requirements (SQRs), which form the basis of the individual procurement proposals. The draft SQRs are prepared by the user directorate of the SHQ concerned by laying down the requirement of the user in concrete and specific terms. The draft is circulated to other possible users, maintenance agency, HQ IDS, Defence Research & Development Organization (DRDO), Department of Defence Production (DDP), the agency responsible for quality assurance, Directorate of Standardization, Technical Managers and, if considered necessary, to any other agency or department. The draft SQRs are discussed in the Services Equipment Policy Committee (SEPC). The SEPC for the Army, known as the General Staff Equipment Policy Committee (GSEPC), is headed by the Deputy Chief, who is a three-star Principal Staff Officer, and the recommendations of the committee are approved at the higher echelons in the SHQ. Each Service has a separate SEPC with a slight variation in regard to its composition and the approval process. The task of formulation of SQRs for equipment that is to be used by two or more Services is undertaken by HQ IDS through an Inter-services Equipment Policy Committee (ISEPC). Thus, the Services have a decisive and almost exclusive say in regard to formulation of the SQRs.

Significantly, the SQRs are expected to be made in such a manner that more than one vendor is able to meet the requirement. The procedure provides that if a single-vendor situation is likely to arise, the reasons for formulating such SQRs should be recorded. Such cases also require the approval of the Defence Procurement Board/Defence Acquisition Council. Any waiver or amendment in SQRs can be approved by the SHQ only before the Request for Proposal (RFP) is issued. Normally, no relaxation in the SQRs is possible after the RFP is issued. However, if any deviation becomes unavoidable it has to be approved by the Defence Minister/Defence Acquisition Council (DAC) on the recommendation of the Defence Procurement Board (DPB).

As in the case of the planning process, the MoD lacks the expertise to offer any guidance to the Services regarding formulation of the SQRs. But this is an extremely important step in the entire acquisition process. Formulation of SQRs requires gathering of information about the range of equipment available in the global market that would provide the requisite capability to the Services. The SQRs formulated on the basis of the information gathered by the Services could be too stringent or defective, resulting in inhibiting competition at the tendering stage. The course that an acquisition proposal takes depends heavily on the quality of the SQRs. According to the 15th report of the Standing Committee on Defence (15th Lok Sabha), as many as 41 RFPs had to be retracted between September 2010 and March 2012 because of faulty or stringent SQRs and faulty vendor analysis (implying that as many vendors did not respond to the RFP as were expected to). The retracted RFPs perhaps accounted for almost half the number of RFPs issued during that period.

The record of the Indian Air Force (IAF) and the Indian Navy (IN) in this regard is much better but there is a need for strengthening the system of SQR formulation because this is a vulnerable spot in the acquisition process. The suggestions made in the past that the task of formulating the SQRs should be entrusted to professional entities have been steadfastly opposed by the Services. A way out could be to set up an independent committee of experts within the MoD to review the draft SQRs. The composition of the committee could vary depending on the type of SQRs coming up for review.

At the pre-tender stage, all procurement proposals, based on approved SQRs, have to go through the process of Acceptance of Necessity (AoN), which is another name for approval-in-principle. This process commences with the circulation of a Statement of Case (SoC) by the SHQ concerned. The SoC contains the background of the proposal, the justification for procurement, details of the SQRs, proposed categorization and information regarding all other related aspects such as maintenance, transfer of technology (if required), quantity, mode of procurement, offsets and the estimated cost. The speed at which a procurement proposal travels through various committees until it is approved depends to a very large extent on the quality of the SoC. A well prepared SoC not only leaves no room for various agencies to raise observations but also ensures that no uncertainties arise subsequently while preparing the RFP which has to conform to the approvals sought through the SoC. This is an area which requires greater attention than it often receives.

From this stage onwards, there is a greater and more active involvement of other departments and agencies of the MoD. The principal players are the Department of Defence, the Department of Defence Production, the Defence Research & Development Organization and the Finance Division of the MoD. They offer their comments on the SoC sent to them by the SHQ concerned, after which the proposals are discussed in the categorization committees. It is, however, not necessary to wait for these comments. A proposal can be taken up for discussion in the categorization committees if the comments are not received within the stipulated period.

There are two hierarchical categorization committees: the Services Capital Acquisition Categorization Committee (SCAPCC) and the Services Capital Acquisition Categorization Higher Committee (SCAPCHC). These committees are embedded in HQ IDS and all procurement proposals are piloted through these committees by the SHQ concerned. The SCAPCC, which is the first committee where the proposal is discussed threadbare, is headed by a three-star Service officer of HQ IDS and the SCAPCHC is headed by the Chief of the Integrated Defence Staff to the Chairman, Chiefs of Staff Committee (CISC), who is an Army Commander equivalent three-star officer. These posts are held by officers from the three Services in rotation.

The discussion in these committees is intensely free and frank, to say the least. This is where the effort that goes into preparation of the SoC and the quality of its presentation comes into play. If the observations made on the SoC by various departments or the points raised by the members in the meeting are not fully answered, either of these committees can refer the matter back to the SHQ concerned for reconsideration/reformulation or defer the decision pending further discussion in subsequent meetings based on fresh inputs to be provided by the SHQ.

There are three important points to be noted. One, these committees generally meet regularly every month. Two, SCAPCC regularly interacts with the Indian industry (through industry associations) before every meeting to ascertain whether a particular requirement could be met indigenously. Three, the Services are represented in these committees at fairly senior levels. The SCAPCHC, for example, has the Vice Chiefs representing their Services. A large number of other Service officers connected with the proposals coming up for discussion also attend the meetings. All members, irrespective of the department or Service they belong to, have the freedom to participate in discussion on every proposal and fairly detailed minutes of the discussions are prepared within a few days of the meeting.

The process of according AoN in respect of proposals that fall within the delegated powers of the Services ends with SCAPCHC. The power to sanction individual procurement proposals up to INR 50 crore each is delegated to the Services. (This is likely to be increased to INR 150 crore shortly.) These powers are exercised by the Vice-chief of Army Staff, Vice-Chief of the Naval Staff, Deputy Chief of the Air Staff and the Director General Coast Guard. All actions, subsequent to the AoN by SCAPCHC in respect of proposals falling in this category, are taken by the SHQ concerned and the final approval to sign the contract is accorded by the aforesaid functionaries with the concurrence of the Integrated Financial Advisors. The MoD does not play any role in regard to processing of such proposals. A large number of proposals fall within the delegated powers, though such proposals do not account for a significant expenditure.

For all proposals with estimated value of more than INR 50 crore, the AoN is accorded by the Defence Procurement Board (DPB) in respect of proposals up to INR 100 crore and by the Defence Acquisition Council (DAC) for all proposals beyond that limit. (These limits would change if and when the powers delegated to the Services are enhanced to INR 150 crore.) The AoN is accorded based on the recommendations of the SCAPCHC. The DPB is headed by the Defence Secretary and the DAC by the Defence Minister but the Services are represented on both. While Vice Chiefs are members of the DPB, all the three Service chiefs are members of the DAC. Thus, the Services have a decisive say in approval of all procurement proposals from the point of view of necessity.

The tendering action follows acceptance of necessity. The Request for Proposal is prepared by the SHQ concerned and issued with the approval of the Director General (Acquisition). If required, a pre-bid meeting is organized by the user directorate of the SHQ concerned to answer the queries of the vendors. The offers, consisting of the technical and commercial bids received in response to the RFP, are opened by a committee headed by the Technical Manager (TM), who is a two-star Service officer. The technical bid is then sent for evaluation to the Technical Evaluation Committee (TEC) constituted at the SHQ concerned. Acceptance of the report of the TEC paves the way for field evaluation (trials), which falls in the exclusive domain of the Services. The result of the field evaluation is examined through the process of staff evaluation by the SHQ concerned. For procurements involving INR 300 crore or more, or in respect of any other proposal recommended by the DPB, a Technical Oversight Committee (TOC) is set up by the Defence Secretary. This committee has one member each from the Service concerned, DRDO and the Defence Public Sector Undertakings. The report of the staff evaluation and the TOC are accepted by the Director General (Acquisition) and the Defence Secretary, respectively. The entire process from the stage of RFP to the acceptance of the staff evaluation and TOC reports is driven by the Services.

The acceptance of the staff evaluation report and the TOC report, wherever applicable, sets the stage for contract negotiation. The Contract Negotiation Committee (CNC) opens the commercial bids, conducts negotiation with the lowest bidder and carries the process forward till the conclusion of the contract. These committees are headed by the Joint Secretary & Acquisition Manager concerned and have the Finance Manager and the Technical Manager as members. The other members of the CNC include the representatives of the procurement agency, the user directorate, contract management branch and the repair agency. All of them are Service officers. The representative of the Director General Quality Assurance (DGQA) is also a member of the CNC. The Advisor (Cost) is also inducted, if considered necessary. If the procurement involves transfer of technology, representatives of the DDP, DRDO and the Production Agency are also inducted into the CNC. The composition of the CNC is laid down in the Defence Procurement Procedure and any change in the composition requires the specific approval of the Director General (Acquisition).

What is significant about the CNC is not that there is a fair representation from the Services on these committees but the fact that the SHQ concerned provides all manner of assistance in the conduct of the proceedings. More importantly, all organizations/agencies are required to ensure that their representatives on the committee have adequate background and authority to take decisions without reverting to their respective organizations. In actual practice, there is continuous interaction and consultation between the members of the CNC and their parent organizations during the course of contract negotiations which are often protracted. The CNC reports are prepared by the Services. While the final note seeking the sanction of the Defence Minister or the Finance Minister (depending on the financial implication) for concluding the contract is prepared by the Acquisition Wing of the MoD with inputs from the SHQ concerned, the draft note for the Cabinet Committee on Security for all proposals above INR 1,000 crore is prepared by the SHQ and sent to the MoD. All queries raised by the Finance Ministry on proposals to be sanctioned by the Finance Minister or by the Cabinet Committee on Security are answered by the SHQ concerned.

After the sanction of the competent financial authority, contracts are drawn up by the SHQ on the basis of the CNC reports and the approval of the competent financial authorities. The contracts are vetted and signed by officials in the ministry. All post-contract management is done by the SHQ concerned. This includes association of the Service officers in pre-dispatch inspections and joint receipt inspections.

This is a good system but there is no denying the fact that there are vulnerable areas, notably formulation of SQRs, preparation of an all-encompassing proposal, transparency in trials, ensuring that the procurement price is reasonable, drawing up of contracts and post-contract management. Hopefully, some of these areas will get addressed in the current round of amendments to the Defence Procurement Procedure 2011, which has been underway for more than a year now.

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

Comments

The only problem is that by Virander K Saini