one. It was just the beginning and a lot of work was yet to be done. Procedures for shipbuilding, upgrades and system integration were yet to be formulated. Standard contract documents, which should protect government interests, were still under preparation. Lack of an integral legal set up in MoD hampered progress in this field. MoD was also seeking an arrangement for external audit of all procurement cases before the contracts were signed.
And finally, the potential of the Indian private sector had not been fully exploited, Progress in this direction had been rather disappointing. However, it was apparent that a serious and determined effort had been made to usher in reforms to streamline the entire acquisition process.
Defence Procurement Procedure – 2005
As mandated in Defence Procurement Procedure – 2002, it came up for review after a period of two years and DPP-2005 was promulgated with effect from 01 July 2005.
The scope of DPP-2005 was enlarged to include Indigenous Warship Building Procedure, which had earlier been issued separately in March 2005. A standard contract document was also placed as an appendix. Various suggestions and directives issued by the Central Vigilance Commission (CVC) and the Comptroller & Auditor General of India were also incorporated. Commercial evaluation of successful proposals was further rationalised with the application of the Discounted Cash Flow and the Exchange Rate Variation techniques.
Though the basic structure of DPP remained the same, there were a number of significant changes, having wide ranging ramifications:-
Earlier, DPP-2002 followed the concept of specifying essential and desirable parameters. Whereas selection of equipment was always done on the basis of compliance of essential parameters, desirable parameters provided useful added features and encouraged vendors to make their proposals more attractive. DPP-2005 did away with the practice of specifying desirable parameters. Now, only essential parameters had to be indicated. As a result, if parameters were framed with emerging technologies in mind, there would never be adequate number of vendors to offer their product. Further, rapid obsolescence of defence technology had to be factored in.
No waiver of parameters could be granted after the issuance of Request for Proposals (RFP). In case no vendor met all the parameters, the case had to be foreclosed and a fresh RFP issued after reformulating parameters. Additionally, if only one vendor claimed compliance with the parameters at paper evaluation stage, RFP had to be retracted and a fresh RFP with revised parameters issued. It was a major change as even a marginal deviation of even a single parameter rendered the whole process infructuous.
For the first time ever, India adopted the concept of offsets in defence procurements. DPP-2005 mandated that all contracts of more than Rs 300 crore would necessarily have associated offsets equivalent to 30 per cent of the contract value. It was, however, left to the foreign sellers to choose offset programmes. The offset policy was more of an expression of intent as detailed guidelines were still under formulation.
DPP-2002 had introduced scrutiny of technical and commercial processes by independent experts for all major contracts. The government decided to retain Technical Oversight Committee for overseeing technical process but dispensed with the commercial review (pre-contractual process and procedures audit) by Eminent Persons Group. Surprisingly, no reasons were given for the same.
Although, promotion of indigenous defence production capability continued to be one of the stated aims of DPP-2005, the private sector remained totally ignored. No attempt was made either to co-opt it in policy making or to tap its immense potential. Lower life-cycle cost of indigenous equipment was also not assigned its due import while comparing commercial aspects. No incentive was offered to foreign producers for having collaborations with Indian companies.
Revenue Procurements
Revenue Procurements are meant for the maintenance/operation of existing equipment and replacement of sanctioned assets. Earlier there was no single manual which could be uniformly followed by all wings of MoD. The much needed Defence Procurement Manual for Revenue Procurements was issued in 2005 and made applicable to all the services, MoD and inter-services organisations. The Manual endeavoured to ensure greater transparency, timely procurement, greater competition and optimal utilisation of defence budget.
Some of the striking features of this manual were as follows:-
Guidelines were framed for the issuance of RFP for indigenous and foreign procurements. Criteria for short listing of vendors and awarding contracts were specified. With a view to bring in accountability and reduce delays, it specified time frame for each stage. It incorporated CVC guidelines and explained various banking instruments. Procedure for assessing reasonability of prices was also explained.
It also clarified a number of commonly used terms and provided uniform interpretation for clear-cut guidelines. These included single tender, risk and cost purchase, repeat orders, option clauses and price variation clauses. The methodology for apportionment of quantity where the lowest bidder was unable to supply as per RFP was explained. It also clarified the concepts of price variation, exchange rate variation and discounted cash flow techniques for high value contracts.
The purchase policy provided product reservation to encourage Small Scale Industries (SSI), Handloom and Khadi Bhandars with exemption from Performance Security Deposit. Additionally, SSI could be allowed price preference up to 15 percent in comparison to large industries. Under the directions of Department of Public Enterprises, purchase preference was granted to Central Public Sector Enterprises (CPSEs) at the lowest valid price (L1) if the price quoted by CPSE was within 10 percent of L1 when tender value was Rs 5 crore or more.
It advocated two-bid system when technical proposals needed examination for their compliance of parameters, as for plants, machinery, IT, communications and turn-key projects. Single bid system was to be adopted only when qualitative requirements and technical specifications were clear and well understood by all.
Only substantially responsive bids (without material difference) were to be evaluated and compared to determine L1. All taxes except octroi were to be included. Buyer could counter offer price to L1. Buyer had the option to vary total quantity by up to 50 percent within the delivery period. Buyer could place repeat order also up to 100 percent quantity within 12 months from the completion of previous purchase order.
Single vendor situations were best to be avoided. Reasons for accepting a single substantially responsive quote had to be recorded in detail.
L1 was to be determined by discounted cash flow method. Price Variation Clauses were permitted only when a contract was spread over 12 months. Exchange Rate Clauses were applicable to imports over one year period. Import content was required to be fixed for calculation. It was not permissible beyond the delivery period due to supplier’s fault.
Revenue Procurement Manual was a very comprehensive policy document and provided much needed guidance to procurement functionaries on all facets of revenue procurements.
Conclusion
Dr Vijay Kelkar
