Avro-replacement programme hits air pocket

The Avro-replacement programme of the Indian Air Force (IAF) hit an air pocket last Saturday (22nd November 2014) when the Defence Acquisition Council (DAC) deferred the decision on whether to go ahead with the single response to the Request for Proposal (RFP), issued more than two years back, for 56 transport aircraft to replace the aged Avro fleet. The fate of the programme now hinges on a number of questions.

The objective of the Defence Procurement Procedure (DPP) is ‘to ensure expeditious procurement of the approved requirements of the Armed Forces in terms of capabilities sought and time frame prescribed by optimally utilising the allocated budgetary resources’. 1 Replacement of the Avro aircraft is an approved requirement of the IAF. Scrapping the on-going process could delay acquisition of the transport aircraft by at least a year or two as it would inevitably involve revisiting the qualitative requirements (QRs) before restarting the tendering process. This could be a time-consuming.

The first question to be asked is whether the IAF can do without the replacement of the Avro fleet. The answer would obviously be in the negative. In that case, the second question would be: are there reasons to revisit the qualitative requirements (QRs) – essentially, the specifications of the aircraft – and can the IAF afford to wait for another couple of years while the QRs are reviewed?

Single-vendor situations always create the doubt that the QRs were unachievable, too restrictive or tailor-made to suit a particular vendor. Any one of these reasons is good enough to review the QRs. Not doing so would undoubtedly be against the stated policy of the Ministry of Defence (MoD) that while ensuring expeditious procurement, ‘it will demonstrate the highest degree of probity and public accountability, transparency of operations, free competition and impartiality’.2

It may be recalled that this is a ‘Buy and Make’ project, in which the RFP was issued to several foreign companies after many of them evinced interest in the project during pre-tender consultations with the IAF. The QRs form an essential part of the RFP. The last date for submission of bids was extended two or three times. The vendors, therefore, had a long enough time to study the QRs and to point out – had that been the case – that the specifications were unachievable, restrictive or tailor-made. Apparently, no one did that. Any decision that the QRs warrant a review must take these facts into account.

Third, in an unprecedented bold step taken by MoD, the Hindustan Aeronautics Limited (HAL) – a leading Defence Public Sector Undertaking (DPSU) – was kept out of this acquisition programme with a view to creating additional capability in the private sector in India for aircraft manufacturing.

The need for beefing up the private sector for manufacturing aircraft has only become more acute over the years. The demand for aircraft in India is set to increase exponentially. With some modification, the transport aircraft required by the IAF could be used in the civil sector also. There are good prospects of the aircraft built in India being exported.

Aircraft manufacturing has a great potential for generating employment and making India a global manufacturing hub – something that the present government is committed to. The question to be asked is whether scrapping the programme only on the grounds of its being a single vendor case would be in sync with the make-in-India initiative of the government.

Fourth, unless there are entities in the private sector which have some experience of manufacturing aircraft/helicopters, MoD may find itself left with no option but to keep nominating HAL as the Indian Production Agency (IPAs) for transfer of technology (ToT) in all future ‘Buy and Make’ programmes, despite HAL’s already overflowing order book.

There is a real danger of the provision in the DPP for nominating IPAs from the private sector for ToT in ‘Buy and Make’ cases remaining inoperative as there are no internal guidelines for selecting a private sector entity for nomination. This is why, in the Avro-replacement programme, MoD had decided to let the foreign vendor choose the IPA.

This is a model which could work effectively in the future ‘Buy and Make’ cases, sparing MoD the trouble of nominating a private sector entity which could easily become a contentious issue with those not chosen alleging favouritism on MoD’s part. Failure of the Avro-replacement programme would mean that either some guidelines will have to be evolved for nominating private sector entities as IPAs in ‘Buy and Make’ cases – something that has defied solution till now – or only the DPSUs would continue to be nominated as IPAs.

Fifth, there is no specific and absolute bar in the DPP on going ahead with the acquisition in the kind of single-vendor situation that has arisen in the instant case. There is a provision for processing a case ab initio for procurement from a single vendor.3 The instant case does not obviously fall in that category.

There is also a provision that if after the technical evaluation only one vendor is found to be complaint with all QRs, ‘RFP would be retracted on approval of the Director General (Acquisition)’. 4 The DPP further provides that in such cases, the acquisition programme would be reviewed to determine the causes of such a single-vendor situation and the RFP would be issued with the approval of the prescribed authorities after taking suitable corrective measures, including reformulation of the QRs. The instant case does not fall in this category also.

In any case, MoD which has laid down the procedure can always amend, modify or interpret it to serve the ultimate objective of equipping the armed forces with what they need. The objective of equipping the services cannot be allowed to become a slave to the self-prescribed procedures.

There is also an issue of reasonableness of price in single-vendor cases. The argument is that there is no real price discovery in such cases because of lack of competition. To be sure, DPP permits ab initio single-vendor procurements. If price discovery is not an issue in those cases, it cannot be a major issue in a situation where the RFP was issued to several vendors, none of whom would have known for certain whether the others would be responding to it or not. Therefore, it cannot be said that the quoted price in the instant case would have been influenced by the prospects of the bidder being the only one in the fray.

More importantly, even in multi-vendor cases, MoD follows the system of working out a reasonable price before opening the price bids. This becomes the benchmark for negotiating with the vendor. The question is whether there are reasons to believe that this system of working out a reasonable price is unsuited for cases where there is only one response to the RFP issued to several vendors.

Sixth, at one point of time it was reported in a section of the press that the conditions of the RFP, especially in regard to the indigenous content, would be impossible to achieve, and that there were practical difficulties in making the aircraft in India. The question to be asked is: if at least one vendor considers the RFP conditions to be achievable is good enough, will this project, if successfully implemented, could be a game changer for promotion of the private sector in defence production in India.

Ultimately, it boils down to whether there are substantive and compelling reasons not to go ahead with this programme and let go of the opportunity to energise the private sector defence industry in India, rather than allowing the single-vendor argument to be the sole determinant.

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

• 1. Paragraph 2 of the Defence Procurement Procedure (DPP) 2013. The earlier versions of the DPP had the same provision.
• 2. Ibid.
• 3. Paragraph 69 DPP 2013
• 4. Paragraph 26 DPP 2013