IAF’s MMRCA tender stuck in offset limbo

The acquisition process for 126 Medium Multi Role Combat Aircraft (MMRCA) for the Indian Air Force (IAF) is facing delays due to uncertainties about offset policy and with vendors facing the prospect of having to redo their homework.

The IAF had submitted its report on the technical evaluation of the six aircraft competing to win the tender last summer. After this submission, the Ministry of Defense had to evaluate the offset proposals submitted by the six vendors and also compare the respective proposals for transfer of technology.

Last September, the respective vendors were invited to a review of their offset proposals by ministry officials, when they were all told that the proposals submitted by them failed to comply with the parameters set by the ministry. They were also informed at the time that in the case of offsets for third party suppliers, all vendors would need to have Memoranda of Understanding (MoU) in place with their suppliers’ suppliers as well, and that a letter to this effect would be issued shortly, which would also list out discrepancies in the offset proposals of the respective vendors.

Although no such letter was forthcoming, representatives of all six vendors were invited to a meeting last month, where they were again informed of their non-compliance with the offset requirements. They were also told that they would be issued letters listing out the discrepancies in their offset proposals by November 30, as well as the structure of the MOUs required to be in place with Indian sub-contractors to the suppliers of the prime vendors, on the basis of which, they would have to submit fresh offset proposals by January 7, 2011.

Although no letter arrived by November-end, the vendors did receive telephone calls advising them that the deadline for resubmission of offset proposals was extended to January 21, 2011 and that the letter listing discrepancies in the respective proposals would arrive by December 17, 2010, that is, today.

No such letter has been received till this evening.

While vendors understand the enormity of the ministry’s task in evaluating the individual offset proposals, said to number in their hundreds, they fail to understand why this process could not have been conducted in parallel with the flight evaluation trials, since the original offset proposals were submitted in July, 2008.

The ministry, on its part, wants to be thorough in setting the offset norms for the vendors in the fray for the MMRCA tender, since this deal, worth over US $ 10 billion, is expected to lay down the ground rules for offsets for successive deals as well.

Industry sources indicate that even the deadline of January 21, 2011 will be difficult to meet considering that any letter listing out possible discrepancies, even when it arrives, will require clarifications, face objections and is likely to cause much argument between the vendors and South Block, before responses are sent.

Some vendors object to the idea of signing MoUs with third party contractors since they do not expect to have any direct dealings with them. They also say that they would prefer to conclude sub-contracts on the basis of bids to discover the best prices and products and services, if and when they win the MMRCA tender.

In the light of the approval granted to the new Defense Procurement Procedure (DPP) and an unprecedented Defense Production Policy by the Defense Acquisitions Council (DAC) on Tuesday (both documents are expected to be published by next month), there is a chance that newer offset policy elements might find their way into the norms being set for the MMRCA vendors, even though technically, the MMRCA tender process is governed by the DPP issued in 2006. In fact, there is now even talk of banking offsets being allowed for the MMRCA tender, which were actually first permitted by the DPP issued in 2008 under the Defense Offsets Policy.

Another issue that is expected to lead to yet more delays in the process is the failure on the part of the ministry to form a team to evaluate the respective proposals made by vendors for the transfer of technology. The methodology for evaluating and comparing the value of the respective proposals for transfer of technology also remains unformulated and unclear. This process, too, is expected to be tedious and time-consuming.

And a third outstanding issue is the post delivery risk allocation with respect to the aircraft. While the aircraft will come with warranties, vendors feel they would breathe easier with clarity on the question of any civil liability that might accrue to an Original Equipment Manufacturer (OEM) in the event of a mishap. While civilian and commercial aircraft deals usually cater for this issue, it remains unresolved as far as the MMRCA is concerned.

Since the second week of February will also feature the Bangalore Air Show, Aero India 2011, these issues are unlikely to see the glimmerings of resolution anytime soon, without which the process cannot proceed toward the formulation of a shortlist of the aircraft and the opening of indicated commercial bids.

The six contenders in the race are Boeing’s F/A-18 Super Hornet, Lockheed Martin’s F-16, EADS’ Eurofighter Typhoon, Dassault’s Rafale, Saab’s Gripen and the Russian MiG-35.