The Long Road to the MMRCA Shortlist

The Indian Air Force (IAF) commander Air Chief Marshal Pradeep Vasant Naik had announced in February at Aero India 2011 in Bangalore that the shortlist for the 126 Medium Multi Role Combat Aircraft (MMRCA) tender would be announced in the next few weeks. Then a few weeks back, he upped the pressure on the Ministry of Defense again, while addressing the Indian Women’s Press Corps. Indo-Asian News Service reported him as saying, “The cost negotiation for MMRCA will begin by the end of this month. I expect the contract to be signed before I retire from service in July this year.”

This pressure is likely intended to get the ministry to move on the outstanding issues related to the MMRCA tender process. Work remains to be done for it to be taken to its logical conclusion (The response this pressure elicits may well be a separate soap opera altogether). But the ministry is also under pressure to meet the April-end deadline for the expiry of the commercial offers submitted by the six vendors. The MMRCA-6 vendors were required to either extend the validity of their bids or resubmit them last year, after they expired.

The key issue holding up movement right now is the business of evaluating offsets for the estimated USD 10 billion contract. The terms of the tender mandate the winning vendor to plough back 50 per cent of the value of the contract into India, something that is hoped to boost Indian defense industry. Although the MMRCA tender is governed by the Defense Procurement Procedure (DPP) of 2006, which generally mandates a 30 per cent offset requirement, an exception was made in the case of the fighter aircraft purchase, keeping in mind the expected value of the contract.

New rules under the DPP of 2011, announced in January, expanded the canvas of options for offset investments to include sectors and services like civil aviation, homeland/internal security and training. This was largely because the MMRCA-6 complained of the existing inability of Indian defense industry to absorb work under offsets, in any substantial manner. Defense Minister Arackaparambil Kurian Antony, however, made clear that these rules would not apply with retrospective effect, precluding the six fighter aircraft manufacturers from taking advantage of the increased options.

StratPost recently reported moves by the ministry to amend the DPP to change the offset evaluation process by inviting only vendors shortlisted as technically qualified to submit offset proposals, and get Law Ministry approval to apply them with retrospective effect, so as to ease the amount of work involved in offset evaluation.

The Technical Offsets Evaluation Committee of the Defense Ministry has been struggling to formulate the requirements for the offset proposals that the vendors would have to match, with a series of delays, and still no terms set in black and white. The last date of January 28 proposed, by which vendors would have to submit offsets proposals that were compliant with the requirements of the ministry, whistled past, with nary a word about the amended requirements. The MMRCA-6 were told to hold on until further notice.

South Block corridor gossip has been speculating that the ministry might simply go ahead with the shortlist on the basis of the flight evaluation trials conducted by the IAF, while extracting undertakings from the shortlisted vendors to comply with any offset requirements cooked up later.

But according to Appendix D of the chapter on ‘Buy’ and ‘Buy and Make’ categories in the DPP of 2006, which lays down the procedure for implementing offsets’ provisions: ‘The offset offer will be examined in two stages by the Acquisition Wing. In the first stage, the first part of the offset offer (refer Para 6.1 and 6.2 above) will be examined to ensure that the offset offer fulfils the mandatory requirements and thereby qualifies the vendor for opening of its commercial offset bid.’

The technical offset offer is different from the commercial offset offer in that it does not contain the commercial values of the offset proposals.

The procedure also says: ‘These Commercial Offset Offers would be opened along with the main commercial offer. The CNC would verify that the Commercial Offset Offers meet the stipulated offset obligations.’

This means that the evaluation of the technical offsets offers has to be completed before the commercial offset offers are examined, simultaneous with the opening of the commercial bids. It should be noted that the commercial offset offers have no bearing on the determination of the L1 (lowest bidding and technically qualified) vendor.

A question that immediately arises from this is how the respective Commercial Offset Offers would remain valid, submitted as they are in sealed envelopes, if the Technical Offset Offers have not been validated yet by the Technical Offset Evaluation Committee? Even if the DPP is amended with retrospective effect, the ministry would then have to validate technical offsets proposals from the selected vendors and iron-out any mismatch with the existing commercial offsets proposals.

Unlike as laid down in DPP 2008 and 2011, under the 2006 procedure, there is no provision for the selected L1 to be able to amend the commercial offset offer after it is opened.

The DPP says the Technical Offset Evaluation Committee will ‘examine the technical offset offers and shortlist the vendors meeting the offset obligations’. [The language in the 2008 and 2011 iterations reads: The (Technical Offset Evaluation) Committee will examine the compliance of technical offset offers by the vendors for meeting the offset obligations.]

There has been speculation that none of the aircraft are fully technically compliant with the Air Staff Qualitative Requirements (ASQR). If this is indeed the case, in theory, the ministry could simply select the single most compliant aircraft open its commercial bid. In this Resultant Single Vendor scenario, the Contract Negotiation Committee (CNC) would then have to arrive at a benchmark of the price it will consider reasonable.

The CNC will only open the ‘sealed commercial offers of the technically accepted vendors’. ‘In case of procurement of new equipment on single vendor/resultant single vendor basis, CNC should establish a benchmark and reasonableness of price in an internal meeting before opening the commercial offer,’ says the DPP.

If the L1 vendor’s price is found to match the benchmark, further negotiations are discouraged. ‘Once the commercial offers are opened and the price of the vendor is found to be within the benchmark fixed, in the internal meeting, there should be no need to carry out any further price negotiations. The RFP in such multi-vendor cases, should clearly lay down that no negotiations would be carried with the L1 vendor.’

There is room for an exception though. ‘In multi-vendor cases, on opening of commercial offers, once L1 vendor is identified the contract should be concluded with him and there would be no need for any further price negotiations. However, negotiations can be held in exceptional circumstances where valid logical reasons exist and such negotiations should be held only with L1.’

But a Resultant Single Vendor selection would also mean that the L1 vendor’s pricing would not be subject to contest from any other vendor. The ministry could also end up with sticker shock, and have to deal with a substantial mismatch between the benchmark price range arrived at by the CNC and the bid submitted by the vendor.

In the event of such a situation, where no aircraft is fully compliant, it would perhaps make more sense to avoid a Resultant Single Vendor shortlist and select those aircraft that satisfy the essential must-haves of the IAF. This would also allow for a wider range of offsets proposals, besides ensuring price competition.

Another issue, although perhaps not as obviously crucial, is that of Transfer of Technology (ToT). The DPP considers it desirable that the Licensed Production contract be negotiated along with the contract for the finished product. ‘In cases where this is not feasible, the purchase contract should include a clause wherein the vendor agrees to negotiate the license contract at a subsequent date, thus obtaining a commitment from the vendor to part with the ToT. In cases, where ToT for Maintenance Infrastructure is being sought, the maintenance contract involving the OEM and the industry receiving the technology would also be negotiated along with the main contract.’

The problem with this is that any negotiation on Licensed Production and ToT that takes place after the selection of the winning aircraft would put the ministry in a position of disadvantage. An agreement in this regard may be less than optimal for India, as the winning vendor, sitting pretty after selection, might not be overly inclined to bend to Indian requirements. Licensed Production and ToT should be seen as at least as important as the aircraft purchase itself, as they have the potential to provide the skills, knowledge and investment to jump-start the Indian defense and aerospace industry. Anything less would mean India shortchanged.

At this time, industry watchers are unsure of the practicality of an imminent announcement of the shortlist at this time. The stability of the Indian government has been increasingly uncertain over the serial disclosures of corruption scandals in the past few months. Even though the government finally acceded to opposition demands for the setting up of an inquiry committee into alleged kickbacks paid for the grant of licenses granted to telecommunication firms for spectrum for running 2G services, other corruption scandals have serially materialized. These include the scandal over allotment of S-Band spectrum by the Indian Space Research Organization (ISRO), the cash-for-votes scandal which alleges the ruling party to have purchased the votes of legislators to support the government’s stand on the Indo-US nuclear deal, the Commonwealth Games kickbacks, the controversial appointment of PJ Thomas as Chief Vigilance Commissioner (CVC) and the brewing scandal over Indian money being stashed in Swiss banks. Needless to say, Parliament ended its session with an uneasy armistice in the run-up to elections in three states, for which voting began on Monday.

The IAF commander had couched his optimism with a caveat – ‘provided dissatisfied vendors do not put a spoke in the wheel and delay proceedings’. The announcement of a shortlist is unlikely to see the spurned vendors go away quietly. Defense deals in India are keenly-followed, considering the number of times they’ve fallen on the wrong side of the line of propriety and been canceled. Observers are therefore unsure if the government would hand over another possible brickbat to the opposition, so soon.

But if the commercial bids are not opened by April 28, the government would have to ask the vendors to resubmit or extend the validity of their commercial bids, again. This is being seen as something to which ministry officials now appear increasingly resigned and for which the MMRCA-6 should be ready.