Contradicting Verdicts & The DPP Mess

At the Offshore Patrol Vessels Asia-Pacific 2011 expo in Singapore, which was held between April 5 and 7, it emerged that a spate of incidents and legal litigations over the past one year has served to make a total mockery of the Indian Ministry of Defence’s (MoD) defence procurement procedures and defence production procedures, with grave implications for not only the force modernisation plans for the Indian armed forces, but also for the emerging military-industrial entities in the private sector. A few major examples given below will suffice to illustrate the prevailing sordid state of affairs.  

Example 1

In the aftermath of the 26/11 terror attacks in Mumbai, the MoD had released a global tender for the procurement of 36 high-speed interceptor boats worth Rs9.7 billion, with the boats having aluminium-alloy hull construction and equipped with waterjet propulsion. Subsequent to the competitive bidding process, Larsen & Toubro (L & T) emerged as the lowest bidder (L-1) and was therefore selected on March 22, 2010 to build these 36 vessels. L & T had offered to build the vessels at a unit cost of Rs666.8 million, while the state-owned Cochin Shipyard Ltd (CSL) had offered a quote of Rs698.9 million, followed by Garden Reach Shipbuilders & Engineers with Rs761 million, Goa Shipyard Ltd with Rs941.7 million, and Hindustan Shipyard Ltd with Rs1,094.1 million. Designed by L & T’s Marine & Ship Design Division, the interceptor boats were to have performed surveillance, search-and-rescue, anti-smuggling and anti-poaching operations along India’s coastline. The boats were planned to be constructed at both L & T’s existing shipyard at Hazira and at its new shipyard coming up at Katupalli near Ennore. Each of the vessels were to be powered by Caterpillar Marine Power Systems’ marine propulsion engines and MJP waterjets, with deliveries beginning within 18 months of contract award. However, before the contract was to be signed, CSL, which had lost the bid (and was ranked L-2 in the bidding process), challenged L & T’s selection as the preferred bidder, claiming that L & T's price quote had utilised the ERV exchange rate variation mechanism (which as per DPP guidelines, is allowed for the MoD-owned defence public sector undertakings, but not for the private sector). This meant that while the L-1 bidder had offered a fixed-price quote for the work and materials/components to be sourced within India,  the quote for imported components was variable and therefore if the US$ appreciated, then the hike in prices of the imported components would have to be borne by the MoD, and not be absorbed by the L-1 bidder. CSL's bid, on the other hand, did not incorporate the ERV exchange rate variation mechanism and was therefore a fixed-cost offer. CSL also claimed that since the tender document had specified that the contract be awarded to an experienced shipbuilder with a proven track-record, the MoD’s selection process was flawed and as a consequence, L & T should not be declared as the preferred bidder. The MoD consequently referred this issue to the Central Vigilance Commission (CVC), which concurred with CSL's point-of-view and ruled that L & T's bid was improper. Eventually, after CSL prevailed over the MoD and was awarded the contract, L & T went to the High Court and the Supreme Court to challenge the MoD’s decision, and lost the case. As a result of this verdict, it would now appear that the methodology applied by the MoD to accord the status of L-1 to any bidder is suspect and can be manipulated with ease in a competitive bidding environment.

Example 2

After 26/11, the Cabinet Committee on National Security (CCNS) and the Defence Acquisitions Council (DAC) had approved the acquisition of 13 offshore patrol vessels (OPV) for the Indian Coast Guard Service (ICGS) in two batches of seven and six, respectively. Each of the OPVs was to have a length of 100 metres, crew complement of 100, and a displacement of 2,000 tonnes. The global tender for this procurement exercise was subsequently released, following which it emerged that Bharati Shipyard Ltd’s offer was accorded L-1 status, with L & T being L-2 and Pipavav Shipyard Limited (PSL) coming in at L-3. However, the state-owned Indian shipyards once again contested this ranking order by claiming that none of these private-sector shipyards had any experience in designing and fabricating OPVs, as a result of which the MoD ordered a re-tendering exercise, with the latest global tender being issued last week.  

Example 3

After 26/11, when the Indian Navy’s requirement for five advanced OPVs (AOPV) was approved by the CCNS and DAC, a global tender was released on March 31, 2010. Seven contenders responded with tender bids and on June 7 the same year, PSL was selected as the preferred bidder. On that day, Nikhil Gandhi, Group Chairman of SKIL Infrastructure, the original promoters of PSL, said: “We have been declared as the lowest bidder (L-1) by the MoD for the contract to build OPVs for the Navy. This will be our maiden foray into building ships for the defence sector”. PSL’s bid, costing Rs26 billion, had proposed the construction of five 110-metre, 2,500-tonne displacement AOPVs designed by Russia’s St Petersburg-based Severnoye Design Bureau. Subsequently, the Department of Industrial Policy and Promotion (DIPP) issued the licence for warship-building to PSL in November 2010 at a rate of five warships per year. PSL, which harbours ambitious plans for building principal surface combatants like aircraft carriers and landing platform docks (LPD) for the Indian Navy in the not-too-distant future, has since gone ahead and reportedly appointed several retired Vice Admirals and senior bureaucrats who had served with the MoD’s Dept of Defence Production & Supplies as advisers and consultants, and last February, signed a memorandum of understanding (MoU) with US-based Northrop Grumman Overseas Service Corp, under which the latter will support PSL with warship design and construction expertise. Yet, despite all this, contract award by the MoD to PSL remains elusive till this day, and going by the trend set by the earlier two examples, it now appears likely that a re-tendering exercise will be ordered by the MoD.

Example 4

In stark contrast to its biased decision-making procedures and processes adopted for procuring vessels for the Navy and ICGS, the MoD, following a global competitive bidding process, on March 16 this year inked a Rs10.94 billion contract with TATA Power’s Strategic Electronics Division (TATA Power SED) under which the navigational aids of an initial 30 IAF air bases and one naval air base will be replaced within a 42-month period as part of Phase-1 of the IAF’s and Indian Navy’s joint Modernisation of Airfield Infrastructure (MAFI) programme. Work will involve the installation of runway lighting systems, Cat 2A instrument landing systems, distance measuring equipment, and Doppler very-high-frequency omni-range navigation systems. Also being acquired are six standby mobile airfield lighting systems, one mobile air traffic control tower, and one joint air traffic control and reporting centre (JATCRC) simulator. Under Phase-2 of this programme, yet to be tendered out, an additional 28 IAF air bases and four naval air bases will be subjected to a similar upgradation exercise. The global tender for MAFI’s Phase-1 was released on January 4, 2008 and all vendor selection-cum-ranking procedures had been concluded between August and October 2009. What makes this contract award inexplicable is the fact that TATA Power SED had, by October 2009, been chosen as the winner primarily due to its L-1 bid status, despite its total lack of track-record in terms of executing such projects. It was no surprise therefore that Selex Sistemi Integrati, a member of Italy’s Finmeccanica Group and a competing bidder, decided to take advantage of the precedents set earlier by the MoD (in case of the selection processes highlighted in the above three examples) and filed a petition with the Delhi High Court in which it questioned the MoD’s selection process and highlighted TATA Power SED’s lack of a track-record in executing such projects. The petition was, however, rejected by the court on November 24, 2010.

Incidentally, Selex Sistemi Integrati, teamed up with the MoD-owned Bharat Electronics Ltd (BEL), is already engaged in upgrading the JATCRCs located at IAF air bases in Adampur, Agra, Ambala, Bagdogra, Bareilly, Bhatinda, Bhuj, Bidar, Chabua, Chandigarh, Gorakhpur, Gwalior, Halwara, Hasimara, Hindon, Jaisalmer, Jamnagar, Jodhpur, Jorhat, Kalaikunda, Nal, Naliya, Pathankot, Pune, Sirsa, Suratgarh, Tezpur, Uttarlai, Yelahanka and Zopuitlang in Lunglei district in southern Mizoram. The IAF has already ordered to date—under a Rs2.937 billion (€52 million) contract—13 S-band ATCR-33S primary surveillance radars and another 13 S-band Sir-S secondary surveillance radars and their related automated air traffic management systems, and 52 related CDS-2000 display consoles from Selex Sistemi Integrati, all of which were delivered by late 2009. BEL began receiving these radars in 2008 for final assembly, and will it also be responsible for through-life product support of these radars. Earlier, BEL had assembled four similar radars and supplied them to the Airports Authority of India (AAI), which in turn had installed them at the new greenfield airports in Bengaluru and Hyderabad. The radars of both airports (which were ordered in March 2006) have already been integrated with a JATCRC. The AAI intends to install additional ATCR-33S and Sir-S in nine other civilian airports, almost all in southern India. The industrial partnership between Selex Sistemi Integrati and BEL dates back to 1972.—Prasun K. Sengupta