Fw: An eye opener_ may be of interest to some
sarabjit grewal
From: shudip talukdar <shud...@gmail.com>
Date: Sat, Feb 2, 2019 at 3:09 PM
Subject: Fwd: An eye opener_ may be of interest to some
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From: Mrinal Suman <mrina...@gmail.com>
Date: Fri, 1 Feb 2019 at 18:14
Subject: An eye opener_ may be of interest to some
To: Mrinal Suman <mrina...@gmail.com>
(Geopolitics January 2019)
Major General Mrinal Suman
Due to its geographical location, the vast expanse of Indian Ocean acquires strategic importance for India. And, for its effective dominance, India needs Long Range Maritime Reconnaissance Anti-Submarine Warfare (LRMRASW) aircraft. These airborne platforms are deployed to search, locate, identify, track and destroy enemy ships and submarines. In other words, LRMRASW aircraft carry out intelligence/electronic intelligence missions; anti-submarine warfare; anti-surface vessel strikes; fleet support operations; and search and rescue operations. Hence, they are extremely potent force-multipliers.
For decades, India had been depending on a fleet of Soviet-era Tupolev Tu-142 aircraft. However, due to their vintage, they were due for de-induction during the period 2006-2011. A proposal was initiated by the Navy for the acquisition of eight LRMRASW aircraft. As per the provisions of the Defence Procurement Procedure (DPP), Acceptance of Necessity was accorded by the Defence Acquisition Council in September 2005. The proposal was categorised ‘Buy Global’. Consequently, Request for Proposals (RFP) was issued by the Ministry of Defence (MoD) in December 2005 to 17 global vendors on two bid system, wherein the vendors are required to submit their technical and commercial bids in two separate sealed envelopes. After technical evaluation (including field trials), commercial bids are opened only in respect of the vendors declared technically acceptable. Commercial bids of unsuccessful vendors are returned to them unopened. Thus, two-bid system guards against unethical inflation of commercial quotes by vendors who clear technical evaluation.
By April 2006, MoD had received proposals from five vendors. A Technical Evaluation Committee (TEC) was constituted to study the received technical proposals to ascertain their compliance with the Qualitative Requirements (QR), as mandated in RFP. After due deliberations, TEC declared two vendors to be fully QR-compliant, i.e. Boeing (P-8I Poseidon) of the US and EADS CASA (Airbus A319) of Spain. Aircraft of both the companies were subjected to extensive Field Evaluation Trials during the period June-July 2007 to validate their performance in the obtaining environmental conditions. Both were found suitable for induction into the Indian Navy.
The process of commercial evaluation started with the opening of the commercial bids of Boeing and EADS CASA by the duly constituted Commercial Negotiation Committee (CNC) in November 2007. Whereas Boeing pegged its bid at ₹ 8,700.37 crore, EADS CASA quoted a price of ₹ 7,776.0 crore. Finally, a contract was signed with Boeing in January 2009 for ₹ 10,773.18 crore for the supply of eight P-8I Poseidon maritime aircraft. The aircraft were delivered between May 2013 to October 2015.
During its test audit, the Comptroller and Auditor General of India (CAG) observed major infirmities in the process followed. In its Report No 9 of 2018, presented to the Parliament on 07 August 2018, CAG has been scathing in its criticism of the functioning of CNC, management of offsets and contract monitoring. This write-up discusses the above issues, as flagged by CAG in its report. Hence, it is a factual narrative with no guesses or conjectures.
Tweaking of the Commercial Bids
It is by far the most serious act of transgression that has the potential to shock the environment. Sheer brazenness of the malfeasance defies credence. Read on.
· RFP required vendors to include the cost of providing product support in terms of maintenance, materials and spares for a minimum period of 20 years in their commercial bids. It was a key term of reference.
· Boeing’s bid of ₹ 8,700.37 crore did not include the cost of product support at all. Boeing stated that a separate contract would need to be negotiated for the said product support. No cost indication was given for the same.
· On the other hand, EADS CASA included product support for two years in its bid of ₹ 7,776.0 crore and provided a fixed formula to extrapolate cost of product support for the balance 18 years.
· For fair comparison of the commercial quotes, CNC should have brought both the bids at par. For that, the quote of EADS CASA should have been reduced by the amount charged for product support for two years. In that way, both the bids would have become comparable, being without any product support levy.
· However, CNC did the unthinkable. Instead of reducing the bid of EADS CASA, it increased it further by adding the cost of product support for another 18 years, using the formula provided by EADS CASA in its proposal. Thus, EADS CASA’s rigged bid ballooned to ₹ 8,712.44 crore.
· Now came the crunch. Deceitfully, CNC compared the EADS CASA bid of ₹ 8,712.44 crore (including 20 years product support) with the Boeing bid of ₹ 8,700.37 crore (without any product support) and declared Boeing to be the lower bidder (L1). A contract was signed with Boeing in January 2009.
As the signed contract was bereft of product support, Indian Navy’s entire fleet of Poseidon aircraft was without any product support till June 2017 when an interim support agreement was signed with Boeing for USD 131 million (nearly ₹ 840 crore @ ₹ 64 per dollar) for product support for mere three years.
Apparently, CAG found the entire process of determining L1 to be highly irregular and totally untenable. When queried by CAG, MoD said that while comparing the bids, it had mistakenly thought that the Boeing bid also included product support for 20 years. It was a blatant lie and CAG rightly rejected it. In fact, CAG exposed the hollowness of MoD’s stand by reminding it that Boeing had specifically written a separate letter to MoD in January 2008 (an year before the contract was signed), reiterating that a separate contract would be required for the stipulated product support for 20 years. Hence, there was no ambiguity at all. It was a wilful act of tweaking the bids to favour Boeing. It is not known if EADS CASA lodged any complaint with the Independent Monitors.
To understand the magnitude of the malfeasance, a comparison needs to be made of both the bids inclusive of the cost of 20-years product support. EADS CASA bid with 20 years product support was pegged at ₹ 8,712.44 crore. As regards Boeing, cost of product support for 20 years can be computed on the basis of the contract signed for 3-years product support, on pro-rata basis. It will be a mind-boggling figure of ₹ 5,600 crore (₹ 280 crore per year). Needless to say, it is a rough and conservative estimate. The actual amount will be far higher as the cost of product support increases with the vintage of equipment.
Now comes the revealing part, if the estimated cost of 20-years product support is added to the commercial quote of Boeing, the bid works out to ₹ 14,300.37. When compared with the equivalent bid of EADS CASA of ₹ 8,712.44 crores (extrapolated with 20 years product support), it shows that the Boeing deal will result in extra expenditure of ₹ 5,587.93 crores. In other words, had CNC not tweaked the bids to favour Boeing, India would have saved close to ₹ 5,600 crores. Although the figure is based on back-of- the-envelope calculations, it does indicate the enormity of the transgression.
Offsets
The maritime aircraft deal was carried out under the provisions of DPP-2006 and the offset policy contained therein. In January 2009, MoD concluded an offset contract with Boeing for USD 641.26 million (₹ 3127.43 crore), being 30 percent of the main contract value. It was to be effective from August 2009 and to be completed within 7 years by August 2016.
The offset contract was drafted in a most slapdash, sloppy and unprofessional manner. MoD is guilty of utter inefficiency and gross dereliction of duty. Several provisions that contravene the offset policy were cleverly inserted by Boeing as foot notes, and MoD functionaries either connived wilfully or failed to take cognizance. Here are two illustrations:-
- India’s offset policy unambiguously states that any change in offset programmes, offset partners and offset percentages would be through written mutual agreement between MoD and the vendor. Through the footnotes, Boeing appropriated to itself the right to change offset projects, partners and percentages without reference to MoD.
- As per the policy, offset credits can be claimed only on the execution of the offset deals and not merely on the placement of orders. Boeing cleverly inserted footnotes stating that offset credits would be assumed to have been awarded on the placement of purchase orders on the Indian partners or when direct investments are made in an Indian entity. Such tweaking of the policy provisions defeats the very purpose of offsets. For, Boeing had submitted offset claims totalling USD 716 million by September 2017 against purchase orders. However, no proof of actual completion of work had been provided.
Under the policy, penalty levied on a vendor for failure to fulfil offset obligations in a given year can be recovered from the bank guarantee of the main contract or from the amount payable to the vendor against his supplies under the main contract. These provisions were duly mentioned in RFP issued for the maritime aircraft.
A penalty of USD 71.26 million was levied on Boeing for the shortfall in offset fulfilment up to August 2016. CAG was shocked to notice that the penalties clause of the offset contract failed to specify the method of recovery of penalties. Contrary to the provisions of DPP and RFP, there was no linkage between the offset and the main contract. When MoD wanted to recover penalty from the payments due to the vendor under the main contract, the Navy expressed its inability as the contract contained no provision to deduct penalty from the bank guarantee or the amount due to the vendor. Consequently, till the finalisation of the CAG report, no recovery could be affected. It is an inexcusable lapse having significant financial implications.
CAG has also noted Boeing’s efforts to wriggle out of its offset commitment through questionable means. First, it tried to claim offset credits against the expenditure incurred on seminars on safety, reliability and airworthiness. The claim was rightly rejected as such programmes do not qualify for offsets. Thereafter, Boeing tried to submit proposals relating to Naval Aviation Management System, Advanced Modelling and Simulating Environment Centre and investment into M/s Mahindra Defence. MoD had to reject them as well being non-compliant with DPP. Finally, Boeing was forced to agree to meet the entire offset obligations amounting to USD 641.26 million through direct purchases. As is obvious, Boeing was not sincere in fulfilling offset obligations and ingeniously tried to claim credits through unauthorized and void programmes.
Indifferent Contract Monitoring and Sub-optimal Exploitation
As mandated, an Apex Steering Committee (ASC) was constituted in May 2010 to oversee, monitor and review progress of the complete project. Although ASC was required to meet every six months, CAG learnt that it actually met only on three occasions – in 2011, 2013 and 2016. More worrisomely, CAG observed that ASC failed to address issues concerning timely procurement of ammunition and sub-optimal performance of sensors, thereby adversely affecting full exploitation of the aircraft. Such a lackadaisical approach is symptomatic of the ineptitude afflicting MoD.
Due to indifferent post-contract management, MoD failed to procure anti-submarine ammunition in time for weapon integration of the aircraft. Such a requirement was mentioned at the outset in RFP itself. In addition, MoD told the Cabinet Committee on Security (CCS) in November 2008 that the weapon integration of the aircraft would, inter alia, include procurement of bombs as well. However, as the contract for the procurement of bombs had still not been signed at the time of the CAG report, anti-submarine capability of the aircraft remained under realised.
Similarly, non-procurement of adequate quantity of longer range sonobuoys and non-adherence to QR in respect of Maritime Patrol Radar for detecting targets during surface surveillance adversely affected the exploitation of the full capability of the aircraft. CAG also observed that the authorities concerned failed to create the necessary infra-structure for the aircraft in time. Rapid Erect Sun Shelter hangers failed to withstand winds much lower than the claims made by the manufacturers and soon became unserviceable.
It was also noticed by CAG that non-completion of warranty repairs within the stipulated period of 150 days had become a contentious issue. As per the records perused by CAG, ‘out of the 63 items pending with Boeing for warranty repairs/return/upgradation, 55 items had exceeded 150 days in the warranty loop’. Boeing blamed the sub-vendors for poor response. Sadly for India, due to sloppy functioning of CNC, the contract contained no penalty provision for failure to fulfil warranty obligations. Being fully aware of the lacuna, Boeing showed no inclination to stand by its commitments.
Finally
In July 2016, India placed a repeat order for four more P-8I Poseidon maritime aircraft, taking the total procurement to twelve aircraft. Undoubtedly, it has been a major acquisition, costing the nation over USD 4 billion. It is a colossal sum by all accounts. MoD and the Naval Headquarters ought to have paid more attention to the acquisition project to safeguard national interests.
Inexcusable culpability of CNC cannot be overlooked. As per Para 47 to 59 of DPP-2006, CNC is responsible to carry out all processes from opening of commercial bids till conclusion of contract. After opening the commercial bids, it is required to prepare a ‘Compliance Statement’ incorporating the commercial terms offered in RFP and those sought by the vendor(s). The aim is to identify discordance, if any, and to study the impact of the same. A similar statement is required to be prepared with regard to deviations noticed in the delivery schedules, performance warranty, guarantee provisions, acceptance criteria, engineering support package etc.
As the bid of Boeing did not include the cost of product support, it was commercially non-compliant with the terms of RFP and should have been declared invalid. The very purpose of seeking the cost of product support in the commercial bid itself was to force the vendors to quote in competition; and to prevent unethical hiking of the cost afterwards. In the instant case, to circumvent the said provision, Boeing deliberately did not include product support in its commercial quote. It wanted a separate contract on its own terms.
More critically, under Para 56 to 59 of DPP-2006, CNC was required to submit an exhaustive report to CCS for obtaining sanction. The report was to include an explanation of the commercial evaluation process; selection criteria and commercial evaluation matrices; method of evaluation and the rationale for the selection made with brief description of different phases of the commercial negotiation process. One wonders if the report submitted by CNC included all the above details. Further, all CNC members need to sign the recommendation report, in the interest of probity and accountability. Any dissenting view, including the reasons for the same, has to be documented. It is not known if there were any dissenting views in the instant case.
The excuse given by CNC that it thought Boeing’s quote to be inclusive of product support is incredulously laughable. Tweaking of quotes to swing the deal in favour of Boeing was a deliberate act of well thought through misdemeanour that has cost the country dear. In light of CAG’s severely critical comments on the highly questionable commercial evaluation process, it is time the government revisits the procedure followed.*****