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CANCELLATION AND REVIVAL OF SPIKE PROGRAMME: LESSONS TO BE LEARNT July, 2018

 

 

Retraction of RFPs or cancellations of the defence deal at advanced stage has been quite a regular feature of the procurement system in India. To put the record straight, the MoD should mention the reasons for cancellation to obviate imbroglio and rumours, which damage the image of not just the Vendor but also of the MoD itself. The author analyses—

On November 21 last, the Ministry of Defence (MoD) formally conveyed to the Israeli firm Rafael Advanced Systems Limited which was on the verge of signing the multi million dollar contract for supplying Spike Anti-Tank Guided Missile (ATGM) that it has decided to retract the Request for Proposal (RFP) for these man-portable missiles.

No explanation was given for cancelling the deal at such an advanced stage after it had been in the making for several years, having been initiated under Defence Procurement Procedure 2011. That the deal was called off on the eve of the historic visit of the Israel’s Prime Minister, Benjamin Netanyahu, added a curious twist to this sudden development.

Some newspapers also reported that the MoD was thinking of suspending some other procurement programmes, including a US $ 400 million programme for buying 10 medium-altitude long-endurance armed Heron TP drones and a US $ 1.2 billion deal for two additional Phalcon airborne early warning and control systems for the Russian-built IL-76 aircraft.

Not surprisingly, this development gave rise to unconfirmed reports of Israel being miffed with the decision and the Israel’s prime minister’s visit being called off for it would have been a huge set back to, and embarrassment for, Israel which has emerged as one of largest suppliers of the defence equipment to India along with the US and Russia in the past few years.

Fortunately, this embarrassment was averted as within less than a month of the decision to scrap the deal, it was reported that MoD had no objection to purchasing the long range (not in sight) ATGM from Israel through a government-to-government deal.

In the event, the visit of Israel’s prime minister from January 14 was back on the cards and indeed everything went off well with the visit. If the flip-flop had caused any consternation or left any scar on the growing defence-ties between the two countries it was not evident during his visit which, by all accounts, was full of bonhomie and business.

This is not a solitary instance of the ambivalence on MoD’s part in matters related to acquisition of equipment for the Armed Forces. Around the same time when MoD let it known that procurement of ATGM was back on track as a government-to-government deal, MoD went ahead and cancelled a programme for making 12 advanced minesweepers or Mine Counter-measure Vessels (MCMVs) which were to be built at the state-run Goa Shipyard in collaboration with South Korea. This was not the first time the programme was called off.

In fact, retraction of RFPs in some cases at the final stages, as in the case of ATGM – has been quite a regular feature of the procurement system in India. Some time back the procurement of Torpedoes for the Scorpene submarines from a manufacturing firm in Italy was retracted, after the firm was told to hold the quoted price for several years beyond the initial validity of the commercial offer, forcing the Indian Navy to restart the programme from a scratch. One could come up with countless examples of this kind.

While in those cases where the cancellation of the programme is on account of surfacing of allegations of malfeasance on the part of the prospective vendors or the other companies which are a part of the same conglomerate the reasons for cancellation are generally made known by the MoD, as in the case of the earlier MCMV programme, in many cases it is left to the imagination of those who are not a part of the system to make conjectures as to why a particular programme had been called off. The November 2016 cancellation of the ATGM programme fits that bill.

What happened between the decision to cancel the earlier RFP and revival of the ATGM programme under government-to-government umbrella will perhaps never be known, at least not officially, but the MoD owes it to the affected companies, if not to itself, to put the record straight. Not doing so serves no purpose and, in fact, can be damaging in ways more than one, which is best illustrated by the Spike episode.

First of all, such incidents spawn rumours which damage the image of not just the organisations which are blamed for the imbroglio but also of the MoD itself. Cancellation of the ATGM programme was rumoured to be on account of the objection raised by the Defence Research and Development Organisation (DRDO) against seeking technology transfer from Rafael Advanced Systems Limited at a time when it had developed the indigenous Nag ATGM with seeker technology. It shows DRDO as well as the MoD in poor light, the former as being an obstruction in acquisition of the badly-required capabilities by the Armed Forces and the latter as not being decisive enough to overcome such impediments. If the cancellation was indeed on account of India not being in the need for Transfer of Technology, making it clear would have been a better way of handling the situation.

Most importantly, by announcing that the deal was back on the table shortly after announcing its cancellation, gave the impression that revival of the programme was either on account of the need to avoid diplomatic embarrassment or to make sure that the immediate need for the missiles is met through outright purchase, as was done in the case of the Rafale aircraft, giving enough time to the DRDO to productionise the Nag missile.

In the first case, revival of the project would seem unwarranted and in the latter it is difficult to understand why this could not be made clear while retracting the RFP. The only lesson to be drawn from this episode is that MoD should come out with a brief statement on the reasons underlying at least those decisions which are puzzling and potentially damaging. This is necessary in order to maintain the credibility of the ministry as a responsible buyer and prevent disparaging allegations being made against its own institutions, such as the DRDO in this case.

But this will help only if such situations are an exception. The MoD has to ensure that, not just in order to maintain its credibility as a responsible buyer but also as an act of fairness to the vendors who incur huge expenditure to participate in the procurement programme and remain engaged for prolonged periods of time, often much beyond the worst case scenarios drawn up internally by the vendors.

There are huge expenses involved for the vendors without there being a reasonable assurance of the RFP not being retracted, much less of winning the contract. Some of these expenses relate to setting up of Joint Ventures (JVs) to meet the expectations of the government’s ‘Make in India’ policy. In the case of Spike missiles, the Original Equipment Manufacturer (OEM) has set up a JV with the private-sector Kalyani Strategic Systems and the state enterprise Bharat Dynamics Limited (BDL) to manufacture the missiles in Hyderabad.

The future of this JV, as also its potential supply chain, does not look too promising at this stage, which should be a matter of concern to the constituents of the JV and would discourage the OEMs contemplating investments in India in the defence sector. Such situations strike at the root of the efforts to create an industrial eco-system that is conducive to defence manufacturing in India.

Expenses incurred on the JV are perhaps insignificant when compared with the expenditure incurred by the vendors on the field trials which are usually on no-cost-no-commitment (NCNC) basis. Retraction of the RFP makes this entire expenditure go down the drain. It may sound radical but introduction of a system of reimbursement of the cost of the NCNC trials in situations where the RFP is retracted after the trials for no fault of the vendors would go a long way in curbing the practice of wanton retraction of RFPs.

[Issue: 1, January-February 2018]