'Financial Gates' set up to bar low bids by suspect private sector players to win Defence contracts

To provide for systemic safeguards against non-delivery of contracted platforms and military equipment, India's Ministry of Defence has amended its Defence Procurement Procedure (DPP) to create "Financial Gates" or entry barriers for companies which bid low to win contracts but lack the financial heft to deliver.

The Indian Navy's Controller of Warship Production & Acquisition Vice-Admiral AK Saxena made this disclosure in New Delhi on July 8 while responding to a question on the long delay by Reliance Naval and Engineering Limited (RNEL) to deliver five Offshore Patrol Vessels (OPVs) under an estimated 2,500 contract awarded in 2011 to the Pipavav shipyard, which was taken over by Reliance in 2015.

"Four Financial Gates will apply to all RFPs (as a consequence to the amendment). These are with respect to credit rating, value of production, capability to raise finances (to deliver the contracted order). The fourth one is meant to keep out big players from small programmes," Rear Admiral Kochhar explained

Delays mar the modernisation and build-up plan of the Indian Navy. Dealing with delays from private sector companies is a new phenomena. In the recent past, another private sector company, ABG Shipyard, collapsed after winning the contract for a Cadet Training Ship with the lowest bid (L1). Former Chief of Naval Staff Admiral Sunil Lanba had disclosed in December 2019 that bank guarantees worth 100 Crore had been encashed for RNEL's failure to deliver the OPVs as per the terms and timelines set in the contract.

The Financial Gates to keep out suspect players were introduced through an amendment to the Defence Procurement Procedure approved by the Defence Acquisition Council (DAC) on March 20, 2019, the Assistant Controller of Warship Production & Acquisition Rear Admiral Ajay Kochhar elaborated.

"Four Financial Gates will apply to all RFPs (as a consequence to the amendment). These are with respect to credit rating, value of production, capability to raise finances (to deliver the contracted order). The fourth one is meant to keep out big players from small programmes," Rear Admiral Kochhar explained.

These Financial Gates had been introduced in the four recent tenders aggregating to $2.2 Billion, including the $2 Billion RFP for 6 Next Generation Missile Vessels (NGMVs). The tender for NGMVs has been issued to all four Defence Public Sector Shipyards, the Ministry of Shipping-owned Cochin Shipyard , besides the big private sector shipyards L&T and RNEL

He said that these Financial Gates had been introduced in the four recent tenders aggregating to $2.2 Billion, including the $2 Billion RFP for 6 Next Generation Missile Vessels (NGMVs). The tender for NGMVs has been issued to all four Defence Public Sector Shipyards, the Ministry of Shipping-owned Cochin Shipyard , besides the big private sector shipyards L&T and RNEL. "All the bidders will have to submit responses to clear the Financial Gates besides submitting the Technical and Price Bids," he explained.

As part of this concept, tenders for 8 fast patrol vessels (FPV), 12 Air Cushioned Vehicles (ACVS) and 8 Missiel-cum-Ammunition Barrages have been issued to 16 smaller shipyards only.

On the status of the OPVs to be delivered by RNEL, Vice-Admiral Saxena disclosed that "some trials" have started on the first of the 5 OPVs. "We're monitoring the delay in the programme very closely. It's difficult to say whether they will be able to deliver. That will be clearer by the year-end," he said.