Rise of competitive bidding as a norm in defence procurement
Abhranil Chatterjee
IIT | ISB | Corporate Strategy | Aerospace and Defense | Strategy Consultant
A common (mis)conception that a people, especially investors and fund managers, have around defence procurement is that most large procurement orders are given to Defence Public Sector Enterprise (DPSUs) on a nomination basis. While there is some degree of truth to it and has been a norm in the past but recent trends?suggests?order?on?competitive basis is going to be the norm rather than the exception. This is also in line with the government’s?effort?to?create?a?level playing field for industry participants.
In order to analyse whether there has been rise in capital procurement programs through competitive?bidding?vis-à-vis?nomination?basis,?we?considered?major?procurement contracts that were awarded since 2015 and estimated the size and nature of the contract. A total of USD 33.5 billion worth of contracts were analysed for. Although not exhaustive in nature, due care has been taken to include major large programs awarded to domestic defence manufacturers. As the objective of analysis is nomination vs competitive bidding from the Indian manufacturer point of view, contracts under Buy (Global) or direct imports through G2G deals have not been considered. However, licensed manufacturing has been considered in the scope of analysis. For example, programs like MH-60R Seahawks, MMRCA Rafale, S400 Triumf has not been considered however programs like C295 or T90S has been considered.
It is evident from the graph above that competitive bids increasing in preference with the government’s push for level playing field for private sector companies. In fact smaller order that have not been part of the analysis are mostly done through competitive bidding. Thus will ultimately result in increasing the percentage of competitive bidding
It?is?pertinent?to?note?that?most nomination based orders for DPSUs are in cases?where?either?DPSUs?are?either Development?cum?Production?Partner (DcDP) for DRDO developed technology or in?case?of?licensed?manufacturing?of imported equipment.?This practice was prevalent because of the lack of system of system?integration?capabilities?in?the private sector. Nomination based orders will thus continue for all programs that are?currently?under?development?and DPSUs have been selected as their DcDP.
However, structurally this is changing with several policy and oversight intervention and precedents are being created where private sector industry are on the path to win orders in cases where traditionally nominated orders would have been given to one of the DPSUs.
For example, in 2021, DRDO opened the Development-cum-Production Partner programme?for private?firms?and they have?been allowed?to?forge?partnership?with?the DRDO to develop?and produce missile systems.
In case of ship-building, it should also be noted that large shipbuilding orders, in cases where it isn’t feasible to finalise the design before issuing the RFP due to the extremely complex design of the vessel or only a single shipyard has the capability to carry out such a project, the shipyard is nominated simultaneously with accord of AoN.
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However, in other cases all the shipyard compete against each other to win orders and are thus considered competitive. This competitive bidding has been happening in all recent Naval projects. For example, the?Next?Generation?Missile?Vessels (NGMV) has competitively won by CSL and is expected to sign the contract in 2022-23. Future projects such as the Next generation?Corvette?(NGC),?Landing Platform Dock (LPD), etc. will all proceed through competitive bidding.?However, strategic?vessels?such?as?the?Next Generation Destroyer, which is expected to have ballistic protection system, Indian Aircraft?Carrier?(IAC-2)?and?nuclear submarine programmed will follow the nomination route.
Our take is that this rising trend of competitive bidding will force DPSUs to be more competitive in nature and the cost plus regime of nomination??based??orders??will??be restricted to strategic projects and DRDO projects?where?DPSUs?are?already nominated production agencies. However, we?do?not?foresee?a?scenario?where existing DPSUs will lose significant market share to the private sector but we expect pressures on margin to build up as more large?programs?go?via?competitive bidding.
Data Analysed for analysis:
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1 年Hi Abhranil Chatterjee, nicely done, I agree on the transient shift from nominated to competitive
Early Stage Investor l Aerospace & Defence l Space Tech
1 年Abhranil Chatterjee. This is good data backed research. This is aligned with our discussion on my post. The orders by nomination are less significant now. Such orders are by nomination because of a reason - capacity/capability/technical etc. You rightly brought out that Ships & Aircrafts may continue to be nominated because of obvious reasons.
Strategic Planning | Transformation Leader | Supply Chains | MBA | Engineer
1 年Thanks for sharing Abhranil. The industry is going through a change on many levels and it will take some time. But, with the progress so far, seems it will not be much.
Nice analysis. The competitive stance is a positive one in my opinion and certainly helps support the level playing field. There will always be nominated sources of supply where a specific niche or national security is concerned but overall it’s important to have government business units efficient and effective to retain capabilities and capacity. Levelling the playing field is one thing but capability and scalability of indigenous core skill is critical