Of Matters Military: Indian Defence Deals (Need for Transparency and Probity)

By Mrinal Suman

All defence deals are shrouded in varying degree of secrecy. Secrecy and transparency are anti-thesis of each other. Lack of transparency creates doubts about their uprightness. In India’s case, every major defence deal gets mired in allegations of irregularities and financial impropriety. The book identifies stages of the acquisition process that are vulnerable to manipulation and finds the integrity pact to be an infructuous addendum. Implementable corrective measures have been suggested to make defence acquisitions corruption-free.
Seven major defence procurements that have come under a cloud in the recent past have been examined in-depth for alleged infirmities and transgressions. Deals for AgustaWestland helicopters and Rafale fighters have been dealt in detail as they continue to hog media attention to date.
Agents are omnipresent in all trade transactions the world over. They bring buyers and sellers together; assist in negotiations; and provide post-contract services. However, their role in defence deals has been a subject of intense debate in India for the last four decades now. The book probes the intractable dilemma facing the government.

• Language: English
• Publisher: VIJ Books (India) Pty Ltd
• Release date: Dec 1, 2020
• ISBN: 9789389620979

Mrinal Suman

Major General Mrinal Suman, AVSM, VSM, PhD, is a highly qualified and experienced officer. He commanded an Engineer Regiment in the most hostile battlefield in the world, Siachen Glacier. He was the Task Force Commander at Pokharan and was responsible for designing and sinking the shaft for the nuclear tests. For that, he was decorated by the President of India. He is India’s foremost expert on myriad aspects of India’s defence procurement regime and offsets. He is regularly invited to address various Indian chambers, associations and foreign industrial delegations. He is a prolific writer and has published more than 550 papers in different journals and newspapers; many have been translated into foreign languages. His views command immense respect. This is General Suman’s fifth book. His earlier books deal with issues confronting the Indian armed forces; reasons for the tardy procurement process; controversies afflicting major defence contracts concluded in the recent past; and reasons for growing anti-nationalism and dissensions in India.

Book preview

Part - 1

Subornment: Opportunities and Concerns

Probity in Defence Procurements: Contouring the Vulnerability Map

Defence deals the world over are regularly subjected to intense scrutiny and investigations. Aspersions are often cast about lack of probity and underhand dealings. In Transparency International’s Global Bribe Payers Index, defence trade appears in the top three sectors for bribery and corruption. The other two are oil sector and major infrastructure projects. The US government estimates that defence sector accounts for almost 50 per cent of all kickbacks in the world, although the arms trade accounts for less than one per cent of the international trade.

As per the reports appearing in the press, most of the defence contracts are tainted by dishonest dealings. Former employee Michel Josserand made public accusations that Thales Group, a French defence corporation, held a centralised slush fund to dole out bribes to ensure key contracts. Thales group vehemently denied the allegations, pointing out that Josserand had been fired for ‘irregularities’ that involved corruption. US defence company Boeing was embroiled in scandal surrounding former Pentagon official Darleen Druyun. The company’s former finance director, Mike Sears, admitted to offering Druyun and her son jobs in return for major government contracts that Druyun oversaw.

Britain’s leading arms manufacturer BAE Systems had been accused of paying more than £1 million to former Chilean dictator General Augusto Pinochet. Israeli police are investigated IAI executives for taking bribes to award exclusive sales territories. One of the alleged bribers was said to be involved in military contracts worth about USD 150 million, including the purchase of Russian Ilyushin Il-76 aircraft. Investigators were focusing on nearly a decade of suspected graft and kickbacks involving ‘many tens of millions of dollars of IAI, or rather, national funds’.

India is no exception. We have had more than our share of controversies and enquiries. Even though India’s defence imports constitute a very small portion of the world trade, they have come to acquire notoriety for sleaze and corruption. Every defence deal gets mired in allegations of irregularities, lack of transparency and financial impropriety. India gained Independence in 1947 and the infamous jeep scandal erupted in 1948. Since then, every major defence deal has been dogged by allegations of kickbacks, controversies and enquiries. Despite the fact that a number of measures have been initiated by successive governments to make defence procurements corruption free, sleaze money continues to tweak the process. The environment is convinced that no deal can be successfully clinched without paying ‘speed money’.

Transgressions in the purchase of helicopters for VVIPs have been hogging headlines for long. According to the Comptroller and Auditor General of India (CAG), The entire process of acquisition poses serious questions on accountability and lack of transparency in the finalization of contract, which need to be addressed. Similarly, purchase of two fleet tankers from Fincantieri during the period 2008-10 was severely criticized by CAG for showing undue favour to the Italian shipyard – the company did not have the specified steel and the commercial negotiations did not address the issue of reasonability of pricing adequately.

Recurrent generation of demand for TATRA vehicles is an example of systemic corruption of the system. As the vendor was obliging all decision makers, it had become an annual ritual. Requirements were inflated to increase the amount of kickbacks. In September 2010, the then Army Chief declined to clear procurement of 1,600 TATRA vehicles. It was a patently sham demand to place orders on BEML for illegal gains. Apparently, the vehicles were not required as no procurements have since been made.

It is generally suspected that interested participants can skew the whole procurement process by influencing decision makers by decadent means. What makes Indian defence acquisitions vulnerable to such undue influences? The answer to this critical question can only be obtained by understanding the nature, limitations and peculiarities of India’s arms procurement mechanism.

India imports nearly 70 per cent of its requirement of new defence systems. Availability of limited number of vendors of high-tech defence products restricts bargaining power of the Government. Additionally, some countries impose export restrictions. The problem gets compounded where technology transfer is sought as an essential part of the package.

National security concerns preclude open tendering. Invitations are sent to a few selected vendors. A fine balance has to be maintained between open competition and secrecy needs. Besides, there is a tendency to play safe by over-stressing security.

Due to high level of technology, the seller always knows the product better than the buyer. He can, therefore, negotiate the contract from a position of strength as the buyer has to accept his contentions. Base or fair price determination is exceedingly difficult due to rapid technological advances. Moreover, as all arms deals are not made public, terms and conditions of previous sales to other countries are not available as guidelines.

Modern defence systems are highly complex and most of the major vendors are in fact system integrators and not producers of complete systems as such. During negotiations, assured life cycle support for the equipment acquires criticality.

Procurement procedure is lengthy as it entails field trials of equipment in varying terrain and climatic conditions.

India seeks offsets equal to 30 percent of the contract value for all deals of over Rs 2,000 crores. Negotiation of offsets is a complex and arduous task. As only peripheral attention is paid to offset contracts, the whole process becomes vulnerable to malpractices.

At times, the cost of life-time support may be more than the purchase price of the equipment. Whereas considerable attention is paid to the quoted purchase price, pricing of support services and spares generally escapes close scrutiny. This provides an opportunity to unscrupulous vendors and dishonest functionaries.

Emergent national security imperatives may necessitate expeditious procurement of urgent operational requirements for unforeseen crisis situations. As time is of essence, certain short-circuiting of normal procedures is inevitable. It results in dilution of standard checks and balances.

Major Steps Taken

The government is fully aware of the need to put a transparent, credible and impartial procurement system in place. It has taken a number of steps. Recommendations of the Parliamentary Standing Committee on Defence, Central Vigilance Commission, CAG and the Kelkar Committee have been progressively incorporated in the Defence Procurement Procedure (DPP). Some of the major provisions initiated by the government to make the process fair and honest are as follows:-

As increased competition promotes transparency and reduces scope for subjectivity, commensurate with security concerns, maximum publicity is to be given to proposed procurements through print and electronic media. Single vendor procurements are be resorted to in exceptional cases only.

Formulation of Services Qualitative Requirements (SQR) has been rationalised to ensure multi-vendor responses. SQR have to be broad-based and of widely available contemporary technology. In case a solitary vendor submits compliant response, the process has to be aborted and fresh Request for Proposals (RFP) issued with reworked SQR.

With a view to safeguard against the possibility of a vendor increasing his commercial quote consequent to his emergence as the solitary technically acceptable vendor; all vendors are required to submit technical and commercial bids together, albeit in separate sealed envelopes. Commercial bids remain sealed in safe custody till technical evaluation is completed.

Both technical and commercial bids are opened by duly constituted committees under Technical Managers and the Acquisition Managers respectively in the presence of vendors or their authorised representatives.

Paper evaluation of all technical offers is carried out by a Technical Evaluation Committee (TEC) constituted under the aegis of the concerned service HQ. A technical offer, once submitted, is not permitted to be changed materially subsequently.

Field trials are carried out under the service HQ as per the trial directive formulated. After each stage of the trials, a debriefing of all vendors is carried out at the trial location itself wherein compliance or otherwise vis-à-vis SQR is specifically communicated to all the vendors in a common meeting. This provision imparts transparency to the whole process.

To confirm that the trials, trial evaluations, compliance to SQR and selection of vendors have been done according to prescribed procedures, the Defence Secretary has to constitute a Technical Oversight Committee (TOC) for acquisition proposals in excess of Rs 300 crores.

As regards commercial evaluation, a ‘Compliance Statement’ is prepared to record discordance, if any. Finally, a ‘Comparative Statement’ is prepared of all compliant commercial bids to determine the lowest acceptable offer (L1 vendor).

Once L1 vendor is identified in multi vendor cases, the contract is to be concluded with him without any further price negotiations except in exceptional circumstances. In single vendor/resultant single vendor cases, a benchmark for reasonableness of price is determined before opening the commercial offer. If vendor’s quote is found to be within the benchmark fixed, no price negotiations need be carried out.

An undertaking is sought from the bidder that he has not supplied/ is not supplying the similar systems or subsystems at a price lower than that offered in the present bid in respect of any other ministry/ department of the Government of India. If the similar system had been supplied at a lower price, then the details regarding the cost, time of supply and quantities should be included in the commercial offer.

An ‘Integrity Pact’ is signed between the government department and the bidders for all procurement schemes over Rs 20 crores. It is a binding agreement between the government department and bidders for specific contracts in which the government promises that it will not accept bribes during the procurement process and bidders promise that they will not offer bribes.

Contouring the Vulnerability Map

Although, the government has taken the above steps to make the procurement regime sound and above board, it is essential to identify the stages where the system can be subjected to external influences and the degree of such vulnerability. It is only then that appropriate steps can be taken to plug those loopholes to make the system foolproof.

Initiation of Proposal and Allocation of Priority. Services Capital Acquisition Plan (for a five year period) contains a large number of approved procurement proposals. As resources are always insufficient to cater for all proposals, only schemes which are accorded higher priority are included in Annual Acquisition Plans. Other proposals remain on paper and get eliminated due to non-availability of funds. Priorities can be skewed to accord higher precedence to a proposal in which a favoured vendor is confident of emerging successful.

Formulation of Vendor-Centric Qualitative Requirements. Manipulation of parameters to favour a chosen vendor effectively rules out competition. It amounts to creating a single-vendor situation. It is one of the most commonly prevalent practices. In the infamous case of VVIP helicopters, the flight ceiling was reduced from the earlier 6,000 to 4,500 meters as the ‘favoured helicopter’ was certified to fly up to an altitude of 4,572 meters only. In addition, minimum cabin height was increased from 1.45 to 1.8 meters. It effectively ruled out all competition as only the ‘favoured helicopter’ complied.

Field Trials. Undue influence can be brought to bear on trial teams to take subjective view of competing equipment, especially in respect of trial parameters which are descriptive in nature and cannot be quantified. A common ploy is to ‘persuade’ trial units and intermediate commanders to raise irrelevant issues to generate doubts about the efficacy of competing equipment on specious grounds and seek retrial. Another subterfuge commonly employed is to over-emphasise importance of the strong points of the favoured equipment while highlighting every small weakness of the competing items to show them in poor light.

GS Evaluation. Evaluation by the General Staff (GS) is the final step in determining whether the equipment is technically acceptable or not. With inputs from numerous agencies, performance parameters of favoured vendor are highlighted and failings downplayed. On the other hand, weaknesses of competing vendors are underlined and thus declared unacceptable. At times, GS evaluation goes to the extent of seeking wavers of the parameters for the favoured equipment on baseless grounds.

Determination of the Lowest Bidder. It is a complex process as the total expenditure includes basic cost, support equipment, services, spare parts, warranty obligations and repair facilities. Requirement of support backup and infrastructure is manipulated to bring down the overall quote of the favoured vendor. Further, a smart vendor always keeps his unit cost price at competitive levels but charges exorbitantly for add-ons through small print. In the case of Life Cycle Costing technique, Commercial Negotiation Committee has enough leeway to manipulate overall quote by subjective treatment of various contributory factors.

Inflating Requirement. One of the commonest ways of seeking more kickbacks is to increase the quantity required after fixing ‘percentage of cuts’ with the successful vendor. For, higher the value of the contract, higher the quantum of kickbacks. It is done either by increasing the quantity in the original contract or by invoking option clause or by placing repeat orders. Similarly, inclusion of ancillary sub-systems after the identification of the lowest bidder provides a windfall opportunity to the vendor to quote any price that it wants for the add-on items.

Illustration: Mapping Vulnerability Contours

Acceptance and Implementation of Offset Obligations. Offsets are a quagmire of corruption. As offset contracts are linked to the main defence contracts, they are, most unjustifiably, accorded the same security classification as the main contracts. Secrecy breeds corruption. Due to the complexities of the process, very few experts carry out appraisal, evaluation and efficacy-ascertainment of various offset programmes, thereby providing considerable opportunities to vendors to manipulate the system to their advantage. Besides, inadequate attention is paid to the drafting of offset contracts. Unscrupulous vendors connive with corrupt officials to show routine commercial activities and trading as offset programmes to earn credits. For example, in the case of the VVIP helicopters, sham services were cited to claim offset credits.

Grant of Final Approval. Once technical and commercial processes are completed, the case is forwarded to the competent financial authority (CFA) for his final approval. No contract can be signed with the successful vendor unless CFA accords sanction. A corrupt CFA can either abort the case or delay his sanction till he is duly gratified by the concerned vendor. As the stakes for the successful vendor are exceedingly high at this stage, his desperation to clinch the deal is exploited to extract huge kickbacks by political leadership and top MoD officials. This is perhaps the most vulnerable stage of the entire procurement process.

The above susceptibilities should be taken as a broad indicator of areas which need closer oversight. The Illustration shows degree of vulnerability at different stages.

Ensuring Probity

DPP has undergone several major revisions since its promulgation in 2002. A number of attempts have been made to ensure probity. In addition to the banning of agents who could swing deals through undue influence, two other provisions relate to the constitution of TOC and signing of the Integrity Pact.

TOC is tasked to check whether the trials, trial evaluations, compliance to SQR and selection of vendors were done according to the prescribed procedures. It also provides oversight on the adopted trial methodology during the trials vis-à-vis the trial methodology given in RFP and the trial directive. In addition, TOC reviews and brings out the