Money Over Matter | Shroud of Secrecy

It’s an open secret that defence procurements have become opportunities for corrupt gains

Maj. Gen. Mrinal Suman (retd)

Due to secrecy, the world arms trade lends itself to malpractices. Transparency International counts it in the top three sectors for bribery and corruption (oil and major infrastructure projects being the other two). Worse, as per the estimates of the US government, while accounting for less than one per cent of the international trade, the arms trade accounts for almost 50 per cent of all kickbacks in the world.

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 the last five years. 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 finalisation of contract, which need to be addressed’.

Similarly, purchase of two fleet tankers from Fincantieri during the period 2008-10 was severely criticised 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. Selection of Rafale aircraft as the lowest bidder also came under cloud for inequitable comparison.

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 been done since then.

Prime Minister Narendra Modi and defence minister Manohar Parrikar with the three service chiefs General Bipin Rawat, Admiral Sunil Lanba and Air Chief Marshal B.S. Dhanoa
Prime Minister Narendra Modi and defence minister Manohar Parrikar with the three service chiefs General Bipin Rawat, Admiral Sunil Lanba and Air Chief Marshal B.S. Dhanoa

Frailties of the Procedure
Defence procurements are a multi-dimensional multi-agency process. A large number of entities participate to ascertain and confirm requirement and suitability of equipment for procurement. As Indian governance works by consensus, all agencies are required to be brought on board. No official is courageous enough to overrule a dissenting note. Such an arrangement gives undue clout to all agencies. They can easily delay or abort a proposal. Therefore, helpless vendors get coerced to ensure that all agencies remain in the loop through speed money at every stage.

Indian acquisition process consists of two distinct stages – planning and acquisition (technical and commercial phases). Both the stages are vulnerable to corrupt practices.

During the planning stage, inter-se precedence accorded to the acquisition proposals contained in the Services Capital Acquisition Plan can be manipulated subjectively. An urgent procurement proposal can be initiated for the purchase of items that are being manufactured/marketed by a ‘friendly vendor’. As resources are always insufficient to cater for all proposals, only schemes that are accorded higher priority are included in the Annual Acquisition Plans. Hence, priorities are suitably skewed.

Services Qualitative Requirements (SQR) that define essential performance characteristics of the equipment being sought are often manipulated to favour a chosen vendor and eliminate competition, thereby effectively creating a single-vendor situation. It is one of the most commonly prevalent practices. In the infamous case of VVIP helicopters, two critical parameters were cleverly introduced to favour the chosen vendor.

Field trials are by far the most critical aspect of the technical evaluation process. These are carried out under the aegis of the concerned Service Headquarters to validate performance claims made by the vendors with respect to compliance with QR. Trials are required to be conducted in all conditions where the equipment is likely to be deployed.

Manipulation of field trials poses the biggest threat to the integrity of the whole procurement system.

Another 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.

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 essential parameters for the favoured equipment on baseless grounds.

One of the commonest ways of seeking more kickbacks by the officials is to increase the quantity required after fixing ‘percentage of cuts’ with the successful vendor – 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.

Determination of the lowest bidder is a complex process. 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 like basic cost, support equipment, services, spare parts, warranty obligations and repair facilities. Requirement of support backup and infrastructure can be manipulated to bring down the overall quote of the favoured vendor.

Inclusion of ancillary sub-systems after the identification of the lowest bidder makes a mockery of the much trumpeted ‘single-stage two-bid system’ and provides a windfall opportunity to the vendor to quote any price that it wants for the add-on items. Normally, a smart vendor always keeps his unit cost price at competitive levels but charges exorbitantly for add-ons at a later date in connivance with the officials concerned. The loot is shared by all.

Once technical and commercial processes are completed, the case is forwarded to the competent financial authority (CFA) for his final approval. 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.

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. In addition, lack of understanding and absence of public interest make offsets highly vulnerable to corrupt practices. 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.

Inadequate attention is paid to the drafting of offset contracts. Provisions are intentionally spelt out in imprecise and vague terms. These loopholes are subsequently exploited through discretionary powers. 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.

Failed Initiatives
India’s Defence Procurement Procedure (DPP) has undergone seven major revisions since its promulgation in 2002. A number of attempts have been made to promote transparency and competition. In addition to the banning of agents who could swing deals through undue influence, two other major provisions relate to the constitution of Technical Oversight Committee (TOC) and signing of Integrity Pact.

A TOC is constituted by the Acquisition Wing for all acquisition proposals in excess of Rs 300 crores and for other key cases. TOC is tasked to see whether the trials, trial evaluations, compliance to SQR and selection of vendors were done according to prescribed procedures.

TOC also provides oversight on the adopted trial methodology during trials vis-à-vis trial methodology given in the Request for Proposals (RFP) and the trial directive. In addition, TOC reviews and brings out the status of a grievance or complaint, if any existing at that stage. TCC has to give its observations and recommendations to the defence secretary. Commercial evaluation commences only after the acceptance of TOC report by the defence secretary.

Defence minister Manohar Parrikar and CNS Admiral Sunil Lanba listen as DRDO Chairman Dr S. Christopher makes a presentation
Defence minister Manohar Parrikar and CNS Admiral Sunil Lanba listen as DRDO Chairman Dr S. Christopher makes a presentation

However, TOC has been a total failure. The contract for VVIP helicopters was signed in February 2010, after clearance by TOC. Yet, CAG was constrained to observe that ‘the entire process of acquisition right from framing of SQR to the conclusion of contract deviated from the laid down procedures’. Apparently, TOC had failed to notice the gross irregularities committed.

However, introduction of mandatory signing of the Integrity Pact has been claimed to be a game-changer to ensure probity. Since 2006, DPP mandates that an Integrity Pact be signed between the government procurement agency and the bidder for all ‘Buy’ and ‘Buy and Make’ procurements exceeding Rs 20 crore. The bidders are required to sign and submit it along with their technical and commercial offers.

It is a binding agreement in which the procurement agency promises that it will not accept bribes during the procurement process and bidders promise that they will not offer bribes. It also includes an undertaking by each bidder to disclose all payments made in connection with the contract in question to anybody (including agents, middlemen and family members of officials).

In addition, every bidder is required to submit an Integrity Pact Bank Guarantee from an Indian Public Sector bank. At present, the guarantee amount varies from Rs 5 lakh (for proposals with estimated value below Rs 100 crore) to Rs 10 crore for proposals with estimated value above 5,000 crore.

As is apparent, an Integrity Pact is nothing more than a moral code. The fact that corruption in almost all defence deals has been proliferating unabated shows its failure. Pledges mean little to the dishonest. It is juvenile to believe that corrupt functionaries who do not fear penal/disciplinary punishments would be deterred by the moral code of Integrity Pact. It is an over-hyped and a meaningless provision. As a matter of fact, Integrity Pact provides a pretence to the deceitful. It is worth noting that even the contract for VVIP helicopters had the much trumpeted Integrity Pact.

Contrary to the normal beliefs, Foreign Military Sales (FMS) are not free of all extraneous influences. To coax Indian decision-makers to shed open competition and opt for single vendor FMS route requires considerable persuasive skills, networking and even ‘sweeteners’. To start with, efforts are made to influence the decision-making apparatus, either through social circles or bribes or through the lure of green cards for the progeny of the key officials. To generate favourable media treatment, members of think tanks and media are taken to visit their factories and ‘looked after’.

Alongside, efforts are made to torpedo every attempt at procurement through competitive route. Seeds of doubt are sown about the competitors in the minds of public through planted stories and third-party complaints. The aim is simple – eliminate all competition by having them blacklisted through selective leaks and innuendoes. Slowly a stage is reached when the buyer country is forced to opt for FMS route for its emergent requirements.

Plugging the Loopholes
Although DPP is an exhaustive and elaborate document covering all stages of the procurement process, it possibly cannot cater for human ingenuity for finding/creating loopholes for corruption. The devious invent innovative ploys to tweak the process for dishonest personal gains. However, four measures that will go a long way to minimise opportunities for misdemeanours are discussed below.

Inject Transparency: Secrecy and probity are anti-thesis of each other. Whereas secrecy breeds dishonesty, transparency is the most potent antidote to corruption. The biggest weakness of India’s defence procurement regime is the secrecy that envelops it. Unfortunately, Indian military’s proclivity for secrecy aggravates the problem. Their misplaced sense of security-consciousness makes them assign unduly high security classification to every procurement proposal, with the result that the whole process remains shrouded in mystery.

The armed forces must curb their propensity to assign unduly high security classification to procurement proposals. As increased competition promotes transparency and reduces scope for subjectivity; commensurate with security concerns, maximum publicity should be given to proposed procurements through print and electronic media.

Selection of Acquisition Functionaries: A system is as good as the people who operate it. Therefore, it is by far the most important requirement. All checks and controls can be rendered ineffective by ingenious functionaries. They can circumvent all rules and provisions with innovative dexterity. Their proclivity to invent opportunities for manipulation is disquieting. Therefore, it is of utmost importance that acquisition staff be of unimpeachable integrity and unblemished track record. Diligent, meticulous and conscientious functionaries are India’s best bet against manipulations in defence deals.

Oversight for Misdemeanours: A well-structured oversight arrangement can prove invaluable in continuous monitoring to ensure that all decisions taken are above board and in good faith. Every contractual arrangement must have an inbuilt mechanism for handling of complaints and redressal of grievances. As most complaints regarding alleged miscarriage of justice arise from a lack of effective communication, such an arrangement will help clarify matters and prevent vitiation of the environment.

Although DPP lays down broad guidelines for the completion of different acquisition activities, they are neither taken seriously nor adhered to. It is essential to enforce timelines strictly. All holdups, either by delays in clearance of files or by raising of irrelevant queries must be looked at with suspicion and investigated.

Exemplary Punishment for Corruption: Corruption involves two parties — bribe giver and bribe taker. It is unfair to apportion the entire blame to bribe givers and take no action against those who demand and extract bribes. Since the exposure of the jeep scandal, no official has ever been punished for taking bribes. Former defence minister A K Antony told the Parliament on 16 December 2013 that no official had been found guilty in 23 cases registered by CBI since 2010. If that be so, to whom did the vendors give bribe? Why have a number of companies been blacklisted for misdemeanour? Why have so many contracts been cancelled for alleged irregularities, the case of helicopters for VVIPs being the latest one? Instead of putting its own house in order, India holds foreign vendors accountable for all wrong-doings.

Lack of probity and transparency in defence procurements has been attracting intense media attention. The environment is convinced that the procurement process can be conveniently skewed by decadent decision makers for a price. It is generally believed that speed money is essential at every stage of the process.

It is commonly said that sunlight is the most effective cleansing agent as darkness breeds virus. Similarly, shroud of secrecy breeds corruption in defence deals and transparency is the best antidote to counter the malaise. Whereas it is understandable that national security concerns must be addressed, excessive stress on secrecy in the whole procurement process is certainly not warranted. Transparency can instil confidence in the environment about the uprightness of the complete process.

Equally importantly, India must handpick procurement functionaries with unblemished record and proven integrity. Thereafter, they should be permitted complete freedom to process procurement cases with total support of the establishment. All decisions taken in good faith must be backed. Additionally, exemplary punishments must be meted out to the guilty.

Demonstration of ‘the highest degree of probity and public accountability, transparency in operations, free competition and impartiality’ continues to be the stated aim of the Indian DPP. It is time the government displays determination to initiate radical reforms to insulate the system from the dishonest influence of the unscrupulous.

Call us