Cutting off the Nose to Spite the Face: India’s Penchant for Banning Vendors

Major General Mrinal Suman, AVSM, VSM, PhD

As per a press release issued on 05 March 2012, six companies have been debarred from further business dealings with the Ministry of Defence (MoD) for a period of ten years. They were accused in the case of illegal gratifications against a former Director General of Ordnance Factories. In addition to two Indian firms, the blacklisted companies include Israel Military Industries (IMI), Singapore Technologies Kinetics (STK), Rheinmetall Air Defence and Corporation Defence of Russia. 

The phrase ‘cutting off the nose to spite the face’ is commonly used to describe needlessly self-destructive over-reaction to an issue that results in disadvantaging oneself more than the object of one’s antagonism or revenge. No other expression describes India’s penchant for blacklisting foreign vendors more aptly. 

India’ blundering approach is best illustrated by the case of Nalanda Ordnance Factory (NOF). Work on the setting up of the factory to manufacture Bi-Modular Charge System (BMCS) for heavy calibre ammunition of Bofors 155 mm howitzers was started in November 2001. Denel of South Africa was contracted to supply technology. After having received complete documents pertaining to transfer of technology and paying for them, MoD decided to cancel all contracts with Denel in June 2005. It had emerged that Denel had employed unacceptable means to grab a contract for the supply of NTW-20 Anti-Material Rifle.  

Consequently, NOF project was kept in abeyance from June 2005 to June 2006 as the warranty cover of the purchased technology had expired. Sanction to revive the project at a revised cost of Rs 2161 crore was accorded in February 2009 with completion deadline of August 2011. After a global search, IMI was selected as the new partner and a contract was signed accordingly. However, as the name of IMI figured in the case registered against a Director General of Ordnance Factories (DGOF), MoD decided to put on hold all dealings with IMI in May 2009.

Plants to manufacture chemicals that go into the production of BMCS like Nitro-Cellulose, Nitro-Glycerine and Sulphuric-Acid-Concentration/Nitric-Acid-Concentration are coming up as per the schedule. Hundreds of crores of rupees have been expended on erecting these factories without any purpose whatsoever as work on the setting up of the main plant to produce BMCS has not commenced to date. Thus, by imposing bans on Denel and IMI, India has harmed its own interests.

STK was participating in tenders to supply of 155mm/52 Calibre Towed Guns, 155mm/39 Calibre Ultra Light Howitzer Guns and Close Quarter Carbines. Interestingly, it was the sole bidder for Ultra Light Howitzers. Suspension of dealings with STK has adversely affected the modernisation plans. In a desperate move, India had to approach the United States for emergent supply of M777 155MM Ultra Light Howitzers under the Foreign Military Sales procedure, a government-to-government deal.  

Shooting in the Foot: Proclivity for Banning Companies

The case of blacklisting of Bofors is symptomatic of the haste in which decisions with far-reaching consequences are taken without due application of mind. After extensive trials, a deal was negotiated with the Swedish company in 1986 for the purchase of 410 guns duly assembled and subsequent production of 1,840 pieces in India through transfer of technology. Once the news of payment of kickbacks became public, India blacklisted the company for corrupt practices. 

It was India that suffered more. Bofors had received the full payment of approximately 1,500 crores. On the other hand, India failed to make use of the purchased technology for indigenous production, had to approach middlemen for purchasing spares at exorbitant rates, resort to cannibalization of parts to keep some guns functional and faced major difficulties in overhauling them. Additionally, Bofor guns of the Navy and 84 mm Carl Gustav Rocket Launchers of the infantry faced shortage of spares. Had India utilised the purchased technology, it would have acquired indigenous competence to manufacture/maintain guns and even develop superior versions. Continuing Indian woes of shortage of artillery guns can be attributed to the shortsighted decision of banning Bofors.   

                                

The same story was repeated in the case of Denel. Plans to mount Denel’s T-6 155mm turret on Arjun hull had been finalised and an initial order had also been placed on a public sector undertaking, when MoD blacklisted Denel in 2005 and ordered suspension of all dealings with it. In addition to the above mentioned stoppage of work at NOF, India’s Field Artillery Rationalisation Plan suffered a severe setback.  

 

The case of banning of HDW makes still sadder reading. As per the contract signed in 1981, HDW supplied two submarines to India in 1987. Thereafter, instead of assembling the planned six submarines in India, only two had been completed when a ban was imposed in 1990 on HDW for allegedly paying 7 percent commission to middlemen. Resultantly, India’s submarine modernisation plan came to a halt and it was forced to purchase spares for maintenance, overhaul and repairs from unscrupulous traders at exorbitant rates. Worse, India failed to exploit imported technology that it had paid for to build indigenous competence.    

Display of Zero Tolerance for Corruption

Since the purchase of Bofors howitzers in 1986, every major deal has attracted criticism for alleged lack of transparency and financial impropriety. Despite Defence Minister AK Antony’s unblemished credentials for probity and his repeated declarations of zero tolerance for corruption, allegations of irregularities are being made against the Indian defence procurement regime with uncanny regularity.

MoD is rightly concerned about its poor image and has taken four major steps to impart credibility to the system. One, ‘demonstration of the highest degree of probity and public accountability; transparency in operations; free competition; and impartiality’ has been spelt out as an essential objective of the Defence Procurement Procedure (DPP). Two, generation of maximum competition is being encouraged. Maximum publicity is being given to all intended procurements and the qualitative requirements are required to be of contemporary technology widely available in the world/indigenous market.

Three, an independent Technical Oversight Committee is constituted in respect of all acquisition proposals in excess of Rs 300 crores to ascertain that proper procedures have been followed for technical evaluation of equipment. Finally, signing of Integrity Pact between the Government and vendors has been made mandatory for all procurement proposals of indicative value of more than Rs 100 crores. It is a binding agreement in which the government officials promise not to demand bribes during the procurement process and bidders promise not to offer bribes. Any violation of probity provisions by a company can invite punitive action.

Despite all the above measures, the environment remains convinced that the whole system is afflicted by corrupt practices and that no vendor can hope to do business with MoD without paying speed money. It is to dispel such negative impressions that MoD feels compelled to take drastic steps like blacklisting errant companies. Surprisingly, MoD is not known to have imposed any other penalty on delinquent companies – it is either no-action or blacklisting.

The Way Forward

As per the contractual provisions mentioned in DPP, MoD can take a number of punitive actions in case any vendor is proved to be guilty of violation of probity norms. These vary from financial penalties to outright blacklisting.

Punitive actions must be commensurate with the degree of misdemeanor and taken in a phased and graduated manner. Such a process will convey seriousness of the Government and send a strong message in unambiguous terms to the environment, thereby dissuading a wayward company from committing a more serious infringement. Therefore, MoD should categorise levels of punishment as follows:-

·          Level 1 – Varying financial penalties.

·    Level 2 – Forfeiture of bid-security and/or performance bond. There is an element of ignominy inherent in such a punishment.

·     Level 3 – Deduction from payments due against the current contracts. This will inflict heavy financial penalty on the company. Such a step will cost the company dear as it will have to borrow additional funds to complete contracts in hand.

·         Level 4 – Disallowing the errant company from participation in future tenders but permitting it to complete its engagements in hand without any prejudice.

·         Level 5 – Blacklisting or total debarment for an appropriate period of time.   

The following points need to be highlighted:-

  

·         For financial penalties under Levels 1,2 and 3, it is the company that suffers the most whereas the Government’s interest are marginally affected due to strained relations and vitiated working environment.

·      At Level 4, errant company is removed from the list of approved vendors for future tenders. It inflicts a major blow to commercial interests of the company and dents its standing. Government’s interests are also adversely impacted – competition and options for future requirements get reduced as there are limited producers of high-tech defence systems in the world. However, no ongoing contract is adversely affected under this punishment level.

·       As Level 5 implies immediate and total ban on all dealings, it is the Government that suffers more than the company. All on-going contracts get stalled with considerable payments already made to the company going waste. Thus, the Cusp of Counter-Productivity is crossed. It amounts to inflicting self-injury. Suspension of Bofors, Denel, HDW and IMI amply proves it. Therefore, the threshold of Cusp of Counter-Productivity should be crossed only after due diligence and once the charges against the accused company stand proved to be of serious transgression.  

It must be remembered that most defence producers are giant conglomerates with multiple subsidiaries. They are system integrators with interests in multifarious defence technologies and equipment. Debarment of such a company de facto implies imposing ban on dealings with all its subsidiaries as well. Thus it is not a single entity that gets affected but its numerous offshoots as well, thereby impacting a number of procurement cases.

Take the case of Israel Aircraft Industries Ltd (IAI). Fears were being expressed that it may face a ban due to alleged irregularities in the Barak anti-missile deal. Fortunately, MoD did not take any hasty decision. In addition to being involved in the upgradation of various air craft, IAI is co-partnering many high-tech developmental projects as well. Most critically, it is the prime contractor for Airborne Early Warning and Control System for India. Blacklisting of IAI would have severely affected modernisation plans of the armed forces.

India should resist the temptation of flaunting its anti-corruption tenacity through abrupt suspension of all dealings with an allegedly errant company. Before taking the extreme step, the following aspects must be kept in mind:-

·         Does the allegation stand proved prima facie?

·         Has adequate opportunity been provided to the company to state its case?

·         What is the degree of seriousness of the alleged misdemeanor?

·         What should be the commensurate punishment?

·         How will the proposed punishment affect India’s interests?

·       In case suspension of dealings is considered to be the unavoidable option, is it the opportune time to order it? Will it be prudent to wait till own interests under ongoing contracts are made secure? Had India waited for a few months before banning HDW, it would have received all catalogues and drawings. 

It is apparent that the recent blacklisting of IMI is a ‘self-goal’. By awarding Level 5 punishment, India crossed the Cusp of Counter-Productivity. The fate of Nalanda factory has been sealed for good and enormous funds wasted. Worse, India’s quest for self-reliance in ammunition for Bofors guns remains unachieved. On the other hand, award of Level 4 punishment of debarring the company from future contracts without affecting contracts in hand would have been a far more prudent and judicious action. 

Blacklisting of a company should be the last resort and taken only in extreme cases as it adversely impacts modernisation of the Indian armed forces. Cancellation of procurement cases midway results in wastage of considerable effort and resources. Additionally, the whole process has to be restarted ab initio, resulting in time delays and cost overruns. Thus, blacklisting hurts Indian interests more than punishing the allegedly errant company. Cutting off one’s nose to spite the face can never be considered an intelligent policy.