Helicopters
for VVIPs: India Must Act Decisively
Major General Mrinal Suman
Contract for the procurement of
helicopters for the conveyance of VVIPs is following the now familiar path. Like
all major defence deals, it is getting mired in allegations of gross
irregularities and wrongdoings.
First
some background information to put the issue in the correct perspective.
A proposal for the replacement of aging Mi-8 helicopters for the
conveyance of VVIPs was initiated by the Air Force in August 1999. Eleven
helicopter manufacturers were invited in March 2002 to submit their bids. As a
single vendor situation developed with Eurocopter EC-225 emerging as the sole fully compliant
helicopter, a decision was taken to issue a fresh Request for Proposals (RFP)
with revised Services Qualitative Requirements to generate more competition.
Subsequently,
the requirement of flying ceiling was reduced from the earlier 6,000 meters to
4,500 meters and a new requirement of minimum cabin height of 1.8 meters
introduced. A fresh RFP for 12
helicopters was issued to six vendors in September 2006. As per the provisions
of Defence Procurement Procedure – 2006, an Integrity Pact was duly
incorporated. Responses of two vendors were found compliant and technical
evaluations were carried out at their premises during January-February 2008.
AgustaWestland AW-101 helicopter was recommended for
introduction into service. Contract negotiations were carried out with the
vendor from September 2008 to January 2009. The Cabinet Committee on Security
approved the proposal in January 2010 at a negotiated price of Euro 556.262
million. The contract was signed on 08 February 2010.
Interestingly,
India got the first whiff of unethical practices of AgustaWestland from Italy
in February 2012. Reports started appearing in the foreign press alleging that
bribes and commissions had been paid by the company to bag the contract. India
did not take the issue seriously. Instead of putting the contract on hold till the
allegations got clarified, India continued to release advance payments to AgustaWestland. Resultantly, by February
2013, India had paid about 45 percent of the total cost of the deal to the
vendor and received three helicopters.
However, arrest of Mr.
Giuseppe Orsi, CEO, Finmeccanica (AgustaWestland is a division of Finmeccania) on
12 February 2013 by Italian investigative agencies forced MoD to act. It could
not dither any more. The case was handed over to the Central Bureau of Investigation
for enquiry and all further payments were put on hold. Clarifications were
sought from the CEO of AgustaWestland as well.
On 14 February 2013, the
Ministry of Defence (MoD) issued a detailed fact sheet to clarify matters by
giving a chronological sequence of the events. Recently,
India has issued a show cause notice to AgustaWestland as to why the contract
should not be cancelled for violating contractual commitments. The company has
been given 21 days to respond.
Contractual Undertakings
Probity
has been an issue of paramount concern in India’s defence procurement regime. In
addition to the commitments contained in the main contract, all contracts with
an indicative value of more than Rs 100 crores necessarily have an Integrity
Pact which prohibits usage of unfair means.
While
signing the contract, the vendor has to give an undertaking that he has
not given, offered or promised to give, directly or indirectly, any gift/consideration/reward/
commission/fees/brokerage/inducement to any person in service of the buyer or
otherwise in procuring the contract. Further, he has to give a commitment not
to resort to such activities during the execution of the contract.
In
case of any breach of the above undertaking, the contract empowers the
Government to cancel the contract (including all or any other contracts with
the seller) and recover from the seller the amount of any loss arising from such
cancellation. In addition, in case of bribe, the Government is allowed to impose
penal damages, forfeit bank guarantee and demand refund of the amounts paid to
the seller.
As the procurement procedure debars employment
of agents and payment of commission, a declaration to that effect is obtained from
the seller. The seller has to agree in writing that if it is established at any
time to the satisfaction of the Government
that the seller has engaged an agent and paid commission, the seller would be
liable to refund that amount to the Government. Additionally, the seller renders
himself liable to be debarred for future contracts for a minimum period of five
years.
Notably,
in case the Government is convinced that a breach of contractual commitments relating
to payment of commission and use of undue influence has taken place, it can ask
for necessary information or even seek inspection of the relevant financial
documents/information.
India’s Options
As per the reports appearing in the
foreign and Indian press, it is alleged that AgustaWestland spent close to 10
percent of the contract value on bribes and commissions to swing the deal in
its favour.
Not unexpectedly, AgustaWestland has
denied all allegations. Faulting India’s action of withholding further
payments, it has questioned India’s unilateral suspension of the contract stating
that neither the contract nor the associated Integrity Pact conferred such
rights on the Indian defence ministry. It has opined that the current dispute
should be settled through arbitration proceedings as provided for in the
contract.
The stand of AgustaWestland is
incorrect. The relevant arbitration clause of the contract reads – “Any dispute, disagreement of question
arising out of or relating to this contract or relating to construction or
performance (except as to any matter the
decision or determination whereof is provided for by these conditions)……will
be referred to the Arbitration Tribunal.” It implies that only those matters
wherein decision/determination powers are not provided for in the contract can
be referred to arbitration.
As
regards probity provisions, both the contract and the Integrity Pact are
absolutely unambiguous. It is for the Government to conclude whether a breach
has taken place. Its decision is final and binding on the seller. In other
words, a seller cannot challenge such a decision and demand arbitration
proceedings. Further, the provisions empower the Government to impose sanctions
without assigning any reasons.
A
key provision which is generally overlooked pertains to the examination of the Books
of Accounts of the vendor. In case of an allegation of violation of any
provisions of the Integrity Pact or payment of commission, the Government is
entitled to seek inspection of all relevant financial documents and the vendor
has to provide them.
In case of breach of probity
provisions, the Government is empowered to take the following actions:-
a) Denial
or loss of contract.
b) Recovery
of all sums paid by vendor to any middleman/agent/broker with a view to
securing the contract.
c) Recovery
of all sums already paid by the Government with interest thereon at 2 percent
higher than the LIBOR. Recoveries can be made through forfeiture of security-performance
bonds and payments due under other contracts.
d) Recovery
of liability for damages to the principal and the competing bidders.
e) Cancellation
of all or any other contracts with the seller.
f) Debarment
of the violator for a minimum period of five years, which may be further
extended at the discretion of the Government.
The
Way Forward
In view of the above, MoD is on a very
strong wicket. It must act to safeguard national interests and prestige. It
must never fall in the trap of arbitration proceedings. Exercising the powers
granted to it under the contract signed with AgustaWestland, it must cancel the
deal forthwith and initiate measures to recover the amounts already paid. A
word of caution will be in order here. It should resist the temptation of
blacklisting/debarring Finmeccanica. It will be a
counter-productive step as all other defence projects in which Finmeccanica is
participating will suffer.
As reported by Comptroller and Auditor General of
India, the Air Force has been meeting the transportation requirement of the
VVIPs with a fleet of six Mi-8 helicopters with a low utilisation level of mere
29 percent. India has already received three AgustaWestland AW-101 helicopters. They should suffice till a fresh deal is
concluded. In any case, helicopters for VVIPs have no operational criticality. India
can wait.*****
