Helicopters for VVIPs: Need to Fix Culpability

Helicopters for VVIPs: Need to Fix Culpability

Major General Mrinal Suman

India concluded a contract with AgustaWestland in February 2010 for the procurement of twelve AW-101 helicopters for the transportation of VVIPs. The Comptroller and Auditor General of India (CAG) carried out compliance audit of the deal and tabled its report (No 10 of 2013) in the Parliament on 13 August 2013. CAG has found the entire process of acquisition to have deviated from the laid down procedures. It concluded that the process posed ‘serious questions on accountability and lack of transparency in the finalization of contract, which need to be addressed’.

Allegations of bribes and payment of commission to win the contract have been dogging Finmeccanica (AgustaWestland is a division of Finmeccania) since February 2012. However, arrest of CEO Giuseppe Orsi in Italy in February 2013 drove India to suspend the contract and hand over the case to the Central Bureau of Investigation. MoD issued a fact sheet on 14 February 2013. Whereas AgustaWestland has demanded arbitration proceedings, India Ministry of Defence (MoD) has issued a show-cause notice to AgustaWestland for the cancellation of the contract.

For all intents and purposes, the deal is dead. India has already paid about 45 percent of the total cost and received three helicopters. India is unlikely to accept additional deliveries. A perusal of the CAG Report shows that the provisions of the Defence Procurement Procedure (DPP) were breached at every stage, both in letter and spirit.

Restricted Competition

The objective of issuing a fresh Request for Proposals (RFP) was to increase competition by reducing the parameter of flight ceiling from 6,000 to 4,500 meters. However, introduction of a fresh requirement of minimum cabin height of 1.8 meters on the insistence of PMO/SPG effectively eliminated all competition. It amounted to tailoring Services Qualitative Requirements (SQR) to help the chosen vendor.

For the issuance of RFP, names of vendors are proposed by the concerned Service Headquarters (SHQ). However, the Ministry of Defence (MoD) has the overriding powers to amend the list by adding or deleting names. Strangely, whereas the earlier RFP had been issued to eleven vendors, the revised RFP was issued only to six vendors. It needs to be ascertained as to who ordered elimination of certain vendors and the reasons thereof. As RFP is issued by MoD, it must explain. It is not clear whether the new RFP was issued to Eurocopter whose machine EC-225 Super Puma had emerged fully compliant in the first RFP when flight ceiling was fixed at 6,000 meters.

Field Trials

Field trials are carried out under the aegis of the concerned service headquarters and are by far the most critical aspect of the entire procedure. Performance claims of the vendors are validated by putting their equipment through extensive user trials in all conditions where the equipment is likely to be deployed. Every RFP mandates that the trials be carried out in India.

Strangely, in gross violation of the policy, the Air Headquarters (Air HQ) coerced MoD to allow it to conduct trials abroad at the vendors’ premises. More shockingly, as the helicopter offered by AgustaWestland was under development, trials were carried out on two representative helicopters and a mock up of the passenger cabin. In a first of its kind, equipment was declared fully SQR-compliant when still under development.  

It needs to be ascertained as to what compelling reasons constrained the Air Headquarters to seek such drastic deviations. Did the Air HQ know that the machine of AgustaWestland was not ready and could not be sent to India; and hence tried to bail it out by having a pretense of trials at its premises?  Equally worrisomely, contrary to the policy provisions, different methodologies were employed for the trial evaluation of helicopters of competing vendors. The Air Headquarters must clarify the issues.

Staff Evaluation Report

The Staff Evaluation Report is prepared by the service headquarters and contains recommendations regarding acceptability of evaluated equipment for introduction into service. No equipment that fails to meet all SQR can ever be considered for acceptance. According to the CAG report, AgustaWestland was recommended for procurement despite the fact that it did not satisfy all parameters.   

SQR are minimum performance characteristics that are considered essential to enable the equipment to perform its designated mission. In other words, non-compliance of any SQR implies a compromise. Why did the Air Headquarters consider it necessary to accord special dispensation to AgustaWestland and seek waiver of SQR to make it acceptable for induction?  

Technical Oversight

With a view to have an inbuilt mechanism for checks and balances, DPP mandates that a Technical Oversight Committee (TOC) be constituted for all proposals above Rs 300 crores to provide expert oversight over the complete technical evaluation process – selection of vendors, conduct of trials, compliance of SQR and identification of technically acceptable vendors. TOC comprises of three members – one service officer, one scientist from Defence Research and Development Organisation and one representative of Defence Public Sector Undertakings (preferably not involved with that acquisition). TOC has to give its ruling, based on a majority decision within 30 days.

As per the MoD fact sheet, a TOC was constituted in this case on 06 August 2013 and found the whole technical evaluation process to be in order. It will be interesting to learn as to whether the TOC report was unanimous or a majority decision. Members of TOC must be held accountable for overlooking all infirmities that the CAG report has observed.  

Commercial Evaluation

It is rather intriguing that instead of asking the vendors to extend the validity of their commercial quotes, as is the standard practice, MoD decided to seek fresh commercial bids from them. As AgustaWestland was reasonably assured of emerging as the sole technically acceptable vendor by then, revised bids provided an unwarranted opportunity to it to defray its overhead costs by inflating the bid.

The process of commercial evaluation is carried out by the Commercial Negotiation Committee (CNC) under the aegis of MoD. It is headed by a Joint Secretary level bureaucrat.

As AgustaWestland had emerged as the sole successful vendor, CNC was required to establish a benchmark and reasonableness of price in an internal meeting before opening the commercial offer. DPP mandates that if on opening of the commercial bid, the price quoted by the vendor is found to be within the benchmark fixed, no price negotiations need be carried out. Criticality of fixing a realistic benchmarked price can be gauged from the fact that an absurdly high value can provide windfall gains to a vendor. This is exactly what happened in the ibid case.

While submitting the proposal to MoD in January 2006, the Air HQ had estimated the cost to be Rs 793 crore. Amazingly, in September 2008, CNC pegged the benchmarked price at Rs 4877.5 crore – more than six times the estimated cost within a period of less than three years. Astonishingly, cost quoted by the vendor turned out to be Rs 3966 crore. Thus, the benchmarked cost was higher by 22.80 per cent. The contract was signed for a negotiated price of Rs 3726.96 crore.

With a view to maintain the sanctity of its ‘single-stage two-bid’ system, DPP prohibits any change in the configuration of equipment after the issuance of RFP. Outlandishly, the Air Headquarters demanded inclusion of additional systems while CNC proceedings were under way. Resultantly, AgustaWestland demanded the price at will. Responsibility must be fixed for failure to include the requirement of additional systems while formulating RFP.   

Offsets

An offset contract for Rs 1118.09 crore was signed along with the main contract. The Acquisition Wing and the then Defence Offset Facilitation Agency were responsible for ensuring scrupulous implementation of the contract. As per the CAG report, every single provision of the offset policy has been breached in this deal. Unauthorised programmes were allowed against offset obligations. Works which had already been completed well before the signing of the offset contract were allowed to be shown as fresh programmes to award offset credits and ineligible entities were accepted as Indian offset partners. 

Offsets do not come for free. All vendors include the anticipated expenses in their quotes. Offset cost penalty can vary between 10 to 15 percent of the value of the main contract. Culpability for slipshod, inefficient and subjective management of offset programmes that deprived India of much needed offset benefits must be fixed.

Finally

Paragraph 75 of the DPP empowers the Defence Minister to grant deviations from the laid down procedure. As observed by CAG, such powers are meant to be invoked only ‘in exceptional circumstances for certain contingencies or exigencies which may have arisen subsequent to the issue of RFP’. Therefore, CAG questions the rationale of making use of these extraordinary powers to grant deviations on eight counts.

However, the most worrisome is the fact that every deviation granted was beneficial to the vendors and detrimental to the interests of India. Acceptance of revised commercial bids, extension of delivery period, dilution of warranty conditions and reduction in the validity period of the option clause helped the vendors. It appears some decision makers were more inclined to favour the vendors rather than safeguarding Indian interests. It is for MoD to identify them and fix culpability.  

Undoubtedly, the contract for helicopters for VVIPs is an ideal subject for detailed case-study to understand nature and extent of infirmities that can afflict a major procurement case. It also demonstrates how a well evolved procurement procedure can be tweaked by knowledgeable (but insincere) officials.*****