Kickbacks in Defence Procurements

Kickbacks in Defence Procurements

(FORCE Jan 2015)

Major General Mrinal Suman

Allegations of corruption have been the bane of India’s defence procurement regime. The saga of dishonest dealings is as old as the history of Independent India. Since the infamous jeep scandal of 1948, every major defence deal has been dogged by allegations of kickbacks, controversies and enquiries. It is generally believed that speed money is essential at every stage of the process. Worse, it is disconcerting to hear foreign vendors claim that their commercial quotes cater for such ‘overheads’.

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 1 per cent of the international trade. Even though India’s defence imports constitute a very small portion of the world trade, it has come to acquire notoriety for sleaze and corruption. 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.

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 Defence Procurement Procedure (DPP). The government has been claiming credit for introducing innovative provisions to check misdemeanours. Two major measures are often cited.

One, a system of internal scrutiny of the technical evaluation process through the constitution of Technical Oversight Committees was introduced for all major procurements in 2002. Two,  signing of an Integrity Pact between the government and the vendors was made mandatory for all procurements over Rs 100 crores in 2006. Under the pact, both sides undertake not to accept and offer bribes respectively. It was claimed that the provision would make the whole procurement process corruption-free. The environment was euphoric. However, the exultation was totally misplaced. It was naïve to believe that the officials who were not scared of punitive legal provisions would be deterred by an honour-code commitment. Soon it was business as usual.

It needs to be recalled here that the contract for the VVIP helicopters was signed in February 2010, after in-house scrutiny by the Technical Oversight Committee. The contract had the much trumpeted Integrity Pact as well. Yet, the whole process was so vitiated and sullied that the Comptroller and Auditor General was compelled to observe that ‘the entire process of acquisition posed serious questions on accountability and lack of transparency in the finalisation of contract’.

The Convoluted Procedure

DPP has been revised a number of times since 2002, with the ostentatious claims of making it sleaze-proof. If that be so, how come scams continue to take place with unremitting regularity? An understanding of the procurement procedure is essential to appreciate its vulnerabilities to the corrupt practices.  

15-Year Long Term Integrated Perspective Plan (LTIPP) and 5-Year Services Capital Acquisition Plan flow from the 15-Year Defence Capability Plan prepared by Headquarters Integrated Defence Staff. Annual Acquisition Plan (AAP) of each service is prepared by the respective Service Headquarters. Requirement of funds is projected as per the anticipated outflow on the schemes as per their inter-se priority in AAP. 

All procurement proposals are categorised and sub-categorised by the Defence Acquisition Council (DAC) to spell out the precise route to be followed. Request for Proposals (RFP) are issued to all competent vendors. Following ‘Single-stage two-bid’ system, vendors are asked to submit technical and commercial proposals in separate sealed envelopes. Technical proposals are opened on the due date while commercial proposals are kept sealed in safe custody in the Ministry of Defence (MoD). After technical evaluation (including field trials and staff evaluation), technically acceptable vendors are shortlisted. Thereafter, their commercial bids are opened to determine the lowest compliant bidder for negotiating the contract.

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. It will be apparent as we proceed. The case of VVIP helicopters has been repeatedly cited as it is symptomatic of the clever ploys through which the whole process is tweaked by the unscrupulous.

Susceptibility of the Procedure to Corruption

An urgent procurement proposal can be initiated for the purchase of items that are being manufactured/marketed by a ‘friendly vendor’. In other words, artificial demand is created to have the favoured proposal included in AAP. Further, priorities are skewed to accord higher precedence to it as funds are always insufficient to cater for all proposals. This is achieved through an unholy connivance between the user directorate and the operations directorate.  

Recurrent generation of demand for TATRA vehicles is an example of the above stratagem. 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 was allegedly offered Rupees 14 crores to clear procurement of 1600 TATRA vehicles. He declined. Apparently, the vehicles were not urgently required as no procurements have been done since then. It was a patently sham demand to place orders on BEML for illegal gains.  

Qualitative Requirements (QR) 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 as QR are always subjective in nature and are based on perceived operational scenarios. 

In the infamous case of VVIP helicopters, two critical parameters were introduced to favour the chosen vendor. The first one related to flight ceiling. It 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. Secondly, minimum cabin height was increased from 1.45 to 1.8 meters. It effectively ruled out all competition as only the ‘favoured helicopter’ complied. Thus the very concept of QR was unethically tweaked for kickbacks.

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 (SHQ) and are required to be conducted in all conditions where the equipment is likely to be deployed, to validate performance claims made by the vendors with respect to compliance with QR. It implies that the equipment on offer must be subjected to the trials under actual terrain/climatic conditions.

Manipulation of field trials poses the biggest threat to the integrity of the whole procurement system. In the case of VVIP helicopters, against all norms, trials were carried out on a substitute helicopter as the helicopter offered by the favoured vendor was still in the developmental phase and not ready for trials. What is worse, the trials were not held in actual terrain/climatic conditions in India but in the vendor’s factory abroad. Shockingly, the helicopter was declared fully QR-compliant and approved for induction.

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. There are many aspects like driver’s comfort that are descriptive in nature and cannot be quantified. Reports on such parameters can be easily managed by smart vendors through undue influence. 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 kickback. It is done either by increasing the quantity in the original contract or by invoking option clause or by placing repeat orders. In the case of VVIP helicopters, the initial quantity of 8 helicopters was subsequently increased to 12 without any justification. Increase in quantity resulted in an excess expenditure of Rs 1,240 crore. The quantum of additional kickbacks can well be imagined.

Another standard practice is to demand inclusion of ancillary sub-systems after the identification of the lowest bidder. It 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.

In the case of VVIP helicopters, demands for Traffic Collision Avoidance System, Enhanced Ground Proximity Warning System and Medical Evacuation System were added-on while the commercial negotiations were in progress. It was a patently decadent and gratuitous step. It is not understood as to why these requirements could not be foreseen before the issuance of RFP in September 2006.

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. CFA can delay grant of approval or even let the whole case lapse. 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.

FMS Route is not above Board

Starting with the procurement of 8 AN/TPQ-37 Fire Finder counter-battery artillery radars in 2002, India has been increasingly resorting to purchases from the United States through the Foreign Military Sales (FMS) route. The single most important reason cited repeatedly in favour of this route is that being government-to-government deals, they are above board and free of all extraneous influences. As a matter of fact, this is a most fallacious logic as it totally ignores the devious activities that precede selection of FMS route by a country.

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.

It is interesting to note that the US has been considerably successful in ensuring that all helicopter requirements of the Indian armed forces are met by the US machines. Over the last one decade, it has managed to stall purchases from other countries.

Offsets Provide Huge Scope for Corrupt Practices   

     

Perhaps no other feature of India’s defence procurements is as prone to corruption as the provisions relating to offsets. Offsets present huge opportunities for unethical practices. There are a number of reasons for the same.

One, although offset contracts are signed concurrently with the signing of the main contract, inadequate attention is paid to their drafting. Provisions are spelt out in imprecise and vague terms, leading to subsequent multiple interpretations and resultant confusion. Invariably, small print favours vendors, adversely affecting the interests of the buyer country.

Two, as offset contracts are related to main defence contracts, they are, most unjustifiably, accorded the same security classification as the main contracts. Secrecy breeds a culture of non-accountability. Thus, opacity of offsets provides an ideal playground for corruption.  

 

Three, implementation of offsets remains poorly supervised. Officials possess little expertise and knowledge to comprehend and manage highly complex offset technicalities, providing considerable opportunities to vendors to manipulate the system to submit inflated and falsified performance reports. 

Four, the offset policy grants discretionary powers to overseeing officials to cater for unforeseen eventualities. Such powers are a major source of kickbacks. When money involved runs into millions of dollars, potency of discretionary powers becomes mindboggling.

Finally, there is a distinct possibility of routine commercial activities and trading being shown as offset programmes to earn credits. For example, in the case of the VVIP helicopters, sham services were shown against offset obligations. Such practices deprive India of genuine offset benefits.  

Conclusion

The biggest weakness of India’s defence procurement regime is the secrecy that envelopes 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. It provides an ideal environment for the corrupt to shortchange the system through their ingenuity for finding/creating loopholes for illegal gains.

Secrecy and probity are anti-thesis of each other. While secrecy breeds corruption, transparency inspires confidence in the environment about the uprightness of the complete process.

Although the initial euphoria has abated considerably, offsets continue to be an exciting proposition for many. As the offset pie is expected to be worth over USD 20 billion during the next ten years, it is essential that the government pays attention to the management of offsets.  Offset contracts should be meticulously drafted and every single detail should be available in the public domain.

As stated above, it is a misnomer that all FMS deals are above board and free from taint. The very fact that decision makers are prevailed upon to forego open competition (with associated cost, quality and delivery advantages), and opt for single vendor FMS route, raises questions of propriety. It is not that FMS route should be totally shunned. It should only be adopted to procure cutting-edge equipment that is unavailable from any alternate source.

Finally, corruption involves two parties – bribe giver and bribe taker. Since the exposure of the jeep scandal, no official has ever been punished for taking bribes. 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 misdemeanor? Why have so many contracts been cancelled for alleged irregularities, the case of helicopters for VVIPs being the latest one? The environment continues to wonder.*****