Blacklisting a Foreign Vendor or Scoring a Self-Goal
(FORCE Sep 14)
Major
General Mrinal Suman
Allegations of payment
of bribes forced the Indian government to scrap the helicopter deal with
AgustaWestland, a British subsidiary of Italian firm Finmeccanica early this
year. Aware of India’s penchant for
blacklisting foreign vendors, it was feared that the government would abrogate all
dealings with the company.
Having seen the adverse
effects of banning Bofors, HDW and Denel, the observers dreaded a similar fate
for a large number of plans in which Finmaccanica was participating. For Navy, Finmeccanica
is upgrading India’s A244 lightweight torpedoes while offering its Black Shark
torpedoes. It has also won the contract for the supply of 3-D band long-range
early warning radar for the indigenous aircraft carrier. In addition, there are
numerous other programmes in which Finmeccanica companies are supplying
critical assemblies.
Worrisomely, conflicting
signals had been emanating from the official sources. On one hand, Defence
Minister Antony told Parliament on April 29 that despite the ongoing probe, AgustaWestland
would remain in competition for two major procurement programmes (56 utility
helicopters for the Navy and 14 twin-engine helicopters for the Coast Guard).
On the other hand, orders
were issued by the Ministry of Defence (MoD) to put on hold ‘all
procurements/acquisitions cases in pipeline with Finmeccannica group of
companies including its subsidiaries and affiliates’. MoD went to the absurd
extent of cancelling the bookings made by Finmeccanica and AgustaWestland for
participation in Defexpo 2014 in February this year. "As per our policy, no
company under blacklist or investigation will be allowed," was the stated stand
of MoD.
Throwing the Baby out
with the Bathwater
All defence scandals
follow a familiar course. Although the Indian defence procurement regime is
notorious for irregularities, both financial and procedural, the government
remains blissfully unaware of all acts of transgression and malfeasance taking
place right under its nose till the foreign media unravels the facts. Picking
up the leads, the aggressive Indian TV anchors start their campaign with high-sounding
clichés. Thereafter, leaders of the opposition party grab the issue to condemn
the government.
Unerringly, official
response is always on the expected lines. In fact, it can be predicted without
any crystal-gazing. Initial denials are quickly followed by promises of seeking
details from our envoys abroad. However, as the spate of revelations in the
foreign media continues unabated and the media pressure build up, the
government is forced to accept that ‘everything is not above board’.
Finally, with a view to deflect
increasing flak, the government reiterates its commitment to probity in public
dealings. To show its resolve for zero tolerance for corruption, the case is
handed over to the Central Bureau of Investigation (CBI) and the foreign vendor
is debarred till the finalisation of the enquiry. Interestingly, every
debarment does more harm to Indian security interests rather than the erring
company’s commercial interests.
The above script has
been getting played out with brazen regularity. After carrying out trials of
various guns on offer, India opted for Bofors 155 mm FH-77B towed artillery
system. A contract for 410 systems was signed with the Swedish firm in 1986 for
Rs 1437.72 crore. India had planned to produce 1,840 pieces within the country
to equip 92 artillery regiments with the transfer of technology.
With the exposure of the
kickbacks, the government banned Bofors for all future dealings. As spares
could not be procured from Bofors, the Army had to cannibalise parts from some
guns to keep others functional. In addition, the Navy was already using Bofors
guns on some ships and the Army had a considerable inventory of 84 mm Carl
Gustav Rocket Launchers (Carl Gustav subsequently became a subsidiary of Bofors).
Both suffered in terms of spares support. Major difficulties were faced to keep
affected equipment on road. Resultantly, middlemen thrived making huge profits.
In the case of Denel of South Africa, discussions were in final
stages for 155 mm howitzers (both towed and self-propelled) when it emerged
that Denel had employed unacceptable means to grab contract for the supply of
NTW-20 Anti-Material Rifle. Charges were filed against Denel for paying commission to
unnamed officials in India. The government
blacklisted Denel in 2005 and ordered suspension of all
dealings with the company. With that, Indian Army’s Field Artillery Rationalisation
Plan suffered a crippling blow from which it has
not recovered to date. India’s quest for indigenous production of 155 mm
ammunition also suffered a major setback as Denel was to provide technical
know-how.
The case of HDW proves
how a hasty and offhand action can prove counter-productive for the nation. A contract was signed with the German firm in December 1981.
India was to get two HDW 209 class fully built submarines with sub-assemblies
and components for assembling two other submarines in India. HDW delivered two
submarines in 1987 and two more were assembled in India in due course. As
allegations of bribery and kickbacks became public, the government decided to
blacklist the company.
HDW is the world leader
with the most advanced air-independent propulsion system. By banning HDW, India
deprived itself of maintenance support, upgradation opportunities, development
of indigenous skills and imbibing of latest technological advancements. Worse, it was forced to purchase spares from unreliable
entities at exorbitant rates. As India failed to exploit imported technology that it had paid
for, India’s quest for indigenous competence to manufacture submarines suffered
terrible setback. Worse, shortage of submarines continues to be the most
alarming weakness of the Navy to date.
Three years ago, six
companies (two Indian and four foreign) were accused of offering illegal
gratifications in the infamous case against a former Director General of
Ordnance Factories. All six were debarred on 05 March 2012 from further
business dealings with MoD. The foreign companies included Singapore Technologies
Kinetics (STK). STK was participating in tenders to supply 155mm/52 Calibre
Towed Guns, 155mm/39 Calibre Ultra Light Howitzer Guns and Close Quarter Battle
Carbines. All programmes have got stalled and no alternate source has been
finalised so far.
As per the media reports,
in addition to Finmeccanica, both Israel Aircraft Industries and Rolls-Royce have
also been under close scrutiny for their allegedly undesirable activities.
Oddities Galore
A study of the above
mentioned cases raises four important issues. First, how is it that the foreign
intelligence agencies get to know of dishonest happenings in India while our
much vaunted anti-corruption regime remains ignorant? In addition to the statutory
agencies, the Defence Procurement Procedure (DPP) provides for the appointment
of two Independent Monitors to oversee the complete process. Besides, 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. Even then, major aberrations remain
unnoticed.
Secondly, why is it that
only the alleged bribe giver is accused but no action is taken against the
bribe receiver? Is he less guilty? Whereas a number of foreign companies have
been unilaterally banned, no official has ever been punished to date for
wrongdoings in defence procurements. It is unfair to apportion the entire blame
to bribe givers and take no action against those who demand and extract bribes.
In fact, it is the bribe receiver who is the main culprit as he coerces the
vendors to indulge in dishonest activities.
Thirdly, the tone and
tenor of DPP and the much acclaimed Integrity Pact put the entire onus of ensuring
probity on the foreign sellers. An impression is conveyed that the Government
is reconciled to the fact that procurement functionaries are bound to fall prey
to temptations, if offered to them. Therefore, it is the duty of the foreign
vendors not to entice our poor vulnerable officials! This is a strange logic. It
amounts to a tacit admission by the government of its inability to find
officials of unimpeachable integrity. Instead of putting its own house in
order, India holds foreign vendors accountable for all wrong-doings and
punishes them.
Finally, not a single
foreign firm has been convicted for the alleged wrong-doings so far, as no
conclusive proof has ever been established against the companies blacklisted. After
years of costly investigations, the cases are closed without any tangible
results. The government is forced to reinstate the companies and allow them to
participate in all defence contracts. Ban on Bofors, HDW and Denel has already
been lifted. It is learnt that STK and other companies may also be cleared in
the near future.
Outright blacklisting is by far the most imprudent way of
managing a delicate and highly critical issue. Whereas it may help the
government to counter criticism, it proves highly detrimental to the Indian
interests. Most foreign vendors are big conglomerates with wide ranging
business interests. Loss of the Indian market may not have such an adverse
effect on their prospects.
On the other hand, every time a foreign vendor is debarred, India’s
defence modernisation plans get stalled and the armed forces are forced to live
with critical deficiencies. Floating of tenders afresh entails major delays and
cost overruns. There are limited manufacturers of high-tech defence systems in
the world who are willing to offer advanced weaponry to India. Blacklisting of
vendors reduces competition and forces the government to resort to single
vendor procurements with related cost penalty.
Further, as most major defence companies produce a large array
of equipment, blacklisting in one contract has a cascading effect on all other
purchases as well. Worse, blacklisting nullifies all transfer of technology
agreements, even if paid for.
Therefore, before taking any punitive
action, the government must examine the issue in its entirety. To start with, the
allegations must stand proved prima facie. Thereafter, adequate opportunity must be provided
to the vendor to respond to the allegations and state its case. MoD must seek
expert advice to determine the extent and degree of seriousness of the alleged
misdemeanor. Before deciding on the quantum and nature of punitive action, likely
fallout on India’s own interest must always be taken into account.
In case suspension of dealings is considered to be the
unavoidable option, it should be timed in such a manner that India’s defence
preparedness suffers the least. Had India waited for a few months before banning
HDW, it would have received all catalogues and drawings of the submarines.
The Recommended Approach
Blacklisting of a vendor should be
taken in extreme cases and only as a last resort. Whereas the need to send a strong message to the
environment in unambiguous terms cannot be disputed, punitive action must
always be taken in a phased and graduated manner to be an effective deterrent.
As per the contractual provisions mentioned in DPP, MoD can take a
number of actions in case any vendor is proved to be guilty of violation of
probity norms. However, jurisprudence demands that punishment should always be
commensurate with the degree of misdemeanor. Therefore, it is a prerequisite to
determine the seriousness of the alleged wrongdoing and award punishment
accordingly.
For deciding punitive action, acts of
transgression should be graded as per their gravity. Such a methodology ensures
that Indian interests suffer minimal damage until the Cusp of
Counter-Productivity is crossed. Punishment becomes counter-productive if it
does more damage to own interests as compared to those of the punished entity.
As shown in the Illustration, for financial penalties
under Levels 1, 2 and 3, only the defaulting vendor suffers. At Level 4, the errant
company is debarred from participating in future tenders. It dents the standing
of the company and inflicts a blow to its commercial interests. India’s
interests are also affected to some extent as competition gets 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.
|
Gravity
of Transgression
|
Punitive
Action
|
|
Level 1
|
Appropriate financial
penalties
|
|
Level 2
|
Forfeiture
of bid-security and/or performance bond.
|
|
Level 3
|
Deduction from
payments due against all the ongoing current contracts, thereby inflicting
heavy financial penalty on the company.
|
|
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.
|
Illustration: Graded Punitive Actions
At Level 5, the threshold of the Cusp of Counter-Productivity
gets crossed. Negative effects on India’s own military preparedness far
outweigh punishment meted out to the accused company. By imposing blanket ban,
all on-going contracts get stalled with considerable wastage of time, effort
and resources. It amounts to inflicting self-injury. Therefore, such an
extreme action should be taken after due diligence and only after the charges of
serious transgression against the accused company stand proved in a court of
law.
Finally
The new government seems to have realised the futility of acting
in haste and blacklisting companies. It has resisted pressure to debar
Rolls-Royce. On 26 Aug 2014, a well thought through order was issued in the
case of Finmeccanica. Acting on the advice rendered by the Attorney General and
considering it to be a Level 4 transgression, the government has decided not to
impose a blanket ban on Finmeccanica and its subsidiaries but follow a
graduated-cum-selective approach. It is to ensure that India’s interests remain
unharmed.
All on-going contracts will be allowed to continue. Those cases
in which Finmeccanica has emerged as the lowest bidder (but contract not
signed) will be put on hold till further orders. All contracts in which the Finmeccanica
companies are sub-contractors will remain unaffected. However, the Finmeccanica firms
stand debarred from participating in any new defence tender where more than one
vendor exist outside the group.
As stated earlier, the government must have conclusive proof
that a major breach of probity provisions has taken place. Media reports and
rumours cannot be the sole basis. As has been seen, a majority of media reports
are subjective, biased and even planted to sabotage a deal. This could be the
handiwork of a losing competitor or even by the entities inimical to India’s
interests. As has been seen earlier, every blacklisting of a foreign vendor
puts India’s defence modernisation plans back by decades. Undoubtedly, it is
the most cost effective option available to the adversaries to impede India’s
defence preparedness.
Although, punishment
must always be commensurate with the degree of misdemeanor, MoD follows only
one course – it is either blacklisting or no-action. The objective of the
punitive action should be to send a strong message that imposes caution on the
environment and act as a deterrent to the delinquent elements.
Finally, it must be
appreciated that most foreign companies are very conscious of their reputation.
They prefer an open, transparent and legitimate environment. Probity laws are
very strict and unforgiving in their home countries. They want to do business
lawfully in India but realise that ‘speed money’ is the password to winning
contracts; and they succumb to unethical practices due to the coercive arm-twisting.
Thus, the Indian establishment is more to blame. It is unfair to put the entire
onus for corrupt activities on the vendors. In any case, blacklisting is never
a prudent option as it amounts to scoring a self-goal. *****
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