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A recurring scandal

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  • May 06, 2016

    The scandal surrounding the procurement of 12 AW-101 VVIP helicopters from AgustaWestland is the latest in a long list of scandals in defence deals. There is no question that the guilty must be punished. But it is equally important to ponder why these scandals keep breaking out in spite of a seemingly strong preventive mechanism being in place.

    The Defence Procurement Procedure (DPP), which regulates defence procurements, requires every vendor to sign a pre-contract integrity pact (PCIP), designed to prevent the vendors from adopting unethical practices to win contracts and remain on course after winning them.

    Those who violate the pact can be slapped with sanctions ranging from the immediate calling off of the negotiations, if the transgression is detected before the award of contract, to the recovery of the bribe money, forfeiture of bank guarantees, and even blacklisting. Every defence contract also contains a clause that requires the vendor to declare that no agent had been employed and no agency commission paid to secure the contract. Breach of the clause invites punitive action.

    The presumption underlying all these measures is that corruption in defence deals is almost entirely because of the shenanigans of middlemen and agents. In the event, all these measures are designed to deal with the symptoms rather than the root cause of the malady.

    The history of past transgressions shows that at least three stages in the acquisition cycle are potentially vulnerable to undue influence and manipulation by unscrupulous elements: Formulation of the services qualitative requirements (SQRs), field evaluation and contract negotiation.

    The manner in which the SQRs — the specifications that the equipment to be procured must meet — are drawn up could make or mar a vendor’s chances of winning a contract. Non-compliance with even one of the several SQR parameters could result in rejection of a vendor’s technical offer but, conversely, a minor tweaking of even one parameter could make the same vendor a frontrunner.

    In the first round of tendering, the EH-101 helicopter (later renamed AW-101) offered by AgustaWestland did not make the cut as it was certified to fly only upto an altitude of 4,572 metres against the requirement of 6,000 metres specified in the Request for Proposal (RFP). The tender was later cancelled because of lack of competition. In the revised RFP issued in 2006, the altitude requirement was reduced to 4,500 metres with a view to widening the vendor base and the cabin height of 1.8 metres was added to the specifications. Such is the magic of SQRs that riding on the revised specifications, AgustaWestland not only made the cut but eventually went on to win the contract.

    Field trials are the second vulnerable stage in the acquisition process. According to a Comptroller & Auditor General (CAG) report, instead of the AW-101 helicopter which was offered for sale by AgustaWestland in response to the revised RFP, the field (flight) trials were conducted on two other platforms as the AW-101 happened to be at the developmental stage at that point of time.

    The contract negotiation is the third most vulnerable stage. The contract negotiation committee (CNC) also negotiates the price with reference to a benchmark price arrived at just before the opening of the commercial offers. Determination of the benchmark, as indeed the entire process of costing, is a weak link in the chain.

    The CAG report on the VVIP helicopter deal points out that the benchmark adopted by the CNC was unreasonably high compared with the offered cost of the AW-101 VVIP helicopters as a result of which it cannot be said with certainty that the deal was struck at a reasonable price. This observation does not appear to be too far-fetched.

    The kickback in this deal allegedly involves 10 per cent of the contracted price. AgustaWestland was obviously able to include this margin in the offered price and get away with it only because the offer must have appeared reasonable to the CNC with reference to the benchmark price. Obviously, something had gone wrong while fixing the benchmark because of which even the inflated price with a built-in margin for graft appeared reasonable.

    It would be absolutely wrong to think that transgressions are rampant or to entertain any doubt about the integrity of the procurement officials. But it would be naive to deny the possibility of middlemen exerting influence at these, and possibly at some other vulnerable stages, in the procurement process. This is what needs to be fixed.

    It is not that no efforts have been made in the past. A policy on regulating the role of agents and authorised representatives was laid down by the ministry of defence in 1989 and revised in 2001 but apparently it never got implemented.

    It was an impractical policy as it sought to micro-manage the role of agents and authorised representatives by going to the extent of saying that the amount of commission to be paid to them will have to be as per the ministry’s guidelines and recorded in the contract. The guidelines also stipulated that the principals will be liable for any transgression by their agents. The policy remained inoperative as the guidelines for regulating payment of commissions never got issued.

    The problem is compounded by the lack of transparency and difficulty the vendors face in obtaining even legitimate information from the ministry. No wonder then that the middlemen thrive as they are able to get not just the legitimate information but much more than that for their principals. Information is power that comes at a cost which the vendors are prepared to pay. Accessibility of officials and smooth flow of information to vendors will break this stranglehold.

    At a conclave held in New Delhi in December 2014, the defence minister had said that the government was working on a policy for regulating the activities of the defence agents and probably also blacklisting of vendors. Hopefully, the much-awaited unreleased portion of DPP 2016 will deliver on this promise.

    The article was originally published in the The Indian Express.