Defence Industry

Defence Purchases: time India asserts itself
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Issue Vol 24.4 Oct-Dec 2009 | Date : 19 Jan , 2011

Press reports have been highlighting Russian refusal to deliver aircraft carrier Admiral Gorshkov at the contracted price and within the agreed delivery period. It is demanding more money on the plea that the Russian technicians had underestimated the quantum of work required to restore the fire-ravaged ship. The stated mistake was committed by the Russians, yet it is India that is being held to ransom. Contrary to all norms of trade, Russia wants India to pay for Russian miscalculations. It defies logic. India knows that it is being treated unfairly but finds itself coerced to acquiesce with repeated price escalations.

The above is not the solitary case of foreign vendors shortchanging India and reneging from contractual obligation without any fear of penalties and debarment. Every report submitted by Comptroller and Auditor General of India (CAG) highlights numerous defaults by foreign vendors. As a matter of fact, there is hardly a contract which gets implemented flawlessly in letter and spirit. Major defaults pertain to the following:-

Deals finalised in the wake of the Kargil war are yet to materialise fully. Russia has acquired notoriety for regular default. Israel has delayed delivery of AWACS while Scorpene contract is irretrievably heading for delivery delays.

  • Most deliveries remain behind schedule. Vendors appear least concerned about honouring the contracted delivery schedules. Timely deliveries are rare. Deals finalised in the wake of the Kargil war are yet to materialise fully. Russia has acquired notoriety for regular default. Israel has delayed delivery of AWACS while Scorpene contract is irretrievably heading for delivery delays. Defence Minister A K Antony publicly expressed his anxiety over continued delays in the delivery of defence equipment while presiding over the induction ceremony of the first AWACS in New Delhi on 28 May 2009.
  • Many vendors invent ingenious methods to escalate prices midway through the currency of their contracts, thereby forcing India to incur additional expenditure. They resort to delaying deliveries to pressurise India for unfair price benefits. The common excuses are unfavourable foreign exchange fluctuations and increased cost of sub-assemblies. Another common stratagem is to keep the price of main equipment stable while seeking overpricing add-ons like training expedients, jigs/fixtures and spare parts.
  • In cases involving transfer of technology, most vendors disregard terms of contract and start playing truant for extracting additional benefits. Instead of transferring know-how to facilitate indigenous production, they adopt delaying tactics to get additional orders for fully built up equipment. Russia delayed providing critical technologies and vital components for the production of T-90 tank in India for the same reason. Vendors exploit India’s urgency to make up deficiencies for unethical gains.
  • With confirmed supply orders in hand, many unprincipled vendors attempt to cheat by supplying sub-standard material. Russia tried to pass refurbished Tanguska air defence systems to India for new equipment. Most of Krasnopol precision ammunition sold turned out to be dud. There is hardly any equipment that fulfills promised performance parameters. Every trick is tried to dupe India. Even much touted fire control system of T-90 tanks failed to perform as per the claimed performance parameters.

Reasons for Foreign Vendors Shortchanging India

Foreign vendors have been getting away with their unscrupulous activities without any fear of punitive action by India. Their past experience has emboldened them to the extent that they violate all provisions of the contracts with impunity. Contracts cease to matter except when smart vendors refer to them to exploit small print for their benefit. Unfortunately, India has failed to discipline them by putting an effective system in place. Some of the major reasons for continuous shortchanging of India are discussed below.

Disjointed Functioning

The basic bane of Defence Ministry’s functioning is rigid compartmentalisation. Although Acquisition Wing has been created specifically to handle capital procurements, not all functions are performed by it. There are thirteen different agencies, each reporting to different functional heads, involved in the procurement process. Every functionary guards his turf with vehemence. He is reluctant to share his knowledge or information.

Also read: Anti-India mindset entrenched in Pakistan

CAG has highlighted numerous cases where the three services have purchased the same item from the same vendor at different rates. Vendors are quick to exploit such weaknesses in the system to derive undue benefits.

Lack of Professionalism

In India, acquisition functionaries are posted in routine turn over. There is no selection based on educational qualifications, demonstrated flair or past experience. Unfortunately, the services are to blame the most in this respect. They have failed to grasp the importance of staff proficiency. A number of critical acquisition functions are being performed by officers posted to New Delhi on their last-leg posting prior to superannuation. Similarly, a bureaucrat from Animal Husbandry or Panchayati Raj Department can be posted to the Acquisition Wing to negotiate advanced weapon systems worth billions of dollars. The role of defence financial advisors is performed by Defence Finance functionaries without elementary knowledge of economics and military matters.

CAG has highlighted numerous cases where the three services have purchased the same item from the same vendor at different rates. Vendors are quick to exploit such weaknesses in the system to derive undue benefits.

Worse, no training is ever provided to acquisition functionaries to enable them to discharge their duties efficiently. Lack of integral legal advice has been another major weakness of the system. To sum up, it will not be incorrect to aver that defence acquisitions in India are being handled by amateurs who are ill-equipped to carry out highly specialised functions.

Poor Contract Drafting

Before the release of Defence Procurement Procedure – 2005, India had no standard contract format. The usual practice followed was to ask the vendor to prepare and submit a draft contract document. On receipt, the draft was circulated to different agencies involved to elicit their comments. The quality of contract vetting depended solely on the diligence of the official involved. The whole exercise was thus carried out in a highly casual and perfunctory manner.

As was to be expected, vendors drafted contracts keeping their own interests in mind and small print invariably contained provisions detrimental to India’s interests. These aspects got revealed at a much later stage when nothing could be done to retrieve the situation. There are numerous instances where India has paid dearly for such lapses.

Lack of Planning

Delayed finalisation of 15-year Long Term Integrated Procurement Plan and 5-year Services Capital Acquisition Plans forces India to go for unplanned procurements. According to CAG, 28 and 43 percent of the budgets in 2004-05 and 2005-06 respectively were expended on unplanned items. CAG held unplanned procurements responsible for restricted competition amongst other ill-effects, thereby giving undue leverage to vendors to demand higher prices.

Also read: A Vision for India

Lack of planning also results in a last minute rush to conclude contracts before the end of a financial year to avoid surrendering unexpended funds. Contract Negotiation Committee for all proposals over Rs 75 crores for the services and Rs 20 crores for Coast Guard is headed by Acquisition Manager with Technical Manager and Financial Manager as members. As a financial year draws closer to closure, they get hard pressed to devote adequate time to each contract, resulting in flawed provisions.

Indifferent Monitoring and Poor Post-Contract Management

Performance of a vendor can best be gauged by the degree of earnestness with which he adheres to the various provisions of a contract. India lacks an effective system for post contract management and monitoring. Although there are a number of agencies involved, there is no single overarching authority to ensure coordination among them. To start with, while responsibility for contract administration and management is that of the Service Headquarters (SHQ) concerned, post-contract monitoring is conducted by the Acquisition Wing. In addition, Equipment Induction Cells are raised by SHQ to deal with the issues related to smooth induction of major equipment in service.

In cases involving one time off-the-shelf buys, Acquisition Manager reviews progress. However, in complex projects entailing design, development and testing, a steering committee under DGA is constituted. The Acquisition Wing submits Quarterly Contract Implementation Reports to the Defence Procurement Board. Due to its preoccupation with procurement activities, the Acquisition Wing has little time to spare for monitoring functions. Once a contract is signed and the related expenditure is booked, the case slides into the background.

Also read: Defence Procurement: Shrinking Competitor Pool

As regards monitoring of the implementation of the offset contract, the vendor is required to submit quarterly reports to the Acquisition Manager concerned. The Offset Monitoring Cell in the Ministry of Defence (MoD) is tasked to assist the Acquisition Wing in monitoring progress of offset programmes. Where necessary, an audit by a nominated official/agency may be ordered to ascertain the actual status of implementation.

The deal for aircraft carrier Admiral Gorshkov is a classic case wherein Russia is exploiting Indian inability to procure an aircraft carrier in the required time frame from alternate sources.

As can be seen, both monitoring and post-contract management do not get the attention that they deserve. Vendors have understood this weakness of the system and have devised innovative ways to disregard contractual commitments. Lax monitoring allows them to get away with major irregularities with impunity.

Limited Vendors

There are very few manufacturers of defence systems in the world with cutting edge technologies. Additionally, the market for state-of-the-art defence equipment and platforms is circumscribed by denial regimes. Many countries either deny export licence or impose unacceptably stringent conditions for sale. Worse, India has been shooting itself in the foot by imposing ban on many major weapon producers for alleged indiscretions.

All the above factors combine to restrict the number of vendors to a handful. Realising their indispensability, they are emboldened to flout contractual undertakings. They feel confident that India would not dare to penalise them for any breach in the fear of jeopardising the ongoing contract. Most defaulting Russian and Israeli vendors fall in this category. The deal for aircraft carrier Admiral Gorshkov is a classic case wherein Russia is exploiting Indian inability to procure an aircraft carrier in the required time frame from alternate sources.

Lack of Feed Back and Data Bank

Perhaps India is the only country that maintains no data bank of the past track record of the vendors. There is no institutionalised arrangement to refer to the past performance of vendors to determine their suitability for newer contracts. As seen above, once a contract is signed, the case slips out of Acquisition Wing’s focus. Little attention is paid to obtaining performance details for future contracts. Taking advantage of this infirmity of the system, smart vendors remain confident in the knowledge that their indifferent past performance will never be a hindrance to their business prospect. That is the reason that regular defaulters like Rosoboronexport continue to obtain new orders.

The Way Forward

While selecting vendors for the issuance of Request for Proposals (RFP), past performance must be factored in. This can be done through two-track methodology. First, an effective post contract monitoring and feedback mechanism should be put in place. A defence procurement network, electronically connecting all concerned agencies, needs to be set up to create a comprehensive data base. Feedback on the progress of all ongoing contracts should be sought on regular basis. Thereafter, profiles of all vendors should be drawn with respect to their compliance with contractual provisions. Vendors could even be graded as per their track record. Habitual defaulters could be considered for debarment for issuance of fresh RFP for a specified period.

India should not hesitate to cancel the said contract and demand full refund. Such a step would send a strong and unambiguous message to the world arms community that India would brook no deviation from contractual obligations.

Past performance should cover the following aspects:-

  • Adherence to delivery schedules.
  • Quality of equipment and ancillaries supplied.
  • Transfer of contracted technology as per the letter and spirit of the contract.
  • Promptness of supply of spares and reasonableness of prices.
  • Quality of after sales service and warranty coverage.
  • Timely completion of turn-key projects.
  • Reasonableness (or excessiveness) of the manufacturer’s recommended quantities of spares.
  • Performance of the equipment over prolonged period vis-à-vis vendor’s claims.
  • Timely fulfillment of offset obligations, where applicable.
  • Willingness to resolve disputes in a fair manner.

The second track recommended is direct in approach, wherein all vendors are asked to provide details of all past and on-going contracts signed by them. Vendors must be apprised upfront that their past record will also be a consideration in final decision making. RFP should contain a standard form titled “Record of Previous Contracts”. It should be a comprehensive and incisive form, covering all aspects mentioned above. Vendors should be asked to submit it along with their technical proposals. Veracity of the information submitted should be got attested by the agencies concerned. During the preparation of the General Staff Report, cognizance should be taken of the report submitted by the vendors and the comments thereupon.

The above methodology will provide two stage screening of all vendors. Initially at the time of selection of vendors for the issuance of RFP, inputs can be obtained from the data bank of past contracts as recommended above. Names of perpetual defaulters could be deleted. Second screening could be by the General Staff at the time of preparing staff evaluation report as considerable time would have elapsed between the issuance of RFP and the completion of technical evaluation. Even if a regular defaulter’s equipment clears technical testing, the case could be debated by the Defence Procurement Board – whether to allow him to participate in commercial evaluation or to summarily reject him for poor track record.

Also read: Defence Production Policy: A Positive Change – CII

Most importantly, contracts should be drafted with utmost diligence and care. Failure to comply with contractual provisions should attract deterrent punishment. All punitive clauses must be spelt out in unambiguous terms. Competent financial and legal advice should be made available to Commercial Negotiation Committees.

It is time India appreciates that it is purchasing military system against hard cash. Days of getting redundant equipment from friendly nations at subsidised rates are over. As a buyer it must assert its rights to safeguard its interests and impose deterrent penalties on willful defaulters. In case a vendor displays deliberate disregard for the letter and spirit of a contract, India should not hesitate to cancel the said contract and demand full refund. Such a step would send a strong and unambiguous message to the world arms community that India would brook no deviation from contractual obligations. Even at the cost of having critical deficiencies temporarily, India should not give in to arm-twisting.

Also read: Fight the terrorist like a terrorist

Reportedly, India is expected to spend in excess of 30 billion dollars on new defence procurements during the next five years. With imports averaging 70 percent of total defence procurements and offsets pegged at 50 percent of contract value, the quantum of offset business generated would be over 10 billion dollars. When the likely expenditure of 10 billion dollars on homeland security is also added, the total value of defence and homeland security business would swell to mind-boggling 50 billion dollars. Therefore, India must put an effective system of penalising defaulters in place. It can ill afford to be shortchanged by deceitful vendors.

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The views expressed are of the author and do not necessarily represent the opinions or policies of the Indian Defence Review.

About the Author

Maj Gen Mrinal Suman

is India’s foremost expert in defence procurement procedures and offsets. He heads Defence Technical Assessment and Advisory Services Group of CII.

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