Defence Industry

Probity in Defence Procurements
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Issue Vol 22.3 Jul-Sep2007 | Date : 18 Feb , 2011

Defence deals the world over are regularly subjected to intense scrutiny and investigations. Aspersions are often cast about lack of probity and underhand dealings. In Transparency International’s Global Bribe Payers Index, the defence trade appears in the top three sectors for bribery and corruption. The other two are the oil sector and major infrastructure projects. 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 international trade.

India is no exception. We have had more than our share of controversies and enquiries. Questions have been raised with regard to the procurement procedure followed and commercial improprieties. Though India’s defence imports constitute a very small portion of total trade, they have come to attract disproportionate media attention due to alleged irregularities.

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 international trade. India is no exception.

It is generally suspected that interested participants can skew the whole procurement process by influencing decision makers by decadent means. What makes Indian defence acquisitions vulnerable to such undue influences? The answer to this critical question can only be obtained by understanding the nature, limitations and peculiarities of India’s arms procurement mechanism.

  • India imports nearly 70 per cent of its requirement of new defence systems. Availability of limited number of vendors of high-tech defence products restricts bargaining power of the Government. Additionally, some countries impose export restrictions. The problem gets compounded where technology transfer is sought as an essential part of the package.
  • National security concerns preclude open tendering. Invitations are sent to a few selected vendors. A fine balance has to be maintained between open competition and secrecy needs. Besides, there is a tendency to play safe by over-stressing security.
  • Due to high level of technology, the seller always knows the product better than the buyer. He can, therefore, negotiate the contract from a position of strength as the buyer has to accept his contentions. Base or fair price determination is exceedingly difficult due to rapid technological advances. Moreover, as all arms deals are not made public, terms and conditions of previous sales to other countries are not available as guidelines.
  • Modern defence systems are highly complex and most of the major vendors are in fact system integrators and not producers of complete systems as such. During negotiations, assured life cycle support for the equipment acquires criticality.
  • Procurement procedure is lengthy as it entails field trials of equipment in varying terrain and climatic conditions.
  • India seeks offsets equal to 30 percent of the contract value for all deals of over Rs 300 crores. Negotiation of offsets is a complex and arduous task. As only peripheral attention is paid to offset contracts, the whole process becomes vulnerable to malpractices.
  • At times, the cost of life-time support may be more than the purchase price of the equipment. Whereas considerable attention is paid to the quoted purchase price, support requirements generally escape close scrutiny. This provides an opportunity to unscrupulous vendors and dishonest functionaries.
  • Emergent national security imperatives may necessitate expeditious procurement of urgent operational requirements for unforeseen crisis situations. As time is of essence, certain short-circuiting of normal procedures is inevitable. It results in dilution of standard checks and balances.

Major Steps Taken

The Government is fully aware of the need to put a transparent, credible and impartial procurement system in place. It has taken a number of bold and innovative steps. Recommendations of the Parliamentary Standing Committee on Defence, Central Vigilance Commission, Comptroller & Auditor General of India and the Kelkar Committee have also been incorporated in Defence Procurement Procedure – 2006 (DPP-2006).


Some of the major provisions which demonstrate Government’s resolve to make the process fair and credible are as follows:

  • As increased competition promotes transparency and reduces scope for subjectivity, commensurate with security concerns, maximum publicity is to be given to proposed procurements through print and electronic media. Single vendor procurements are to be resorted in exceptional cases only.
  •  Formulation of Services Qualitative Requirements (SQR) has been rationalised to ensure multi-vendor responses. SQR have to be broad-based, realistic and of widely available contemporary technology. In order to obviate the possibility of tailor-made SQR to suit a particular vendor, in case a solitary vendor submits compliant response the process is to be aborted and fresh Request for Proposals (RFP) issued with reworked SQR.
  • With a view to safeguard against the possibility of a vendor increasing his commercial quote consequent to emergence of a single vendor situation after technical evaluation; all vendors are required to submit technical and commercial bids together, albeit in separate sealed envelopes. Commercial bids remain sealed in safe custody till technical evaluation is completed.
  • Both technical and commercial bids are opened by duly constituted committees under Technical Managers and the Acquisition Managers respectively in the presence of vendors or their authorised representatives.
  • Paper evaluation of all technical offers is carried out by Technical Evaluation Committee (TEC) constituted under the aegis of the concerned service HQ. A technical offer, once submitted, is not permitted to be changed materially subsequently.
  • Field trials are carried out under the service HQ as per the trial directive formulated. After each stage of the trials, a debriefing of all vendors is carried out at the trial location itself wherein compliance or otherwise vis-à-vis SQR is specifically communicated to all the vendors in a common meeting. This provision meets a major demand of vendors.
  • To confirm that the trials, trial evaluations, compliance to SQR and selection of vendors has been done according to prescribed procedures, the Defence Secretary has to constitute a Technical Oversight Committee (TOC) for selected acquisition proposals in excess of Rs 300 crores.
  • As regards commercial evaluation, a ‘Compliance Statement’ is prepared to record discordance, if any. Finally, a ‘Comparative Statement’ is prepared of all compliant commercial bids to determine the lowest acceptable offer (L1 vendor).

Also read: Facing the Dragon: Is India prepared?

  • Once L1 vendor is identified in multi vendor cases, the contract is to be concluded with him without any further price negotiations except in exceptional circumstances. In single vendor/resultant single vendor cases, a benchmark for reasonableness of price is determined before opening the commercial offer. If vendor’s quote is found to be within the benchmark fixed, no price negotiations need to be carried out.
  • An undertaking is sought from the bidder that he has not supplied/is not supplying the similar systems or subsystems at a price lower than that offered in the present bid in respect of any other Ministry/Department of the Government of India. If the similar system had been supplied at a lower price then the details regarding the cost, time of supply and quantities should be included in the commercial offer.
  • An ‘Integrity Pact’ is signed between the Government department and the bidders for all procurement schemes over Rs 100 crores. It is a binding agreement between the government department and bidders for specific contracts in which the government promises that it will not accept bribes during the procurement process and bidders promise that they will not offer bribes.

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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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