Indian Defence Review

Boeing Apache

Secondly, it publicly hints at market participation based on faith rather than upon rational judgment. It implicitly acknowledges that once this faith is shaken and revealed, the professional manager may be forced to abandon his course. The issue is not that the black hole exists, but rather that the black hole is now clearly seen to exist.

The cynic may opine that none of these matters because key Indian defence contracts are so large that foreign corporations will always come back; they have to. There is some truth in this view but it is substantially rearward-looking. It has been this way so far but the business environment is changing. History is no guarantor of the future.

The Indian MOD may soon find itself caught in an unpleasant pincer movement. On one side, serial blacklisting is steadily shrinking the size of the competitor pool. On the other side, a developing crisis of corporate faith threatens a voluntary reduction in the size of the same pool. The resulting erosion of competition may threaten the viability of current procurement process. Indeed it would not surprise Vulcan if the MOD soon finds itself in the unaccustomed position of mendicant, actively having to entreat and implore corporations to participate. How then to avoid an unsustainable reduction in competition?

Clearly, in the face of defence capability gaps of alarming significance and proximity, time is of the essence. This implies a limited number of quick but significant fixes to the system. Vulcan respectfully suggests two such measures.

Targeted Sanctions

In the event of corrupt practice, the current system effectively punishes the innocent with the guilty and manifestly harms the national interest. The system should be changed so that the guilty are targeted, the conduct of the innocent encouraged (if not incentivised) and the national interest promoted. Would this be so difficult to achieve?

For the corporation, the sanction of blacklisting is as bad as it can get; the trouble there is that blacklisting is often indiscriminate in its effect; it tends to punish the innocent with the guilty.

Do people really imagine that corporations actively seek to corrupt? In general they do not by reason of self-interest; such activity significantly increases their costs and risks. Far more commonly, they are approached by an individual with the power to ‘make or break’ them within a competition. This is tantamount to blackmail.

Yet despite repeated exposure, new approaches seem to keep coming. One is forced to conclude that the risk of conviction and/or the magnitude of the sanctions imposed upon the individual are insufficient; fear does not outweigh greed. For the corporation, the sanction of blacklisting is as bad as it can get; the trouble there is that blacklisting is often indiscriminate in its effect; it tends to punish the innocent with the guilty. Targeted sanctions are required:

For corporate involvement in corrupt practices, replace blacklisting with a new, tightly-targeted sanctions regime. For example for the guilty competitor; non-disqualification from competition with the imposition of savage financial penalties. For the innocent competitor; the deliberate conferral of some measure of relative competitive advantage (This to promote the national interest, punish the guilty and positively incentivise ethical conduct).

Funded Competitions

Competition should be promoted by reducing the size of the stake required to enter the game. As long as competitors are required to fund defence acquisition competitions on a ‘no-cost, no-commitment basis’, the field will be restricted to an increasingly smaller group of large corporations. This impairs the economic efficiency of the procurement process and increases the MOD’s risk.

Worse, the same situation dis-incentivises systemic reform because the state machinery suffers few costs in the event of delay or failure: heavy cost is borne by the participating corporations. In fact the bureaucracy is actually sustained by delay and failure. Better by far that the state itself funds defence acquisition competitions; to do otherwise is false economy.

This article may be viewed as partisan pleading for undeserving mega-corporations. That would be a misunderstanding. Despite a wealth of good intentions, the State’s execution of large international defence procurement competitions appears to be entering crisis.

It is a crisis borne of dysfunctional bureaucracy and of misconceptions regarding the nature and behavior of corporations. But because many of India’s defence capability gaps are now critical in nature, the crisis cannot be neglected: the associated risks for the Indian State are becoming too great. A limited number of just, self-interested actions by the State could rapidly restore faith and mitigate the nation’s risk thereby.

Notes

1. V Raghuvanshi, “India Reopens Bidding for Howitzers”, Defense News, 16th August 2010, p 16.
2. S Dutta, “Bofors Trial Scrapped Third Time”, The Telegraph, Calcutta, India, 25th July 2010. http://www.telegraphindia.com/1100725/jsp/frontpage/story_12723859.jsp#
3. Live Fist, 27th August 2010. http://livefist.blogspot.com/2010/08/frustrated-st-kinetics-waits-for-guns.html