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Wednesday, April 4, 2012

Defence Procurements- A Class apart

In the media frenzy generated by General V.K Singh’s not so startling revelations our genius for muddling very different issues and focussing on the more salacious aspects of them has once again become very evident. Knee jerk reactions like the reference to the CBI of the Tatra procurements will ensure that the flaws in the decision making process remain unaddressed and the opportunity for serious and radical systemic reforms is again passed over.

There are at least four distinct sets of issues the current episode throws up - the issue of defence procurements (policies, systems, processes), the issue of the relationship between the Service Headquarters and the Ministry, the issue of the conduct of the Army Chief and that of the Minister and the issue of the state of our defence preparedness. Each of these deserves a separate analysis.

This essay confines itself to the issue of corruption in defence procurements. ‘Why’ does it occur and what is special about corruption in defence? ‘ Where’ does it occur and relatedly, ‘how’ does it occur ?

The issue of ‘why’ is complex. Many reasons make it different from corruption elsewhere. The market is what is called ‘monopsonistic’ i.e a monopoly on the demand side rather than the supply side and monopolies of both kinds can be pernicious. Paradoxically, however, given the uncertainties and the whimsies of the market the number of suppliers is also limited. This necessarily leads to an unhealthy relationship between the buyer and the supplier which veers between being cosy and crony like to being tense and adversarial. The risks involved are considerable and therefore the need for intermediation often very necessary.

Security concerns necessitate a veil of secrecy on defence acquisitions making it very difficult to apply the rules of transparency applicable elsewhere. Perversely, the need for confidentiality also becomes an excuse for conducting business in devious and furtive ways.

The nature of the market therefore, is one which provides fertile breeding ground for corrupt practices. What increases the complexity is the incredibly tortuous system of procurement designed by the Indian bureaucracy on the famous CYA principle, which ensures that multiple opportunities for charging rent arise and this rent has to be paid and is paid, irrespective of who one chooses to buy from and irrespective of their being honest jokers in the pack at different levels. Procedures, intended to prevent foul play,paradoxically and ironically achieve the opposite of illicit payments being made simply for play to happen- foul or fair.

Which brings us to the question of ‘how’, but before that let us briefly look at the interesting issue of ‘where’ ? There are three separate tracks that all procurements in MOD go through and each of these tracks has a bewildering multiplicity of hurdles and passes through so many stages that it would make a Steeplechase track look silken and smooth.

The first is the track of demand estimation, demand vetting, demand projection and inter se priority determination. This is an exercise firmly in the domain of the Service Headquarters and it is here that decisions are taken on the numbers/ volume required and the inter se priority to be accorded to the items to be procured within available budgets . It is astonishing how incredibly unpredictable this can be. Capital intensive production capacities set up at huge costs on the basis of long term, sustained demand, go abegging for orders simply because a new COAS changes priorities, or a transaction does not go in favour of the desired party, or because the one projecting the demand does not like the face of the supplier or the supplier does not appoint the right intermediary. As no one can be penalised for not wanting to buy, huge sums are paid simply to sustain demand, especially when it comes to repeat orders.

The second track is the technical one - from framing the GSQRs, to preparing the engineering specifications, technical trials, user trials, and techno commercial evaluations before the procurement process commences and the entire spectrum of post contract activities related to quality inspections, controls and quality assurance. This is the jealously guarded turf of the Service Headquarters and brooks no interference from anyone outside. The procedural labyrinth which any supplier has to go through to have his product declared as technically acceptable is Kafkaesque beyond anything Kafka could have imagined and offers limitless opportunities for seeking rent. Most suppliers provide for huge margins in their costs to go through this ordeal successfully, and those who do not or cannot afford to inevitably suffer. Being a purely technical matter, neither the processes nor the practices are ever audited or subjected to independent professional scrutiny.

The third track is the actual procurement one, where the onus shifts to the Ministry and the dreaded Babu.Here, there is a well established hierarchy of rent collectors along the approval chain. The approval cycle itself is so complicated and so lengthy that the opportunity for each functionary or facilitator to collect his share of the booty along the nuisance value chain is maximised . At no stage does anyone really need to circumvent or short circuit the procedure because following the procedure itself provides the opportunity. For the rent collectors/ facilitators along the approval chain, it is not necessary to either deviate from procedure or to influence the purchase decision in favour of any bidder. All he needs to do is to keep the process moving forward because all the bidders open a kind of Letter of Credit with the established chain of rent collectors before the procurement process begins and as each stage of the transaction is crossed , the rent gets automatically paid at the appropriate level. At the apex of the decision making chain is the Chief Collector, which could be the Minister/ Prime Minister , or his/her confidante who gets the highest share of the rent. It matters little who wins an order, because payment is made for the final approval being granted and not for deciding in any one’s favour.The drill is so well established that the flow of rent rarely gets disrupted except when there is a falling out among the middlemen or one of them decides to violate the Thieves’ Code of Honour.

What can be done to change ? First, devolve and delegate clear and full decision making authority for procurements massively down the chain of command- from the Ministry to the Service Headquarters, from the Service Headquarters to the Commands, Commands to the Corps and Corps to the Divisions. Restrict the role of the Ministry to procurement of major weapon systems and platforms. Have a clear hierarchy of Budget Holders who are fully responsible, within their budgets to take all decisions for achieving budgeted outcomes. Second, simplify procedures dramatically, moving from administrative controls and restrictions to budget based methods of control. Third, enhance the level of discretion available to the decision makers rather than reduce or constrict it. There is no substitute for trust. Trust a group of wise and professionally competent men to weigh the pros and cons of each option and take a decision they feel is in the best interests of all stakeholders. Guarantee them complete protection from any allegations of misuse of trust. Four, distinguish between middlemen/agents who perform a genuine service for the supplier and the deal fixers, and give the former legal recognition and allow them free and easy access to the buyers/ decision makers making interactions with them transparent and aboveboard. Five, make a transition from engineering solution based specifications to critical performance parameters, share these parameters with potential suppliers and test product performance against these parameters. Six, integrate the Departments of Defence Production and Defence Research with the Department of Defence and privatise the Defence PSUs, the Ordnance Factories and the Defence Labs by converting them into widely held public limited companies answerable to their shareholders for performance and thereby encourage a shift from pure ‘buy’ decisions to ‘ buy and make’ decisions from a customer friendly industry.

While this may appear too radical an agenda, the point is that the kind of changes in procurement policies and systems that have been attempted so far have managed to achieve the impossible- deterred the honest from taking any decision and paralysed the system and paradoxically, substantially increased the opportunities for the dishonest to eke out his ‘rent’ from a vast new range of hurdles which a supplier has to go through to secure business. Only radical reform can break this deadlock.