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Saturday, September 8, 2012

Two months ago, at the peak of the ’Tatra gate’/ COAS versus MOD imbroglio, I had attempted an analytical understanding  of corruption in defence procurements- ‘why’ does it occur and what is special about it, ‘where’ does it occur and ‘how’ does it occur. Some of those arguments need reiteration and some  further peculiarities of the Indian Defence establishment  need to be highlighted because corruption  is so deeply embedded in the  very architecture of the establishment that only a radical redesign of that architecture can offer a way out.

On the question of ‘why’ I had  in the earlier article referred to the ‘monopsonistic’ ( a monopoly on the demand side) nature of the  defence market, combined with, paradoxically a limited number of suppliers because of the whimsies and uncertainties of the market. A perverse kind of monopoly therefore prevails both on the demand as well as the supply side leading to an extremely unhealthy buyer seller relationship.

While buyer seller relationships in the defence market are universally complex they are not necessarily as unhealthy as in our case. The Indian defence establishment, modelled somewhat on the Soviet system, is a closed universe which does not permit  access to any  healthy external  market forces or influences. The Defence Empire consists of three distinct Kingdoms each having its own duchies, provinces, satrapies and fiefdoms. These are the Department of Defence, the Department of Defence Production and the Department of Defence Research. Each of these kingdoms have their own, exclusive, ’rent seeking’ preserves which they jealously guard. The kingdoms of Defence Production and Defence Research, in particular, control gigantic  subordinate establishments,-PSUs, Ordnance Factories and Defence Laboratories- all hugely lumpy, capital guzzling investments, set up over thousands and thousands of acres of land on a scale lavish enough to shame Donald Trump and Mukesh Ambani. The ostensible justification for these monstrously inefficient investments is to achieve some kind of strategic self reliance which is tightly controlled by the State. Private industry has to be kept away except by way of reluctant ancillarisation and supply of some components- a process which opens up yet another area of rent seeking opportunities.

In theory, the relationship between the three kingdoms and the Armed Forces these kingdoms are meant to serve is supposed to function like this. The Armed Forces work out their present and futuristic requirements, qualitatively ( the GSQRs) and quantitatively (elsewhere I have shown how highly convoluted and corruption prone this exercise can be) and communicate these to the Defence Research establishment. The DRDO develops the products to match these requirements. The Armed Forces try out and approve the prototypes or the pilots and then Defence Production comes in to ’designate’ one of their units to ( a typical Indian usage) ‘productionise’ the product. The product is inducted into service and everyone lives happily thereafter, until the next product development cycle begins. Because  everything is within the confines of the MOD it is supposedly insulated from corrupting influences from outside.

Practice shows a perfect perversion of theory. First, each kingdom and each fiefdom within each kingdom has its own bewilderingly complex procedures, and crossing each stage of these designed hurdles within each of those fiefdoms, requires intermediation, facilitation and payment of ‘rent’. Rent seeking opportunities increase geometrically. By way of illustration, those framing GSQRs do so primarily by drooling over Janes’s catalogues and cherry picking specifications from different  competing products in the hope that they will achieve the best combination. The smarter international players try to enter at this stage itself to influence the framing of requirements in a way that is favourable to their existing product range or the ones they are developing for the international market. Considerable sums exchange hands at this stage itself. Once framed and passed on to the Defence Labs ( or sometimes directly to the production agencies as the gestation period for indigenous R&D may be unacceptably long) the Labs decide which are the parts of technology  (knowhow and knowwhy)they themselves will develop, which aspects they will seek technology cooperation with international partners and which parts or components they will fully import and then integrate with the full system (e.g the engine in an aircraft or a tank). The processes by which these decisions are taken are completely opaque and  the jealously guarded turf of the R&D establishment, providing room for heavy duty influence peddling and mediation. Inevitably, the tendency to reinvent the wheel ( being the softer option because adaptation  on the other hand involves considerable drudgery and a soiling of hands which our technology developers are not ready for) delays the product development cycle and on the one hand leads to extraordinary pressure from the Armed Forces ( their preparedness cannot be sacrificed for indigenous capacity development) for imports and on the other ensures that by the time the product is even halfway developed it is already completely out of synch with contemporary technology and rapidly changing requirements. Making the product acceptable at this stage again requires heavy intermediation and facilitation, the burden for which is borne by the foreign ’ component’ supplier. Component import is more often than not a euphemism for full scale technology/ know how import and termed ‘component import’ when done by the R&D establishment and ‘technology import’ when done by others.

It is evident that each stage of procurement in each kingdom adds to the cost. The costs get hugely magnified once the prototype or the pilot gets scaled up for production. At the production stage in the kingdom of Defence Production another vast avenue of rent seeking emerges. Because the production units are set up at such a heavy cost and because they are designed for ‘cost plus’ operations there is little incentive for cost efficiency. The Armed Forces rightly resent having to pay high costs for technologically outdated products ( the Tatra is a classic example) and therefore have a bias towards direct imports ( which keeps their own ant the Department of Defence’s rent seeking opportunities intact) and the production units need to sustain their  high cost operations. So the production units desperately seek to maintain demand and take the route  of outsourcing some part of the production through the private sector who is required to pay for maintaining the demand at sustainable levels. Hence, the offer of bribes simply to maintain demand.

The story goes on and on and one can elaborate a hundred different ways in which corruption is guaranteed by the system. To bring about any change I can only repeat my suggestions in an earlier article.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.