Defence Procurements: Dealing with Unethical Practices

The crippling effect of blacklisting potential weapon systems suppliers/ vendors because of unethical business practices manifests in the unacceptably slow progress in military capability development. While unethical business and procurement practices cannot be condoned, punitive actions need to be based on verifiable and established wrongdoing and not mere allegations stemming from unhealthy business competition amongst vendors to bag the contract. Much too often, inspired leaks in the media or anonymous complaints and representations by retired senior service officers and bureaucrats have led to the cancellation of contracts. This is detrimental to capability acquisition.

The Defence Procurement Procedure (DPP) has mandated provisions to ensure probity and accountability in the procurement process including the signing of a ‘Pre- Contract Integrity Pact’ for all schemes exceeding Rs 100 crore. The Ministry of Defence (MoD) has the power to enforce a series of (one or all) sanctions, on establishment of a violation by the vendor/ bidder [1] as under:

• Denial or loss of contract.
• Forfeiture of bid security and performance bond.
• Liability for damages to principal and competing bidders.
• Finally, debarment of a violator for an appropriate period of time.

The DPP legislates an Integrity Pact (IP) as a binding agreement between the Government and the bidder, in which the Government promises that it will not accept any bribes during the procurement process, while the bidders promise that they will not offer bribes. The IP thus establishes a monitoring process and is a legal document. At present, the IP has been adopted by 23 countries the world over. In India, 39 public sector companies have adopted IP. The Government and various anti-corruption organisations have to work in tandem to ensure that more and more players in the defence industry adopt the IP. However, Defence Public Sector Undertakings (DPSUs) are not required to sign an IP with the MoD, which creates a situation of conflict of interest. In addition, the playing field between the DPSU and the private sector is not level. The MoD therefore needs to use these provisions to its benefit, to safeguard its prime interests in defence procurements.

Debarment/ blacklisting are potentially high threat punitive measures. However, for a country like ours, grappling with an already complex defence acquisition system and striving for acquisition of major weapon systems and technology, with an articulated aim of following a multi-vendor procurement process as mandated in the DPP, they are also likely to be the most counterproductive. The emerging consolidation of the global defence industry implies that blacklisting of major weapon systems producers is likely to lead to either denial of the military capability sought by the Armed Forces or pursuance of the procurement through a limited/ single vendor base, thus leading to repudiation of state of the art technology and/or price discovery.

Debarment has received a great deal of publicity as an anti-corruption strategy. However, its success in ensuring good governance is limited, if it is relied upon, as a punitive tool against malpractices in award of defence contracts. Like any sanction, its power relies on the idea that rule breakers will be caught so that potential rule breakers are deterred from even attempting to sabotage the process. It alters the risk versus profit ratios that are understood to dominate premeditated acts of corruption. If the procurement process as a whole cannot prevent vendors or individuals (agents) winning contracts, debarment/ blacklisting by itself will not remedy the malaise. 

Impact on Capability Development

The effect of blacklisting/ debarment of vendors on our capability development process is irrefutable. In particular, restrictions imposed on participation of major defence contractors viz Rhinemetal, ST Kinetics, IAI and Rafael on participation in Indian defence contracts has resulted in prolonged delays/ lack of competition. This has inhibited the multivendor acquisition situation, especially in cases where the vendor base has been reduced to a single vendor. The table below (as collated from open domain data) lists out the Air Defence equipment/ weapon system schemes delayed as a result of debarment of relevant/ potential suppliers[2]. Similar patterns can be established in almost all categories of capability.

The delay in the acquisition of capability has resulted in:

• Denial/ absence of key defence capability as in case of AD weapon systems.
• Reduced deterrence capability and consequent emboldening of potential adversaries manifesting in calibrated low intensity conflict/ proxy war.
• Cost escalation, in case where the same weapon system/ equipment is intended to be procured after a certain period of time.
• The negative technological and financial impact of non-availability of core technologies in the country, which could have been acquired, absorbed and put to dual/ multiple use, in cases where ToT is sought along with the weapon system.

Recommendations

• The existing cases of blacklisting/ debarment that has restricted certain capability development acquisition programs for the Indian Army be reviewed towards allowing participation of leading and established global defence equipment producers/ suppliers in a multi-vendor bidding system.
• Creation of legal and contractual framework towards articulating a graded punitive mechanism involving financial penalties and enhanced liabilities for company management including possibility of imprisonment and/or personal financial liabilities.
• Extended liability in the form of business in non-contextual areas such as major misconduct by a defence contractor resulting in debarment of other arms of that company from award of Government contracts.
• Debarment of firms/ entity should be a measure of last resort. Even then, the possibility of delivery of contracted equipment, in cases where misconduct is revealed post contract (as in the case of Augusta Westland   12 x AW 101 VVIP helicopter deal), should be explored/ enforced, in adherence to cost and timelines for delivery.

Conclusion

The current trends in mergers and acquisitions in the global defence industry is likely to continue and progress beyond pan European/ US corporations as important elements of consolidation of holdings and optimising of supply chain strategies. The next step for US firms will be to acquire or merge with large European defence companies in view of the prevalent economic situation. The emerging weapon systems sales and ToT between erstwhile business rivals viz, France and Israel is likely to lead to further consolidation and complexities. An analysis of cross holdings of various defence entities and their subsidiaries indicates that almost no entity/ sub entity meets the highest benchmarks with respect to ethical corporate conduct, adherence to global arms trade norms, workforce management and environmental protection standards. Defence procurement procedure and policies therefore have to align itself with this reality while ensuring that adequate mechanisms are in place to ensure probity, accountability and transparency.

The author is a Senior Fellow at CLAWS. Views expressed are personal.