The defence procurement system needs radical reform to address corruption
In the media frenzy generated by General V.K. Singhs not-so-startling revelations,our genius for muddling issues and focussing on their more salacious aspects has once again become evident. Knee-jerk reactions,like the reference of the Tatra procurements to the CBI,will ensure the flaws in the decision-making process remain unaddressed and the opportunity for serious and radical systemic reforms is again passed over.
There are several distinct sets of issues the current episode throws up ,all of which deserve separate analyses.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,that is,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 necessary. Security concerns necessitate a veil of secrecy on defence acquisitions,making it 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 that provides fertile breeding ground for corrupt practices. What increases the complexity is the tortuous system of procurement designed by the Indian bureaucracy on the famous CYA principle,which ensures that multiple opportunities for charging rent arise,and that this rent has to be paid and is paid,irrespective of who one chooses to buy from and irrespective of there being honest jokers in the pack at different levels. Procedures intended to prevent foul play ironically achieve the opposite,with 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 look at the interesting issue of where. There are three separate tracks that all procurements in the defence ministry go through,and each of these tracks has a bewildering multiplicity of hurdles .
The first is demand estimation,demand vetting,demand projection and inter se priority determination. This exercise is in the domain of the SHQ. It is here that decisions are taken on the volumes required and the inter se priority to be accorded to the items to be procured within available budgets. It is astonishing how 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 army chief 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. 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 is technical from framing the general staff qualitative requirements,to preparing 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 SHQ,which brooks no outside interference. The procedural labyrinth that any supplier has to go through to have his product declared technically acceptable is Kafkaesque and offers limitless rent-seeking opportunities. Being a purely technical matter,neither the processes nor the practices are audited or subjected to independent professional scrutiny.
The third is actual procurement,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 need to circumvent or short circuit the procedure,because following the procedure itself provides the opportunity. 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 who could be the minister,prime minister,or a confidante of either 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,not for deciding in anyones favour.
What can be done? First,devolve and delegate clear and full decision-making authority for procurements down the chain of command. Restrict the role of the ministry to procurement of major weapons 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,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. Trust a group of 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 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 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 defence PSUs,ordnance factories and defence labs by converting them into widely-held public limited companies answerable to their shareholders for performance,thereby encouraging 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 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 that a supplier has to go through to secure business. Only radical reform can break this deadlock.
The writer is a former secretary to the government and handled army procurement in the 1990s