Making defence procurement uncontroversial

Fixing complex procurement rules and getting over our hypocrisy over middlemen

Sadly but unsurprisingly public debate over General V K Singh’s comments to the media is overwhelmingly concerned with personal motives, interests and conduct of the individuals involved. Given what has made it to the public domain is a fraction of a whole saga most “Why?” questions have no known answers, forcing people to impute motives and connect dots. Since everyone loves a good ‘scam’ we can expect the heat and decibel levels to go up in the coming days. [See a related post on "What to debate while debating in the dark."]

The most important question though has answers that are not cloaked in secrecy but are in plain sight. That question is: Why are there endless controversies over defence procurement, for things ranging from frozen meat to coffins, from trucks to helicopters? Inability to make defence procurements uncontroversial is not merely a corruption-related issue. It is a national security issue. If all you need to do to slow down India’s military modernisation is a plausible scandal, everyone from India’s strategic adversaries to disgruntled equipment vendors have an inexpensive option to do us in.

So why, despite endless revisions of procurement policies and rules, despite putting personally incorruptible ministers in charge, despite the efforts of honourable general officers to clear things up, do we still have a situation where someone can allegedly walk up to the army chief’s office and offer him a bribe? [See Nitin Gokhale's report]

The answer is because our defence procurement rules are too complex and we have made it illegal for those who can help navigate through these byzantine rules to operate openly. As I wrote in a 2007 op-ed in Mint:

Given their remarkable resilience, there has been no attempt towards examining why middlemen exist in the first place. Ironically, is this inability to come to terms with the fact that middlemen might play a useful economic role in a system with complex regulations has not prevented this government from further complicating regulations to keep them at bay. [Mint]

To make defence procurements uncontroversial then either we must simplify the procurement procedures or allow middlemen to operate under a regulatory framework. But why are procurement procedures complicated in the first place? That’s because we add too many objectives to a single purchase. Beyond whether a given purchase is effective, we are concerned about indigenisation, technology transfer, offsets and suchlike. At the same time we are frequently oblivious to the geopolitical implications of large purchases. My colleagues and I have argued in favour of liberalising the defence procurement regime so that the armed forces get the best bang for the buck. [See this Takshashila Discussion Document]

Others might disagree with the need to liberalise defence procurement and that argue that complex procurement rules are unavoidable. Even in this case, the policy on middlemen must still change. If rules are complex there will be those who can make money from navigating through them. That’s how lawyers, chartered accountants and travel agents make a living. There’s nothing intrinsically wrong or immoral about middlemen, agents and lobbyists. It is our rules that make them so, driving underground a genuine economic activity.

Instead of prohibiting middlemen in defence procurement, a far better policy would be to create a regulatory framework under which they can operate legitimately. Agents could be required to declare their past and current affiliations, and disclose relevant family connections. Former defence officers and their civilian counterparts could be required to serve out a cooling off period before getting into the business. The policy objective ought to be to align—to the extent possible—the economic incentives of the middlemen to the organisational interests of the armed forces.

While there can be a genuine debate over the best approach to military modernisation—on what is the right balance between liberalisation, indigenisation, public and private sectors—it is hard to see how we can continue to justify the failed policy on middlemen. Unless you are blind to reality, blinkered by sanctimoniousness or bound by hypocrisy, it should be clear that the consequences of the anti-middleman mindset are eating into the moral fabric of our defence services.

Related Post: A military modernisation manifesto

, , , ,

4 Responses to Making defence procurement uncontroversial

  1. Trushant 27th March 2012 at 14:30 #

    Dear Mr Pai,

    As a guy who does capital procurement for living..I can safely vouch that the defence procurement policy and procedures (DPP) adopted by MoD is one of the most robust document I have seen. The procedures are well laid down and the annexures with various formats are simple to adopt. For MMRCA deal..where some MP from Andhra is claiming foul play (ofcourse on behest of the losers)..its quite evident that the DPP was followed in its true spirit…and the best bird has won. You may say that mega deals like these are tools for strategic leverage(on US of A)…on the other hand you also say that our armed forced should get best bang for the buck..if we follow your first statement and had gone with the Boeing F/A 18…your second statement is contradicted as Rafale is much much better platform. Anyways…if the government(s) feel that we should indigenise the production of military hardware..its a no brainer that we would gain a long term independence in our foreign policy.. we would not be cowed down by the threats of technology denial/ sanctions..and ofcourse stupid contracts like CISMOA and EUA would be thing of past. Your point regarding legalising the middlemen is valid to some extent. Yours Truly

  2. Ritwik 27th March 2012 at 17:14 #

    These are all good points, and I’m glad to see that you recognize that there can be a legitimate ground for complexity.

    In my view though, the problem of corruption/kick-backs in defence procurement has very little to do with complexity (a large company is not an individual constrained by limited information processing, has an army of subject matter experts, lawyers to figure these things out) or middlemen, but is fundamental to the process of institutional sales and purchases – a sub-category of principal-agent issues.

    Witness, for example, sales of medicines/ medical equipment or mess contracts in hostels and offices, or lighting/electrical contracts in large construction sites. These aren’t processes with extraordinary complexity and the ‘middlemen’ are simply the sales reps/ distributors – perfectly legal and indeed part of the entire business model. Kickbacks, cuts etc. are still rife. Common to these is simply the fact that person who recommends/ makes the purchase decision (doctor/ facilities manager/ architect, respectively) is not the ‘person’ who pays.

    A, say, 5% cut is a perfectly optimal sub-game equilibrium is this circumstance. Corruption is always and everywhere rational. A legal lobbyist does not change this, Indeed it is hard to see what extra benefit does a lobbyist bring when, say, the business development head for India for the arms manufacturer might be a person who has equally good (if not better) domain competence as well as relationships with his clients.

    The real reason that lobbyists/ middlemen exist is because the internal ‘rules’ of international companies prevent them from directly bribing the purchaser. So you pay ‘fees’ to the lobbyist or give sales discounts to the distributor, who then keeps some of it and passes the rest along to the purchaser. The legal status of the middleman has very little to do with this process.

  3. Dara 28th March 2012 at 11:11 #

    Pardon my being old fashioned.

    The real scam is being overlooked. Why in over 60 years have we not been able to have even a fledgling indigenous industry? Like poverty eradication, does it suit everyone involved to perpetuate dependance on foreign suppliers? Why has there been no encouragement given to local private players to join hands with PSUs and become self sufficient. We are happy to allow foreigners into our defense backyard but baulk at our own. This is madness. By now we should have been able to have at least 50% self sufficiency in our defense procurements.

    Who are responsible for this sorry plight? Have any of these patriots who stand up giving lectures on national security even once questioned our poor indigenous performance or suggested taking radical steps to improve matters? No sir, they will not. It suits everyone. Defence procurement is the milch cow and the golden goose for too many vested interests.

  4. AG 28th March 2012 at 13:20 #

    Nitin

    I am a long time reader of your blog and enjoy reading the well reasoned perspectives.
    however i find your language tedious at best.
    on occasion — this post is one example — the focus on sounding like the economist leaves your post incomplete. fair enough, you’ve said we have a failed policy on middlemen, but you give little by way of solutions!

    the point of your post is actually very straight forward (to my understanding)
    - defence procurement is a complex and expensive process and india is a major buyer (why so is a different matter)
    - however, given the variety of solutions, platforms and vendors, navigating this market place is not easy. fat contracts, infrequent spending (MMRCA’s are bought once in 2 decades) and long lead times means buyers can never really be aware of what’s available, who to buy from, who can modify and make better etc.
    - across the world and in all marketplaces, brokers exist. even in something as simple as renting a flat, a broker exists.
    - by virtue of the marketplace, the broker, who lives and breathes these alleyways has a better chance of being able to match supply and demand. in other words, he renders a useful service
    - ergo, instead of trying to ban the broker, make him part of the process and regulate him. open and clean with transaction charges, like an i bank!

    its simple as that, and does not harm anyone’s moral fabric!

More in Public Policy, Security (64 of 1646 articles)


What needs to be done to promote India's interests Excerpts from my article in the 60th issue of Pragati: A ...