Lokpal and defence procurements Need for reforms at different levels

Saturday, June 25, 2011, Chandigarh, India The Tribune by N.S. Sisodia
IN recent weeks, the Lokpal Bill has dominated public discourse. There seems to be a naïve belief that a strong Lokpal will root out all corruption. However, a law to establish a Lokpal is unlikely to be more effective than the existing laws to prohibit dowry or untouchability. To make a significant dent on the all-pervasive malaise of corruption, reforms will be needed at different levels of governance and in different sectors, particularly those prone to corruption.

One sector needing special attention is defence. John Githongo, Kenya’s former Permanent Secretary for governance, has called defence “the last refuge of grand corruption”. Fortunately, over the past few years, the defence sector in India has remained untainted by any major scandal. But the world over defence is rated as the most corruption-prone of all international businesses. According to Transparency International’s (T.I’s) Bribery Payers’ Index, defence has the dubious distinction of ranking among the top three most corrupt sectors, along with oil, construction and engineering.

A US Department of Commerce report asserts that the defence sector alone accounts for 50 per cent of all graft allegations. Experts estimate that bribes amount to nearly 15 percent of expenditure on arms acquisition. Hence, ministries of defence can never afford to be complacent. It is hardly surprising, therefore, that in his recent address to the top brass of the Army and Air Force, Defence Minister A.K. Antony had cautioned them about “the danger of falling prey to corrupt practices perpetrated by vested interests in the garb of aggressive marketing” and urged them to “stand guard with resolve against any such overtures”.

Corruption in defence hurts the nation’s vitals. It makes defence more costly and diverts scarce resources from development. Corrupt practices dramatically impact operational effectiveness and in turn the credibility of the defence forces. Corruption scandals erode public trust, create insecurity and demoralise the armed forces.

National security is treated as sacrosanct. Why is then defence so corruption prone? Transparency International offers some answers. First, defence contracts are large, technically complex and extremely difficult to comprehend fully. Understanding technical specifications of highly sophisticated equipment like a modern-day multi-role aircraft can be a daunting task. Technical specifications are more specific in defence than in other sectors and hence vulnerable to manipulation. Second, defence contracts involve huge sums of money with all their attendant risks. All transactions are carried out under a cloak of secrecy, on the ground of national security. However, secrecy works more in favour of companies and officials rather than public interest. Third, the task of developing technology-intensive weapon systems requires huge investment in research and development over a number of years. The arms export market is highly restrictive in nature. The supply side of the market is controlled by government and multilateral export regimes. On the demand side is generally the government or a government agency. The nature of the market is such that the equilibrium of demand and supply is hardly ever achieved. Most sellers are desperate to recover their huge investments and profiteer, whenever an opportunity arises. This desperation leads to unscrupulous practices. Fourth, the use of agents and middlemen in defence business is widespread; they flourish despite all types of bans. Agents act as the conduits for bribes. Information about agents is, therefore, treated as commercially sensitive. Fifth, because of the very nature of defence business, there are only a handful of suppliers. This situation leads to lack of competition. An analysis of the available data shows that more than 50 per cent purchases in defence are from a single source, making price discovery a complex task.

Finally, offsets, which are additional investments made by suppliers over and above their sales, are a large and unregulated area, which pose a special challenge in terms of transparency. Economists see offsets as highly problematic and inefficient. The World Trade Orgranisation has banned offsets in other sectors, but the practice of offsets in defence transactions is common. In India too, offsets are now a mandatory requirement in large contracts. Assessing a fair value of offsets from the preferred supplier is never easy.

Can an effective Lokpal make defence corruption-free? The answer is obviously no. But such an institution can help the process of investigation and prosecution of the corrupt. This has to be done in a manner that it does not hamper decision-making for defence procurements, which is already painfully slow. What can then be done to deal with corruption in defence? One major area needing reform is the formulation of technical specifications or ‘Qualitative Requirements’. Either on account of inadequate technical knowledge and data or due to deliberate design, these are often worked out in such a manner that only a couple of vendors or sometimes just a single vendor can meet them. This practice virtually eliminates competition and renders price — negotiations an infructuous exercise.

Unless qualitative requirements are designed broadly, by specialists, with a view to consciously encouraging competition, defence transactions will remain vulnerable to corrupt practices. According to an International Monetary Fund paper on the subject, “The natural policy prescription to attack corruption in military spending/procurement should be to introduce competition and reduce patronage at the level of officials receiving bribes”. This calls for greater transparency regarding defence requirements. Sharing of information regarding future defence requirements, however sanitized, is essential for providing prospective vendors leads for the future.

Defence budgets are often approved by parliaments without detailed scrutiny. Disclosure of costs and expenditures associated with defence purchases and stricter parliamentary oversight can help promote greater transparency. In the process of reforming procurement procedures, defence suppliers should be fully engaged through a consultative process. While agents and middlemen are banned in India, if in actual practice they continue to operate, it is better to disclose their identities, payments and terms of their contracts. Offsets should be subjected to rigorous standards and supervision. They should also be fully disclosed to enhance transparency and facilitate monitoring.

No one should be under an illusion that the Lokpal law alone can effectively fight corruption. Equally vital will be the role of systemic reforms which prevent opportunities and incentives for corruption.
The writer is Director-General, Institute for Defence Studies and Analyses, New Delhi.
Lokpal and defence procurements Need for reforms at different levels by N.S. Sisodia