Contracting with the MoD: stealing lollipops from babies

The Hawk assembly line in Bangalore. HAL claims that BAE Systems has failed to provide drawings, jigs, and parts according to the agreed schedule. BAE Systems denies the charge.

by Ajai Shukla

Business Standard, 3rd Nov 09

If India’s military eventually plumps for primarily American equipment, a major reason will be: soldiers, sailors and airmen are completely sick of being gypped through poorly-framed acquisition contracts that entirely favour the foreign suppliers.

Take India’s contract with BAE Systems, UK, for 66 Hawk Advanced Jet Trainers (AJTs), a billion dollar procurement that took 18 years to finalise. That contract, it now emerges, was framed so poorly that today --- with HAL Bangalore blaming BAE Systems for failing to properly transfer technology --- India’s Ministry of Defence can do nothing to twist BAE Systems’ tail.

The MoD now finds that the Hawk contract contains no provisions for liquidated damages in case BAE Systems defaults on its obligations. And, in an act of inexplicable generosity, India’s MoD paid BAE Systems an unprecedented “up-front” amount of 30% of the contract value; such a payment seldom, if ever, exceeds 15%. Now, with more jet trainers needed and the production line facing delays, fresh inquiries have gone out to global manufacturers, restarting procurement afresh.

Why do such fiascos routinely occur? Astonishingly, because India’s MoD does not have the legal experts needed for negotiating and framing complex defence contracts. The MoD’s forlorn Legal Cell, manned by 10-12 lawyers on deputation from the Ministry of Law, comes up during the framing of every defence contract against a battery of specialised contracting experts, an integral part of the establishment of every global arms vendor.

This year, the Indian MoD’s beleaguered and inadequate legal team will oversee capital expenditure of more than Rs 50,000 crores. When the MoD finalises its choice of medium multi-role combat aircraft (MMRCA), these less-than-legal-eagles will have to negotiate and frame a single contract worth Rs 50,000 crores. Supplementary contracts will be needed governing offsets worth half that value again.

Within the MoD, alarm bells have long been sounding. The Solicitor General and the Attorney General have been approached for help in accessing top-class legal advice. But, so far, there has been no response.

The complexity of a defence contract is virtually unparalleled. A “standard contract” is rarely feasible because the usage of each piece of equipment is radically different. Being an international contract, reaching agreement on arbitration is always difficult, especially considering confidentiality and non-disclosure arrangements. Defining “force majeure” is extremely important, especially when governments can invoke national interest during the execution of a contract. The MoD’s civil servants deal routinely with such issues, but without the benefit of solid legal advice.

India’s military has long suffered from flawed and inconsistent contracting, especially with Russian suppliers. Since the early 1980s, India’s strike corps --- the tank units that would spearhead a thrust into Pakistan during war --- have faced frustrating shortages of on-board fitment equipment that an ethical defence vendor would supply as a part of the contract. In an instance that generated much resentment, India’s first T-72 tanks were supplied by Russia without the tarpaulin covers that keep out dust and rain. When the military asked for tarpaulins, Russia demanded a supplementary contract, eventually supplying them at highly inflated prices.

In some contracts, especially those involving the supply of “strategically important” equipment, the vendor has the leverage to ignore his contractual obligations. Russia’s shakedown of India over the cost of the Gorshkov is an example of the limitations of any contract. Linking the Gorshkov sale with the transfer of nuclear submarine technology, Russia dismissed the initial price as “unreal, a mistake”, and demanded a renegotiated price. But, in most defence procurements, a good contract guarantees satisfactory supply as well as a healthy buyer-seller relationship.

US defence companies are confident that the experience of contracting with them --- with no hidden costs, superb product support, and a “partnership” approach towards the Indian users --- will make a big impact on the Indian military. So far, contracting with the US has been relatively smooth, but it is still too early to tell.

The MoD’s lack of capability in defence contracting is just one, especially worrisome, dimension of a broad systemic incompetence in procuring defence equipment. As a Group of Ministers in April 2000, numerous committees and, most recently, an excellent CAG report pointed out, the MoD has failed to put in place a functionally specialised acquisition organisation to handle a task that is clearly far beyond current capabilities.

But instead of a coherent system, procurement continues under 13 different agencies, each reporting to a different functional head. Contracts, after they are concluded, are managed by four different agencies with very little co-ordination among them.