Why are defense procurements susceptible to Corruption?

By Aastha Suman

 From the time that India realized the importance of a strong defense infrastructure and decided to procure advanced weaponry and equipments, its procurements have been sullied and muddied by allegations of corruption.  In fact kickbacks received during procurements of the Swedish Bofors guns, the Barack missile, the French Scorpene deal, the HDW (SSK) German submarines have all garnered huge attention from the media. Latest to join this long list is the Augusta Westland VVIP chopper scam. This makes us wonder, whether the defense sector is specifically prone to corruption or whether it is just as much ridden with corruption as any other sector or any other government department in India? A closer study, points towards the former option.

According to Transparency international, defense sector is one of the three most corrupt sectors, others being oil and construction/engineering. Yet, interestingly, the Bribe payers index report, 2008 which reflects perception of bribery of international suppliers, lists defense as medium corrupt sector with public works and contracts, real estate, oil and gas, civilian aerospace rated as more corrupt comparatively.  Similarly, KPMG’s Bribery and Corruption Survey 2011 also suggests that defense sector is medium corrupt with sectors like Real Estate and Construction, Telecommunications, Social development sector (education, poverty, alleviation), Financial Services (Banking, Insurance, Mutual Funds, etc.) perceived to be more corrupt. The secrecy shrouding the defense sector and its significance in national security may be reasons for such a perception.



India needs to import most of its defense equipments, as it does not yet possess all the advanced technologies required for modern military hardware. In fact, India has the world’s 10th largest defense budget and is the world’s largest importer of arms.  The union budget 2013-14, increased the defense allocation to Rs 2,03,672 crore, a 14% growth over the previous year’s budget. Presumably, defense procurement contracts involve huge sums of money and the total expenditure on defense purchases by India during the years from 2001-2002 to 2010-2011 (Revenue and Capital) was 4,42,607.70 crore! More money invariably points at the sector being more predisposed at corruption.

Furthermore, the defense needs of a country itself are undefined and more based on subjective perception about possible threats and safety and security needs fueled by arms race. When needs are ambiguous, then how the needs are met will also be equally subjective and ambiguous which results in large discretion at political, administrative, financial and technical levels of decision making. For instance in a firm with ten employees, its need for computers are fixed to ten, one for each but how can a country decide how many fighter planes or how many battleships it needs?

Often, defense contracts are large, technically complex and extremely difficult to comprehend. Understanding technical specifications of highly sophisticated equipments is a daunting task as they are more specific in defense than in other sectors making it vulnerable to manipulations. 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 a useless exercise.

Moreover, most cutting edge defense technologies require huge investments in research and development over a number of years. This makes the arms export market highly restrictive in nature. Most suppliers are desperate to recover their huge investments and accumulate profits whenever an opportunity arises. This desperation leads to unscrupulous practices.

While the supply side of the defense market is controlled by government and multilateral export regimes, the demand side is generally the government or a government agency. Due to the nature business, there are only a handful of suppliers. This situation leads to a monopoly like situation or lack of competition. An analysis of the available data shows that more than 50 per cent purchases in defense are from a single source, making price discovery a complex task. Many times the lack of suppliers is due to fixed alliances. Soviet Union for instance being an old Indian ally may be a much more trusted supplier than countries which have shown to have Anti- India tendencies.

Then there is the highly controversial issue of use of agents and middlemen who act as conduits for bribes in defense business, specifically highlighted in the Quattrochi-Bofors Scandal and lately in the Augusta Westland Chopper controversy. Over time many steps have been taken to eliminate or at least regulate these middlemen. In fact, middlemen were proscribed in early 2001 which was later revoked and detailed guidelines were issued vide their letter No. 3(2)/PO (Def) 2001 dated 2 Nov, 2001 which included compulsory registrations of such agents.

These disclosure requirements during registrations were considered too invasive and onerous to comply with, resulting in hardly any agents registering themselves. Also, the fact that Ministry of Defense (MoD) has reserved the right to approve accreditation of an agent, and that the Ministry of Defense has the right to ask its foreign suppliers to change its agent at any stage of the procurement, has deterred many agents from registration.

Also, offsets, which are additional investments made by suppliers in a country 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. In India, offsets are now a mandatory requirement in large contracts. Assessing a fair value of offsets from the preferred supplier is never easy.


Legal Provisions

The defense procurement policy and the defense procurement manual have specific provisions to deal with corruption. Apart from the provisions on agents, they provide for a pre-contract integrity pact by the bidders, their suppliers etc. The Defense Procurement Procedure – 2006 (continued in DPP-08) made an integrity pact compulsory for all capital procurement schemes above Rs. 100 crores. Any violation by a bidder of its commitments or undertakings leads to a denial or loss of contract, forfeiture of the bid security and performance bond, liability for damages to the principal and the competing bidders, and debarment of the violator by the principal for an appropriate period of time.

In addition to the integrity pact, the procurement contract requires an undertaking that the seller has not used any undue influence in relation to the obtaining or execution of the contract. The seller undertakes that he has not given, offered or promised to give, directly or indirectly any gift, consideration, reward, commission, fees brokerage or inducement to any person in service of in procuring the Contracts.

The primary statute dealing with corruption in India is the Prevention of Corruption Act, 2000 under which acceptance of gratification or a valuable thing  by any public servant or middlemen  inducing or exercising personal influence over public servants and abetment of the same, is an offence. Also, punishable is criminal misconduct by a public servant which includes habitually accepting bribe, dishonestly misappropriating money, obtaining by corrupt or illegal means any valuable thing or pecuniary advantage  or having disproportionate assets. Some of the persons charged with corruptions may also be punished under the Indian penal code under Criminal breach of trust, Cheating, forgery etc.

Moreover, under the FCRA, 2010, a Government servant or employee of any corporation, member of any legislature, political party or office-bearer thereof, Organization of a political nature cannot receive foreign contribution. Also, under Section 6 of FCRA Act read with Rule 7 of FCRA Rules, no member of a Legislature or office-bearer of a political party or Judge or Government servant or employee of any corporation or any other body owned or controlled by the Government shall, while visiting any country or territory outside India, accept, except with the prior permission of the Central Government, any foreign hospitality.

To sum up, only the bribe taker may be punished and only rarely under abetment or as middlemen the bribe giver may be punished. This leaves a large loophole for entities giving bribe to go scot free. Also, in cases of defense procurements where the bribes are paid by foreign entities, there are no extraterritorial dimensions to this statute unlike the UK bribery Act and US Foreign Corrupt practices Act.

Another important statute important to ensure transparency in the government is the Right to Information Act, 2005. However, exemption from disclosure is provided to certain categories of information in larger public interest like information, which may prejudicially affect the sovereignty and integrity of India, the security, strategic, interests of the State, relation with foreign State etc. Defense procurements largely fall under these exemptions and hence, this statute is very much useless in this context.

However, the Lok Pal Bill, 2011 and Interest Disclosure (Protection of Informers) bill, 2002 are laws which may in the future help to mitigate the rising corruption in defense, specially at the higher levels of administration. Also, India has taken a positive step by ratifying the UN Convention on corruption last year which may mean that the anti corruption regime in India shall be soon extended to include private sector and also new provisions will be made to make it a punishable offence to bribe a foreign official.


Way Forward

Defense procurements have special problems which makes it vulnerable to corruption. At the outset, a close study of the loopholes in the present defense procurement regime is needed and it is required that these loopholes be systematically plugged. Also, there is an urgent requirement for amending the present anti-corruption laws, to provide them with an extra territorial jurisdiction component. Lastly, there is need to have a political will to bring around these changes. The enormous public money spent each year on defense infrastructure should be enough impetus to bring about these changes at the earliest.