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The debate over defence middlemen

The Merlin MK II AW101 helicopters of AgustaWestland. In the chopper deal case, a services qualitative requirement was allegedly changed to bring down the altitude requirement for the VIP helicopter from 18,000 feet to 15,000 feet to benefit the Italian manufacturer. Photo: Jonathan Eastland/AlamyPremium
The Merlin MK II AW101 helicopters of AgustaWestland. In the chopper deal case, a services qualitative requirement was allegedly changed to bring down the altitude requirement for the VIP helicopter from 18,000 feet to 15,000 feet to benefit the Italian manufacturer. Photo: Jonathan Eastland/Alamy

Defence minister Parrikar wants to ease arms procurement and end corruption. Could legalizing middlemen be the first step?

New Delhi: When defence minister Manohar Parrikar announced on 31 December that the government will introduce a policy, perhaps as early as February, to regularize the role of middlemen in arms purchases, there was a distinct sense of déjà vu.

In 2002, based on the recommendations of the Central Vigilance Commission, the Atal Bihari Vajpayee-led National Democratic Alliance (NDA) government had declared a similar intent.

Unfortunately, the process of registration they recommended required middlemen to provide bank details, particulars of financial transactions and tax returns going back several years, all of which served as a major deterrent for those who might have even toyed with the idea in what remains a shadowy industry.

Reform is needed because of the growing view that modernization of the armed forces—and consequently its war preparedness—is suffering because of the corruption that has plagued the arms procurement process involving middlemen, politicians and, sometimes, senior figures in the armed forces.

Legally, middlemen do not exist in India in the field of arms procurement. In fact, under the United Progressive Alliance (UPA) in 2004, the defence ministry had introduced an integrity clause for all defence contracts upwards of 100 crore, which required the selling company to declare that it had not engaged any middlemen or agents to secure the contract.

Middlemen are present in all areas of procurement—useful for helping sellers cut through red tape—but have become particularly controversial in defence because deals tend to involve large sums of money and, sometimes, sweeteners.

Despite the government rule, no arms procurement deal in India is complete without the active involvement of middlemen—or defence agents as they prefer to be called. And even though the country has introduced increasingly complex measures in its arms procurement procedure to cut down on corruption, the number of men who facilitate access and deals for foreign companies has only increased. This is because India is one of the largest importers of arms and ammunition in the world today.

At the same time, efforts to indigenize the arms industry have met with limited success, which means requirements of most important goods—ranging from artillery guns to choppers and fighter jets—mandate looking outwards. According to the Stockholm International Peace Research Institute, India’s business accounted for 10% of the global arms markets between 2007 and 2011.

Companies from countries like Israel, Russia, South Africa, France and the US are all racing to grab a share of the pie that is the Indian arms market.

“It is unrealistic to expect foreign companies to know how to navigate the bureaucracy and acquisition process in India. They need someone who can keep them abreast with the opportunities that arise. Defence agents are important both for the vendors as well as for the acquirers," argues retired air vice marshal Kapil Kak, a defence analyst and a former additional director at the Centre of Air Power Studies.

He is not the only one to think so. Several army officers and defence experts Mint spoke with agreed with the need to legalize agents, arguing they are indispensable to the whole process of defence procurement.

“There are legally recognized agents in nearly all other important sectors like oil, etc., then why has defence been excluded? However, the government will have to be strict with payment rules," says Mrinal Suman, who retired as a major general of the Indian Army. The new policy intends to address that issue by banning companies from paying agents a commission or percentage of profit from a deal.

A major problem is that the entire process of arms procurement, across the services, is extremely opaque—and one to which layer upon layer of complexity has been added over the years. Ironically, most of it in attempts to eliminate corruption.

The steps to be followed are clearly laid out in the defence procurement procedure (DPP) which was drawn up in 2002 and reviewed six times, the last in 2013.

The very first step is a Request for Information (RFI), which is issued to manufacturers, vendors and Indian defence attaches posted abroad. The information collected is then reviewed and then a Services Qualitative Requirement (SQR) drawn up. The SQR, prepared by line directorates of the services, “should lay down the user’s requirements in a comprehensive and concrete manner", according to the DPP.

The other steps in the chain are Acceptance of Necessity, inviting of offers through a Request for Proposals, field trials, commercial negotiations and approval of the financial authority before the signing of the contract. It is a long-drawn-out process involving a large number of people from departments across the services and bureaucracy, which means procurement can take up to a decade. The middleman’s services become useful in two respects for the buyer and the seller: he navigates this civil and military bureaucratic maze and ensures the contract goes to a particular firm.

The first defence “middleman" to capture the popular imagination in India was Ottavio Quattrocchi, an Italian who was suspected of having facilitated the purchase of Swedish Bofors howitzer guns by the Rajiv Gandhi government in the late eighties. Win Chadha was named as the Bofors agent by the Central Bureau of Investigation (CBI) while Quattrocchi was believed to have acted as a middleman between the company and those in the establishment who received kickbacks.

Neither man was arrested.

Since then, in spite of their preference to work from the shadows, more and more defence agents have found themselves in the public eye.

Names like UK-based Sudhir Choudhrie, Suresh Nanda and M.S. Sahni have cropped up in various deals being investigated by the CBI.

Then there is Abhishek Verma, son of a former Congress member of Parliament (MP). Verma is in Tihar jail for violating the Official Secrets Act. He is alleged to have received $530,000 from Swiss company Rheinmetall Air Defence to get its name off a blacklist of several companies.

Violation of the defence ministry’s integrity clause leads to a company being blacklisted.

In 2013, the country became familiar with the names of the Tyagi brothers—Sanjeev or “Julie", Rajeev or “Docsa", and Sandeep—first cousins to retired air chief marshal S.P. Tyagi. They are alleged to have played a major role in Italian helicopter manufacturer AgustaWestland NV bagging a contract for providing 12 choppers to the Indian Air Force.

Most middlemen have connections with either powerful politicians or senior officers in the services. Some are from service families or are retired officers themselves. They cultivate further contacts by hiring retired officers and bureaucrats who have served in the relevant departments and still have contacts there. “Most of the so-called middlemen don’t have any technical knowledge. Their expertise lie in manipulating the system," says an arms manufacturer based in Delhi.

Manipulation of the system begins with the SQR itself. “It is difficult to ensure that the SQR is free from all manners of influence. A slight tweak, ostensibly of an innocuous nature, can eliminate certain vendors and heavily favour others," says Amit Cowshish, a former financial adviser for acquisitions with the ministry of defence.

In the AgustaWestland case, for instance, the SQR was allegedly changed to bring down the altitude requirement for the VIP helicopter from 18,000 feet to 15,000 feet, thus favouring a particular company that had not been shortlisted. The ministry however had denied that the changes were made to favour the company; it told the court that the prime minister and the president rarely made visits to places that were at an altitude higher than 4,500m (around 14,800 feet).

SQRs when drafted are further vetted by a committee which consists of three-star officers and representatives from different departments like Defence Research and Development Organisation (DRDO), Director General of Quality Assurance (DGQA).

“With so many people being involved it is difficult to establish who is working with an ulterior motive," says Cowshish.

A retired naval commodore, who was involved in the acquisition of a frigate in the early 2000s, nervously recalls a change in the specification of a sonar.

“The file came to me at 4.30pm on a weekday from the office of a very senior officer. Around 9.00pm that same night, I got a call from a gentlemen representing a certain firm saying they could meet all our specifications. Till today I don’t know where the leak came from."

For the middlemen, no contact is too small to be cultivated.

From peons to mid-rank officers to generals and powerful politicians, every individual is a step in the chain that takes them to the desired goal—the arms contract.

The second vulnerable stage is that of the Field Trial Evaluation (FET)—even though the trials that are conducted are very exhaustive. Indian defence requires weapons that work well in temperatures that range from -50 to +50 degrees Celsius.

“Few countries have a terrain as varied as ours and we need to ensure that weapons purchased can function well in every battle-field," says a retired army officer.

The refrain around the world, he jokes, is that if the Indian Army has tested and brought something, then it can be purchased blindly. “A brigadier is in charge of the FET. The team consists of him, one or two officers of the trial wing, a colonel who is the commanding officer of a unit, representatives from the EME (corps of electrical and mechanical engineers), DRDO, DGQA and of course the vendors. It is a bloody mela," recalls a retired colonel who was a trial officer in one of the earliest trials for the 155mm/52 calibre towed artillery guns.

In August, the Indian Army conducted its fifth round of trials for the gun, according to a report in The Hindu. India has not procured any artillery guns since the Bofors scandal—an example of how the role of the middleman can have an impact on procurement and national defence.

Charges of mismanagement and red tape have led to multiple issuance and withdrawal of the tender for these guns. “I used to save the daily results on a pen drive, which I would wear around my neck while sleeping," recalls the colonel.

He is categorical that field trial results cannot be manipulated.

“There are so many people around. If a weapon fails, it fails in front of everyone, how can the results be manipulated?"

But as recently as last week, the CBI registered a case against brigadier V.S. Saini of the Indian Army Aviation Corps for allegedly tampering with the trial flight record of light utility helicopters that are meant to replace the aged Cheetah fleet.

Then there is the important matter of the actual capability of the weapon. “Till date, India has never purchased a sub-standard weapon," says Mrinal Suman.

Equally, the colonel cited earlier sings the praises of Bofors, saying, “It is a fantastic gun. It really improved our capabilities."

A retired lieutenant general who served as Master-General of the Ordnance in the nineties disagrees: “The fact of the matter is that there has always been corruption in arms procurement but the degree was less. Today the money involved is so much, the stakes are so high," he says.

Over the years India has either cancelled or put on hold deals worth billions of dollars because of corruption allegations.

Although no high-profile arrests have been made, in 2012, several big companies were blacklisted for offering bribes and engaging middlemen. These include Singapore Technologies Kinetics, a state-run defence equipment supplier, and Corporation Defence of Russia.

All three were accused of bribing the former director general the of ordnance factory board, Sudipta Ghosh.

South Africa’s Denel SOC Ltd, one of the vendors during the retired colonel’s field evaluation trials for the 155mm howitzer, was later blacklisted for paying kickbacks.

Officers complain that the government appears to be punishing middlemen and companies—the bribers—rather than Indians who take these bribes.

“We are going around chasing companies like Bofors, Westland but have we found any of our own officers or bureaucrats guilty? When does a buyer become influential? When we are vulnerable. We need to fix the chinks in our armour," says Suman.

The CBI is currently investigating several cases related to kickbacks and bribery in arms deals.

Legalizing middlemen, argue experts, does away with the need for secrecy as well as the wheeling-dealing that is currently responsible for much of the dirt associated with arms deals.

“These people need to be bona fide representatives of their companies or a corporate entity in their own right. Make MNCs legally responsible for them. If there is transparency, a lot of things will fall into place," says the Delhi-based arms manufacturer cited earlier.

According to some in the field, arms middlemen are no different than lobbyists, consultants or legal representatives who are hired by multinational companies in other sectors to push sales.

“Arms companies need someone to navigate the system, someone who can talk to officials on their behalf, monitor the process—and all in an above-board manner. Defence MNCs have set up offices here and they are employees. You can’t call these people middlemen. They are legal representatives, who need to advise companies about RFPs, how to answer them, how to keep track of trials, etc," says a retired brigadier.

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