Tuesday, 22 May 2007

CAG: Army isn't clear about what it needs

(Part 2 of a three-part series on the CAG's report on defence procurement)

by Ajai Shukla
Business Standard: 20th May 2007

The CAG, in its latest report on foreign defence deals, has sharply criticised the army for a plethora of shortcomings in its structure and procedures for buying military arms and equipment from foreign vendors. The CAG report No 4 of 2007, which minutely examines 37 separate defence acquisitions between the period 2003 and 2006, is particularly critical about the way the army takes the very first step towards buying military equipment: deciding exactly what it needs.

Any householder buying an expensive item first decides what she needs. If the purchase is a refrigerator, she chooses a size that fits the number of family members and the space she has to install the refrigerator. Functions like frost-free and bottle space depend on household usage. And, importantly, there's the element of opportunity cost; choosing a fancy model with an ice dispenser means having to go without that blender she also needs.

The military's Defence Procurement Procedure (DPP) is supposed to start with an identical process, identifying precise requirements for the equipment proposed to be purchased. Laying down those requirements in the form of General Staff Qualitative Requirements (GSQR) is the first, and the most vital, part of any procurement. According to the CAG, the army goes wrong from this very first step.

The CAG report, in unusually blunt terms, points out that GSQRs have been wrongly formulated, reflecting neither the army's own requirements, nor the reality of the market. In the GSQRs for 11 purchases that were scrutinised, the CAG found that four spelt out requirements that were unavailable anywhere in the world. In four cases, the requirements "were unrealistic with respect to the actual requirements on the ground," which means that they did not meet the army's operational needs. And in seven cases, there was no way of testing whether the equipment met the parameters specified in the GSQRs.

The CAB observed that unrealistic GSQRs meant that, "in 66% of the cases, only a single vendor was pre-qualified." In "single-vendor" cases, the vendor's monopoly means that he can virtually dictate his own price. Even more serious was the CAG's observation that GSQRs were formulated "sometimes merely on the basis of manufacturer's brochure." Global vendors, admittedly with vested interests, have long alleged that Indian GSQRs are formulated to favour particular vendors. The CAG comes close to confirming that.

The MoD admits that its procurement regulations lay down that in single-vendor situations, the GSQRs are supposed to be reformulated and fresh tenders issued. This procedure, however, was not observed in a single case under audit.

The CAG's report also illustrates that GSQRs did not differentiate between essential and inessential requirements in a piece of equipment. Amongst several examples provided by the CAG is the purchase of High Resolution (HR) Binoculars, procured to keep a watch on Pakistani and militant activities across the LoC. Indian suppliers, Bharat Electronics Limited (BEL) and Ordnance Factories Board (OFB), lost out to a foreign vendor, despite their HR Binoculars meeting all the GSQRs during user trials, and having proved themselves superior to the foreign suppliers in the three vital aspects of clarity, resolution, and magnification. Ignoring those important aspects, (and, in fact, incorrectly citing "good resolution and clarity" and "better magnification" as reasons for buying the foreign binoculars) the contract was awarded to the foreign company on the grounds of extraneous reasons like "eye-piece movement" and "minimum focusing distance", which barely figured in the GSQRs.

This was just one of many such cases in which, "parameters were specified which were unimportant, unverifiable and non-measurable. There was no grading of the parameters as critical and non-critical and nor was there an inter-se priority or weightage of the parameters."

The CAG also criticises the army's tendency to place orders piece-meal, without first determining the quantities it needs, disqualifying itself from economies of scale. In one example cited in the report, the army's 9th Plan included the procurement of 4700 rocket launchers (RL Mk III). The army eventually bought rocket launchers in three separate contracts for smaller amounts, in a space of just ten months, incurring a loss of almost Rs 10 crores.

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