Major General Mrinal Suman
Contract for the procurement of helicopters for the conveyance of VVIPs is following the now familiar path. Like all major defence deals, it is getting mired in allegations of gross irregularities and wrongdoings.
First, some background information to put the issue in the correct perspective.
A proposal for the replacement of ageing Mi-8 helicopters for the conveyance of VVIPs was initiated by the Air Force in August 1999. Eleven helicopter manufacturers were invited in March 2002 to submit their bids. As a single vendor situation developed with Eurocopter EC-225 emerging as the sole fully compliant helicopter, a decision was taken to issue a fresh Request for Proposals (RFP) with revised Services Qualitative Requirements to generate more competition.
Subsequently, the requirement of flying ceiling was reduced from the earlier 6,000 meters to 4,500 meters and a new requirement of minimum cabin height of 1.8 meters was introduced. A fresh RFP for 12 helicopters was issued to six vendors in September 2006. As per the provisions of Defence Procurement Procedure – 2006, an Integrity Pact was duly incorporated. Responses of two vendors were found compliant and technical evaluations were carried out at their premises during January-February 2008.
AgustaWestland AW-101 helicopter was recommended for introduction into service. Contract negotiations were carried out with the vendor from September 2008 to January 2009. The Cabinet Committee on Security approved the proposal in January 2010 at a negotiated price of Euro 556.262 million. The contract was signed on 08 February 2010.
Interestingly, India got the first whiff of unethical practices of AgustaWestland from Italy in February 2012. Reports started appearing in the foreign press alleging that bribes and commissions had been paid by the company to bag the contract. India did not take the issue seriously. Instead of putting the contract on hold till the allegations got clarified, India continued to release advance payments to AgustaWestland. Resultantly, by February 2013, India had paid about 45 percent of the total cost of the deal to the vendor and received three helicopters.
However, arrest of Giuseppe Orsi, CEO, Finmeccanica (AgustaWestland is a division of Finmeccania) on 12 February 2013 by Italian investigative agencies forced MoD to act. It could not dither any more. The case was handed over to the Central Bureau of Investigation for enquiry and all further payments were put on hold. Clarifications were sought from the CEO of AgustaWestland as well.
On 14 February 2013, the Ministry of Defence (MoD) issued a detailed fact sheet to clarify matters by giving a chronological sequence of the events. Recently, India has issued a showcause notice to AgustaWestland as to why the contract should not be cancelled for violating contractual commitments. The company has been given 21 days to respond.
Probity has been an issue of paramount concern in India’s defence procurement regime. In addition to the commitments contained in the main contract, all contracts with an indicative value of more than Rs 100 crores necessarily have an Integrity Pact which prohibits usage of unfair means.
While signing the contract, the vendor has to give an undertaking that he has not given, offered or promised to give, directly or indirectly, any gift/consideration/reward/ commission/fees/brokerage/inducement to any person in service of the buyer or otherwise in procuring the contract. Further, he has to give a commitment not to resort to such activities during the execution of the contract.
In case of any breach of the above undertaking, the contract empowers the government to cancel the contract (including all or any other contracts with the seller) and recover from the seller the amount of any loss arising from such cancellation. In addition, in case of bribe, the government is allowed to impose penal damages, forfeit bank guarantee and demand refund of the amounts paid to the seller.
As the procurement procedure debars employment of agents and payment of commission, a declaration to that effect is obtained from the seller. The seller has to agree in writing that if it is established at any time to the satisfaction of the Government that the seller has engaged an agent and paid commission, the seller would be liable to refund that amount to the government. Additionally, the seller renders himself liable to be debarred for future contracts for a minimum period of five years.
Notably, in case the Government is convinced that a breach of contractual commitments relating to payment of commission and use of undue influence has taken place, it can ask for necessary information or even seek inspection of the relevant financial documents/information.
As per the reports appearing in the foreign and Indian press, it is alleged that AgustaWestland spent close to 10 percent of the contract value on bribes and commissions to swing the deal in its favour.
Not unexpectedly, AgustaWestland has denied all allegations. Faulting India’s action of withholding further payments, it has questioned India’s unilateral suspension of the contract stating that neither the contract nor the associated Integrity Pact conferred such rights on the Indian Defence Ministry. It has opined that the current dispute should be settled through arbitration proceedings as provided for in the contract.
The stand of AgustaWestland is incorrect. The relevant arbitration clause of the contract reads – “Any dispute, disagreement of question arising out of or relating to this contract or relating to construction or performance (except as to any matter the decision or determination whereof is provided for by these conditions)…will be referred to the Arbitration Tribunal.” It implies that only those matters wherein decision/determination powers are not provided for in the contract can be referred to arbitration.
As regards probity provisions, both the contract and the Integrity Pact are absolutely unambiguous. It is for the Government to conclude whether a breach has taken place. Its decision is final and binding on the seller. In other words, a seller cannot challenge such a decision and demand arbitration proceedings. Further, the provisions empower the Government to impose sanctions without assigning any reasons.
A key provision which is generally overlooked pertains to the examination of the Books of Accounts of the vendor. In case of an allegation of violation of any provisions of the Integrity Pact or payment of commission, the Government is entitled to seek inspection of all relevant financial documents and the vendor has to provide them.
In case of breach of probity provisions, the Government is empowered to take the following actions:-
a) Denial or loss of contract.
b) Recovery of all sums paid by vendor to any middleman/agent/broker with a view to securing the contract.
c) Recovery of all sums already paid by the Government with interest thereon at 2 percent higher than the LIBOR. Recoveries can be made through forfeiture of security-performance bonds and payments due under other contracts.
d) Recovery of liability for damages to the principal and the competing bidders.
e) Cancellation of all or any other contracts with the seller.
f) Debarment of the violator for a minimum period of five years, which may be further extended at the discretion of the Government.
The Way Forward
In view of the above, MoD is on a very strong wicket. It must act to safeguard national interests and prestige. It must never fall in the trap of arbitration proceedings. Exercising the powers granted to it under the contract signed with AgustaWestland, it must cancel the deal forthwith and initiate measures to recover the amounts already paid. A word of caution will be in order here. It should resist the temptation of blacklisting/debarring Finmeccanica. It will be a counter-productive step as all projects in which Finmeccanica is participating will suffer.
As reported by Comptroller and Auditor General of India, the Air Force has been meeting the transportation requirement of the VVIPs with a fleet of six Mi-8 helicopters with a low utilisation level of mere 29 percent. India has already received three AgustaWestland AW-101 helicopters. They should suffice till a fresh deal is concluded. In any case, helicopters for VVIPs have no operational criticality. India can wait.
(The author is has commanded an Engineer Regiment in the Siachen Glacier area and was awarded the gold medal for being ‘the most outstanding engineer of the year’. He was also the Task Force Commander at Pokharan. He superannuated in 2003.)