Arrest of a retired Air Chief is a sad development. The AgustaWestland deal is in the news once again. What are the true facts of the case? Here is an article that clarifies most issues.
The contract for the procurement of helicopters for VVIPs has been in the news since the arrest of the head of the Italian defence group Finmeccanica, the owners of AgustaWestland, for alleged payment of bribes to clinch the deal. In addition to handing over the case to the Central Bureau of Investigation, Ministry of Defence (MoD) issued a detailed fact sheet on 14 February 2013 containing a chronology of the important procedural milestones of the deal.
The much awaited report of the Comptroller and Auditor General of India (CAG) was tabled in the Parliament on 13 August 2013. It has found the entire process of acquisition right from the framing of Services Qualitative Requirements (SQR) to the conclusion of contract to have deviated from the laid down procedure. Exposing infirmities in every stage of the procurement process, CAG has sought accountability and raised serious questions about the lack of transparency.
This article endeavours to carry out an appraisal of the whole deal, relying primarily on the report tabled by CAG, fact sheet issued by MoD and the information available in the public domain.
The Backdrop
Mi-8 helicopters of the Communication Squadron of the Indian Air Force (IAF) have been meeting heli-lift requirements of VVIPs since 1988. As Mi-8 helicopter could fly only up to 2,000 meters and that too during day-light conditions and good weather, a need was felt to replace the complete fleet with modern helicopters possessing better capability in terms of avionics, high altitude operations and passenger comfort.
After evolving SQR in consultation with the Prime Minister’s Office (PMO), a Request for Proposals (RFP) was issued to 11 manufacturers in March 2002. Importantly, it was mandated that the helicopters should be able to operate at an altitude of 6,000 meters. Although four vendors responded, the Technical Evaluation Committee (TEC) found three proposals (Mi-172, EC-225 and EH-101) to be compliant and recommended that they be called for trial evaluation.
Only two helicopters were trial evaluated as EH-101 (later renamed as AW-101) was certified to fly up to an altitude of 4,572 meters only. Flight Evaluation Trials (FET) were conducted in end-2002 and the report submitted to MoD in May 2003 for acceptance. EC-225 (Eurocopter Super Puma) was recommended for procurement.
PMO objected to the emergence of a single vendor and directed that SQR be reformulated to generate competition. Further, the Air Headquarters (Air HQ) was directed to co-opt the Home Ministry and the Special Protection Group (SPG) in framing parameters to ensure that all operational, security and convenience requirements are duly satisfied. Consequently, in a meeting convened by PMO in November 2003, it was proposed to reduce ceiling requirement to 4,500 meters and have a desirable SQR of minimum cabin height of 1.8 meters. As a desirable SQR (since done away with) was simply an expression of wish, it was not a limiting factor and no equipment could be eliminated for its non-compliance.
The Defence Procurement Procedure (DPP) mandates that in the event of a single vendor emerging successful, the case should be aborted and a fresh RFP issued with revised parameters. Hence, the steps taken were in order.
However, in early-2005, powerful decision makers appear to have decided to procure helicopters from AgustaWestland. Thereafter, the whole procurement exercise was reduced to a sham and every single provision of DPP was tweaked to forestall challenges to AgustaWestland. The unbridled audacity displayed by the decision makers is simply unbelievable. The magnitude of the transgression can be gauged by a close examination of the various aspects of the procurement process.
1. Service Ceiling
As a follow up of the instructions issued by the National Security Advisor (NSA) in March 2005, fresh SQR were evolved in consultation with PMO and SPG. Air HQ had been insisting since 1988 that requirement of service ceiling of 6,000 meters was an inescapable operational necessity to access many border areas. The same was also reiterated to the Defence Secretary in January 2004.
However, in a meeting convened by the Defence Secretary in May 2005, it was decided to lower the altitude requirement to 4,500 meters. Thus, the altitude ceiling was inventively fixed to facilitate the entry of AgustaWestland as EH-101 (AW-101) which could fly only up to 4,572 meters.
2. Cabin Height
Air HQ considered cabin height of 1.45 meters to be acceptable in view of the fact that flights undertaken by VVIPs are generally of short duration. Strangely, on the insistence of PMO/SPG, minimum cabin height of 1.8 meters was converted from a desirable to a mandatory SQR. It implied that no helicopter with lesser cabin height could be considered for procurement. Although Air HQ cautioned that making cabin height of 1.8 meter a mandatory SQR would lead to a single vendor situation as only EH-101 (AW-101) possessed it, the objection was disregarded.
It made the entire exercise of generating competition a farce as the process was skillfully contrived at the very outset to clear the path for the selection of AgustaWestland as a single vendor. Despite the fact that the earlier proposal had been aborted for resulting in a single vendor situation, the fresh proposal was deliberately perverted at the parameter formulation stage itself. Expectedly, the process led to the emergence of AW-101 as the sole compliant helicopter.
3. Reduced Competition through Limited Tendering
Whereas the stated purpose of issuing fresh RFP with revised parameters was to generate more competition, MoD reduced the number of invited vendors from the earlier 11 to 6. Consequently, instead of increasing competition, new RFP reduced it. When queried by CAG for this anomaly, MoD replied that limited tendering was resorted to due to security considerations and that the vendors had to be vetted from the intelligence angle. It defies logic. MoD did not clarify as to what fresh inputs it had received regarding their becoming security threats since the issuance of the first RFP.
Additionally, MoD justified the exclusion of five vendors on the ground that they had failed to comply with SQR in the earlier RFP. Again, it was an absurd logic. How could a vendor who was non-compliant in 2002 be considered unfit in 2006 as well? It was for the vendors to state whether they had been able to develop machines in the interim period to meet Indian requirements. Some feel that the competition was intentionally kept restricted to reduce threats to AgustaWestland.
4. Location and Conduct of Field Evaluation Trials
Only three vendors responded to the new RFP. The proposal of Rosoboronexport (Mi-172) was rejected for non-deposition of the earnest money and refusal to sign the pre-contract Integrity Pact. Accordingly, Sikorsky (S-92) and AgustaWestland (AW-101) were shortlisted for FET. FET is by far the most critical aspect of the entire procurement process as it aims to validate performance claims made by the vendors in their technical proposals. Attention needs to be drawn to two grave misdemeanours during FET.
First, DPP mandates that FET must be carried out in all conditions where the equipment is likely to be deployed. Even the new RFP had categorically stated that FET would be carried out in India in varying climatic, altitude and terrain conditions on ‘No Cost No Commitment’ basis. In their responses, both vendors had agreed to it.
Undoubtedly, all vendors prefer to have FET at their own locations as it saves considerable costs and helps them in channelising trials in the manner that suits them the best. However, MoD never allows it. Most surprisingly, Air HQ accepted the request of both the vendors to hold trials at their respective sites. CAG has highlighted the extent of the pressure put by the then Chief of the Air Staff (CAS) on the Defence Secretary and the Defence Procurement Board. It is not understood as to why CAS was so insistent on carrying out FET abroad. It was a gratuitous demand.
On being repeatedly coerced by CAS, the Defence Minister granted permission with great reluctance in December 2007. However, he cautioned that the trial process should be credible, technically competent and above board. He directed that the trial directive should give equal opportunity to both the bidders.
CAG’s report has revealed that the helicopter offered by AgustaWestland was still in the developmental phase and not ready for trials. Perhaps, it was the reason for its reluctance for FET in India. Undoubtedly, Air HQ was aware of it and decided to bail it out by obtaining sanction for FET abroad.
Secondly, FET is required to be carried out on the equipment being considered for procurement and not a substitute. DPP allows no deviations whatsoever. It is considered a sacrosanct necessity and DPP allows no dilution of this requirement.
In total contravention of the directions issued by the Defence Minister and the provisions of DPP, different methodologies were employed for the trial evaluation of S-92 and AW-101. Whereas FET in respect of Sikorsky was conducted in the USA on the same S-92 helicopter as mentioned in their technical offer, trials in respect of AgustaWestland were carried out in the UK on representative helicopters (Civ-01 and Merlin MK-3A) for different parameters and a mock up of the passenger cabin.
Most shockingly, AW-101 helicopter was declared fully SQR-compliant. CAG has rightly questioned the methodology of evaluating different aspects of equipment on separate platforms and hoping that the configured machine would satisfy all SQR. In other words, AW-101 was selected without subjecting it to real FET. Can there be a bigger travesty of the procedure?
5. Additional Requirement
One of the most intriguing aspects of the deal is an increase in the requirement of helicopters from 8 to 12. CAG has found no justification for the same. The Communication Squadron had been managing with a fleet of eight Mi-8 helicopters since 1988 and had never complained of shortage. More importantly, even the first proposal initiated in 1999 sought eight helicopters (five in VIP configuration and three in non-VIP configuration). Accordingly, the first RFP issued in March 2002 was for 8 helicopters only.
However, in October 2005, SPG insisted that the requirement be increased to 12 (eight in VIP configuration and four in non-VIP configuration). MoD accorded sanction for the increased number in January 2006.
CAG has found the procurement of additional helicopter to be unjustified that resulted in a totally avoidable excess expenditure of Rs 1240 crore. It has opined that the increased requirement was not commensurate with the low utilisation levels (29 percent) in the past. It appears that the requirement was increased only after it was reasonably ensured that the order would go to AgustaWestland through the tailor-making of SQR.
Two interesting points emerge. One, whereas it should be for the Air HQ to determine the requirement as it is its responsibility to make adequate helicopters available for the transportation of VVIPs, NSG was allowed to usurp this right. Two, PMO/NSG had been co-opted with the proposal since 1999. They never projected additional requirement till October 2005.
6. Faulty Staff Evaluation
Staff evaluation is the last stage of technical evaluation. It confirms full compliance of equipment with SQR. DPP specifically debars grant of waiver or amendment to SQR after the issuance of RFP in ‘Buy’ cases. CAG observed that both the vendors (Sikorsky and AgustaWestland) were not found fully compliant with SQR. However, the Staff Evaluation Report recommended the induction of AW-101.
When queried by CAG, MoD admitted that the non-VIP version offered by AgustaWestland was partially compliant with respect to two SQR. MoD claimed that the infirmity could be operationally overcome.
The above reasoning questions the sanctity of SQR. DPP defines SQR as minimum inescapable performance characteristics that are considered essential for the performance of equipment for the designated operational tasks. Any SQR that can be dispensed with or can be ‘overcome operationally’ should not have been included in the RFP in the first place. It is evident that special dispensation was accorded to AgustaWestland.
7. Frequent Deviations
To cater for unforeseen contingencies, DPP has empowered the Defence Minister to approve deviations on the recommendations of the Defence Procurement Board. It is an enabling provision that should be invoked in rare and exceptional circumstances.
In this case, CAG has observed numerous instances of deviation from the provisions of the DPP. Even the Ministry of Finance pointed out that the approval of the Defence Minister had been sought for eight deviations, including seeking additional commercial quotation from both vendors; non-compliance of two SQR by AW-101 helicopter; extension of delivery period from 36 to 39 months; reducing the validity period of the option clause from 5 to 3 years; incorporation of rear air-stairs in the four non-VIP helicopters; requirement of additional items; and deletion of active Missile Approach Warning System (MAWS).
As per RFP, vendors were required to provide a warranty of 3 years or 900 hours ‘whichever is later’. On the request of the vendors, MoD changed it to ‘whichever is earlier’, thereby diluting the warranty clause to its disadvantage. Similarly, MoD granted deviation to the vendor by reducing the validity of the option clause from 5 to 3 years. It gave undue benefit to the vendor. An option clause carries a cost penalty as the vendor has to keep his manufacturing facilities functional.
8. Commercial Negotiations
Perhaps, the most shocking aspect of the whole deal was the slapdash manner in which commercial negotiations were carried out with AgustaWestland. CAG has been scathing in its observations.
Every procurement proposal contains estimated cost of the whole deal. In order to arrive at a realistic cost, DPP mandates that the concerned Service Headquarters must obtain inputs from major vendors through the issuance of Request for Information (RFI). Such a requirement becomes inescapable in respect of systems that are unique in their configuration. Air HQ floated no such RFI. Consequently, their estimate of the likely cost was devoid of any logical foundation. It was a contrived and unrealistic estimate. The lapse is indefensible.
In single vendor cases, Contract Negotiation Committee (CNC) is required to establish a benchmark of reasonableness of price prior to the opening of the commercial offer. If the quoted price falls within the benchmark, price negotiations are dispensed with. CAG has observed that CNC carried out benchmarking of price in an unrealistic manner at 67.4 million dollars per helicopter (without passenger cabin modifications). Resultantly, the following absurdity emerged:-
a) Estimated cost in the proposal submitted by the Air HQ was Rs 793 crore which was duly approved by MoD in January 2006.
b) In September 2008 (in less than three years), CNC benchmarked the reasonable cost at Rs 4877.5 crore – more than six times the estimated cost.
c) Cost quoted by the vendor AgustaWestland was Rs 3966 crore. Thus, the benchmarked cost was higher by 22.80 per cent.
Even the Ministry of Finance had pointed out that the difference between the final negotiated price and the estimated cost to be abnormally high.
9. Offsets
As regards the fulfilment of offset obligations, CAG has observed major infirmities. Offsets were allowed to AgustaWestland which were not compliant with the DPP provisions, e.g. creation of infra-structure. Further, there was ambiguity in the offset contract regarding the type of services and export orders to be executed by IDS Infotech (Indian Offset Partner).
Surprisingly, work completed prior to the award of the helicopter contract was allowed to be included in the offset contract – AgustaWestland gave year-wise break up of work for the offset programme from 2011 to 2014 even though the work had already been completed by IDS Infotech well before 2010. It was totally in contravention to the offset policy directions.
Many IOP selected for the discharge of offset obligations were not even eligible. Worse, many programmes which were based on uncertain expectations were also included. These could never have been completed in the planned time frame. CAG noticed that offset obligations had remained unfulfilled up to August 2012. In short, the complete offset contract was handled in a slipshod, inefficient and subjective manner. Almost all critical provisions of the offset policy were flouted.
Finally
As has been seen above, every act of omission or commission was carried out to tweak the process. One can summarise by saying that the said deal is a fit case study – it provides a road-map for swinging a deal in favour of a chosen vendor:-
· Service ceiling was reduced to 4,500 meters as AW-101 could fly only up to 4,572 meters.
· Cabin height was fixed at 1.8 meters. It effectively made it a single vendor case as no other helicopter possessed that facility. Moreover, fewer vendors were invited to limit competition.
· Major deviations were granted to favour the vendor – all to the disadvantage of the buyer.
· Trials were held abroad on substitutes and mock-ups as the helicopter on offer was still under development. Thus AW-101 was declared acceptable without testing it. There cannot be a greater mockery of trials.
· Whereas the Air HQ had projected the likely cost to be Rs 793 crore in January 2006, CNC benchmarked it at Rs 4877.5 crore in September 2008. Something is terribly amiss.
Unfortunately, CAG report reveals only a tip of the iceberg. The whole deal is mired in irregularities and infirmities. One will not be surprised if the ongoing investigations reveal it to be a murkier affair than the much maligned Bofors.*****
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