CAG on defence purchases: the Tehelka syndrome - Broadsword by Ajai Shukla - Strategy. Economics. Defence.

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Tuesday 22 May 2007

CAG on defence purchases: the Tehelka syndrome

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

by Ajai Shukla
Business Standard: 21st May 2007

It is no longer a secret that thousands of crores from the MoD budget have been surrendered over the 10th Defence Plan (2002-2007) because of slow defence procurement procedures. Former Defence Minister George Fernandes has openly declared that was because of the “Tehelka syndrome”, or the MoD bureaucracy’s reluctance to conclude contracts for fear of victimisation by “the three Cs”. That’s the CBI, the CVC and the CAG.

Now, the CAG, in a performance audit of MoD’s capital acquisitions between 2003 and 2006, has also examined the reasons for the MoD’s surrender of over Rs 3500 crores between 2003 and 2006. (Rs 600 crores were additionally surrendered on 31st March 2007). In a nutshell, the CAG has concluded that the structure of the defence acquisition organisation is inefficient, ignorant and ineffective and unable to expend what it is allotted. The unstated corollary is that more monetary surrenders are inevitable.

Explaining to the CAG why it has surrendered such large amounts (32% of the capital acquisition budget in 2002-03, the largest surrender) the MoD said, “due to the complexities involved in the acquisition process, sometimes the cases could not be finalised due to various factors such as delays in equipment trial evaluation, commercial negotiation and approvals.”

The CAG has dismissed that explanation outright. Its report points to an unimplemented Group of Ministers (GoM) report in April 2000, set up in the wake of the Kargil Review Committee’s report. The GoM recommended creating a separate and dedicated institutional structure to undertake “the entire gamut of procurement functions”, which would ensure closer participation of Armed Forces in decision-making, higher operational efficiency and cost effectiveness.

The CAG points out that defence acquisition is “a cross-disciplinary activity requiring expertise in technology, military, finance, quality assurance, market research, contract management, project management, administration and policy making”. It concludes that the existing system of acquisition being handled by unspecialized personnel posted for three-year tenures is simply not adequate.

The CAG has reinforced the GoM’s recommendations, fleshing it out with the following specific recommendations:

  • An integrated defence acquisition organisation be set up, incorporating all the specialisations involved in defence procurement under one head.
  • A special cadre of Acquisition Managers be developed by training suitable people in the different areas of acquisition.
  • Stability of tenure be ensured so that officials have the time to develop expertise in the acquisition functions they are performing.
  • An integrated electronic information system, connecting all branches of defence procurement, should be put in place to support the acquisition process.

Presently, the MoD’s procurement structures and systems, that were set up in October 2001 to deal with capital acquisitions includes an overarching Defence Acquisition Council (DAC) under the defence minister, and a Defence Procurement Board under the Defence Secretary, overseeing the procurement being carried out by a plethora of different offices, staffed by short-tenure officers, untrained in procurement, many of them conducting procurement in addition to other responsibilities.

The CAG report points out, “Thirteen different agencies, each reporting to different functional heads, are involved in the processing of procurement…. Even for post-contract management four different agencies were involved with very little co-ordination among them.”

The MoD responded to the CAG’s recommendations, stating that a Committee had been constituted to look into the re-structuring of the acquisition wing of Defence.

More cost-conscious defence organisations, such as the British MoD, have long ago handed over procurement functions to integrated and specialised procurement organisations. In the UK, the Defence Procurement Agency’s 4300 staff members buy $12 billion worth of military equipment each year, using Integrated Project Teams and a methodology they call Smart Acquisition. The DPA manages more than 13,000 contracts a year, ranging from the purchase of submarines to small parts for a field radio.

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