Contracting with the MoD: stealing lollipops from babies - Broadsword by Ajai Shukla - Strategy. Economics. Defence.

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Monday 2 November 2009

Contracting with the MoD: stealing lollipops from babies

The Hawk assembly line in Bangalore. HAL claims that BAE Systems has failed to provide drawings, jigs, and parts according to the agreed schedule. BAE Systems denies the charge.

by Ajai Shukla
Business Standard, 3rd Nov 09

If India’s military eventually plumps for primarily American equipment, a major reason will be: soldiers, sailors and airmen are completely sick of being gypped through poorly-framed acquisition contracts that entirely favour the foreign suppliers.

Take India’s contract with BAE Systems, UK, for 66 Hawk Advanced Jet Trainers (AJTs), a billion dollar procurement that took 18 years to finalise. That contract, it now emerges, was framed so poorly that today --- with HAL Bangalore blaming BAE Systems for failing to properly transfer technology --- India’s Ministry of Defence can do nothing to twist BAE Systems’ tail.

The MoD now finds that the Hawk contract contains no provisions for liquidated damages in case BAE Systems defaults on its obligations. And, in an act of inexplicable generosity, India’s MoD paid BAE Systems an unprecedented “up-front” amount of 30% of the contract value; such a payment seldom, if ever, exceeds 15%. Now, with more jet trainers needed and the production line facing delays, fresh inquiries have gone out to global manufacturers, restarting procurement afresh.

Why do such fiascos routinely occur? Astonishingly, because India’s MoD does not have the legal experts needed for negotiating and framing complex defence contracts. The MoD’s forlorn Legal Cell, manned by 10-12 lawyers on deputation from the Ministry of Law, comes up during the framing of every defence contract against a battery of specialised contracting experts, an integral part of the establishment of every global arms vendor.

This year, the Indian MoD’s beleaguered and inadequate legal team will oversee capital expenditure of more than Rs 50,000 crores. When the MoD finalises its choice of medium multi-role combat aircraft (MMRCA), these less-than-legal-eagles will have to negotiate and frame a single contract worth Rs 50,000 crores. Supplementary contracts will be needed governing offsets worth half that value again.

Within the MoD, alarm bells have long been sounding. The Solicitor General and the Attorney General have been approached for help in accessing top-class legal advice. But, so far, there has been no response.

The complexity of a defence contract is virtually unparalleled. A “standard contract” is rarely feasible because the usage of each piece of equipment is radically different. Being an international contract, reaching agreement on arbitration is always difficult, especially considering confidentiality and non-disclosure arrangements. Defining “force majeure” is extremely important, especially when governments can invoke national interest during the execution of a contract. The MoD’s civil servants deal routinely with such issues, but without the benefit of solid legal advice.

India’s military has long suffered from flawed and inconsistent contracting, especially with Russian suppliers. Since the early 1980s, India’s strike corps --- the tank units that would spearhead a thrust into Pakistan during war --- have faced frustrating shortages of on-board fitment equipment that an ethical defence vendor would supply as a part of the contract. In an instance that generated much resentment, India’s first T-72 tanks were supplied by Russia without the tarpaulin covers that keep out dust and rain. When the military asked for tarpaulins, Russia demanded a supplementary contract, eventually supplying them at highly inflated prices.

In some contracts, especially those involving the supply of “strategically important” equipment, the vendor has the leverage to ignore his contractual obligations. Russia’s shakedown of India over the cost of the Gorshkov is an example of the limitations of any contract. Linking the Gorshkov sale with the transfer of nuclear submarine technology, Russia dismissed the initial price as “unreal, a mistake”, and demanded a renegotiated price. But, in most defence procurements, a good contract guarantees satisfactory supply as well as a healthy buyer-seller relationship.

US defence companies are confident that the experience of contracting with them --- with no hidden costs, superb product support, and a “partnership” approach towards the Indian users --- will make a big impact on the Indian military. So far, contracting with the US has been relatively smooth, but it is still too early to tell.

The MoD’s lack of capability in defence contracting is just one, especially worrisome, dimension of a broad systemic incompetence in procuring defence equipment. As a Group of Ministers in April 2000, numerous committees and, most recently, an excellent CAG report pointed out, the MoD has failed to put in place a functionally specialised acquisition organisation to handle a task that is clearly far beyond current capabilities.

But instead of a coherent system, procurement continues under 13 different agencies, each reporting to a different functional head. Contracts, after they are concluded, are managed by four different agencies with very little co-ordination among them.


  1. Looks like our tax money is being squandered by this inefficient MOD folks. Even an idiot would know that they need to put arbitration class and penalty clause for delays & non satisfactory service. Ignorance is not an excuse, it is a sin. All the stupids including the defense minister of Defense should be Hanged to Death in public and their properties should be confiscated to compensate for the liquidated damages that our exchequer had suffered to their incompetent decisions.

  2. Hi Ajai

    Hope you have recovered from dengue completely

    Very insightful, dint realize that such a small element could prove so crucial

  3. Your comments make India, especially the MOD wallas look very pathetic.
    If these type of defence acquisition fiascos have been going on for decades and the MOD babooos have not come up with competent legal talent from within the country, that too does not auger well for a country with a billion citizens.

    If legal experts who spealize in legal contracts without loop holes that could be exploited are not found in India, then GOI might as well look for such experts from the Commonwealth countries.

    Legal contracts involving governments or multinationals should be commercial documents where neither party should have undue advantage on the other.

    Your comment is an eye-opener in that the ordinary citizens are not aware of the shortcomings in government undertakings and we are quick to point an accusing finger at others without realizing that fault lies with us.

    Hope the MOD and GOI will not make fools of themselves in the MMRCA and other ongoing negotiations to purchase defence equipment.






  5. Why is it unethical to copy and reverse-engineer in such cases? MoD should have a clause that if a company fails to do the necessary ToT then MoD WILL do the reverse engineer.

    When it comes to ToT everyone is going to behave the same. Why put the halo on americans?

    Just because you don't have experience with someone makes him Innocent?????????????

  6. With India in the market for billions of dollars in Arms, reactor and other stuff, it would be economical to hire a law firm in the US that can also train the home grown team. Law firms in the US are cutting people like crazy. This may be a good time to sign a deal.

  7. I think the MOD has a vested interest in breeding such inefficiency. How else can they thrive in chaos and ensure kickbacks? Its the complicated network of command for such responsibilities coupled with the years that it would take to untangle it that ensures total lack of accountability and total insurance from prosecution.

  8. The note above brings to mind what China did - post 1976, they started sending professionals abroad for training who'd bring back that expertise to help China grow. And guess who were amongst the first to travel abroad? Lawyers...

  9. So much babudom that we have to buy even the tarpaulins from Russia, as if they do not make those in INDIA.

    Prasun ji, is there some clause written in the contract that if we use our own designed tarpaulins on the tanks, the warranty stands expired??

  10. Very good article. The practice of contracting for defense equipment in India seem to be stuck in the cold war era. If the Soviet Union was the only supplier of major arms, did it matter if the defense contracts were sophisticated or not?

    However, the flawed procurement practices of the MoD that may have survived the cold war are an albatross today. It goes without saying that it is time to reform. It's time to fight off the interest groups in the MoD so that our troops can fight off the enemy in the battlefield.


  11. Hi Ajai,
    Even abroad, indeed, MoD's arbitral body has the reputation to be favorable to foreign sellers, while generally defence contracts contain strict clauses (heavy penalties) in case of contractual failures/misconduct from the vendor.
    According to you, what is the root of the problem? Why government's "experts" are so lax?
    I doubt this is only a matter of education/training.
    Maybe this lax is a real government's policy: if you cut the contract, even if this one is a real mess, you remove bread from the mouth of PSUs... and PSUs need work and upgrades...

    Do you think that the DPP 2009 will allow to change things? It is only an opinion but I think this lax is mainly due to state opacity. Private companies are now allowed to bid in defence programs after proving they are able to absorb the needed technologies. If state companies are no more the only actors able to deal directly with defence acquisition programs, maybe the government will have less scruple to act legally when needed.
    Or is it hopeless???

  12. To Anon@00:30: Am unaware of the existence of MBT-specific tarpaulin covers that keep out dust, snow and rain. But camuflage-type covered shelters for MBTs, ICVs and for EME workshops have been produced in India since the 1970s by OFB, and Kolkata-based Bengal Tools Ltd, and by Shiva Engineering Works. All such shelters are insulated from weather-related vagaries.

  13. Prasun,

    Every MBT is issued with a 30 X 30 foot tarpaulin, which we tankmen use to cover it when it is parked for a considerable period of time outside its garage. In addition, an MBT comes with a canvas bivouac, which is used as shelter by the crew when out on training or operations.

    Both these have been issued since time immemorial.

    I don't know which camouflage-type covered shelters you are saying are produced in India. Since 1975, that I can personally vouch for, plain olive green canvas has in vogue with the Indian Army. Perhaps you're mixing it up with the Singapore or Malaysian armies.


  14. so it boys down to the same thing again. we need a proper strategic culture, so that a new kind of
    "defense" lawyer fraternity can be developed.

    This is a huge area and specialists and specialized courses may be in order.

  15. Ajai,
    I very much doubt if entities like the OFB, and Kolkata-based Bengal Tools Ltd and Shiva Engineering Works exist in either Malaysia or Singapore or anywhere else other than India, for that matter. FYI the illustrated and descriptive product range of these companies are clearly published in the Indian Defence Products Directory, published by the MoD's dept of Defence Production & Supplies.

  16. A major problem area is selection of right people for defining the requirement and there after selection of vendor and have a watertight contract.earlier the things were different and we were at the mercy of other developed country with attitude of take it or leave it.however with the economic advancement our leveraging capability has gone thing to do is to select a proper team of person to identify the requirement and then float global inquiries.As of now the team that is there in MOD is mostly of dead wood section officers who take pride in the fact that how many times they have returned back the file.More often than not one hears in informal discussions that how as a trial officer an equipment under trial which was rejected time and again got inducted despite the observations.It calls for review of the entire process.Even the persons chosen by army for WE directorate need to chosen carefully and put through a specialised training for the job .the inherent flaw in the selection process of officers for AHQ is that selection is based on clearing staff college. without adequate experince and knowledge in specific field they end up copying specs from various scientific journals while making GSQRs and the problems thereafter.

  17. What is unbelievable is the shameful allegation that an army personel was responsible for reducing the Air Forces buy of 8 squadrons down to just 2.

    After which he went on to work for the Israeli company.

    If India's dream of being a super power and putting to rest the problem of Pakistan is to come to fruition then we have to invest in indigienous system even though they might not be exactly what we want.

    The Akash might not be great against the 4.5 jets of the enemy but China and Pakistan have a large number of 3,4th gen plane, which will also need stopping. And which is where Akash could come in handy.

    The babu attitude of armed forces would have to go in order for all this to happen.


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