The arrest of the former air chief S P Tyagi is unprecedented. Never in the annals of India’s armed forces had any service chief been arrested on grounds of corruption. The AgustaWestland contract, aside from the kickback issue, also exemplifies how not to process an acquisition case and sign a contract. Details available in the public domain are disturbing; they bristle with infirmities, breaches, infractions — so glaring the deviations are that anyone familiar with the Defence Procurement Procedure-2006 (DPP-2006) will blanch how it ever happened. Yet, it did.
A sequential recap would be apt. The Indian Air Force, tasked with the air transportation of VVIPs, proposed replacing its ageing helicopters with more-advanced ones on operational grounds. The initial Request for Proposal (RFP) 2002 issued by the Ministry of Defence (MoD) for the replacement of Mi-8 helicopters stipulated a mandatory altitude requirement of 6,000 metre.
Only one helicopter, the EC 225 of Eurocopter, fulfilled this benchmark while the EH-101 helicopter (later renamed AW-101) of AgustaWestland didn’t. The first RFP was cancelled due to a single-vendor situation. Far from broad-basing the Services Qualitative Requirements (SQRs), in the revised RFP 2006 the operational altitude requirement of 6,000 metres considered inescapable in North and Northeast was reduced from 6,000 to 4,500 metres.
A new requirement of 1.8 metre cabin height too was introduced. Rather than averting a resultant single-vendor situation, the firms merely swapped places: while the AW-101, earlier ineligible, was found eligible, the EC 225, earlier eligible, was found ineligible. Worse: the 2006 RFP with revised SQRs was issued to only six vendors as opposed to 11 in 2002.
To compound it further, the field evaluation trial (FET) of AgustaWestland’s AW-101 (still under development) was done on representative helicopters Merlin MK-3A and Civ-01 and mock-up of passenger cabin, whereas actual S-92 helicopter of Sikorsky was evaluated. Even the evaluation of helicopters was done abroad and not in India as per the 2006 RFP — another instance of deviation from the procedures.
The Contract Negotiating Committee (CNC) determined the reasonableness by relying on the basic price of AgustaWestland helicopter as $27 million per helicopter in 2000, as available on the internet. It granted cost increments of $2 million for the new engines; a 15 per cent increment on the cost of the basic helicopter for development and certification amounting to $4.4 million.
Thus the cost of the basic helicopter came to $33.4 million; with 3.5 per cent inflation rate from 2000 to 2010 (the base year of delivery) added, it came to $47 million. An amount of $20.4 million was further added for additional fitments/fixtures like glass cockpit etc and it was benchmarked at $67.4 million per helicopter. It troubled the CAG, which found no logic to support the base price reasonableness of $27 million adopted by the CNC for 2000 when the RFP itself was issued in Sept 2006. Interestingly, as per the internet, the basic price of AW-101 VIP helicopter was $18.2 million in 2010!
The benchmarked cost worked out to `4,877.5 crore against the estimated total project cost of `793 crore approved by the MoD in January 2006, six times more the estimated cost. The vendor offered `3,966 crore — a good `911.5 crore lower than the benchmark cost of `4,877.5, that was 22.80 per cent higher than the offered price!
The Ministry of Finance (MoF) too pointed out this alarming difference. The MoD’s response was bereft of substance, attributing the benchmarked cost to lack of the past procurement of such helicopters by the IAF to arrive at a comparative base! This was hollow when para 15 of DPP-2006 prescribes that the vendor should be asked to provide all elements aimed at structuring the costing of the weapon and equipment system to help formulate an all-encompassing commercial offer format at the RFP stage. The CAG found no such request made. This is unforgiving, more in a case where, as per the MoD’s admission, they had no clear reference base to arrive at a realistic cost. The CNC’s benchmarking was flawed and inflated — far higher than the vendor’s offered price, and eliminating any room for negotiation.
Other issues too suck. One relates to warranty of three years/900 hours which was changed from “whichever is later” to “whichever is earlier”. The MoD hides behind the defence minister’s approval for this deviation, averring quizzically that helicopters were practically not likely to fly more than 900 hours in the first three years. This flies in the face of the policy page of the Communication Squadron of the Air headquarters which inter alia specifies that a helicopter is required to fly 540 hours per year and thus a total of 1620 flying hours in three years.
Also, the MoD had provided for spares and associated equipment from the vendor on the annual flying task of 540 hours per year. Thus, as the CAG says, by accepting warranty only for 900 flying hours/three years “whichever is earlier”, flying risk of 720 hours (1,620-900) for spares wasn’t covered for each helicopter, thereby diluting the warranty clause to the IAF’s disadvantage.
The MoD equivocates here too: that the change in the term “whichever is later” was open-ended and the warranty limit of three years would occur first. If the term was open-ended, why then include it in the RFP? The same goes for the reduction in the option period from five to three years in favour of the vendor. If the AW-101 VVIP helicopter was a limited-production version, why include that? Even the MoF found the financial cost of option infructuous.
The MoD’s contention that the option clause is a standard term of contract under DPP-2006 and hence was included shows how mindlessly this was addressed by the CNC. Similar is the inclusion and later deletion of dual colour Active Missile Approach Warning System requirement. Equally the need for four additional helicopters beyond the eight at the instance of SPG costing `1,240 crore is open to questioning, given the past low utilization level (29 per cent) over 11 years (1999-2010) of the existing eight helicopters. What appears unconscionable is the impugning of the spirit of para 75 of DPP-2006 that permits deviation with approval of the minister. This is meant to be a one-off case for certain exigencies subsequent to the issuance of the RFP and not a handmaiden to seek the minister’s approval with the frequency as in this case.
The MoD processed the case and the MoF demurred on many issues. When it went to the Cabinet Committee on Security, the CCS, after taking into account the issues raised by MoD and MoF, accorded its approval, inter alia stating that it’d taken more than three years to complete the tender and field evaluation processes and it would take another three years for the helicopter to be made available; and if it were to be repeated, it would be too long and not acceptable from the VVIP security angle. In 2010, the MoD signed a contract with AgustaWestland at a cost of `3,727 crore.
What’s most puzzling is the way the CNC and the MoD’s acquisition wing processed the case. The CNC consists of three managers — for acquisition, finance and technical — at the joint secretary level responsible to examine all aspects relating to their respective spheres of expertise. The managers report to the director-general (acquisition). The Services’ headquarters too are inextricably associated especially on technical matters, much as the defence finance division is on financial. The Defence Procurement Board is chaired by the defence secretary with the financial advisor defence services (FADS), D-G (Acquisition), AS & FA (Acquisition), all three vice-chiefs, and the chief of integrated staff committee (CISC) among others as members. Similarly, the Defence Acquisition Council headed by the minister too is composed of three Services chiefs, defence secretary, FADS, D-G (Acquisition) and the CISC.
How and why such serious breaches of procedures happened is hard to comprehend. But it’s an opportunity to fix responsibility and bring the guilty to book so that the scrapped AgustaWestland case becomes an exemplar and rings down the acquisition corridor as “what-not-to-do” in all future cases.