Business Today Net Special

AUDITSCAN
Long Ago in Glasgow!

By M.V.Ramakrishnan

Extreme permissiveness in Defence purchase operations is the raging sensation of the day. But far from being a new phenomenon, it is a long tradition with very deep roots stretching back to the distant past, far beyond even the Bofors affair. Long before investigative journalism hit the world's headlines with Watergate, investigative auditors belonging to the organization of the Comptroller and Auditor General of India (CAG) had been discovering serious anomalies in the Government of India's export incentive schemes and purchase operations abroad. But such exposures did not usually capture the close attention of the media. It may be significant today to recall one such context, which concerned the functioning of the Indian Frigate Project Office (IFPO) in Glasgow, Scotland.

Objective: - Competition

IFPO had been set up in 1965 in Newcastle-upon-Tyne on the premises of the Messrs. Vickers Armstrong, who were, in collaboration with Yarrow Shipbuilders in Glasgow, rendering full technical aid to India for the construction of Leander class frigates in the Mazagaon Docks, Bombay. In the beginning IFPO had served the purpose of being an effective link with the British firms providing technical aid. But after the technology was transferred and Mazagaon Docks began to build the Godavari class frigates of Indian design (broadly but not wholly based on the Leander model), IFPO's basic objective also underwent a transformation. It was no longer meant to be a mere unit for technical liaison, but was perceived as an instrument for undertaking effective market research and identifying competitive sources of supply.

IFPO was shifted in 1970 to Glasgow, where Yarrow Shipbuilders provided it with all the facilities, including excellent telecommunications and instant access to all-major sources of supply anywhere in the world. IFPO's new mission was to set up a lively competitive ambience all over Europe for the procurement of vital components and systems required for the shipbuilding effort in India, and that was the sole justification for its continued existence. It was manned by a team of competent naval officers and engineers, led by a dynamic Commodore in charge as Controller, IFPO.

Reality: -Suppression

In actual practice however, IFPO was functioning in a remarkably ineffective manner, merely dealing with routine paper work relating to contracts. All major procurement action was being taken directly by the Naval Head Quarters (NHQ) in New Delhi. IFPO was seldom asked - or even allowed - to undertake any extensive or intensive market research anywhere in Europe, or Great Britain. It had no role to play at all in the vital matter of identification of potential sources of supply in respect of major items of procurement. In the event, several serious omissions came to light in the course of certain innovative audit investigations based on the auditors' own market research. Among the significant revelations were the following: -

Brown Brothers, Edinburgh, had supplied a fin-type <I>Denny-Brown <I> stabilizer for all the six Leander class frigates built by Mazagaon Docks. Justifying the continuation of IFPO in mid-1977, the Controller had specifically cited this as a typical example of the kind of equipment that would need a thorough market research. Reason? -- The firm had changed its model three times in ten years and it was desirable to look for other sources for the Godavari class frigates under construction. But NHQ instead of using IFPO's services to survey all potential sources decided in late 1977 to place an order with Brown Brothers for the same type of stabilizer for three ships on the basis of a single-source quotation.

Even the limited market research undertaken by the CAG's audit officers revealed that another reputable British firm, Vosper Thorneycroft of Portsmouth, had also been specializing in the manufacture of fin-type stabilizers for naval vessels, and had supplied the item for more than 20 Leander class frigates of Britain's Royal Navy. This firm was never asked for a quotation. Before the contract with Brown Brothers was finalized, Vosper Thorneycroft had voluntarily approached IFPO, but the latter was nowhere in the picture and the offer simply went unnoticed. Naval HQ's explanation for the omission was flimsy and superficial.

Another important context where considerable scope existed for creating a competitive set-up was the purchase of engine-order and propeller-order telegraph for the three ships under construction. The firms Evershed and Vignoles had supplied the telegraph system for the Leander frigates. There were major design alterations in the on-going cases, and it would have been useful to call for competitive bids. But Naval HQ decided to buy the system for all three ships from Evershed and Vignoles, completely ignoring another firm -- Kelvin Hughes of Ilford -- which had the capability to supply this item. And when the auditors went on discovering such serious omissions and asking ruthlessly pointed questions, the Indian Navy's explanations and arguments became more and more frivolous and inconsistent, as in the following cases: -

Contradictions

One of the contexts in which wide market research in Europe would have been extremely useful was the purchase of sewage treatment plants for the ships under construction, because this was an entirely new item of equipment that hadn't been fitted in the old Leander class frigates. Also there were several potential suppliers in the UK, Germany and Scandinavia. But without even consulting IFPO, Naval HQ purchased the equipment in 1977 from a British firm called Hamworthy on the basis of a single-source quotation. When asked to explain the reason for ignoring several other competent sources in Europe, the reason cited by NHQ in 1981 was that they were not British firms -- which totally contradicted the very argument for continuing the frigate project office in Glasgow! And NHQ had no answer at all when one asked why it had also ignored another British firm called Weir Pumps, in Glasgow where IFPO itself was located and was actually supplying similar equipment to Britain's own Royal Navy.

And what had NHQ done in the case of seawater desalination plants? It had decided to buy three ship-sets of this equipment in 1978 from a Dutch firm called Stork Werkspoor, without even calling for quotations from a well-known British firm -- Caird and Rayner of Watford. This firm had supplied equipment of identical specifications to various Navies of the world including the Indian Navy. In UK, the Royal Navy had chosen this firm for supplying such equipment for several frigates, destroyers and command cruisers. The Ministry of Defence had included its name in the authoritative List of assessed Contractors. The Indian Navy had no explanation at all for ignoring this very reliable British source of supply!

Contempt for Propriety

In the absence of any encouragement to undertake market research - and, indeed, in the light of the apparent discouragement -- IFPO's own capability as an instrument of market assessment was tending to get severely blunted. So much that it had not even made an attempt to compile an elementary directory of potential suppliers of important systems.

When confronted with these disturbing questions and asked to clarify the precise contributions made by IFPO, the Controller came up with the strange argument that the limited resources of his office did not did not permit checking of credentials or carrying out market research as an on-going activity. The poor fellow just couldn't confess that he wasn't being allowed by NHQ to undertake any worthwhile market research, of course!

The significance of this intriguing scenario went far beyond the actual money value of the purchases made for the frigate project, which was very substantial. For what it really indicated was the great contempt for propriety governing the whole set-up of Defence purchases abroad. In the case of purchases of weapon systems and aircraft the financial implications of such indifference would be truly colossal, and the mischief played by middlemen would only be one of the manifestations of the overall malaise.

Challenge for Auditors

It is an encouraging sign that last year the Government of India, on its own initiative, had directed that all major Defence purchases costing more than Rs. 75 crore should be referred by the Defence Ministry 'suo moto' to the Comptroller and Auditor General of India and the Central Vigilance Commissioner for urgent scrutiny.

The aspect concerning middlemen is normally beyond the purview of the CAG. But a vital question, which arises, is whether his organization is fully geared up today for making urgent and effective audit scrutiny of all the technically complicated cases referred to it. There is a need to set up extremely skilful investigative teams of auditors for this purpose, who must be encouraged to specialize in this field and to adopt innovative audit techniques for evaluating the complex and intricate aspects of the transactions they review. Surely this constitutes a great challenge for the CAG of India and his audit officers!

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