SHADY DOES IT

Herald
July 2001

The person least surprised by the massive corruption alleged against former naval chief Mansoor Ul Haq is the Auditor General of Pakistan.
He has seen much more

Disclosure and transparency have never been the mainstays of the armed forces public policy.  If spokesmen of the defence forces are to be believed, contracts for the purchase of defence equipment are signed after hectic deliberations and careful consideration, leaving no room for anyone – including the defence service chiefs – to manipulate the deals.  This myth, however, was shattered by the corruption case against former naval chief admiral Mansoor Ul Haq, which exposed the rot within the supposedly incorruptible defence services.

Interestingly, while Haq’s case may have shocked the general public, it came as no surprise to the office of the Auditor-General of Pakistan (AGP).  The department had long been investigating defence procurement deals and believes that Haq’s case is just the tip of the iceberg.  In reality, the entire process of finalising defence contracts is suspect and merits a high-level review.  According to inquires made by the AGP’s office, the armed forces have caused the national exchequer a staggering loss of 20 billion rupees between 1987 and 1999 under the head of defence purchases alone.  This does not include the million of dollars paid out in commissions and kickbacks, Mansoor Ul Haq’s Agosta-90B deal being a case in point.

The recent report prepared by the AGP, due to be taken up by the public accounts committee in the first week of July, details corruption and mismanagement in defence procurements to the tune of 7.159 billon rupees between 1990 and 1995 alone.  These losses were incurred due to faulty planning and unnecessary procurement.

The audit department recommends that the whole system of procurement in the armed forces be made subject to a high-level review by a committee consisting of members of parliament, top management of the armed forces, the ministry of finance and the auditor-general’s office.  According to the AGP’s report, the armed forces flout instructions from prime ministers and governments with impunity, striking highly suspect deals with manufacturing concerns of their choice and engaging agents for reasons that are totally non-transparent.  “Government instruction for procurement of defence stores should be followed in true spirit. It should be transparent from the record that the directorate general defence procurement tries to make purchase at the most economical rates.  There is a need to investigate each case for fixing responsibility for various irregularities and [the resultant] loss to the public exchequer,” the report states.

The directorate general of defence procurement (DGDP) is a joint services organisation working under the ministry of defence and the defence production division.  Its mandate is twofold: to procure all defence stores with economy and speed from indigenous sources as well as overseas suppliers and to formulate procurement policies for the purchase of defence stores.  It is also mandated to provide full administrative cover to the three directorates of procurement for the army, the air force and the navy.  The DGDP concluded 111 contracts between 1990 and 1995 of which 100 were selected for audit while the rest worth less than five million rupees each were ignored.  Interestingly, when the audit department sent its report to the ministry of defence seeking explanations for the funds lost, the ministry did not even bother to respond.

The report begins by scrutinising a 180.28-franc deal struck with Segam of France in February 1992 for upgrading the avionics of 16 Mirage-III aircraft.  The DGDP paid the French firm 6.5 million francs in excess of the contract amount without any apparent rationale.  Sources in the national accountability bureau (NAB) claim that the excess payment was actually made so that negotiators could receive commissions from the French company.  The deal was later expanded to include 24 more Mirages that were to be upgraded in France.  Sources in the NAB claim that relevant air force officials must have minted 20 million dollars from the phased transaction which was executed between 1992 and 1996.

Similarly, in June 1992, the DGDP purchased a BN-2T defender aircraft worth 2.45 million dollars along with spares from a British firm.

According to the contract, the seller was to arrange an aircraft transportation company for the aircraft’s delivery to Pakistan. However, in a surprise move in August 1995 the DGDP amended the contract, adding a new clause regarding shipment of the aircraft whereby another 2.362 million dollars-almost equal to the original price of the aircraft-were shown to have been paid to the British firm as transportation charges.  The AGP remains deeply suspicious of the amendment, arguing that non-inclusion of the shipment clause in the original contract supported the contention that the sellers had already included all such costs in the originally quoted price of 2.45 million dollars.  This case has been sent to the ministry of defence where it is still pending.

Another one million dollars were apparently misappropriated in the purchase of F-7P and FT-7P aircraft from China’s national aero technology import and export corporation (CATIC).  Along with the aircraft, the Chinese firm also offered 40 spare engines with life enhancing technology at the rate of 575,000 dollars per unit.  The DGDP jacked up the per unit price to 600,000 dollars, claiming that the extra 25,000 dollars per unit were being paid for the enhanced-life technology.  However, the audit department has found no evidence to prove that the extra money was paid for the enhanced life technology.

In October 1992, the services headquarters awarded proprietary suppliers status to a Chinese firm for the purchase of 125 mm shells for two different kinds of tanks.  In January 1993, the DGDP concluded a contract with the firm for 5,400 shells at the rate of 1,100 dollars apiece.  It also placed an order for 2,760 shells for the other tank type at 535 dollars apiece.  In May 1993, an agent of the ministry of defence in Belarus quoted 825 and 500 dollars respectively for the two kinds of shells.  But the DGDP went ahead with the contract with the Chinese firm resulting in an extra expenditure of 2.5 million dollars.

In yet another non-transparent deal, the DGDP invited tenders for the purchase of three aircraft for the army.  Learjet came up with the lowest bid at 4.695 million dollars and offered the latest aircraft manufactured in 1993.  But the DGDP concluded a contract with the American firm Cessna for 5.1 million dollars even though the Cessna planes were manufactured in 1990.

The next major case of frivolous spending recorded in the AGP’s report came up in April 1994 when four ship-borne long-range air surveillance radars were purchased from a Dutch firm.  The firm quoted 45.463 million guilders as the package cost which included allied equipment and services.  But once the deal was concluded, the DGDP ended up paying the company an excess amount of 1.455 million guilders.  Whether the firm actually received this money or not remains a mystery to this day.  But according to the AGP report, the fact that the company was not asked to refund the money lends credence to suspicions of foul play.

In June 1994, the DGDP signed a contract with a Swedish firm Bofors for the purchase of a torpedo system valued at a little over 146 million kronor equivalent to 877.218 million rupees.  In June 1996, the DGDP amended the contract to provide for redesigning and modification of the system, increasing its total cost by 1.5 million kronor.  According to the AGP report, this additional money was paid to Bofors despite the fact that the original contract stipulated that the required modifications Bofors responsibility.

In May 1995, the naval headquarters showed an interest in procuring test equipment for sonar calibration at sea.  A single tender was issued to a French firm which was declared a proprietary supplier and the firm promptly responded with quotation of 13.25 million francs on June 13.  The offer was negotiated and a contract was concluded on June 19 for 11.8 million francs.  Interestingly, the same company had quoted a price of 10.6 million francs for the same equipment in January 1995.  Still, the DGDP went ahead with the higher quotation causing a loss of eight million rupees to the national exchequer.

A year later, following several smaller but equally suspect deals, the DGDP concluded a highly non-transparent deal with a British car company on June 30, 1996.  The directorate agreed to buy 1,047 Land Rover defenders at 20,889 dollar apiece when the market value of the vehicle was around 13,000 dollars.  The price negotiated by the DGDP should have been even lower given that car companies tend to offer substantial discounts in big contracts.  But the DGDP ended up paying 8.25 million dollars over and above the market price of these 1.047 vehicles.  When the audit department tried to probe into the matter, the DGDP reluctantly provided them with the case file but only for a few hours.  The file was never produced again despite repeated requests from the audit department.  In its final report, the audit department concluded that non-provision of records to the audit department roved that the amount had been misappropriated.

These are only some of the 100 cases audited by the AGP in which audit officers have found genuine reasons to suspect foul play.  But misappropriation is apparently not the problem afflicting the DGDP.  The AGP has also identified losses worth 1.4 billion rupees that occurred primarily due to unnecessary procurements.  One typical example of this is the purchase of a civilian passenger aircraft in May 1991 by one of the defence services.  Bought for 37 million rupees, the aircraft was declared surplus after only seven months.

Similarly, in June 1991, the DGDP concluded a contract with a US firm for the procurement of spare parts, components and consumables for ships of American origin which the Pakistan navy had leased.  The initial value of the contract was three million dollars but it was subsequently modified to 13.25 million dollars.  At the conclusion of the contract, it was found that spares and other components worth 7.2 million dollars were purchased unnecessarily and were declared surplus by the navy.

In the same period, Pakistan navy purchased Stonefish mines from a British firm under a contract whereby the final deal was subject to the success of certain tests.  These tests on the mines and their related equipment were to be carried out in Pakistan coastal areas.  If the equipment was found to be defective the manufacturer was under contractual obligation to rectify the faults, failing which the contract could be cancelled.  The trials, conducted in October 1992 and March 1993, were considered unsatisfactory but the firm was neither asked to improve the system nor to refund the money.

Consequently, the entire amount of five million pounds as well as the 22 million pounds incurred on conducting the trials was wasted.

The kind of ostentatious conduct for which successive civilian governments have been severely criticised by the present military government is in ample evidence within the armed forces as well.  For example, on December 22, 1991, the DGDP acquired an executive Fokker aircraft for the chief of army staff at a cost of 2.074 million dollars.  The deal included two spare engines for the aircraft.  But the then COAS did not like the aircraft and the GHQ declared the aircraft surplus, to be disposed off by the DGDP.  However, no one showed any interest in acquiring the executive aircraft and it was ultimately handed over to the air force.

The armed forces also match the shortsightedness of their civilian counterparts when it comes to making expensive purchases.  In June 1992, the DGDP entered into a 6.2 million dollar contract with a US firm for the purchase of 47 structural life extension programme kits for 28 T-37B aircraft, which were on lease from the US air force.  However, the aircrafts lease agreement expired in June 1994 and the PAF decided not to use T-37B type aircraft anymore. Thus the kits for which Pakistan had paid 6.2 million dollars were rendered useless.

Similarly, the DGDP lost 992 million rupees in one go in June 1994 when it concluded a 24.8 million dollar deal with a Chinese company for three LY-60 surface to air missile systems.  These were to be installed on Type-21 frigates.  In August 1995, the technical directorate of naval weapons and equipment informed the DGDP that the proposed system was not feasible for Type-21 frigates.  Instead, the technical directorate said, the navy was contemplating another system on F22P Chinese fighters which were yet to be acquired.  The Chinese firm was asked to modify the system to fit the F22P fighters instead of the Type-21 frigates.  The firm, however, refused to do so, arguing that it had already gone more than half way with the construction of the design to match the systems with Type-21 frigates.  The systems were therefore purchased but as they could no be installed on Type-21 frigates, taxpayers ended up losing 24.8 million dollars in one fell swoop.

Yet another example of the armed forces lack of foresight relates to the repair of PNS Hunain, a combat ship leased to Pakistan navy by the US.  The repair and overhaul expenditure was initially projected at 1.2 million dollars but subsequently enhanced to 5.2 million dollars despite the fact that the US government had told Pakistan that it was not interested in extending the lease of any of its ships.  In December 1992, the deputy chief of naval staff ordered that the contract for repairs and overhaul should be cancelled but the DGDP ignored these instructions and released the money to the contracted firm.  Between 1992 and 1995, 8.474 million dollars were spent on PNS Hunain which was returned to the US in 1995.  Moreover, it could not be confirmed if the equipment and weapons system installed on all of the US ships were removed or not.

Just as one department scratches the other’s back in civilian governments when it comes to making a quick buck, so do the various military departments involved in defence procurement.  In May 1995, the DGDP contracted the Bahria Foundation to sell off 75,637 new items and spare parts belonging to the Pakistan navy, all of which had been procured in excess of actual requirement.  The approximate book value of these items, as estimated by a US firm Peterson Builders Inc., was 94.141 million dollars.  But instead of trying to explore the market to ensure maximum returns, the DGDP allowed the Bahria Foundation to sell off the entire lot for a more 37 million dollars.  Interestingly, the Bahria Foundation pocketed 50 percent of the sale proceeds as commission.  According to the AGP’s report, such high rates of commission have never been offered before.  In all, some three billion rupees were lost in the exercise.

The story does not end here.  The dozen-odd cases detailed here are only the tip of the iceberg and such practices are likely to continue within the armed forces until they are made subject to some sort of combined civil-military scrutiny.  The most unfortunate aspect of the whole affair is that while civilian governments can be kicked out of office for their perceived corruption and mismanagement, the armed forces remain completely protected from all forms of accountability.