Of Matters Military: New Chief and the Challenges

Of Matters Military: New Chief and the Challenges

Major General Mrinal Suman

Human memory may be short but institutional memory is eternal and highly sensitive to all issues that affect its health and standing. Therefore, institutional history is most unforgiving and never condones any act of transgression that brings disrepute to its character. Indian army as an institution is proud of its non-partisan disposition and well-evolved merit-based promotion system.

Devious tweaking of the system by a parochial Chief to ensure elevation of his protégé will always be remembered as a black episode in the history of the Indian army. In a hierarchy based organisation like the army, such transgressions have a complex cascading effect – the complete line of succession for higher ranks has been distorted. Many deserving officers have got left out.  

End of May 2012 will see a change of guard at the apex of the Indian army. Assumption of the appointment by the Chief-designate will mark the triumph of parochialism over justice. Therefore, he will have to carry the burden of an acute guilt-complex. He knows that the environment is aware of the manipulations that facilitated his rise – the current incumbent has been deceitfully deprived of his full tenure and the careers of many brilliant officers who could have posed a challenge to his advancement were ruthlessly ruined. 

To be trusted is the greatest compliment that a leader can earn. It flourishes on the credibility that a leader enjoys in his command. On the other hand, partisanship is an impropriety of the worst kind and erodes credibility of leaders and undermines their standing in the eyes of the led. Being a beneficiary of partisan dispensation, the new Chief will have to work hard to prove his impartial credentials. One wonders as to how he would muster moral courage to exhort troops to trust the organisation and have faith in the justness of the system. For a military leader, it is the most unenviable situation to be in. 

Additionally, the new incumbent will be hard pressed to put up with many disconcerting situations. How will he face the outgoing Chief to accept the baton? Similarly, having usurped the appointment that should have rightfully gone to the Northern Army Commander, it will be tough for him to interact with him. 

The present Chief will be going out on a moral high. Despite a massive slander campaign launched by the purchased media and some inimical elements, his reputation as an incorruptible leader and a professionally upright commander remains intact. Having faced the wrath of a corrupt, manipulated and prejudiced environment, he will be long remembered for his attempts at cleansing the system. The new Chief will have to contend with his predecessor’s unblemished reputation and live up to it. 

Two serious cases are pending finalisation. A writ petition is pending in the Jammu and Kashmir High Court seeking an enquiry into his alleged involvement in a fake encounter that resulted in the death of an innocent person. He is also being accused of command failure during his tenure with the UN peacekeeping force in Congo and a court of enquiry is in progress. Conviction under either of the cases will make his position untenable. 

  

Finally, one wonders if it has ever crossed the mind of the Chief-designate that it would have been far more honorable to retire as an upright Army Commander than to become the Chief through questionable means. History will never forget the conspiracy and the subterfuge that facilitated his elevation – turning the national motto ‘Satyamev Jayate’ on its head. It should never be forgotten that when history judges key players in retrospect, it is always unsparing and ruthless in exposing their misdemeanors.  

Advisability of Allowing Indirect Offsets

Advisability of Allowing Indirect Offsets

Major General Mrinal Suman, AVSM, VSM, PhD

Although India’s defence offset policy was first introduced in Defence Procurement Procedure – 2005, detailed policy guidelines were issued in May 2006. Having decided to adopt an approach of gradual, incremental and phased application of offsets, India has been making changes in the policy during periodic reviews. However, the basic contours remain unchanged. Offset threshold and offset percentage have been retained at Rs 300 crores and 30 percent respectively.

Taking cognizance of the inputs received, Ministry of Defence (MoD) allowed offset banking in 2008. More importantly, the requirement of prior registration by Indian offset partners was done away with. As fulfillment of offsets was restricted to the export of defence products/services and FDI in defence industry/R&D, foreign vendors felt constrained. Acceding to their repeated requests, MoD expanded the scope of offset programmes to include civil aerospace, internal security and training fields in 2011, thereby offering vendors wider choice to fulfill their obligations. The term ‘defence products and services’ was replaced by ‘eligible products and services’. This was a major step. 

Items for internal security like arms and ammunition; protective equipment and vehicles; surveillance and night fighting devices; counter-insurgency equipment and gears; and training aids have since been added to the list of ‘eligible products’. Civil aerospace products like air frames, aero engines, aircraft components, avionics, raw material and semi-finished goods have also been included in the list. Similarly, the term ‘services’ for the purposes of discharge of offset obligations has been defined to include maintenance, overhaul, upgradation, life extension, engineering, design, testing of eligible products and related software or quality assurance services. As regards training, only training services and equipment have been made eligible for offset credits.  

Offsets and their Categorisation

Offsets are best described as formal arrangements of trade wherein a foreign supplier undertakes specified programmes with a view to compensate the buyer as regards his procurement expenditure and outflow of resources. In other words, the supplier undertakes programmes to generate benefits for the economy of the buyer country. It is a formal arrangement as it has inbuilt contractual obligations. Many consider offsets to be some sort of a leverage exploited by a buyer to obtain compensatory benefits.

Generally, offsets are categorised on the basis of their fields of activities, as follows:-

a)    Direct Offsets. Transactions that are directly related to the primary defence items or services being contracted in the main contract. Direct offsets in their simplistic form may include buy-back or co-production or licensed production or sub-contracts of the system and its sub-systems. In this arrangement, the seller helps the buyer produce the product or a part thereof and purchases it back for incorporation in all similar systems sold by him elsewhere in the world.

b)    Indirect Offsets. These are transactions that are not directly related to the defence items or services being exported in the main contract. Indirect offsets have a much wider scope and transcend other economic or social activities. They generally take the form of compensation trading. Reciprocal trade, counter purchase, switch trading, counter deliveries and parallel trade fall under this category. The importance of indirect offsets can be gauged from the fact that over the years a definite shift is discernible towards them. Today, indirect offsets outnumber direct offsets by two to one, as the buyer countries have realised their immense economic and social potential. 

Over a period of time, indirect offsets have been further sub-categorised to specify the areas they relate to. All indirect offsets that relate to defence goods and services are called ‘semi-direct’ or ‘indirect offsets (defence-related)’. On the other hand, all offset activities that span non-defence sectors are called ‘indirect offsets (non-defence related)’ or simply ‘indirect offsets’.     

As stated above, India allows offset programmes in defence, civil aerospace and internal security fields. Both civil aerospace and internal security are analogous to defence sector and are presently dominated by the public sector production agencies under MoD. Therefore, it will not be incorrect to state that India’s current offset policy accepts ‘semi-direct’ or ‘indirect offsets (defence-related)’. On the other hand, India does not allow indirect offsets that are not related to defence or defence-like fields.

Increasing Demand for Indirect Offsets

Reforms are an evolutionary and continuous process. MoD deserves credit for being open to receiving suggestions from the environment and incorporating changes in the policy after due consideration.

India is expected to import foreign military equipment worth USD 120 billion during the next few years. With offset percentage fixed at 30 percent, the quantum of offset obligations will be close to USD 36 billion. Foreign vendors are anxious about the capability of the Indian defence industry to absorb offset orders of such enormous magnitude. 

They consider inclusion of civil aerospace and internal security to be of peripheral importance as all items mentioned under internal security already appear in the list of defence products. Most of these items are produced by ordnance factories. As regards the civil aerospace sector, HAL (a MoD undertaking) occupies a monopolistic position in the Indian aerospace industry with a few private sector companies being fringe players.

Therefore, foreign vendors are pressurising MoD to widen the scope of offset activities to include fields that are unrelated to defence. In other words, foreign vendors are demanding introduction of offsets covering other social, industrial, infrastructural and economic sectors. For the sake of brevity, all non-defence related offsets will be referred to as indirect offsets for further discussion. 

 

Introduction of Indirect Offsets

Offsets do not come for free and entail considerable cost penalty. Cost penalty increases with an increase in the offset percentage demanded, albeit not in direct proportion. An offset requirement of up to 50 percent inflates the cost of the main contract by close to 10 per cent. It is an empirical estimate as the actual cost penalty depends on the type of offset programmes undertaken.

Indian policy has pegged offset percentage at 30 percent, with the sole exception of MMRCA deal where it has been raised to 50 percent. It implies that India would be incurring an additional expenditure on account of offsets to the tune of USD 12 billion (10 percent of the proposed USD 120 billion shopping list).  It is a colossal sum by all accounts. To ensure that commensurate benefits are obtained by the country and the funds are not frittered away, the complete gamut of offset process has to be duly streamlined.  

Before accepting indirect offsets, India must pay attention to the following five facets : - 

a)  Formulation of Policy. Offsets should form a part of an overall national endeavour with well-specified aims. A national policy needs to be formulated with the objectives that are sought to be achieved through offsets duly spelt out. The policy statement should also lay down offset thresholds and indicate the areas in which offsets are preferred. This is by far the most critical aspect as it is not the quantum of offsets but the relevance of the areas in which they operate that determines their usefulness.

b)   Creation of Required Structures and Organisation. An overarching authority is required to be set up under a nominated nodal ministry at the national level to oversee the complete gamut of offset activities. It should give ‘in principle approval’ to offset packages for all high value import deals and should consist of members from various ministries dealing with commerce and industry. It should also have representatives of Indian industry – both public and private sectors. Other experts from different fields should be co-opted as and when required. It should issue necessary directions for apportioning required weightage to direct and indirect offsets; prioritise areas/fields in which offsets should be sought; fix offset thresholds for different types of procurements; and issue guidelines to all concerned ministries for fixing offset percentages.

c)  Finalisation of Offset Programmes. This process starts with the issuance of tender documents in which requirement of offsets is specified. Once bids are received from the vendors, they are evaluated along with their offset packages. Discussions are carried out for seeking clarifications from the bidders, if required. Once the successful bidder is identified, a detailed dialogue is initiated with him to draw out a mutually acceptable offset plan, which is flexible, realistic, realisable and practical. The plan should spell out proportion of direct and indirect offsets, and identify fields for offset programmes with their multiplier values with inter se priorities.

d)  Negotiation of Offset Contracts. Negotiations are carried out with the vendor to discuss specific projects in each field to have an optimally balanced mix. Thereafter, expert groups are constituted for different projects and their reports included in the offset contract document. All aspects including levels of technology, value addition, penalty clauses, measurement methodology and time frame for implementation are spelt out in clear and unambiguous terms. To cater for unforeseen contingencies, offset contracts should have adequate inbuilt flexibility.

e)   Monitoring of Offset Programmes and Award of Credits. As offset contracts remain on the periphery, it is rightly said that an unmonitored offset programme never delivers. Therefore, it is essential that their implementation is closely and regularly monitored by a properly constituted oversight authority that can apply timely corrections to put a non-performing programme on track.  Offset credits should be awarded to a vendor only after ascertaining successful completion of a programme. Feedback is also collated to recommend changes in the policy provisions to improve efficiency of the offset regime. 

Although all facets are distinct, a certain degree of overlapping is natural. As can be seen, management of offsets requires multi-disciplinary expertise. This requirement becomes more pronounced in the case of indirect offsets wherein their functioning falls under the superintendence of multiple ministries. Therefore, it has to be a well coordinated effort at the national level. No single ministry by itself can identify and monitor offset programmes covering the entire spectrum of economic and industrial fields. 


Limitations of Indian Defence Offset Policy

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India has no national offset policy. Indian defence policy is a stand-alone and an exclusive endeavour of MoD. No other ministry is involved. In case MoD decides to accept indirect offsets, it will be faced with the following predicaments:-

·         Who will identify non-military fields in which indirect offsets should be sought?

·         Who will prioritise the identified fields and assign inter se weightage to them?

·         How will multiplier values be determined for each offset programme?

·         Who will provide necessary skills to negotiate offset deals pertaining to different sectors and sign contracts?

·         Who will monitor and validate successful implementation of offset programmes for the grant of credits?  

Needless to say, all the above mentioned issues are beyond the competence of MoD. It will have to depend on the expertise of the concerned ministries who are unlikely to respond at the behest of MoD. Therefore, an empowered coordinating authority at the national level is an inescapable prerequisite before considering acceptance of indirect offsets.

It must also be borne in mind that there are four major risks involved with indirect offsets. One, indirect offsets can result in a loss of focus, away from the main contract under MoD as inter-ministry coordination can be quite vexing and exasperating.

Two, as offset contracts have to be completed co-terminus with the main contract, any delay in offset programmes can adversely affect completion of the main contract. Worse, MoD cannot expedite indirect offset programmes as these would be functioning under the superintendence of other ministries. Imposition of penalty for default and its recovery by way of deduction from the bank guarantee of the main contract or the amount payable to the vendor under the main contract can vitiate the working environment.

Three, whereas offset cost penalty will be borne by the defence budget, benefits will not accrue exclusively to the indigenous defence industry. Finally and most worrisomely, indirect offsets are highly vulnerable to corrupt practices as they span multiple ministries and remain under peripheral supervision.   Allegations of malpractice in offsets can even endanger the main contract as MoD will be hard pressed to initiate punitive action against the delinquent vendors.

The Way Forward

Howsoever desirable indirect offsets may be India is not yet ready to accept them, as seen above. As indirect offsets would overlap all ministries, it will well nigh be impossible for MoD to interact with other ministries and obtain their enthusiastic participation. Therefore, to start with, India should evolve a National Offset Policy (NOP) with clearly spelt out aims and objectives. Policies applicable to different ministries should flow from it.

NOP should be pragmatic with long term applicability and sufficient inbuilt flexibility to cater for changing situations. It should contain directions for apportioning weightage to direct and indirect offsets along with norms for fixing offset threshold and offset percentages. It should also lay down guidelines for approving, validating, discharging and measuring offset contracts. 

Union Commerce Ministry should be tasked to act as the nodal ministry for offsets in all fields. Necessary structures and organisations will need to be set up both at the Commerce Ministry and other concerned ministries. All high value offset packages of Rs 1,000 crores and above should be handled by the Commerce Ministry whereas powers to manage packages of lesser value should be delegated to respective ministries. 

Offsets should not be viewed in isolation as one-time agreements, but as an important and integral element of long-term national policy. To derive full benefit from offsets, it is absolutely necessary to understand the dynamics of offsets.  Inappropriately selected and poorly monitored offset programmes invariably prove to be highly wasteful in national resources and uneconomical for their value.   

Finally, India possesses enormous leverage with its huge shopping list. This power should ideally be used to fill a critical technological void or fulfill an important economic need. Offset policy should be in consonance with the national economic objectives and the immense potential of offsets should be exploited as engines of national economic growth and technological upgradation of the indigenous defence industry.

Vulnerability of FMS Route to Abuse

Vulnerability of FMS Route to Abuse

Major General Mrinal Suman, AVSM, VSM, PhD

Two developments have brought the issue of Foreign Military Sales (FMS) deals under the public spotlight once again. First, there were reports in the press stating that the Army Chief had drawn the attention of the Government to serious maintenance problems being faced in the earlier FMS deals. The second development pertains to reported overpricing of Boeing C-17 heavy lift transport aircraft. Press reports allege that the US had pegged the value of the deal at USD 4.1 billion during President Obama's visit to India in 2010, at a unit cost of USD 410 million for ten aircraft. Considering the sale price of USD 300 million per aircraft charged from Australia, the total package should not cost India more than USD 3 billion. Worse, while notifying the US Congress, the US has pegged the value of the proposed deal at USD 5.8 billion. It implies that India will be over-charged by 37 percent if the package cost is USD 4.1 billion and a whopping 93 percent if hiked to USD 5.8 billion. 

India has been increasingly resorting to purchases through FMS route. Starting with the procurement of 8 AN/TPQ-37 Fire Finder counter-battery artillery radars in 2002, India has found FMS route to be a convenient mode to bypass the complexities of the Defence Procurement Procedure. More importantly, being government-to-government deals, they are projected to be above board and free of all extraneous influences. Other major deals signed under FMS route include purchase of six C-130J Hercules transport aircraft for USD 962 million and naval vessel Trenton for USD 88 million. 

As two major deals for C-17 aircraft for the Air Force and 155mm Light-Weight Towed Howitzers for the Army are presently under advanced stage of negotiations, it is time a closer look is taken at the intricacies of FMS process. 

Attributes of FMS Route

FMS is one of the two common routes adopted by the US to sell military equipment to foreign countries; the other one being Direct Commercial Sales (DCS), under which defence manufacturers are free to sell their product to foreign buyers, albeit subject to the licencing regime. Under DCS route, US companies have to compete with producers from other nations to bag orders. Both technical and commercial aspects dictate selection of the winner. Therefore, US manufacturers are forced to price their product very competitively. Thus, DCS is a tough and laborious process – more struggle and less profitability. 

On the other hand, FMS route provides an ideal opportunity to well-networked US producers to bag orders without much sweat by piggyback riding on US government’s initiatives. Further, in order to exercise stricter export control, Security Assistance Management Manual provides for designating certain items of critical nature as “FMS only”, thereby increasing incidence of FMS deals. 

FMS is a five stage process, as follows:-

a)    Prospective buyer nation submits a Letter of Request (LOR) to the US Government’s Defence Security Cooperation Agency (DSCA).

b)    After notifying the US Congress of possible sale, DSCA sends a Letter of Offer (LOO) to the requesting government. It contains all terms and conditions of the proposed sale.

c)    The buying government is required to submit a Letter of Acceptance (LOA) along with the initial advance.

d)    A legal contract is signed.

e)    The US Government supplies the item either from its own existing stocks or after fresh procurement from the producer.

For buyer nations, FMS route has both positive and negative attributes. These are summarised below:-

a)    Benefits of FMS Route. Being government-to-government transactions, a certain degree of sovereign guarantee is inbuilt in the system and quality-cum-performance parameters are assured. There are no middlemen. As the US Government procures the item as per its normal procedures, the buyer nation is saved considerable effort. Further, the US Government is in a better position to provide logistic, training and exploitation support since the item is already in use with its forces. It is an ideal route for the US allies who have common operational doctrine and where inter-operability of equipment is an essential consideration.

b)    Weaknesses of FMS Route. The equipment would have been developed specifically for the US forces, keeping in mind their capabilities, doctrine and envisaged operational exploitation. A buyer country has to accept the equipment as it exists and cannot evolve its own parameters – the equipment may not match its requirements fully. Worse, the US Government insists that the buyer nation signs the contract on the dotted lines and does not entertain any suggestions for alterations. It is a ‘take it or leave it’ situation for a buyer.  

An Appraisal 

This article endeavours to examine FMS procedure to ascertain if FMS deals are really as fair, transparent and cost-effective as claimed.  

a)    Probity and Manipulation

The single most important reason cited repeatedly in favour of FMS route is the total absence of middlemen as transactions are directly between the two governments. This is a most fallacious logic as it totally ignores the activities that precede selection of FMS route by a country. The whole process of coercing a prospective buyer nation to abandon open competition and seek US equipment on a single vendor basis is carried out in an apparently innocuous but surreptitious manner. 

First, through a large number of pro-active corporate executives, deep inroads are made into the decision making apparatus through social networking. Repeated presentations are made to convince the key government officials of the unmatched superiority of the US equipment. All possible stratagems are employed to bring dissenting officials around. Even promises of facilitating grant of green cards to their progeny are dangled. To obtain favourable media coverage, members of think tanks and media are taken to visit their factories and ‘looked after’. Efforts are made to have every important functionary on board (or in pocket) so that no objections are raised at any level once the proposal to opt for FMS route gets activated. It is a painstaking and time consuming task but considered highly rewarding by big players.

Secondly, all efforts are made, both overtly and covertly, to torpedo every attempt at procurement through competitive route. Overt means employed are representations to the government, hard-selling by visiting US dignitaries and seeking intervention of known pro-US Indian officials. Covert means include sowing seeds of doubts about the competitors in the minds of public through planted stories and third-party complaints. The aim is simple – eliminate all competition by having them blacklisted through selective leaks and innuendoes. Slowly a stage is reached when the buyer nation is forced to opt for FMS route for its emergent requirements. Has not the case of 155mm Light-Weight Towed Howitzers followed a similar path?  

  

b)    Pricing Conundrum

Advocates of FMS also claim it to be a cost-effective option as the buyer nation gets equipment at the rate at which it is purchased for the US forces. Unfortunately, it is a misrepresentation of facts. The pricing process is highly exploitative, subjective and cloaked in secrecy. The following points need to be highlighted:- 

·       A buyer nation can never get to compare prices of an item available through FMS and DCS routes, thereby getting deprived of an opportunity to opt for the cheaper route. No purchaser can obtain DCS price quote after submitting LOR under FMS. Similarly, all DCS negotiations have to be aborted by a purchaser before submitting LOR. It is a highly unreasonable arrangement and contravenes norms of fair trade practices.

·       The US Government imposes additional handling charges for sales negotiations, case implementation, contract negotiation, contract management, financial management and allied expenses. In other words, the final FMS price includes administrative surcharge and contract administration services costs. Additionally, Arms Export Control Act requires a charge for a proportionate amount of any nonrecurring costs of research, development and production of major defence equipment sold through FMS.

·       The buyer nation gets to know the final price of equipment only after its delivery. Prior to that, only estimated price and payment schedules are intimated to the buyers.

·       Under the provisions of Defence Federal Acquisition Regulation Supplement of May 1995, the US government allows its defence producers to recover ‘offset costs’ from buyer nations. However, the producers are required to factor it in the unit cost of main equipment and not mention it separately. This effectively hides the true value of offset cost-penalty from the buyers and provides an avenue for undue price hikes. 

  

c) Contractual Blackmail

 

It is a standard trade practice that both the seller and the buyer negotiate various terms and conditions to arrive at mutually acceptable provisions for inclusion in the contract. In the case of FMS, it is a unilateral process. A copy of the pre-drafted contract is handed over to the buyer nation for signing. No questions or changes are entertained. Needless to say, every sentence of the draft is loaded in favour of the US Government.  Provisions pertaining to offsets and technical support are symptomatic of asymmetrical contractual obligations. Worse, no assurance against future embargos/bans is provided.

While proclaiming a hands-off policy with regard to offset practices, the US Government allows its producers to recover offset overheads from a buyer nation. Yet, it does not guarantee fulfillment of offset obligations. A purchaser country is advised to negotiate a separate offset agreement directly with the prime contractor. It is a strange way to abdicate responsibility. As payments against the main contract are made directly to the US Government, the buyer nation cannot withhold them in case of offset defaults. 

Two important points relating to technical support for the equipment sold under FMS have also been a cause of disquiet. One, in the initial package, excessive quantities of support equipment and spares are included. As a buyer country is not fully conversant with the equipment at the time of purchase, it has to accept whatever is included in the package. It is only at a later stage that it realises their futility. The second point is about the lack of guarantee of continued US support. As has been India’s experience with fire finder radars, back up technical support is not as forthcoming as it should be. Spare parts take unduly long to materialise, keeping critical equipment in off-road state for disquietingly long periods. 

The Way Forward

India’s much hyped defence procurement procedure is based on the fundamental principle of transparency, free competition and impartiality. Every FMS deal violates the said principle. There is a total lack of transparency as no Request for Information is issued to the environment to let possible competitors know of the impending procurement and facilitate their participation. LOR is sent to the US Government without any publicity. In many cases, the information becomes public only when DSCA notifies the US Congress of the possible sale. By then it is invariably too late for other vendors to intervene. 

FMS is a non-competitive and single vendor process wherein no tenders are issued to generate competition by seeking techno-commercial bids from multiple vendors. FMS deals effectively circumvent all competition. Apparently, any process in which a single vendor is pre-selected for the placement of orders can never be impartial. 

It is not that FMS route should be totally shunned. It should be adopted to procure cutting-edge equipment that is unavailable from any alternate source. FMS route also acts as a tool of foreign policy to develop closer strategic synergy with the US. However, India must curb its penchant for resorting to FMS route to circumvent convolutions of DPP and finding an easy way out to affect procurements. Importantly, India must demand a right to negotiate contractual terms to safeguard its interests. 

Finally, undoubtedly FMS route is cleverly exploited by experienced US manufacturers to bag multi-million dollar deals with the active help of the US Government. To coax Indian decision makers to shed open competition and opt for single vendor FMS route requires considerable persuasion skills, networking and even ‘sweeteners’. Non-US companies allege unfair tweaking of procedures and manipulation of policies to their disadvantage. They are convinced that the whole process is not above board.