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.