Thursday, 21 June 2018

Apache “copter scam” is fake news: allegation of overpricing, even before price fixed


By Ajai Shukla
Business Standard, 21st June 18

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Caught in the rotor blades

·      The deal to buy the AH-64E Apache is a particularly complicated one: the basic helicopter, including the airframe, is a direct commercial sale (DCS), which New Delhi has negotiated directly with Boeing

·      However, the engines, fire control systems and radar, key avionics and weapons and missiles are being bought under foreign military sale (FMS) category, which is negotiated with the Pentagon
 

·      The sale amount the US government notifies to the US Congress is a “not to exceed” estimate, while the contract is almost invariably signed for a significantly lower amount

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Washington’s June 12 notification to the US Congress informing it that the US government is proceeding with the sale of six Apache attack helicopters to India for an estimated $930 million dollars has evoked allegations of wrongdoing.

Noting that this amounts to $150 million for each Boeing AH-64E Apache helicopter, National Herald wrote that Israel paid less for its F-35A fifth generation fighters. Observing that the price “seems outlandish”, the newspaper wrote: “In 2017, Boeing and US Army signed a $3.4 billion contract for 268 AH-64E Apache helicopters at a unit cost of about $13 million per chopper, albeit remanufactured with a few newly built.”

On June 13, activist Prashant Bhushan tweeted: “Modi gov[ernmen]t to buy 6 Apache 64E [heli]copters for 930M$ (Rs 1000Cr each). US army bought 35 of the same helicopters 3 yrs ago for 691M$ (Rs 120 Cr each). Modi pays 8 times market price and sends >5000Cr of our money down the drain! Kickbacks?”

Business Standard has investigated these allegations around the Apache purchase and found that the uproar stems from a lack of understanding of the way America processes foreign arms sales.

Such sales fall under two main categories: In the Foreign Military Sales (FMS) category, the US Department of Defense (the Pentagon) acts on behalf of the customer, negotiating costs with the US vendor, usually benchmarked at the price the vendor last sold the equipment to the US military. Very often, the foreign customer gets the equipment cheaper than the US military did, since the production line would have been amortised earlier.

For impending FMS sales, the Defense Security Cooperation Agency (DSCA) – a branch of the US State Department – must notify Congress, giving the legislature the opportunity to question the sale.

The second category is Direct Commercial Sales (DCS), in which the foreign customer negotiates directly with the US vendor company, with the permission of the US government. No Congressional notification is required for this.

The case of the AH-64E Apache is a particularly complicated one: the basic helicopters, including the airframe, is a DCS, which New Delhi has negotiated directly with Boeing. However, the engines, fire control systems and radars, key avionics and weapons and missiles are being bought under FMS.

The DSCA’s notification to the US Congress, therefore, relates to only half the Apache helicopter – the parts that come under FMS.

That should make the $930 million estimation for six helicopters even more outrageous, because it relates to only the FMS portion of the Apache – effectively, just half the helicopter.

In fact, the figure the DSCA puts forward in the Congressional Notification is seldom what the international customer pays. Instead, it is the most expansive of estimates, which one US official describes as the “not to exceed” cost of the equipment being cleared. The eventual contract price, which the customer signs with the Pentagon, is almost invariably lower.

Interestingly, the customer often pays less than even the contract price. The Pentagon monitors the cost at which the equipment is manufactured, driving down prices continually to keep its industry efficient. The customer eventually pays a “cost plus” price, which is very often less than the contracted price.

There are numerous examples of this. In 2010, the DSCA notified Congress about the sale to India of 22 AH-64D Apache helicopters (only the FMS portion) for $1.4 billion. In 2015, when the contract was finally signed, India paid only $900 million for the FMS portion of the contract. With the DCS portion contracted for an additional $900 million, the entire sale cost India $1.8 billion – or $80 million per Apache, inclusive of large stocks of weapons and missiles.

Once all 22 Apaches are delivered, India might end up paying less than that.

Similarly, the DSCA notified the US Congress about the sale to India of ten C-17 Globemaster III transport aircraft for $5.8 billion. Eventually, India paid $4.1 billion for those aircraft.

The complexity of the data about prices paid by other buyers – especially by the US government – sometimes causes misapprehensions that India has paid a higher cost.

For example, the National Herald data – that the US government bought 268 Apaches in 2017 for $3.4 billion, or less than $13 million each – glosses over the fact that 244 of those helicopters were “remanufactured”. That means they were overhauled and upgraded earlier model Apaches.

Last August, India’s defence ministry cleared the purchase of six additional Apaches for an indicative price of Rs 4,168 crore – which Washington notified the US Congress as a $930 million sale. But that too is a “not to exceed” estimation, which also includes a large amount of weaponry and training equipment. Once India signs the contract for these helicopters, a more exact figure will be available.



3 comments:

Anonymous said...

Good clarification, the press and opposition made the similar mistake in Rafale deal.
GtG deals are the best. The armed forces should indicate 2-3 models that are acceptable.
Then Indian govt decides which one to buy and
Sign contract with foreign govt.

Anonymous said...

National Herald + Prashant Bhushan... enough said. Classic split and run; former because of who the owners are and the latter because that is his Pavlovian response to any government expenditure over a few rupees. I am glad to see that you are setting the record straight, Ajai but question remains why such agenda driven threads even deserve a response.

Anonymous said...

Why do you have to take cognizance of news in National Herald if Sonia and Rahul Gandhi fame