Tuesday, 23 February 2010

The cost of Antony's halo

Defence Minister AK Antony rides one of the T-72s that remain night-blind because of MoD procurement failures. Is the Congress Party beginning to realise that Antony needs to go?

by Ajai Shukla
Business Standard, 23rd Feb 2010

Sarojini Naidu famously observed that it cost India millions to keep Gandhi in poverty. It is harder to determine what this country pays to perpetuate Defence Minister AK Antony’s reputation for honesty, but the monetary penalty alone is thousands of crores per year.

Here’s how it adds up. Antony’s obsessive quest for unblemished weapons procurement has delayed the acquisition of artillery and anti-aircraft guns, fighters, submarines, night fighting gear and a host of equipment upgrades. With arms inflation at 15 per cent per annum, a five-year delay means that India pays twice what it should have. And when that equipment is obtained through government-to-government purchases and other single-vendor contracts, the cost is about 25 per cent more than it would have been in competitive bidding. Conservatively estimating that delays afflict just half of the defence ministry’s Rs 50,000 crore procurement budget, India buys Rs 25,000 crore worth of weaponry for 125 per cent more than what it should have paid.

Over and above that figure is the cost to national prestige and the devaluation of India’s military deterrent when — as in the wake of the 26/11 terror strikes in Mumbai — India’s armed forces are unprepared for immediate strikes. That happened on Antony’s watch.

To inconvenient questions about procurement delays, Antony declares that “India is a democracy” and “we have to ensure full transparency”. Point out to him that many democracies manage timely procurement in a transparent manner, and you will get a patronising, “Don’t worry, we are doing all that is necessary to safeguard the security of the country.”

After five years of insensibility to Antony’s disastrous custodianship of the Ministry of Defence (MoD), the Congress party seems to be realising that in India’s deteriorating security environment, Antony’s functioning might leave the party with having to account for a military embarrassment. Last week, Congress party spokesperson Manish Tewari wrote an opinion piece in a national daily, arguing for all the changes that Antony has assiduously blocked during his five disastrous years in office.

Tewari called for “reforms that are visionary”; treating Indian private industry on a par with the public sector; and “drastically retooling” the Department of Defence Production. Though qualified as his personal views, the article represented growing opinion within the Congress party.

s it fair, Antony’s defenders will ask, to pin the blame entirely on him? After all, George Fernandes had publicly declared that fear of the three C’s — the CAG, the CVC and the CBI — held back MoD bureaucrats from making decisions. But Antony, like no other defence minister before him, endangers national security by his otherwise laudable fetish for probity. The message that flows out of Antony’s office and seeps through the procurement department is: cancel an ongoing procurement at the first hint of irregularity. It does not matter whether the suspicion has been planted by a rival arms dealer; a paid-for Parliamentary question; or a letter from an MP which has clearly been dictated by someone who possesses every detail of the tender in question. Just put the process on indefinite hold.

One MoD official asked me: Point out one official who has been punished for delaying the procurement of even the most vitally needed equipment. But if I am seen to move a file quickly, the defence minister’s office will ask, “What is the hurry. It seems almost as if you have a stake in that deal.”

Then there is Antony’s obvious bewilderment about the technical issues of the military, a crashing ignorance that cannot be condoned in India’s top military decision-maker. Antony’s apologists cite his preoccupation with party matters; but that is hardly convincing. His predecessor, Pranab Mukherjee, who had an immeasurably larger role in the party and national affairs, handled the MoD with skill and knowledge.

At a lunch, three years ago, I asked the Australian defence minister why his air force was buying F/A-18F Super Hornet fighters when Australia was already in line for the futuristic F-35 Joint Strike Fighter, which was nearing completion. His answer: Australia’s ageing F-111 fighters would be retiring in 2010; since the F-35 project was running a couple of years late, 24 new Super Hornets would be inducted to retain Australian capability. (The Super Hornets are reaching Australia next month.)

Contrast that urgency with Antony’s “we-will-consider” approach, even though India faces a greater chance of military confrontation with Pakistan or China than Australia does with New Zealand or Papua and New Guinea.

Antony’s personal image and goals are damaging national security and the image of his party. If electoral seat adjustment and managing state-level dissidence is his particular skill, let him move out of that crucial corner office in South Block and give him a place in the Congress party office.

After Neville Chamberlain had miserably failed to rein in Hitler in 1939, British MP Leo Amery echoed the words of Oliver Cromwell in calling for Chamberlain’s head at a memorable session of the British Parliament: “You have sat here too long for any good you are doing. Depart, I say, and let us have done with you. In the name of God, go!”

Mr Antony?

Sunday, 21 February 2010

Defence magazines: feeding off the arms business

Force magazine publisher, Pravin Sawhney, with Brig Gurmeet Kanwal, Director of CLAWS (Centre for Land Warfare Studies) at the Force Magazine stall in Defexpo 2010

by Ajai Shukla
Business Standard, 20th Feb 2010

Amidst the talk of billions of dollars at Defexpo 2010, Rs 65 lakhs might appear small change. But this amount --- what SP Guide Publications paid to become the official media partner for Defexpo --- is such a quantum leap over earlier figures that defence industry specialists are sitting up and taking notice.

Indian defence periodicals have grown steadily over the last decade, in numbers, circulation and scope. The lone defence publication of the 1970s --- Vayu, a bi-monthly focused on aerospace --- now has some 20-22 rivals. Many of these are monthlies and bi-monthlies set up without real expertise, infrastructure or even correspondents. But they have created a tough playground where even established players struggle for sales and advertising income.

Fuelling this boom is India’s emergence as the biggest defence buyer in the world. Pioneering editors, including Bharat Verma of Indian Defence Review, recall that, as recently as in 2000, income came only from sales. Advertising became a significant revenue stream only in 2001, after the government allowed the private sector into defence production. And about 2004, when foreign companies, especially US corporations began to view India as a crucial defence market, advertising rapidly eclipsed sales revenues.

“The Americans’ thinking was: let’s be aggressive. Let’s place advertisements everywhere”, says Pravin Sawhney, Publisher and Editor of Force, a newsmagazine launched in 2003. “They still don’t discriminate between the good and the indifferent publications.”

That lack of discrimination, complain many defence publishers, postpones the inevitable shakeout, allowing even low-quality defence publications to feed off the limited advertising budget.

“Many of these magazines are just instruments to garner advertising sales and, with American companies pulling out the stops to gain visibility, ”, says Sawhney. “They don’t have correspondents, they don’t have news; they just hire a few retired generals, admirals and air marshals who pen their opinion on various subjects. Many of their articles are pulled off the internet.”

Of the two dozen-odd publications crowing the marketplace, the best selling --- Vayu and Force --- print close to 20,000 copies, though it is hard to assess how many are distributed at a discount or handed out free. The smaller magazines print just a couple of thousand.

But this relatively tiny readership is loyal and influential. “There is no way of making money in this business, but we take satisfaction in having built a bank of strategically educated people”, says Bharat Verma, the editor of the venerable IDR. “When India Defence Review came out in 1986, there wasn’t a single magazine in the strategic domain. India had fought four wars and had accumulated a wealth of strategic experience but there was no forum to express it.”

Verma also points out that the mainstream media now regularly picks up security and defence-related stories from specialist publications and taking these issues to the masses. According to Verma, “Even the army quotes us while raising thorny issues. A recent article in IDR, by Mrinal Suman, which argued that India was not yet ready to allow women a larger role in the army, formed the basis of a case that the army took up to reduce the intake of women.”

Even with the big players like SP, Vayu, IDR and Force, arms companies bargain hard while negotiating advertisements. A full-page colour spread is listed at Rs 3 lakhs, but publishers admit that they get beaten down to a fraction of that. Indian companies pay substantially less than their foreign counterparts.

“To survive, we cut down on production quality”, explains Ashwini Sharma who publishes the South Asia Defence Review, one of the smaller journals. “I would like top-quality colours and paper but let’s face it, that comes first only in pornography. In this business, content is more important.”

Content, however, remains a problem. Business Standard discovered in a survey of defence publications during Defexpo 2010, that a significant part of their content consists of “advertorials”. These are advertisements masquerading as editorials, except for a small tag on the top of the page saying “by invitation”. While accepting that his magazine, Force, carries paid-for articles written by defence companies extolling their own products, Sawhney explains that this happens only in “special issues” during the Defexpo.

SP Guide Publications has paid Rs 65 lakhs to rise above this melee. The company’s Chairman, Jayant Baranwal, says, “We want an association with the MoD; that relationship is important to us. The defence and aerospace business will become much larger and we want to be a part of it.”

Friday, 19 February 2010

Russia objects to T-72/T-90 simulators: Friend turns 'foe' in tank battle simulator deal

by Ajai Shukla
Business Standard, 19th February 2010

The deeply traditional Indian Army, which prides itself on training outdoors with real equipment, could soon start training on simulators like other high-tech armies.

A hypothetical situation, not too far in the future: after yet another terrorist strike in India, an armoured combat group prepares to raid a terrorist camp near Sialkot, across the Jammu border. Satellite images and photos of the camp taken the previous day by an agent are fed into a simulator, housed in a container next to the tanks. Each tank crew spends time on the simulator, virtually experiencing the next day’s operation and rehearsing their individual tasks.

Tata Advanced Systems, partnering Canadian giant, CAE; is competing with Indian simulator developer, Zen Technologies, to provide India’s T-72 and T-90 tank regiments with 80 containerised simulators that could be transported anywhere, including to a border launch pad. The MoD will soon announce the winner.

No plan survives contact with the enemy, it is said. But this one has run into problems with a friend! Russian officials have told Business Standard that the T-72 and T-90 are their tanks and nobody other than the Original Equipment Manufacturer (OEM) could produce a simulator without infringing Intellectual Property Rights (IPR).

Viktor Komardin, the chief of Russian export controller, Rosoboronexport, pointed out that nobody had consulted Russia. Komardin said, “Is this legal? Is this ethical? Is this proper? If India wants a real simulator, it should be asked for from Russia itself. A quality simulator cannot be created without information from the designer on issues like ballistics and fire control computation.”

Indian officials are either unaware of the Russian objection, or are choosing to ignore it. Komardin says no Indian official has approached Russia for a tank simulator, even though Russia has one available.

CAE, however, denies infringing Russian IPR. CAE India President, H J Kamath, told Business Standard, “No proprietary or OEM software or equipment is needed for the simulator. No original equipment has been used, nor do we need any data or source codes from Russia. Everything has been simulated.”

Zen Technologies is equally emphatic. The company’s President, Kishore Dutt Atluri, says, “We don’t need any information from Russia. The physics of the T-72 and T-90 tanks are well known.”

Interestingly, CAE is also engaged in developing a full-crew simulator for the Arjun tank, which is made by the Defence R&D Organisation, for which the DRDO has given permission.

This conflict notwithstanding, simulator training is entering military consciousness. Long the primary method of training commercial pilots — because of the enormous cost of flying empty airliners on training sorties —- the logic of cost-effectiveness is now overwhelming the army’s traditional preference for live training. The cost of running a tank column (11 litres per kilometre of diesel, plus maintenance and depreciation) is exorbitant compared to the cost of running a simulator.

“Militaries worldwide realise that simulator training is one-tenth the cost of live training on heavy equipment”, says Martin Gagne, CAE’s military simulation head. “Besides, the new buzzword is “mission rehearsal”. Training is not just about flying an aircraft or driving a tank but about preparing for an actual mission.”

Besides the large order for tank simulators, which would install simulation training centres in every major tank base, Hindustan Aeronautics Limited (HAL) and CAE will commission, by mid-2010, a Helicopter Academy to Train by Simulation of Flying (HATSOFF), in Bangalore. This facility will allow the switching around of various cockpits, including the Bell 412, the military Dhruv, and the Dauphin.

And Lockheed Martin will provide the six C-130J Super Hercules transport aircraft that India has bought along with flight simulators.

A visit to one of the many simulators on display at Defexpo 2010 in Delhi illustrates that the real challenge in simulator design is in creating a realistic environment. Says Zen’s Atluri, “Recreating a tank or its gun controls is easy. Recreating an entire virtual world around it is the difficult part.”

That is one reason why companies like Zen, which have provided gaming software to companies like Sony, and have long experience in satisfying demanding young video-game enthusiasts, are now making it big in military simulation.

Thursday, 18 February 2010

Eurofighter’s mission to India: making the shortlist

(Photo: Courtesy Mario Serrano at airliners.net)

The Typhoon simulator as seen from the cockpit. Eurofighter has put up this simulator at Defexpo 2010

by Ajai Shukla
Business Standard, 17th Feb 2010

On Monday, two Eurofighter Typhoon fighters of the Luftwaffe --- the German Air Force --- took off from the Laage Air Base in Germany on probably the most important mission any Typhoon has ever flown.

After touching down in Bangalore today, they will prepare for flight trials by Indian Air Force pilots, which begin on Monday. The outcome of those trials in Bangalore, Jaisalmer, and then Leh, will be crucial in determining whether 126 Typhoons, and possibly more later, will sport the roundels of the IAF.

The IAF has already tested four fighters in this six-aircraft, US $11 billion contest to select a Medium Multi-role Combat Aircraft (MMRCA): the American F/A-18 Super Hornet and the F-16IN Super Viper; the French Rafale; and the Russian MiG-35. On the heels of the Eurofighter will come the last contender: Sweden’s Gripen NG.

After the flight trials are over, IAF sources tell Business Standard, the competition will narrow down to a short-list of three or four contenders; two fighters, they say, have already performed below par. Then the commercial bids will be opened; MoD procedure mandates that the lowest bidder wins the contract.

Synchronised perfectly with the start of its flight trials, Eurofighter Typhoon has transported a flight simulator to Defexpo 2010, which is running in Delhi from 15-18th Feb. In that simulator, over the last three days, key Indian decision-makers have personally experienced the Eurofighter. These include Defence Minister AK Antony; the IAF chief, Air Chief Marshall PV Naik; the pilot overseeing flight-testing, Air Commodore Rakesh Dhir; and a host of VIPs, including Anand Mahindra.

Eurofighter’s next splash will be during Exercise Indradhanush, in October, when a group of RAF Typhoons fly into India, participating for the first time ever in the joint Royal Air Force-IAF exercise. That is expected to grab media attention exactly at the moment when the MoD is finalising its decision on which fighter to buy.

“The Eurofighter particiation in the exercise is not part of a plan”, the boss of Eurofighter GmbH, Bernhard Gerwert, told Business Standard. “The Luftwaffe is sending the fighters for flight testing; the Typhoons in the exercise are from the RAF. But this does reflect Eurofighter’s pan-European nature.”

Eurofighter’s careful public relations strategy reflects the skill with which Eurofighter has handled its MMRCA campaign. Unlike some of its contenders, which spent millions of dollars in promoting their fighters in India and participating in air shows for years, Eurofighter only launched its India campaign in 2008. The Typhoon itself was first displayed in India last February, at the Aero India 2009 in Bangalore.

Only French manufacturer, Dassault, which has offered the Rafale, has been more restrained. The Rafale has never been displayed in India.

Eurofighter’s campaign has also been enhanced by a growing list of sweeteners. Having earlier offered full “partnership” for India in the Typhoon programme, Defexpo 2010 has seen a ramping up of parent company, EADS’ engineering centre in Bangalore.

Bernhard Gerwert elaborates, “We are shifting R&D out of Germany and into India. The Airbus Engineering Centre in Bangalore currently has 120 local engineers, who carry out civilian R&D for the airliner business. By 2012, this will have stepped up to 400 engineers for civilian R&D and 200 engineers working on military programmes.”

Gerwert clarifies that this does involve the politically sensitive transfer of jobs to India. Each one of the new engineers will be a new hiring.

Wednesday, 17 February 2010

Shaurya surfaces as India’s underwater nuclear missile: New “hybrid” technology more advanced than China’s or Pakistan’s

By Ajai Shukla
Defexpo 2010, New Delhi

The country’s top defence scientist has, for the first time, revealed that India’s new Shaurya missile, which can carry a one-ton nuclear warhead over a distance of 750 kilometers, is specially designed to be fired from Indian submarines, and could form the crucial third leg of India’s nuclear deterrent.

If launched from a submarine off the China coast, it is capable of reaching many of China’s major cities, including Beijing, Nanjing and Shanghai.

Air and land-based nuclear weapons are delivered to their targets by fighter aircraft and ballistic missiles respectively. Since these can be knocked out by an enemy first strike, the most reliable nuclear deterrent has traditionally been underwater, missiles hidden in a submarine.

Dr VK Saraswat, the DRDO chief and Scientific Advisor to the Defence Minister, revealed to Business Standard at the ongoing Defexpo 2010, “We have designed the Shaurya so that it can be launched from under water as easily as from land. The gas-filled canister that houses the missile fits easily into a submarine. The underwater leg of the nuclear triad needs to be totally reliable and needs a state-of-the-art missile.”

India’s undersea deterrent has so far revolved around the K-15 ballistic missile, built with significant help from Russia. The K-15 was to equip the INS Arihant, India’s lone nuclear-powered submarine, which is being constructed in Visakhapatnam. But now, after rigorous underwater testing, the Shaurya could be the mainstay of Arihant’s arsenal.

“The Shaurya was developed from ground up as a submarine-capable missile”, confirms Dr Prahlada, the top DRDO scientist responsible for liaising with the military. “Every piece of technology for fitting it in a submarine is already in place.”

Shortly before the Defexpo 2010, Dr Saraswat had publicly stated that India’s missile technology was ahead of China’s and Pakistan’s.

Now top DRDO scientists have revealed that the Shaurya is not a ballistic missile, as it has been thought to be; it is actually a hypersonic cruise missile, which never leaves the atmosphere. A ballistic missile is like a stone being lobbed towards a target. Rockets toss it upwards and towards the target; after the rocket burns out, gravity pulls the missile warhead down towards the target. Buffeted by wind and re-entry forces, accuracy is a problem; and, since the ballistic missile’s path is predictable, shooting it down is relatively easy.

The Shaurya has none of these issues. Its solid-fuel, two-stage rocket accelerates the missile to six times the speed of sound before it reaches an altitude of 40 kilometers (125,000 feet), after which it levels out and cruises towards the target, powered by its onboard fuel. While ballistic missiles cannot correct their course midway, the Shaurya is an intelligent missile. Onboard navigation computers kick in near the target, guiding the missile to the target and eliminating errors that inevitably creep in during its turbulent journey.

The Shaurya, say DRDO sources, will strike within 20-30 metres of its target after travelling 750 kilometres.

Conventional cruise missiles, like the American Tomahawk and the Indo-Russian Brahmos, offer similar accuracy. But their air-breathing engines carry them along slowly, rendering them vulnerable to enemy aircraft and missiles. The Shaurya’s solid-fuel, air-independent engine propels it along at hypersonic speeds, leaving enemy fighters and missiles far behind.

“I would say the Shaurya a hybrid propulsion missile”, says Dr Saraswat. “Like a ballistic missile, it is powered by solid fuel. And, like a cruise missile, it can guide itself right up to the target.”

Making the Shaurya even more capable is its ability to manoeuvre, following a twisting path to the target that makes it very difficult to shoot it down. In contrast, a ballistic missile is predictable; its trajectory gives away its target and its path to it.

Guns and vehicles: the Mahindras bet big on defence

Top: The FH-77B and the M777 Ultralight Howitzer dominate the Mahindras and BAE Systems displays at the Defexpo 2010

Centre: A closer look at the M777, which has, painted on its side, "Combat proven", "600 delivered" and "lightest 155mm artillery system in the world"

Below: Anand Mahindra conveys his optimism about Mahindras' future in defence to Broadsword

(A three-part series, looking at major private sector players in defence)

by Ajai Shukla
Business Standard, 17th Feb 2010

As Anand Mahindra unveiled his new defence company’s latest product --- the Mine Protected Vehicle for India (MPVI) --- the lights, music and camouflage-clad women models could only briefly obscure the most glaring truth at the ongoing Defexpo 2010 in Delhi: that India’s private sector, even after investing thousands of crores into defence technology, infrastructure and corporate structures, is still waiting for MoD orders.

The new MPVI, like Mahindra Defence Systems’ Rakshak, Marksman and Axe vehicles before it, has been developed with the pro-active strategy of creating and stimulating MoD demand. So far, those orders have failed to materialise. MDS’ order book mainly features the Ministry of Home Affairs (MoHA) and state governments buying protection for their police forces.

Ironically, the Mahindra Group’s breakthrough in defence could come from guns, not vehicles. Parked alongside the MPVI, and dominating the display hall, are two 155mm guns that could shape the future of MDS. One is the modernised version of the well-known FH-77B Bofors gun; the other is the M777 ultralight howitzer (ULH). India is considering buying hundreds of these guns for several billion dollars.

The Bofors gun will be leaving for the next phase of long-running Indian Army trials in Leh at the end of the Defexpo; army sources say it has been the leading contender so far. Meanwhile, New Delhi has approached Washington for buying the M777 ULH, which is manufactured in America.

Anand Mahindra is betting big on BAE winning these contracts; in an audacious play he has increased his stakes in the defence business rather than reducing his exposure. A joint venture --- called Defence Land Systems India or DLSI --- has been formed with MDS holding 74% of the Rs 100 crore JV, and BAE Systems 26%. The government turned down a request for BAE Systems to be allowed to hold 49%.

Speaking to Business Standard, Anand Mahindra pointed out that the MoHA’s and state governments’ orders of protected vehicles had kept MDS in the black, even in the absence of MoD orders. The Faridabad plant that built those vehicles, which was now transferred to DSLI, would keep rolling. And, as soon as the gun contract was won, DLSI would set up a Greenfield factory to build 55% of the gun system in India.

Mahindra believes that, “The negative perception against the Bofors gun no longer exists; the gun never committed any crime. And, after the gun’s performance in the Kargil conflict, the country and the MoD are ready to buy it. We have already created a business model to be prepared for that moment and will build the facilities that are needed for manufacturing the gun in India.”

Haryana Chief Minister BS Hooda, is believed to have suggested that the Mahindras set up the new gun factory in Haryana, near Rohtak.

Anand Mahindra says that BAE Systems is genuinely committed to transferring to DLSI the crucial technologies needed to build the gun in India, even though BAE Systems has, in the past, expressed concern about holding just 26% of the equity. “There is no option for BAE Systems; this is a business necessity for them. The price sensitivity of buyers today requires them to cut costs and we have displayed our competence in high-tech manufacture while building automobiles.”

A riskier challenge ahead for the Mahindra group is its ambitious venture into developing and manufacturing the Future Infantry Combat Vehicle (FICV) for the Indian Army. The MoD will choose between the Tatas, L&T, MDS and the public sector Ordnance Factory Board, and Mahindra believes that its strong automotive heritage and the foray into manufacturing protected vehicles, such as the MPVI, equips it to develop a quality product.

It is not yet clear whether MDS would partner BAE Systems, the world’s largest grounds systems company, in developing the FICV.

In the immediate future, the MPVI will compete for orders with similar vehicles developed by several domestic manufacturers, including Ashok Leyland and the Tata Group. The MoD has procured a significant part of its requirement of almost 400 MPVs from the public sector Ordnance Factory, Medak.

The Axe and the Rakshak --- two of the vehicles that MDS has developed for security forces --- are currently competing for a big Rs 350 crore army order for some 950 vehicles.

Monday, 15 February 2010

Special coverage of Defexpo 2010: a gateway to the Indian defence market

A Boeing Chinook helicopter, which India is considering for replacing its Russian Mi-26 heavy lifters, carries an underslung load in a high altitude area

By Ajai Shukla
Business Standard, 15th Feb 2010

If there is a global economic slowdown or a recession, no signs of it are visible at the Pragati Maidan exhibition grounds where Defexpo 2010 will be held from 15-18th Feb 2010. Some 650 exhibitors, ranging from global defence giants to Indian Small Scale Industries (SSIs), have worked almost around the clock over the last week to put together displays that would do justice to the capital city of the world’s biggest buyer of weaponry.

A sneak preview by this correspondent on the eve of the show revealed a glitzy array of stalls that included eye-catching laser displays, high-tech weaponry, functioning aircraft simulators and the array of attractively attired female counter assistants that are the hallmark of defence expos all over the world.

Defexpo 2010 is ready for business, a feat of organisation considering that, two months ago, it was still being decided whether Pragati Maidan would be available for the exhibition or placed under renovation for the Commonwealth Games. On 7th Dec Pragati Maidan was handed over to the Defence Exhibition Organisation, which hosts each Defexpo. Meanwhile, the CII, which had been the event manager for Defexpo 2008, pulled out saying that it had incurred a loss last time.

Despite these handicaps, especially the short time available, the lure of the Indian defence market has ensured that practically every global defence major will be here for the exhibition. Attendance is up 50% over last year; more than 250 foreign companies will be here. There are 30,200 square metres of display stalls, almost double that of Defexpo 2008, the last exhibition, which sold 17,000 square metres of display space. If one were to include the outdoor displays, this year’s figure goes up to 40,000 square metres.

India’s first major defence exhibition was an air show, Aero India 1998, while the first land and naval systems exhibition --- the first of the Defexpo series --- took place in 1999. Encouraged by their success, the MoD decided to hold a Defexpo and an Aero India air show every two years. The Defexpo --- this one is the 6th --- is held on even years, while the Aero India show is held on odd years, both of them in the month of February.

The biggest exhibitor this year, India’s Defence R&D Organisation, or DRDO plans to use Defexpo 2010 to establish linkages with prospective technology partners across the globe. The DRDO has rented 1400 square metres of display area for which it has shelled out more than Rs 1.5 crores. Close on its heels is Israel, with 1200 square metres of display space for its defence companies; since foreign exhibitors pay almost thrice as much as Indian companies, Israel has paid Rs 3.5 crores for that space.

The Defence Exhibition Organisation’s stated aim is to promote Indian defence industry. That translates not just into cheaper display space for Indian companies, but also extra discounts for Small and Medium Enterprises (SMEs) and Small Scale Industries (SSIs), many of which work at the cutting edge of military technology.

But foreign defence companies are hardly complaining about the expense. For them Defexpo 2010 is an important opportunity for winning a share of the Indian defence market, which a recently released CII-KPMG report estimates would be worth some US $100 billion (Rs 4,50,000 crores) between now and 2022. Besides this, India will spend US $9.7 billion (Rs 44,000 crores) by 2016 on homeland security. The CII-KPMG report’s estimation could be conservative, given that India already spends more than US $11 billion (Rs 50,000 crores) annually on foreign military supplies and the defence budget is likely to continue its steady rise.

Currently, international defence majors supply almost 70% of India’s requirements of capital acquisitions. The Indian government has declared, without setting a timeframe, that it will source 70% of its defence needs from Indian suppliers. The global majors are, therefore, scurrying to partner Indian defence producers in order to become a part of the Indian defence business. Right now, there is a Foreign Direct Investment cap of 26% in the field of defence, but the government has already signalled, in its Economic Survey for 2009, that this could be raised to 49%.

Tie-ups with Indian companies are also being driven by foreign vendors’ need to discharge offsets liabilities accruing from recent and future sales to India. The MoD’s offset regulations impose a minimum offset of 30% of the contract value for all contracts above Rs 300 crores. In practice, the offset liability has been set as high as 50% in the contract for multi-role combat aircraft. This has to be discharged through the purchase of products or services from Indian defence companies; or through investments into the industrial infrastructure of Indian defence JVs; or through investment into Indian R&D organisations. In all three cases, the foreign vendor must identify an Indian partner through which it will discharge its obligations. Defexpo 2010 provides defence companies with a platform for meeting prospective offset partners.

To facilitate the creation of these linkages, Defexpo 2010, for the first time in an Indian defence exhibition, is providing facilities for Business-to-Business (B2B) meetings between vendors. Vendors have also scheduled a host of product launches during this exhibition.

Another highlight of Defexpo 2010, particularly for vendors who want more clarity on Government of India policy, will be a series of seminars that have been scheduled during the exhibition. One of the most keenly anticipated will be the seminar on “The Indian Army next generation systems, an evolution”, which will include key officials like the Secretary Defence Production; the Vice Chief of the Indian Army; and the directors of every key arm including the armoured corps, infantry, artillery and air defence.

Defence companies with interests in maritime production will also look forward to the seminar on “Leveraging offsets for naval self-reliance”, which will be addressed by the chief of the Indian Navy and by key naval procurement officials.

The success of any defence exhibition is eventually determined by the amount of business that is done. Measured in those terms, Defexpo 2010 may not generate an enormous amount of actual signing. But while Indian defence procurement follows its own slow cycle, the growing churn in India’s defence production environment will be enough to make this Delhi visit a crucial date in the diaries of most global, and Indian, defence companies.

Minister of State for Defence, MM Pallam Raju: “Private sector should complement, not compete with DPSUs”

MM Pallam Raju with former Chief of Integrated Defence Staff, Lt Gen HS Lidder

by Ajai Shukla
Business Standard, 15th Feb 2010

On Foreign Direct Investment

Q. There is a long-standing demand, from within the Indian defence industry as well as from global arms corporations, for the Foreign Direct Investment cap of 26% in defence to be raised to at least 49%. Is the MoD addressing that request?

I think in allowing foreign participation [into defence], we have made a beginning. Recently we have amended the Defence Procurement Policy [of 2008], creating a new category in which a private company can enter into a partnership with a foreign vendor… and start manufacturing within the country. So we are trying to facilitate industry and corporate India in a big way.

We can understand the concerns of foreign vendors about percentage of ownership. But we are in an evolution; it (increasing FDI limits) may take some time.

Q. Is the FDI cap of 26% in defence only notional? Press Note No 2 of 2009 effectively permits higher FDI through multi-layered structures in which foreign entities have a cascading holding?

At the end of it all, the discretion lies with our ministry (i.e. the MoD) about whom we allow in joint venture collaboration. If we feel that security is getting compromised through higher-than-evident FDI, we might not permit that JV.

Private versus Public sector

Q. The private sector complains about discrimination. Whenever the MoD has to choose between giving business to a private company and a Defence Public Sector Undertaking (DPSU), it opts for the DPSU.

We are all for facilitating the entry of the private sector [into defence production], but I think the private sector is taking short cuts in many cases. They should seriously look at bringing value addition into the country and at complementing what the public sector does. They should play a complementary role, not try to compete in those areas where the public sector is already present. That does not mean that we will let our DPSUs be inefficient. We are driving them towards better efficiency and delivery. But the private sector should look at bringing in value addition into our defence manufacturing.

Q. Wouldn’t you say that competition from the private sector would bring in efficiencies of its own?

I agree. They can gradually get into this area [of defence production]. But they should look at what the country needs. We don’t need low-tech; we need high-tech. That is the whole idea of the offset policy also. And that is where I feel that the private sector should focus.

Q. Is there disappointment within the government on the way the private sector has approached defence production?

They have to look at it with a long-term perspective… and they should work towards the nation’s objective of bringing in greater value addition and greater self-reliance.

Q. Are you saying that the private sector is not putting in enough money?

I wouldn’t know. But I do know that larger companies like the Tatas and L&T have gotten in with a lot of commitment. But they have to look at ways of making things happen.

Q. But major defence producing countries all fund their private corporations in defence production.

At this stage the government may not commit anything. But as we see greater involvement from the private sector, the policy will evolve. This is not to say that we will stick to today’s policy [forever]. We will treat (review) policy as and when response comes from the private sector.

The whole idea is to enable private sector participation and to increase self-reliance. It doesn’t matter whether [a military product] comes from the DPSUs or from the private sector. The buzzword is “self-reliance”; and, of course, greater value addition. If we see that coming, definitely the ministry would respond.

Q. There is disillusionment about what the DPSUs, despite their MoD support, have achieved. The private sector feels it would deliver much more with some support…

The DPSUs manufacture products that the DRDO has developed…. That responsibility was given to the public sector; it was to be the integrator, with some vertical components being given to the private sector. Now, if some large private company comes and says, “we can do it better”, we will say, “you are welcome, go ahead and do it.”

Q. But you are also saying that they should not enter into the same area as the DPSUs, then they are being counterproductive.

Maybe they can make a beginning with it; but they have to move on. Otherwise we will end up supporting the public sector, and also supporting the private sector… of course we want greater efficiency; but we have a responsibility towards the public sector also. Otherwise, in a downturn, the private sector will walk away, saying there is not enough business. But these guys (the public sector) will stand by us.

Q. Wouldn’t you say that the private sector is inherently more efficient than the public sector? It has taken 60 years of public expenditure to set up the DPSUs…

What I’m saying is that if someone wants to manufacture guns, they should not start manufacturing what the Ordnance Factories are manufacturing. They should manufacture the next generation of guns. They may be able to do the existing product better… but they will be killing the DPSU. The Ordnance Factories will not be able to respond so fast (as the private sector).

Q. Have you considered that there might be a conflict of interest for the bureaucrats who decide on whether a particular contract should be given to the private or the public sector? The bureaucrats who decide are on the boards of many of the DPSUs?

I think that we have a responsibility to the DPSUs since [their] ownership rests with the Government of India… I have observed the capabilities and capacities built up in the DPSUs, and it will be very difficult to replicate them today. So having built up these capabilities and capacities, it is important to utilise these assets in the service of the nation.

I am not saying we will let them be inefficient. But there is a necessity to support them to some extent. And the role of the Joint Secretaries, when they are on the boards of DPSUs, it is to exercise the control of the government and to drive them to greater efficiency and to ensure that they survive well. They (the bureaucrats) should be on the boards, there are no two ways about that.

But when it comes to purchasing, it is a different bureaucrat who is articulating the needs of the concerned service: the army, air force, or navy. It is not the same JS [who is on the board of the DPSU]; The procurement official would be looking for the best price and delivery. There is no conflict of interest… it is a different individual.

Raksha Udyog Ratnas (RuRs)

Q. The delay in Raksha Udyog Ratnas (RuRs) is blamed for slowing the entry of the private sector into defence production.

I will not comment because my minister (AK Antony) has not said anything yet on the subject. The spirit of the RuR recommendation by the Kelkar Committee was to allow the larger player into defence manufacture. And because defence orders are not a regular flow, it would be prudent to identify companies with deep pockets who can survive the troughs [and nominate them as RuRs]. This idea, however, was opposed by small companies who don’t have such a high turnover, but who have certain [technology] capabilities. They protested and said why should we be discriminated against when we have better capabilities.

Taking their views into consideration, better wisdom prevailed. We said, why should we discriminate? We should let everybody have an equal opportunity; why should we give preferential treatment to the big players.

Q. A big reason for nominating RuRs was to provide a forum for the MoD to fund R&D, to the extent of 80% of development costs.

Now that option is open to every company, not just RuRs. That offer is open whether it is a small company or a large company. We are waiting for people to come forward. We will fund 80% of the development cost, but the project must make sense to us.… we must believe that there is a future in the proposal that they are bringing to the table.

Q. But you are saying, and it is an important point, that if a private sector company has a viable project, the MoD will fund 80% of the development cost.

We will, we will! The whole idea of the offset programme; of the “buy and make” category; of the 26% FDI, is to bring in greater value addition into the country. I know the private sector is trying to do its bit… and I know that they are looking for a certain kind of assurance from the armed forces. But I can assure you that if they produce a good product, the armed forces will just grab it.

So the initial risk of putting money into a product and developing it… they have to take that risk. (repeats that).

Army, DRDO want L&T; but Antony bats for BEML

The second section of a Sarvatra bridge being launched. The bridge consists of 5 sections, each bridging a distance of 15 metres

(Concluding a 3-article series on DPSU Dadagiri: hanging onto influence)

by Ajai Shukla
Business Standard, 15th Feb 2010

The Sarvatra, an assault bridge, which allows advancing tank spearheads to quickly bridge canals and water obstacles, remains denied to Indian strike forces even though its design was completed years ago. The reason: Defence Minister AK Antony wants to give the lucrative order for manufacturing Sarvatra bridges to MoD-owned Bharat Earth Movers Limited (BEML), rather than to Larsen & Toubro, the private company that spent a decade designing the Sarvatra in partnership with the Defence R&D Organisation (DRDO).

Mr Antony has ignored the recommendations of the army, the DRDO, and his own officials, while nominating BEML as the nodal agency for the Rs 170 crores contract to build the first 8 Sarvatra bridges. In a baffling order, Mr Antony has noted on file that he agrees with the army’s and DRDO’s recommendations in favour of L&T; but he nominates BEML as the nodal agency for the first 8 bridges. This controversial decision, with the potential to attract CAG and CVC intervention, has not yet been implemented.

The MoD has not responded to an emailed questionnaire on this subject.

BEML, one of the MoD’s eight Defence Public Sector Undertakings (DPSUs), claims that it should be the nodal agency because it manufactures the Tatra high-mobility vehicles on which the Sarvatra bridge is carried. Each of the Sarvatra’s five sections is mounted on a Tatra. But L&T points out --- and the army and DRDO agree --- that BEML has had nothing to do with the engineering of the Sarvatra, a complex, decade-long process of engineering aluminium structures.

Whichever of the two is the nodal agency, initially L&T will manufacture the bridges while BEML will build the Tatras. But the nodal agency will obtain more prestige and profit: recognition as the builder of the Sarvatra, and profit margins over the entire bridge. The nodal agency also decides the improvements in technology. It could choose an alternative partner in the future, or even go it alone.

L&T worries that the initial contract for 8 bridges is merely the thin end of the wedge. Once BEML is nominated the nodal agency for those, a precedent will have been established for the army’s entire requirement of 50 Sarvatra bridges. Priced at about Rs 22 crores each, the entire order is worth Rs 1100 crores.

BEML has not responded to an emailed questionnaire on this issue; and L&T officials have declined to be interviewed for this article.

However, in multiple interviews, entrepreneurs from private companies engaged in defence manufacture --- speaking off-the-record to avoid offending the MoD --- unanimously allege that South Block openly favours DPSUs. Besides the MoD’s obvious financial stakes in the DPSUs, point out private sector officials, MoD officials sit on the board of each DPSU.

BEML’s 11-member board includes two MoD joint secretaries, in their ex-officio capacity.

However, Minister of State for Defence Production, MM Pallam Raju, told Business Standard that there was no question of this impairing the MoD’s impartiality. Insisting that MoD officials would remain on DPSU boards, the minister said, “…There is a necessity to support them (DPSUs) to some extent. And the role of the [MoD] joint secretaries, when they are on the boards of DPSUs, it is to exercise the control of the government and to drive them to greater efficiency and to ensure that they survive well. They (the bureaucrats) should be on the boards; there are no two ways about that.”

Denying any conflict of interest for the board members, Pallam Raju explained, “When it comes to [deciding on procurements], it is… not the same JS [who is on the board of the DPSU]; The procurement official would be looking for the best price and delivery. There is no conflict of interest… it is a different individual.”

The Sarvatra Bridge allows Indian mechanised forces, including the 60-tonne Arjun tank, a quick crossing over canals and rivers that come in their path. Capable of bridging a 75-metre canal or river in less then two hours, this would leave the enemy with little time to side-step forces to block the Indian advance. The Sarvatra will replace the East European PMS Bridges, which require 57 Tatra vehicles to bridge 100 metres. In contrast, the Sarvatra, with just five Tatras, bridges 75 metres. At Rs 60 crores per set, the PMS costs almost thrice as much as a Sarvatra.

(The three-article series stands concluded)

Saturday, 13 February 2010

The ECIL influence: MoD shuts out private companies from fuze purchase

The Fuchs M9801 multi-option fuze for artillery shells from 105 mm to 203 mm. Fuchs fuze components are imported by the Electronics Corporation of India Limited (ECIL), assembled, and sold to the Indian military

(Part 2 of a series on: DPSU Dadagiri: hanging onto monopoly)
Yesterday’s article, on the MoD’s violation of procurement rules in nominating BEL for developing EW systems, made waves in Bangalore soon after hitting the stands. On the last day of a 4-day, MoD-organised seminar on EW, officials from private companies were effectively expelled from a seminar they had been invited to attend. Before resuming this morning an announcement was made: today's session is only for the public sector!

by Ajai Shukla
Business Standard, 13th Feb 2010

Controversy surrounds the Ministry of Defence’s Rs 800 crore procurement of artillery fuzes, tiny electronic devices that cause artillery shells, fired from guns like the 155mm Bofors, to explode when they reach their target. Forbidden by a Lok Sabha committee from ordering fuzes on a single-vendor basis from the Electronics Corporation of India Limited (ECIL), and to ensure multi-vendor competition instead, the MoD has structured the tender in a manner that excludes private bidders.

Simultaneously, proceeding on a single-vendor basis, the MoD has ordered 4,00,000 fuzes, worth over Rs 200 crores, from ECIL, citing urgent military needs.

ECIL is not a defence PSU; it functions under the Department of Atomic Energy. But a close relationship with South Block, which terms it “the sole approved supplier”, has long given ECIL automatic rights over 80% of the army’s requirement of fuzes.

That near-monopoly status has been questioned by a stream of MPs, the Central Vigilance Commission (CVC), the Lok Sabha Standing Committee on Defence, and the Lok Sabha Committee on Petitions (in its 43rd Report, tabled on 8th Nov 08).

The questions raised against ECIL include its dependency on South African company, Fuchs Electronics, the main supplier of fuzes to blacklisted South African armaments company, Denel. Critics have pointed out that ECIL merely assembles fuzes from components supplied by Fuchs. The main components --- a safety & arming device (S&A), the battery and an electronic timer kit --- all come from abroad.

Despite that, ECIL has flourished with its key buyer --- the Indian Army’s artillery branch --- on its right side. Army HQ admitted to a Lok Sabha committee that its former Director General of Artillery, Lt Gen Charanjit Singh, joined ECIL as an advisor immediately after he retired. The army’s justification: “ECIL had been appointing several retired defence officers as their advisor (sic).”

ECIL has not responded to an emailed questionnaire on these issues.

But the most serious charge against alleged MoD-ECIL collusion is the MoD’s alleged doctoring of its tender (Request for Proposals, or RfP, in MoD terminology) for the supply of some 10 lakh fuzes, a contract worth some Rs 600 crores. The RfP has lumped together three different kinds of fuzes: point detonation, timed and proximity fuzes. A vendor either supplies all three types, or supplies none. Private companies like Hyderabad-based HBL Defence Electronics, and Delhi-based Micron Instruments Pvt Ltd, all manufacture one or the other type of fuzes, the stipulation that vendors must provide all three fuze types effectively rules them out of contention.

Artillery experts say that each fuze type involves different technologies. Lumping the three types together would exclude companies with excellent capabilities in, say, timed fuzes, simply because it was not manufacturing proximity fuzes.

Small, high-tech companies that are bidding for the contract argue that the MoD would benefit by diversifying its sources of supply, rather than remaining dependent on one large PSU. The Defence Procurement Policy of 2008 (DPP-2008) encourages the cultivation of diverse suppliers.

The MoD has not responded to an email questionnaire on the subject.

The tender for 10 lakh fuzes is also characterized by a high degree of tolerance for ECIL’s dependency on imported fuze components from Fuchs. The RfP specifically allows import duty exemptions for fuze components up to 70% of the value of the contract. Considering that the contract value includes a profit margin of about 15%, the 70% exemption clause effectively allows vendors to import 80% of the fuze.

“This is hardly indigenous production”, points out Dr Jagdish Prasad, Chairman of HBL Defence Electronics, which claims a far higher percentage of indigenous components in its fuzes. “Importing 70% of the fuze and assembling the components in India does not wean our military off foreign dependency.”

This tender, floated on 2nd April and opened on 27th August 09, is currently hanging fire. MoD sources say that objections from MPs, and from government vigilance organisations, have held back the MoD from ordering trials and awarding the contract.

Before electronic fuzes were invented, artillery shells were exploded by mechanical fuzes that detonated on impact with the ground. Birla group company, VXL Technologies was India’s primary supplier of mechanical fuzes. Three decades ago, Bhabha Atomic Research Centre (BARC) first produced electronic proximity fuzes; the production licence for the famous VT-8A fuze was given to ECIL. When that became obsolete, ECIL’s failure to absorb technology, and to conduct R&D on fuzes, took it to Fuchs. That great dependency continues today.

Friday, 12 February 2010

MoD breaks its own rules to favour its PSU

The Samyukta EW system, in which the DRDO partnered Tata Power SED to create fully-indigenous Control Centres

(3-article series on: DPSU Dadagiri: hanging onto monopoly)

By Ajai Shukla
Business Standard, 12th Feb 2010

Uncertainty hangs over one of India’s most strategically vital Electronic Warfare (EW) programmes after the Ministry of Defence violated its own procurement rules by handing it over on a plate to Bharat Electronics Limited (BEL).

The Rs 2000 crore project for developing a “Track and Wheel Based EW System” was first offered to several vendors (MoD letter No B/50529/TWBEWS/ SURAJ dated 12th June 08). Three months later, inexplicably, the MoD discarded competitive bidding and categorised the system as “BUY INDIAN BEL”. No such category exists in the MoD’s Defence Procurement Procedures of 2006 and 2008 (DPP-2006; and DPP-2008). The CAG, the CVC and the Ministry of Finance have repeatedly stressed on the need to ensure multi-vendor bidding.

In doing BEL this favour, the MoD overlooked the claims of companies like L&T, Axis, and Tata Power Strategic Electronics Division (SED), the firm that Dr APJ Abdul Kalam, called up IN the late 1990s to help develop the Samyukta, India’s first major EW system. So vital was Tata Power SED to the Samyukta that, at a time when the private sector was not allowed into defence production, a special gazette notification designated the company a “Gazetted Work Centre” for the Samyukta.

Emailed a questionnaire on this violation of rules in favour of BEL, the MoD has not responded.

Electronic Warfare is modern warfare’s crucial fourth dimension. The winner of the physical contest on land, sea and air, is increasingly decided through an unseen battle fought over the electromagnetic spectrum. In this Electronic Warfare (or EW), each side scans the enemy’s radio, radar and data transmissions, taking in his operating frequencies and monitoring his plans. At a key point in battle those frequencies are crippled by powerful electromagnetic surges, leaving the enemy directionless and blind.

For obvious reasons of security, serious militaries all demand indigenous EW systems. In the Samyukta project, Tata Power SED produced an entirely Indian Control Centre, the heart of the system. Rahul Chaudhry, CEO, Tata Power SED, elaborates, “Our engineers wrote a million lines of code for the Samyukta. We also produced the ruggedised control workstations, entirely renouncing any support from foreign entities.”

In contrast to Tata Power SED’s indigenous effort, Business Standard has learned that BEL’s share of the Samyukta, including the crucial radio sub-systems, imported the bulk of its components from vendors that included Thales (France); Rhode & Shwartz (Germany); and Elisra (Israel).

But the Minister of State for Defence Production, MM Pallam Raju, justifies this preferential treatment to BEL, one of its 8 Defence Public Sector Units (DPSUs), the profit of which goes to the MoD. Pallam Raju told Business Standard, “I think that we have a responsibility to the DPSUs since [their] ownership rests with the Government of India… I have observed the capabilities and capacities built up in the DPSUs, and it will be very difficult to replicate them today. So having built up these capabilities and capacities, it is important to utilise these assets in the service of the nation.”

BEL’s windfall in being assured a large order of the “Track and Wheel Based EW System” will allow it to aggressively subsidise several other EW projects that are being tendered, including the Rs 1300-1400 crore “Integrated Electronic Warfare System (IEWS) for Mountain Terrain” and the IEWS for Cross Country and Desert Terrain.

Private industry sources complain that this extraordinary favour to BEL comes even as the military courts the private sector in building defence industrial capability. In July 2005, the Headquarters Integrated Defence Staff (HQ IDS) shared its long term perspective plan --- entitled “Technology Development for Joint War Fighting Capability” --- with private industry, after which several private companies sunk money into developing the identified technologies, including EW technology.

With BEL poised to corner the profit, private companies that sank tens of crores into technology development say they have no option but to market their crucial software codes. Overseas EW integrators are looking for suitable Indian software as a method of discharging their offset obligations. That entails the danger of EW software codes finding their way into commercially available EW systems, available to countries inimical to India.

(Tomorrow: On a short fuze: ECIL’s explosive strategy)

Thursday, 11 February 2010

MoD scraps plans for Raksha Udyog Ratnas

India's defence minister, AK Antony has bowed to public sector unions. Industry bodies plan to take up cudgels

By Ajai Shukla
Business Standard, 11th Feb 2010

The MoD has decided to retain decades-old barriers against allowing India’s private sector a meaningful role in defence production. Minister of State for Defence Production, MM Pallam Raju has revealed that the MoD has scrapped its plan to nominate leading defence players from the private sector as Raksha Udyog Ratnas (RuRs), or Champions of Defence Industry, thus granting them the same status as Defence Public Sector Undertakings (DPSUs) and Ordnance Factories (OFs).

The highly-regarded Vijay Kelkar Committee on Private Sector Participation in Defence Sector had recommended in 2005 that selected private sector companies should be permitted to build major defence platforms like tanks, aircraft and ships, effectively allowing them into an inner circle that had been reserved since independence for DPSUs and OFs. In June 2007, the MoD-appointed Prabir Sengupta Committee finished examining more than 40 private sector applicants and recommended about 15 of them for RuR status.

Nothing has been heard of that report since then, and Business Standard can now confirm the burial of that proposal. Pallam Raju has told Business Standard that small private sector companies, which would have been ineligible for RuR status, opposed this initiative.

The MoS said, “I don’t want to give any details, since my minister has not spoken on this issue yet. But this idea was opposed by small companies who don’t have deep pockets, but have vertical capabilities. They protested and said why should we be discriminated against when we have better capabilities. Taking their views into consideration, better wisdom prevailed. We (the MoD) said, why should we discriminate? We should let everybody have an equal opportunity; why should we give preferential treatment to the big players?”

MoD sources, however, suggest that this decision was prompted less by opposition from private sector companies and more by pressure from the DPSU trade unions, which feared job losses from business flowing to private sector companies. So far, Defence Minister Antony had promised that he would reassure the DPSU trade unions that there was business enough for everybody.

A key benefit to RuRs would have been the reimbursement by the MoD for 80% of the R&D expenses they incurred on nominated weapons systems. Pallam Raju points out, “Now that’s open to everybody… not just RuRs. That offer is open whether it is a small company or a large company. We are just waiting for people to come forward. We will fund 80% of the development cost, [provided] we believe that there is a future in the proposal that they are bringing to the table.”

The MoD also argues that the recent amendment to the Defence Procurement Procedure of 2008 (DPP-2008), which has created a new procurement category of “Buy and Make (Indian)”, has obviated the need for RuRs. This category allows a private company to lead the development of a weapons platform, by integrating its various components, including a high percentage procured from abroad.

But the private sector is closing ranks against the scrapping of RuRs, which many private companies have become aware of in their conversations with the MoD. Business Standard has learned that all three industry bodies, CII, FICCI and ASSOCHAM, are approaching the MoD to point out that the tax and excise benefits that DPSUs and OFs enjoy, continue to make it an uphill playing field for the private sector. Nominating selected RuRs would entitle them to those benefits.

DPSUs, OFBs and other MoD entities like the DRDO have been granted total exemption from excise and enjoy favourable treatment in the payment of customs duty for materials, sub-systems and systems that they import. Private companies do not benefit from these exemptions.

Tuesday, 9 February 2010

Israel develops capabilities, India pays the bill

India's first Phalcon AWACS was delivered by Israel on 25th May 2009. Here it touches down on Indian soil for the first time, at Jamnagar Air Base.

by Ajai Shukla
Business Standard, 9th Feb 09

For many Indian commentators, especially those on the right, Israel provides an inspiring example of how to deal with external threat. One could equally argue that notwithstanding its comfortable position as the regional hegemon, Israel and its citizens remain insecure, xenophobic and afflicted by a disturbing sense of victimhood. It’s a debate that continues, especially in that country.

What Israel unquestionably does illustrate for India --- with this country paying hundreds of millions of dollars annually for the lesson --- is a well-considered plan for building their defence industry. In becoming India’s biggest defence supplier, Israel has bared a hard-nosed strategy that our policymakers must grasp and emulate.

Since Israel does not market aircraft or ships, its defence companies have focused on the lucrative market for upgrading India’s predominantly Russian weaponry, including MiG-21 fighters; ship-borne missiles; and T-72 tanks. Their first step was to understand Russian technology, for which Israeli defence companies accepted initial contracts at cost price to build their engineers’ capabilities. With that experience gained --- at India’s cost, one must note --- Israeli systems designers progressively graduated up the complexity scale. Today, Israel’s defence industry, with capabilities honed across a generation of Russian platforms, can bid across the globe.

The opportunities for Israel are vast. Some 30,000 T-72 tanks are in service worldwide, including 2500 in India. But Israel, not India or Russia, will feed off that upgrade market. India provided Israel with the tanks, the opportunity and the money for creating that capability. Ironically, the MoD ignored India’s own defence industry; its undeniable competence could have been as easily translated into capability.

Israeli industry garnered another windfall from its offer to build the Phalcon Airborne Warning & Control System (AWACS). This airborne radar mounted on a Russian IL-76 aircraft, allows airborne controllers to monitor and control airspace for hundreds of kilometres around. No Israeli company had ever designed such an AWACS before, but India handed over US $1.1 billion (Rs 5000 crores) to Israel Aerospace Industries (IAI) and Elta. Hundreds of Israeli designers learned on the job, building AWACS capability on Indian money. Israel will now build another three AWACS for India, several for the Israeli Air Force and export more to Chile and Singapore.

Another feeding trough is the ongoing upgrade of Indian Navy ships, especially the technologically challenging system for “net-centric operations”. This digitally interlinks the fleet’s sensors and weapons --- in the air, on the surface and underwater --- into seamless information and command networks. The two Israeli companies bidding for this strategic contract, Rafael Advanced Defence Systems and IAI, began building capabilities while fitting Indian warships with the Barak missile early this decade. With detailed knowledge of the warships’ Russian combat management system, Israeli engineers are now ready to design the net-centric operations system, the crucial nerve centre in war.

In this, as in other upgrade contracts, India’s MoD has ignored the advantages of building indigenous capability. Precision Electronics Ltd, a Delhi-based company that engineers high-tech defence electronics, joined hands with US giant, Raytheon, to bid cheaper than Rafael and IAI. It seemed as if, at last, Indian capabilities would also be built. But, mysteriously, the MoD scrapped that tender last month. There is no way to verify the industry buzz that the Israelis contrived that cancellation; the only thing known for sure is that Rafael and IAI are being investigated by the CBI for corruption in the Barak sale. But it would be safe to bet that, when fresh bidding is ordered, the Israelis will come in with cheaper prices.

The Israeli strategy is: a financial loss is acceptable, to curb Indian defence industrial capability. Each time an Indian company develops capability in a strategically vital domain, foreign companies will be shut out from that realm forever.

Strangling the competition at birth is business, not criminal activity. Israel can be expected to do that. What defies logic, though, is the MoD’s dogged refusal to nurture Indian R&D the way it has Israel’s. This is of a piece with the MoD’s approach to Russia during that country’s troubled 1990s. With Russia’s economy bankrupt and military design bureaus and manufacturing units in dire straits, India placed a string of equipment orders --- Sukhoi-30MKI fighters; Talwar class frigates; and T-90 tanks, amongst others --- providing life support to that dying establishment. China, in contrast, simply bought over a bevy of top Russian design engineers, paying them to live in China and build capabilities within China’s defence industries.

Ashok Kanodia, the MD of Precision Electronics, admires and envies the Israeli companies. Admitting that his own strategy involves bidding at cost price, Kanodia explains, “My gain will be the engineering capability and experience that is created, with the MoD paying the bill. Monetary profits are for later.” But he ruefully admits that, with the MoD apparently unconcerned with developing Indian capabilities, Israeli firms are now unstoppable.

The MoD, it would appear, has failed to understand that the essence of defence indigenisation is about building domestic design capability. All that South Block seems to have is an oft-repeated target: moving from 70% reliance on foreign equipment to 70% supply from Indian companies. But how exactly this will be done, the MoD has never pronounced. Since a target cannot substitute for a strategy, it is time that South Block implements a clear policy that would allow Indian companies --- especially in the private sector --- to build their capabilities with some assurance of business. That might be the best thing that Israel has done for India.