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Saturday, December 11, 2010

Lockheed offsets mock MoD norms

By Ajai Shukla
The IAF's first C-130J Super Hercules at a photo-op after making its first flight. This aircraft is slated to be delivered within the month

(A two-part series on India’s defence offset policy)
By Ajai ShuklaBusiness Standard, 9th Dec 10, has a modified version of this article
Earlier this year, while commenting on India’s poorly framed and inadequately monitored defence offset policy, this newspaper had highlighted the potential for foreign arms vendors to completely bypass their offset liabilities (“India’s next big scam”, 20th Apr 10). That, it now appears, is already happening.
US defence major Lockheed Martin’s offset proposal, arising from its sale to India of six C-130J Super Hercules transport aircraft for US $962 million (about Rs 3835 crores), are seen by some MoD officials as violating provisions of the offsets policy.
They say they make a mockery of the ministry's stated aim of boosting indigenous defence industry.
Lockheed Martin’s US $275 million offset offer --- which Broadsword has reviewed in detail --- was proposed on 21st Nov 08 and cleared by the MoD. However, several ministry officials fear that allowing Lockheed Martin to bypass their offset liabilities would invite similar disregard by other vendors.
The largest component of Lockheed Martin’s offset offer is a US $121 million proposal to import and operate a “weapons system trainer” (WST), which is a simulator on which instructors from Indian company, Mahindra & Mahindra will train IAF crews of the C-130J.
The first shocker is the cost of the WST, one of four simulators needed to train C-130J aircrews (the others being a “cockpit procedures trainer”; “avionics systems management trainer”; and a “fuselage trainer”). For this piece of hardware alone, Lockheed Martin is claiming offsets credit worth US $121 million, almost 45% of its entire offset liability.
This has been made possible because the Indian Air Force, for reasons unknown, did not include simulators while actually purchasing the C-130J. the WST been a part of the C-130J contract, Lockheed Martin would have been liable --- in accordance with the Defence Offset Policy, a part of the Defence Procurement Procedure of 2008 (DPP-2008) --- to pay 30 per cent of the cost of the simulator as offset.
Pushpinder Singh, a noted aerospace expert and the editor of Vayu magazine points out, “Simulators are vital for training crewpersons. That is why every buyer of aircraft includes training simulators in the primary contract. That benefits the buyers because the vendor becomes liable for offsets for the simulator as well.”
Responding to an emailed query from Business Standard, Lockheed Martin confirmed: “The requirement for a weapon system trainer (WST) was not included under the Letter of Request (LOR) for the C-130J issued by the Government of India in December 2006. Lockheed Martin chose to include a WST in its offset proposal…. The Government agreed with our view and approved the proposed offset project after negotiations.”
Contacted by Business Standard for a comment on the IAF’s actions, the defence ministry did not respond.
Considered individually, almost every component of Lockheed Martin’s $121 million simulator offset proposals violates the defence ministry's offsets policy. Take, for instance, offset credit for $48 million to directly import the simulator, which will be installed in Hindon, outside Delhi, and operated by Mahindra & Mahindra, Lockheed Martin’s Indian offset partner.
Straight imports of defence equipment cannot be treated as offsets under the Defence Offsets Policy. Lockheed Martin, however, claims: “Direct foreign investment is permitted as an offset under the terms of the DPP. The milestone credits for the WST project are based on direct foreign investment in India which results in the provision of aircrew training facilities and capabilities.”
This, say offset experts, is factually incorrect. Para 2.1(b) of the offset policy permits “direct foreign investment for industrial infrastructure for services….” But the policy defines “services” as “maintenance, overhaul, upgradation, life extension, engineering, design, testing of defence products, defence related software or quality assurance services.” What is being provided in this case is a ready-built simulator from Lockheed Martin.
The other credits claimed by Lockheed Martin, in connection with the WST are:
(a) Offset credit for US $15 million, for technology transfer. The DPP-2008 has no provision for technology transfer to be treated as offsets.
(b) Offset credit of US $55 million, for contracts that will be given to the Mahindras to operate and maintain the simulator.
(c) Offset credit of US $3 million, for travel savings, which has been calculated in terms of air tickets, lodging, TA/DA etc, for IAF personnel who would otherwise have had to travel to the US. This is not permissible as offsets in DPP-2008.
Lockheed Martin’s other offset proposals have rung alarm bells within the ministry. They include offset credit of US $20 million for “aircraft engine design services” with Bangalore-based engineering firm, QuEST. This would only be treatable as an offset if the design services were for military engines, but there is no way of ensuring that.
It has proposed offset credit of US $15 million for “manufacture of F-16 avionics components” with Tata Power. While this would indeed be eligible for offsets, Tata Power confirms that there is no ongoing dialogue with Lockheed Martin.
Finally, a whopping offset credit of US $119 million for “manufacture of RFID components” with Bharat Electronics. RFID components are not military equipment under the DPP-2008, and this manufacture does not qualify for offsets.
Worried by such violations of the offset policy, the MoD is carrying out a major review. But Indian defence industry, which was supposed to benefit from offsets, is concerned that, instead of tightening the policy, the MoD is poised to create further loopholes that would benefit foreign vendors.

Your feedback are always welcome.
Thank you!

Lockheed Martin - C-130J Super Hercules In Action

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