G2G India Defense Deals or Govt to Govt Defence Acquisitions

G2G: Govt to Govt Indian Defence Procurements 1

By: Kamaljit Singh Jassal [email protected]

Background 1. As was the practice world over in 21st century, defence trade was aligned based on the political and strategic relations. Both these forms are manifestation of Government-to-Government (G2G) trade. Post-independence, while India showed a tilt to erstwhile USSR (majorly Russia) despite practicing non-aligned movement, ample hardware was procured from the erstwhile commonwealth rulers in UK. Naval ships Vikrant, Beas class Frigates, aircrafts Hunters, Alize, Avro, Wiley Jeeps, Guns, Radars, Missiles etc were part of the continued dependence during the warring years of 1947, 1962, 1965. This procurement was purely G2G as it originated from one Government to another government, was sans open competition and was given as part of political considerations. 2. India’s ally USSR played a stellar role in the truce during the 1962, 1965 and 1971 wars which made USSR a trusted strategic ally in need. Being a strategic ally, many other things are shared which drive down the procurement cost of military hardware, as strategic relations subsidise or offset these in some other area where India had strength and could afford it. This led to first wave of modernisation in 70s and 80s with the heavy Russian hardware. This was a real G2G strategic trade with both the Government synergising on the issue, but here the cost consideration were not the main issue. This was also the time when Indian forces experienced Russian inventory and exploited it in the battle field. Russian hardware stood to the Indian battle field and vagaries of the weather. Generally, Russian procurement trade was tied to strategic considerations while the earlier UK procurement was part of continued political dependence. 3. With the Glasnost (openness) and Petrovoiska (Re-structuring) visiting USSR in late 80s, strategic trade shifted to Dollar based trade. By the end of 80s decade and right at the start of 90s, India had slipped into worst ever monetary position which called for a relook at dollar based trade. This called for certain reforms in defence procurement and word indigenisation was coined in as a start for self –reliance. 4. While the Indian Defence Procurement reforms evolved with the emergence of procedures in year 1992, 2002, 2005, 2006, 2008, and so on, G2G format of procurement which was devoid of competition then, continued to be in practice in some form or the other. Procurement of Hermes (Viraat), Andromeda (Krishna) from UK in 1988 and 1998 respectively and LPD Jalashwa ex US Navy are Naval examples. G2G formats 5. During the later 2 decades (viz 1990-99 & 2000-10), two structures-procedures got evolved, due to long pursuing Government efforts. Incidentally, these are with the great super-powers of cold war times viz Russia and USA.

(a) Indo-Russian Inter-governmental Commission (IRIGC-MTC) was created in 2000 at the Govt level. This group is for facilitating defence cooperation and

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continuing spares or long term support for the hardware bought earlier. Indian Government for its defence forces needed a single point/ nodal agency for discussing with various sub-vendors located in ex-USSR. This industry coordinator was required as most of the spares/ long term product support of earlier bought hardware were lying with production units/ companies in states other than Russia. This was responded to by the emergence of ROSBORON Export company or commonly called RoE, which has backing of the Russian Govt. Today, G2G format with Russia or ex USSR does not exist formally. While Russia has a military technical group (IRIGC-MTC) which considers all acquisitions related issues but since entire production is not done in Russia alone and hence relevance of ROSBORON Export comes in. Correctly speaking, with Russia G2G format has got split with Policy/ procurement issues being dealt with the Govt while Business/ contracting issues are dealt by RoE. This system though not legally robust but is making the business go as the challenges to supply side are well known as are risk to demand side. It should be well understood that India has a long time history of strategic reliability with Russia/ ex-USSR and hence Indo-Russia/CIS/ ex-USSR defence trade is very much relevant.

(b) Indo-US civil trade was building up, in the intervening period, due to India’s IT software skills. Post India’s Nuclear test explosion in 1998, US had placed a ban on Defence trade. As a result, India had started looking at Israeli military ware which was not only of state of art/ war but was also relatively cheap. With thrust on indigenisation or growing self-reliance, as well as changing Geo-political situation in Indian region (post 9/11), made USA to rethink on NSSP with India. In 2005, USA lifted military sanctions and sought active defence cooperation with India. As USA had an evolved structure of Foreign Military Sales (FMS), it was very easy for India to comphrend same. Minor changes wherever required were discussed and contracted accordingly. While the early procurements in the year 2005 to 2008 (mainly C130J, C-17 etc) were done in a direct G2G approach (sans competition), later part of the 2000 decade saw multi-bidding followed by FMS/DSA or a hybrid approach taking place (for Navy’s P8I ac). While the USA hardware is well proven in the Asian terrains, its maintenance issues costing are still to be understood. ToT and offsets are also the issues which challenge the otherwise clean time bound process of this acquisition.

6. One thing that could be seen from the above two formats is growing shift to strategic relationships or the deals rather than political nature of them. Procurements are being driven by the need or SQR rather than political opportunity. Also, the market has shifted to being a Buyer market rather than a Sellers’ market. India’s growing stature and evolving structures that deal the procurements is getting professionalised with more thinking and rationality brought to forth in decision making. Procurement is not stand alone today but is coupled with discovery of cost, offsets, transfer of technology, co-production concepts etc.




Need of G2G 7. Need of G2G or Inter Government Agreement has been defined in DPP2013 (since 2006) and it states as follows:

Quote:

Inter Government Agreement

71. There may be occasions when procurements would have to be done from

friendly foreign countries which may be necessitated due to geo-strategic advantages

that are likely to accrue to our country. Such procurements would not classically

follow the Standard Procurement Procedure and the Standard Contract Document

but would be based on mutually agreed provisions by the Governments of both the

countries. Such procurements will be done based on an Inter-Governmental

Agreement after clearance from CFA. The following cases would fall under the

preview of this provision:-

(a) There are occasions when equipment of proven technology and

capabilities belonging to a friendly foreign country is identified by our Armed

Forces while participating in joint international exercises. Such equipment can

be procured from that country which may provide the same, ex their stocks or by

using Standard Contracting Procedure as existing in that country. In case of

multiple choices, a delegation may be deputed to select the one, which best meets

the operational requirements.

(b) There may be cases where a very large value weapon system /

platform, which was in service in a friendly foreign country, is available for

transfer or sale. Such procurements would normally be at a much lesser cost than

the cost of the original platform/ weapon system mainly due to its present

condition. In such cases, a composite delegation would be deputed to ascertain

its acceptability in its present condition. The cost of its acquisition and its repairs

/ modifications would be negotiated based on Inter-Governmental Agreement.

(c) In certain cases, there may be a requirement of procuring a specific

state of the art equipment/platform, however, the Government of the OEM’s

country might have imposed restriction on its sale and thus the equipment cannot

be evaluated on ‘No Cost No Commitment’ basis. Such equipment may be

obtained on lease for a specific period by signing an Inter-Governmental

Agreement before a decision is taken for its purchase.

72. In cases of large value acquisition, especially that requiring product support

over a long period of time, it may be advisable to enter into a separate Inter

Government Agreement (if not already covered under an umbrella agreement

covering all cases) with the Govt of the country from which the equipment is proposed

to be procured after the requisite inter-ministerial consultation. Such an Inter-

Governmental Agreement is expected to safeguard the interests of the Govt of India

and should also provide for assistance of the foreign Govt in case the contract(s) runs

into an unforeseen problem.




G2G Future 8. By the name of it, G2G deals means a direct Govt to Govt deal or requirement which originated from the Govt and proposed to/ accepted by other Govt. However, in practice this does not happen as it is the ‘user’ which has been defined as the king in defining the needs/ SQRs and hence a ‘need’ generally originates from the field/ SHQs and moves upwards and then laterally. This system is going to steady up for most of the future G2G procurements. Clearly, earlier definition was good for striking political deals, but with growing essence to relevance of equipment or matching requirements of the hardware, value for money, strategic considerations etc have out-weighed the earlier political based G2G methodology. With the Indian MoD and Defence Forces, realising the need of technology for production at home and retaining the production for long term product support, there is growing shift towards co-production and absorbing offsets in technology. 9. Future G2G & ‘User’ Requirements. Indian Defence Production has not taken off and Indian R&D is nowhere to provide it the take-off. ‘User’ of the Defence/ Security is going to look at an existing platform or system or equipment which can provide him the edge. This proven equipment or platform may not meet the Indian environment conditions and hence a user trial would be called for. As detailed in the above paragraphs that DPP allows such procurement under Para 71 (a) & (b). This G2G user oriented procurement shall continue to stay and get consolidated in one or the other form.

10. Future G2G & VFM. User requirement would continue be the mainstay for all future military procurements. While the user may not find his all the requirements in the existing platform or equipment but modification to the existing platform or equipment would get him the best value for money. Para 72 (b) of DPP-13 covers this for an existing platform or equipment. We could have a new platform or equipment being produced simultaneously in such a manner.

11. Future G2G & Price Discovery. Generally, when G2G procurements happen, they are provided at prices which are due to strategic nature and can be called as ‘strategic cost’. In the world of arms procurement, discovery of correct cost is allways Buyer’s dilemma. When the procurement of arms is put to open bidding process, it is said that price discovery takes place. However, in the world of Indian arms procurements, it has been seen that bribe and other misuse/ abuse takes place in due process, which results in cancellation of the open competition deal. Cancellation of Augusta Westland VVIP chopper deal in recent times (2013), is an example of multi-vendor bidding process going wrong. In the future, multi-vendor bidding process would be the order of day. After due technical qualifications and L1/ price discovery, contracting could proceed in G2G format. While the FMS process of USA did offer the proven equipment under a discovered price but better discovery of the price takes place when an equipment procurement is placed in open bidding by multi vendors. Indian MoD is likely to use this multi-vendor bidding process followed by G2G contracting rather than existing discovered price G2G. It is here that existing FMS of USA would have to be tailored. Instead of FMS offering the equipment or the




platform at discovered cost, they would have to compete in the open competition with multi-vendors and it is only after having bagged the order, would Govt like the contract to proceed under Govt monitoring. This will satisfy the price discovery as also proof against the mud-slinging. For this reasons, many of the lead countries like Germany, Japan, Italy, Israel, France, UK etc would have to formulate a G2G procedure or tailor their so called ‘Foreign Defence Sales’ programme or procedure in line with this methodology. 12. It is very likely that an equipment or platform being sold under or offered under an existing FMS or such G2G procedure of a technologically advanced nation for a discovered price may be asked for a value less than such price. It would be the ability of the offering nation to do such a deal for its strategic & business considerations to strike a deal to keep the competition out ab-inito. Such nations may take advantage of the running production lines (for economy of scales) or near finishing production line (due to change in technology/ up gradation) of such military wares to strike this kind of deal. Clearly, this would be kind of strategic+cost consideration, as well as to keep the tap dry of other competitors. Future G2G & D&D Projects 13. Today, the scope exists for various advanced nations of doing the G2G deals wherein not just the finished hardware is sold to India but also they can leverage of each other’s strengths as well as the total numbers (for economy of scales). 14. An example to this effect is FGFA (5th Generation Fighter Aircraft) deal which is a joint production project wherein the final aircraft would be inducted in the Russia and India at the same time. In this strategic format, pooling of funds for R&D is done by both the countries with the existing Russian Design Bureau and final product is produced in large numbers which provide economy of scales. 15. A differentiated structure of G2G deal is seen in the BrahMos. A joint stock company was created wherein near equal share holding was held by India and Russia. Today this company has designed and produced the missiles which are being used in defence forces on either side. This is an example where in combined R&D mind pool was used and production is done in India to meet its requirements.

16. BrahMos and FGFA models are different from earlier procurement oriented G2G format. In the procurement oriented format, Licensed Production, Transfer of Technology is sought/ paid for while in this new format, sans competition, Government goes with the strategic partner wherein the sharing of technology and long term product support is built in to wholesome procurement/ production/ modernising the versions thereof/ implicit knowledge as ToT etc. This G2G format, sans competition, can be the future of Indian defence procurements with the nations who have technological strengths but don’t have the numbers to make it as a business case but yet see India as an ally if not a long term strategic partner. It is in this case, any nation may see their technological strengths in design/ production of Nuclear Aircraft Carrier, Nuclear Submarine, Mechanised Vehicles, A-A Missiles,




fighter aircrafts, fighter helicopters, communications etc and seek joint production and meaningful/ time-bound parallel induction into each other forces.

17. This Design & Development cum Production oriented G2G would be the best G2G deals in future. This has its own benefits. Best part of this G2G format is that if a lead foreign company or Nation shows such inclination for the Indian programme (mentioned in TPCR) then it can get hands down a long term contract for 15 years requirement numbers listed in LTIPP(2012-27) or TPCR. Many of the good defence companies and lead technology company in the Europe and USA are going through the downturn. Few of the Indian Industrialist had tried to buy these low technology companies to bring in defence manufacturing in India. While the lead foreign defence companies have the technological prowess but they donot have the economy of scales or simply put cost of production is too high for them to compete in small quantities open bidding process. Risk of cancellation not only escalates the uncertainties but also increases the cost of bidding. As it is many lead companies find the cost of NCNC trials high. In order to beat these uncertainties, thwart the open competition, have economy of scales for host & guest country, G2G deals under D&D projects would rise. Best part of this format is that mind boggling hassles of Offsets procedure are also subsumed. About the author: Kamaljit Singh Jassal retired from active Naval Service, in the rank of Commander, on 31 Dec 12. As Joint Director in Ministry of Defence, he was formulated LTIPP 2012-27 (Long Term Integrated Perspective Plan – a tri-service plan), 12th Defence Plan and was also part of executive committee that formulated Revised Offset Policy 2012, TPCR and 12th Defence Manufacturing Plan. As member SCAPCC, he has processed around 400 to 450 tri-service proposals. He is freelance consultant on Planning, Finance and Operations.


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G2G India Defense Deals or Govt to Govt Defence Acquisitions