Army chief slams BEML on Tatra, awards it Rs 1,500-cr deal

by Ajai Shukla

Business Standard, 31st May 12

The outgoing army chief, General V K Singh, claims he scuttled a Bharat Earth Movers Limited (BEML) bid to sell overpriced Tatra vehicles to the Indian Army. But, in February 2012, the army quietly signed a contract with BEML for an even larger and more controversial purchase: a $275-million (about Rs 1,500 crore) contract for 204 armoured recovery vehicles (ARVs).

Last week, the army chief declared in a television interview that he knew the WZT-3 ARV contract was a scam and BEML should be investigated in detail. He called the Tatra deal “a wake-up call for us to start examining other areas where things could have gone wrong”.

But in February, BEML was nominated, without bidding, for the lucrative order for additional WZT-3 ARVs. Disregarded entirely was the fact that in three previous contracts for a total of 352 WZT-3 ARVs (44 in 1999; 80 in 2002; and 228 in 2005), BEML had disregarded the contractual stipulation to indigenise the ARV. Instead, the Indian defence public sector undertaking (DPSU) imported fully built ARVs from a Polish company, Bumar, fitted cosmetic Indian components and supplied these to the army.

The WZT-3 ARVs are essentially T-72 tanks kitted for repair and recovery, rather than for fighting. Instead of a gun and turret, the T-72 is fitted with a heavy-duty crane, winch and repair equipment. This allows the ARV to travel cross-country with tank columns, repairing tanks that break down.

The purchase of these essential vehicles has been fraught with controversy. In 2003, Brigadier Inder Mohan Singh was a Deputy Director General in the Master General of Ordnance (MGO) Branch, which handles the procurement of “in-service equipment,” as the WZT-3 was since 1999. He has told Business Standard the tendering process was manipulated to ensure BEML emerged the lone bidder. The tender was sent out to only two PSUs, Bharat Heavy Electricals Ltd (BHEL) and BEML; only BEML bid. When Larsen & Toubro threw its hat in the ring, the defence ministry’s acquisitions chief ruled it out as an “unsolicited bid”. That left BEML, the single vendor, at liberty to dictate terms.

Top L&T officials verify this happened, though the company has declined to comment officially, since it had not been invited to bid.

Brig I M Singh says Ukraine then wrote in, offering their T-72 based ARV for trials. This was an attractive offer, since Ukraine was willing to use the T-72 chassis and running gear that India was already building near Chennai, while importing only the recovery gear. This, saysby Singh, would have made their ARV 30-40 per cent cheaper than the WZT-3. He put up an official proposal that the Ukrainian ARV be invited for trials, since this was a Rs 1,000-crore contract that should not go to a single bidder.

That idea was quickly shot down by the MGO himself, Lt General V K Jetley, whose brother, Colonel Virendar Jetley, had been employed by Bumar India, a joint venture between Bumar Poland and the New Delhi-based Chemon Group, headed by prominent Delhi cigar baron, Chetan Seth. “Within days, I was removed from the ARV cost negotiation committee,” says Brig Singh.

Chetan Seth, interviewed by Business Standard, confirms Col Virendar Jetley was his employee. However, he denies any influence was exercised.

Arms dealers have long sought a link with the MGO’s office, which controls a large chunk of the defence budget.

The owner of Vectra, Ravi Rishi, now under the CBI scanner in the Tatra case, employed two successive MGOs soon after they retired: Lt Gen R I S Kahlon, from the time he retired till his death last year; and Lt Gen S J S Saighal, who hit the limelight when Eurocopter, which employed his brother, Lt Gen H S Saighal, won a massive Indian contract for 197 light helicopters. The defence ministry overturned that decision after rivals protested.

With the contract for 228 WZT-3 signed in 2005, Bumar Poland began sending shiploads of ARVs to Mumbai. While BEML was supposed to indigenise these quickly, Brig I M Singh says BEML did absolutely no work on the ARVs.

“The Bumar ARVs did not even go to the BEML plant. When the ship from Poland reached Mumbai, we would send drivers to unload the ARVs. They would load the ARVs onto a train to Ordnance Depot, Kirkee, from where the frontline units would collect them,” says Brig Singh.

Chetan Seth admits the ARVs never went to BEML but claims some Indian parts would be fitted onto the ARVs in Ordnance Depot, Kirkee. “It took some time, but we indigenised drivers’ periscope sights; drivers’ adjustable seats; periscopes; and radios. We had a team of five Polish engineers in Kirkee,” avers Seth.

Approached for comments, BEML chief, V R S Natarajan, said he would respond in a press conference once the army chief retired. When pressed for answers, he asked for an emailed list of questions, to which he has not responded.

Meanwhile, another Chetan Seth company, Optic Electronics, was providing an illustration of how “indigenisation” worked in the WZT-3.

According to a senior Chetan Seth employee, Optic Electronics functioned from an SEZ in Noida, importing surplus parts from East Europe depots, touching these up, and then re-exporting them at a 500 per cent profit.

“Optic Electronics would import the day sights for each WZT-3 ARV for $5,500. These stained, often rusty, parts would be cleaned up and re-exported to Bumar Poland for around $25,000. These would then be fitted onto the WZT-3,” says the Seth employee on condition of anonymity.

Chetan Seth says he built day sights in partnership with a Polish company called PCO. He admits providing day sights for the WZT-3, but denies they were surplus parts from junkyards.

Ironically, the “indigenisation” of the WZT-3, which never crossed even 20 per cent, was being done through low-tech routes like ploughs, driver sights, towing ropes and seats, even as India was running a full T-72 tank manufacturing line at Heavy Vehicles Factory, Avadi, and building T-72 engines at the Engine Factory, Avadi.

Business Standard learned during a visit to Avadi last November that the Ordnance Factory Board (OFB) had quoted a price of Rs 40-50 lakh per engine for the WZT-3, but BEML rejected this as too high. Consequently, Bumar continues to source the engine from East Europe. The OFB’s quote has also been rejected for the latest order for 204 WZT-3 ARVs, which bodes ill for any prospect of indigenisation.

The ministry of defence has not responded to an emailed request for comments.

Thank God that's over...

Ajai Shukla

Business Standard, 29th May 12

On April Fools’ Day 2010, while taking over as Chief of Army Staff, General V K Singh identified his foremost goal as restoring the army’s “internal health”. On Thursday, in what surely will be a frosty ceremony, he will hand over to his successor, General Bikram Singh, an army whose generals are badly divided. Not even in the 1950s and 1960s, when the ambitious Lieutenant General B M Kaul exploited his proximity to Jawaharlal Nehru to split the officer community into pro-Kaul and anti-Kaul factions, did India witness the sorry spectacle of an army chief publicly denigrating his top commanders.

Where did V K Singh go wrong? Many argued (including this columnist) that the army chief was within his rights to take his government to the Supreme Court. This after the defence ministry rejected his petition to adjust his date of birth, and thereby allow him another 10 months in office. But once the Supreme Court judges rubbished his case in court, forcing him to withdraw his petition, V K Singh faced the prospect of an anonymous retirement just four months away.

His desperate riposte was ill-judged from the start. Soon after his setback in the Supreme Court, a group of illustrious citizens, including a retired navy chief, Admiral Ramdas, filed a writ petition in the Supreme Court that rested on the communal narrative of a Sikh conspiracy to get General Bikram Singh into office. While the petitioners cannot be conclusively linked with V K Singh, the evidence suggests that they were at least manipulated by him. On February 10, the day V K Singh withdrew from the Supreme Court, the general’s henchmen approached me with a detailed briefing on “Operation Moses”. Reduced to its cringe-worthy essentials, this had Prime Minister Manmohan Singh and his wife; Planning Commission Chairman Montek Singh Ahluwalia and his wife; former army chief General J J Singh and his wife; and the Shiromani Gurdwara Prabandhak Committee (every Sikh down the chain, you get the drift?) in cahoots to get V K Singh out of office on May 31, 2012, when Bikram Singh would be poised to take over from him. I declined to pursue these improbable and slanderous allegations. Regrettably, Admiral Ramdas & Co approached the Supreme Court, challenging Bikram Singh’s appointment.

Perhaps this communalism should not have been a surprise. After all, the Rajput card was played without compunction whilst V K Singh was fighting his date of birth battle. A group of Rajput parliamentarians was dispatched to the prime minister to plead on his behalf. When a proxy was needed to file a Supreme Court writ petition on the general’s date of birth, the “Rohtak Grenadiers’ Association”, packed with the general’s fellow-Rajputs, was conveniently at hand.

Sadly for V K Singh, nothing worked. The PM politely reminded the Rajput MPs that the army must remain apolitical. The Supreme Court, less politely, dismissed the Rohtak Grenadiers’ Association writ petition. And the apex court, while throwing out the “Operation Moses” writ petition in end-April, scolded the petitioners for communalising the issue.

With avenues closing fast, V K Singh apparently decided to use his office to launch himself into politics. By end-March, he had donned the garb of an anti-corruption crusader. First an earlier interview was dusted out in which he described turning down a Rs 14 crore bribe by one of his senior generals; that was followed in short order by the leak of his letter (still a whodunit!) to the PM warning about the army’s poor state of operational readiness. The insinuation was clear: with corruption below him and indifference above, V K Singh alone was a bastion of morality. Last month, in an unabashedly political move, the chief travelled to Ballia for a Samajwadi Party function to unveil a statue of former prime minister Chandra Shekhar.

Last Friday, the outgoing chief proved that he had lost any lingering trace of judgement. Sharing a platform with R K Anand – a disreputable lawyer who the Supreme Court convicted for contempt of court after an NDTV camera caught him buying off a key witness in the notorious BMW kill-and-run case – V K Singh launched a public tirade against one of his corps commanders, Lt General Dalbir Singh Suhag, ironically accusing him of making public a show-cause notice issued to him. Suhag was apparently being targeted as the army chief who would take over from Bikram Singh. Earlier that day, V K Singh had attended an ex-servicemen’s rally in Dharamsala, where he sat listening as former Congressman Vijay Singh Mankotia flayed the government.

Fortunately, it is time to turn the page. It would be a mistake to believe (as Pakistan’s generals are prone to do) that the Indian Army will remain deflated for long. The young and mid-ranking officers, and the rank and file, remain untouched by V K Singh’s shenanigans. Bikram Singh has his task cut out for him: to apply a healing touch and to visibly and conclusively bury the vendettas that V K Singh pursued. The corrosiveness of the outgoing chief will itself make his successor look good. Above all, Bikram Singh must embrace the virtues of silence. An army chief expresses himself with tanks and guns, not in lengthy interviews on news television.

Defence industry staggers under rising dollar, seeks MoD protection

By Ajai Shukla

Business Standard, 26th May 12

With the dollar hardening almost 25 per cent from Rs 45 a year ago, to Rs 56 on Wednesday, our import-dependent defence is obviously taking a hit. The 13.15 per cent rise in the latest defence budget --- from Rs 1,70,937 crore last year, to Rs 1,93,407 crore for 2012-13 --- has been wiped out and more. The picture is even bleaker when inflation is factored in, which runs at about 15 per cent annually for defence equipment.

The damage extends to the Indian defence industry, which even in “indigenous” weaponry uses a substantial share of foreign components and systems, ranging from 30-70 per cent. Until last year, the Defence Ministry (MoD) sheltered the defence public sector --- which includes 8 defence public sector undertakings (DPSUs) and 39 Ordnance Factories (OFs) --- through a mechanism called foreign exchange rate variation (FERV), which adjusted their income to cover forex fluctuations. In contrast, the private sector has stood exposed to foreign exchange (forex) risk.

Consequently, many private players stare at unexpected losses. Take Larsen & Toubro, which won a Rs 1,000 crore contract in March 2010 to build 36 fast interceptor craft for the Indian Coast Guard. These are 110-tonne patrol and rescue vessels that are propelled by water jets at a scorching 44 knots (81 kilometres per hour). L&T says that about 40 per cent of the vessel is imported, including the engine and the water jets. Given a profit margin of 10 per cent, the L&T quote catered for a forex component of Rs 360 crore. Given the rupee’s fall, that forex component has risen to Rs 445 crore today. L&T says it is struggling to break even on this contract.

Or take Bangalore-based Alpha Design Technologies Ltd, which won a Rs 48 crore contract last September to build target designators for the air force, laser beams that “light up” a target, allowing a laser-detecting aircraft bomb to ride the reflected beam to the target for a pinpoint strike. When Alpha submitted its bid in Nov 2010, the dollar was worth Rs 44.37; today it is 25 per cent higher. Given that 70 per cent of the target designator is imported, Alpha faces a substantial loss.

“We were competing against DPSUs like Bharat Electronics Ltd, which the MoD covered against FERV risks. With profit margins in defence electronics barely 5 per cent, how could we afford forex hedging?” asks Colonel HS Shankar, CMD of Alpha.

Industry sources tell Business Standard that forex hedging costs were about 6% per cent annually, when the rupee was stable. A three-year hedge, essential given the time taken for discharging defence contracts, would have cost 17-18 per cent. With the rupee in freefall today, a three-year hedge will cost a vendor 30 per cent.

“With the rupee nose-diving, quoting for fixed price contracts has become extremely risky without hedging at high cost. Imagine the plight of Indian bidders when competing for Indian defence contracts against foreign companies who are anyway automatically protected,” says MV Kotwal, President (Heavy Engineering), L&T.

Now the private sector has asked industry bodies, CII and Ficci, to approach the MoD for protection. Business Standard has learnt that Ficci will be considering the issue at its National Executive meeting on May 29^th.

So far, the MoD has been entirely unsympathetic. L&T’s Kotwal says that private sector companies had asked the MoD to treat them at par with the DPSUs, which enjoyed FERV protection. The government acceded to that request in the latest Defence Procurement Procedure of 2011 (DPP-2011), but not in the manner requested.

“Instead of allowing FERV for the private sector, DPP-2011 denied it to both the public and the private sector!” says Kotwal.

In fact, DPP-2011 shelters Indian vendors from FERV in global contracts, i.e. when an Indian company competes and wins in an international tender. However, FERV shelter is disallowed in the contract categories of “Buy (Indian)”; “Buy & Make (Indian)”; and “Make” categories, which are open to Indian companies alone. The only exception is for DPSUs, when the MoD nominates them as the source for procurement or production.

CEOs of defence manufacturers point out that they already absorb significant risks, including potential fluctuations in commodity prices, especially aluminium and steel. But they say it is unfair to expect them to cater for rupee fluctuations that stem from the government’s macro-economic policies.

“When the government buys from a foreign arms vendor it absorbs the forex risk, but it wants fledgling Indian defence manufacturers to absorb that risk themselves. The private defence industry is just learning how to walk; it cannot yet carry the forex risk. If the MoD is serious about building a private defence industry, it should not transfer forex risk to us,” says Rahul Chaudhary, CEO of Tata Power (Strategic Electronics Division).

Across the defence sector, there is recognition that the ongoing forex-related turmoil is rooted substantially in the MoD’s inability to develop manufacturing capabilities in the materials, components and sub-systems that that go into modern weapons systems.

“India has successfully integrated high-tech weaponry like the Tejas Light Combat Aircraft; the Arjun tank; even a nuclear submarine. But as long as the MoD does not build capability in basic components that we continue to import --- such as Very Large Scale Integrated (VLSI) chips and image intensifier tubes and thermal imaging detectors for night vision devices --- even these indigenous programmes carry extensive forex risk,” says Major Karun Khanna, Advisor to Alpha Design Technologies.

The rupee depreciation has also affected capital procurement from overseas vendors. Says KPMG’s defence analyst, Neelu Khatri: “The capital budget allocation of Rs 79,579 crore in April was worth US $15.6 billion then; today it is worth just $14.22 billion. An effective cut of $1.42 billion means a 9 per cent procurement cut for a nation that is heavily dependent on imports and already suffering alarming rate of equipment obsolescence.”

Naval training sailship completes 5000 nautical mile odyssey

The Indian Navy's training sailship, the Mhadei, arrived at Kochi Port today after completing a grueling 5000 nautical mile odyssey to South East Asia. The vessel, skippered by naval pilot Lieutenant Commander Abhilash Tomy, was on a training voyage to provide off shore sailing experience to two officers and four sailors.

The Mhadei began its voyage from its base port, Goa, on 17^th March. Over the next two months, it sailed to Ezhimala, Kochi, Port Blair, Langkawi and Phuket. Lieutenant Commander Tomy terms it a good experience despite having to  face the gathering monsoon winds on their return leg. 

The vessel will cast off from Kochi on 29^th May to return to Goa. Mhadei had created history when Commander Dilip Donde of Indian Navy became the first Indian to circumnavigate the globe solo in May 2010.

Afghanistan: withdrawal by 2014, military aid ends by 2024

By Ajai Shukla

Business Standard, 23rd May 12

The NATO summit in Chicago that concluded on Monday put the stamp of finality on a western withdrawal from Afghanistan by 31^st Dec 2014, leaving security thereafter in the hands of Afghans. Starting next summer the Afghan National Security Forces (ANSF) will assume the lead role in imposing security across the country, with western forces moving to a backup role. The question of who will pay the ANSF’s $4.1 billion annual tab remains unanswered for now.

Announcing the withdrawal of the 40-nation, International Security Assistance Force (ISAF), which has overseen Afghanistan’s security since 2001, a joint communiqué stated on Monday, “ISAF’s mission will be concluded by the end of 2014. But thereafter Afghanistan will not stand alone.”

That generosity will last only for a decade; NATO says that Kabul must support its own forces by 2024. “Afghanistan’s yearly share (of the security budget) will increase progressively from at least US$500m in 2015, with the aim that it can assume, no later than 2024, full financial responsibility for its own security forces,” says the communiqué.

During the interim period, NATO’s support remains conditional on Kabul’s “commitment to a democratic society, based on the rule of law and good governance, including progress in the fight against corruption.” The western insistence on corruption-free governance has been a major irritant for President Hamid Karzai.

Turning the screws on Karzai, who must constitutionally step down as Afghanistan’s president after completing his second term in 2014, NATO leaders stated, “The forthcoming elections must be conducted with full respect for Afghan sovereignty and in accordance with the Afghan Constitution. Their transparency, inclusivity and credibility will also be of paramount importance. In this context, continued progress towards these goals will encourage ISAF nations to further provide their support up to and beyond 2014.”

So far, ISAF has functioned under a “peace-enforcement” mandate under Chapter VII of the UN Charter. Now NATO will seek a fresh UN mandate for its new mission that would be confined to training, advice and assistance. The communiqué noted. “We will ensure that the new mission has a sound legal basis, such as a United Nations Security Council Resolution.

The joint communiqué papered over serious rifts within NATO. Newly-elected French president, Francois Hollande, insists on withdrawing French forces from Afghanistan by 2012, while German Chancellor Angela Merkel wants to salvage NATO’s honour through a synchronised pullout. These divisions are being gleefully exploited by the Taliban, which registered its presence at Chicago with a 3-page statement urging NATO countries to follow France’s example.

The ANSF already has responsibility for security across half of Afghanistan, according to time lines that were mandated in the November 2010 NATO summit in Lisbon. In the first phase, which was completed in July 2011, the ANSF took charge of Kabul city, six smaller towns, and two of Afghanistan’s 34 provinces. In the second phase that began last November, Afghan forces assumed responsibility for a much larger area: six provinces, seven cities and 40 rural districts. With the completion of the third phase, which President Karzai announced on 13^th May, three quarters of Afghanistan will be under ANSF charge. But the most violent areas --- like southern Afghanistan, where Taliban influence is strongest --- are still controlled by western forces.

Despite “assuming security responsibility” for large swathes of Afghanistan, the ANSF remains incapable of operating independently. Western forces still provide crucial logistic support; medical facilities; air support and mentoring. Experts say it will take at least a couple of years for the ANSF to operate independently.

The biggest loser at Chicago was Pakistan’s president, Asif Zardari, who accepted a special invitation to Chicago but couldn’t get to meet his US counterpart. According to US press reports, President Barack Obama is believed to have made a meeting conditional on Islamabad agreeing to reopen American supply routes from Karachi Port to Afghanistan. Despite a meeting between Secretary of State Hilary Clinton and President Zardari, that deal was not closed.

At a press conference after the summit, US president Barack Obama acknowledged “tensions between ISAF and Pakistan, the United States and Pakistan,” but pointed out that, “they are being worked through both military and diplomatic channels.”

Referring to the extremism and instability in that country, Obama declared that “it is in Pakistan’s interest to work with us and the world community to ensure that they themselves are not consumed by extremism that is in their midst.”

NATO leaders, eyeing exit, to pledge support to Afghan forces today

By Ajai Shukla

Business Standard, 20th May 12

On Sunday and Monday, at a keenly-watched meeting in Chicago, NATO leaders will argue over who should pay the US $4.1 billion bill for the Afghan National Security Forces (ANSF) after the pull-out of foreign troops by end-2014 leaves Afghan security largely in the hands of Afghans.

Currently, a NATO-led International Security Assistance Force (ISAF) oversees Afghan security, along with US military forces that operate independently of ISAF. Starting from 2015, an Afghan National Army (ANA) and Afghan National Police (ANP), numbering some 352,000 troopers, would assume full responsibility for security. Their numbers would be reduced incrementally to 228,000 by 2017.

NATO has assessed that Kabul would require about US $4.1 billion annually for maintaining this force. High-level Washington sources say the US is trying to peg its contribution to $2 billion; NATO countries could contribute another $1 billion; the Afghan budget would pay for about $500 million; leaving a $600 million gap that must be filled in Chicago.

So far, NATO countries have been less than forthcoming. Germany has pledged $193 million annually; the UK has offered $110 million per year; and non-NATO member, Australia, will pay $100 million per year for the next three years. Over several years now, NATO members have regularly failed to meet their financial commitments towards ANSF training.

Afghan authorities are pressing Washington to fill the budget gaps. Afghanistan’s deputy foreign minister, Jawed Ludin, pointed out at a press briefing in Kabul this week that, “The $4.1bn is the cost not of 352,000 [soldiers and police] but of the reduced size, which is 228,000. The United States will be paying for the extra soldiers that will be needed between 2014 to 2017.”

Washington faces difficulties in allocating more money, given the depth of anti-war sentiment that is playing out in Chicago, where busloads of demonstrators are arriving to protest the war. The US has lost almost 2000 soldiers during a decade of war in Afghanistan. Another 4,500 US citizens lost their lives in Iraq.

The US draw down from Afghanistan plays out in the strategic backdrop of the US “pivot to Asia,” presented by President Obama in January. “We’re turning the page on a decade of war,” Obama had said, announcing that the US would turn away from Europe and West Asia towards “the arc extending from the Western Pacific and East Asia into the Indian Ocean region and South Asia.”

However, Washington is negotiating an arrangement with Kabul that could allow for a residual footprint of some 25,000 to 30,000 US troops in garrisons in Afghanistan that would focus on “counter-terrorist operations,” a euphemism for drone strikes against radical jehadi forces.

On Sunday, Afghan president Hamid Karzai will hold one-on-one talks with Obama in Chicago. There is no meeting scheduled between Obama and Pakistan’s president Asif Zardari, but his attendance suggests a cooling of tensions between Washington and Islamabad. Pakistan has blocked the move of US logistic supplies through the country after at least 24 Pakistani soldiers were killed in a NATO air strike on their border check post last November. Seen as a key player in any solution in Afghanistan, Pakistan is believed to have been lured to Chicago with the promise of $1 billion in released grants and an estimated $1 million per day in transit fees for the move of supplies into Afghanistan.

NATO last met in the US in 1999, two years before Al Qaeda terrorists brought down the World Trade Centre twin towers, triggering the war in Afghanistan. The 9/11 attacks led NATO member countries to invoke, for the first time ever, the common defence provisions of the North Atlantic Treaty of 1949. This mandates that an attack on one member country will be regarded as an attack on all of them.

Impending change of guard at Southern Naval Command... Vice Admiral KN Sushil to retire on 31st May

Today, Vice Admiral KN Sushil, Flag Officer Commanding in Chief, Southern Naval Command spent time with his sea going units, the last time he will do so before retiring from service on 31^st May. A proud submariner, Admiral Sushil  was among those who inducted the  Shishumar Class (HDW) submarines into the Indian Navy. As the first Inspector General Nuclear Safety of Indian Navy, Admiral Sushil did the ground work for inducting advanced nuclear submarines like INS Chakra into the navy.

In the maneuvers held off the Kochi coast today, eight ships from the Southern Naval Command participated. INS Tir, from the Kochi-based 1^st Training Squadron was the FOC-in-C's flag ship. Dorniers, Seakings, Chetaks and Dhruv Advanced Light Helicopters from INS Garuda also participated. The admiral exhorted the men on board to keep the Naval Ensign flying high and remain sharp and ready to defend the interests of the nation.