Worrisome deals

In the context of the Army's recent major Armoured Recovery Vehicles deal, some questions about India's continuing reliance on defence equipment imports when it has the public sector infrastructure capable of producing such equipment independently.

PRAVEEN SWAMI Samata Party treasurer R.K. Jain: "Nanda approached me. Czechoslovakia's price was the lowest, second Slovakian, third was the Poland." Tehelka: "Haan, Haan." R.K. Jain: "He said, 'I will give you one crore rupees in advance'." Tehelka: "Okay." R.K. Jain: "You get disapproved the last one. Czechoslovakia because they are so lower that we cannot match their price." Tehelka: "Okay." R.K. Jain: "If you can push him out. Delegation is going on to the... delegation has been ordered to go to Czechoslovakia. Stop this delegation, and technically reject this company. Here are the documents." Tehelka: "Hmm." R.K.Jain: "By which it's proved that this company is closed for the last two years. They will start only after getting this order." Tehelka: "Yeah, yeah." R.K. Jain: "I will give one crore rupees. And I will give you... if they are technically disapproved, then you are my agent." Tehelka: "Yeah." R.K. Jain: "For this particular... perks... and I will give you so much of commission." Tehelka: "Okay." R.K. Jain: "I said, 'Fine.' He gave me the correspondence. I took the correspondence to George." Tehelka: "Hmm." R.K. Jain: "And he said, 'All right, I'll reject it.' He is a very intelligent man."

- from the Tehelka tapes transcripts, page 21.

NOT so many months after that taped conversation, India's Armoured Recovery Vehicle (ARV) procurements are back in the news. On March 31, India signed an order for 80 Polish WZT-3 ARVs priced at Rs.45 crores each, to supplement its existing fleet of 225. India's demands for ARVs to service its tank fleet are among the biggest in the world. The country needs an estimated 400 recovery vehicles for its 58 armoured regiments, each of which operate between 45 and 50 tanks. It is clear that despite the Tehelka revelations, a well-oiled scam continues to operate in ARV acquisitions. India's reliance on expensive imports, although it has a huge public sector infrastructure capable of producing ARVs, raises some uncomfortable questions.

Negotiations for acquiring ARVs for the T-72 battle tank fleet began in the early 1990s. The cheapest equipment on offer was the Czechoslovakian one, but officials argued that the manufacturer, Czech Bohemia, intended to offer surplus army stock, not original equipment. The Tehelka tapes substantiated rumours that this claim had not a little to do with the influence of powerful intermediaries acting on behalf of the Slovak rival, ZTS Martin. Thereafter, the Czech offer was mysteriously knocked out of the fray. In 1999, India split an order for 85 ARVs between Poland and Slovakia, for $723,000 each. India had earlier purchased 35 ARVs from Poland for $900,000, and subsequently supplemented that order by buying another 78, at approximately the same price.

When orders were placed in 1999, the deal contained transfer of technology provisions that would have allowed the ARVs to be manufactured in India. Since the time of Prime Minister Rajiv Gandhi, India has insisted that dealers representing arms firms have no role in procurements. Since the mandate has at least on paper to be respected, firms enter into tie-ups with defence public sector undertakings (PSUs), which in turn act as agents under the cover of making the equipment in India through mandatory technology-transfer agreements. The Slovak manufacturers had a tie-up with Bharat Heavy Electricals Limited (BHEL), while the Poles had one with Bharat Earth Movers Limited (BEML). The Czech bid was eliminated on the grounds that the bidder was not an original manufacturer. This rule did not seem to apply to the Slovak firm UNIMPEX, a ZTS Martin subsidiary reportedly represented by an influential Delhi-based arms dealer.

None of this second round of imports ought to have been necessary in the first place. BHEL had earlier intended to manufacture the ARVs itself at the Heavy Vehicles Factory (HVF) at Avadi near Chennai, but failed to do so because the HVF was unable to supply the T-72 main battle tank chassis on which the ARV is built. Avadi has facilities to produce between 100 and 120 T-72 Ajeya main battle tanks annually under licence, but a parliamentary committee found in the mid-1990s that it actually produced only a quarter of that number owing to mismanagement and inefficiency. Officials contacted by Frontline failed to give any clear answer about current production levels, which are being configured to build the T-90 main battle tank, of which India has bought 310 in completed and kit form. The Army, however, has complained that the T-72s fail to meet the general staff qualitative requirements and have to be constantly returned to Avadi for modification and repair. At least two defective T-72s exploded at the Armoured Corps Centre at Ahmednagar, killing at least one soldier and injuring several others during trials last year.

The ARV deal with Poland reveals that none of the major issues of producing the recovery vehicle has been resolved. No one has answers for why ARVs intended to be produced as a result of the 1999 deal are yet to be built locally. The situation is, on the face of it, absurd. Defence PSUs produce most of the key components needed for ARVs - T-72 chassis, engines and gearboxes. All that remain are the cranes that lift damaged or faulty tanks on to the ARV, equipment not difficult to make in India. Ironically, informed sources told Frontline that the current deal with Poland included India supplying T-72 engines to the Polish firm Boomer Labedy, which did not possess the needed infrastructure. The finished ARVs will then be shipped back to BEML in knocked-down form, and the PSU will then, so to speak, fix the nuts and bolts.

All this points to a sad reality about defence PSUs. Since the 1990s, they have been increasingly stripped of their role as cutting-edge manufacturers of military equipment into quasi-brokers for influential arms dealers. The problem dates back to 1985, when India was negotiating for the purchase of 155 mm howitzers and ammunition from four contenders. The Rajiv Gandhi government asked all four for declarations that no dealers would be used in India. All four complied. Soon after, AB Bofors signed a $1.3 billion contract to supply 410 FH-77 guns. A year later, an investigation by journalists N. Ram and Chitra Subramaniam blew the lid off the deal. It became clear that agents had indeed been involved in the deal, which involved high-level corruption. The scandal was to play a key role in the defeat of the Congress(I) in the 1989 elections.

Agents were banned after the scandal. It is little known, however, that payments to agents continued through other official channels until 1989. Military Supply Missions attached to the Indian embassies in Tokyo and Washington, and the High Commission in London, continued to acquire equipment for key military programmes. Commissions were paid to agents in India, identified by the primaries, through the Reserve Bank of India in rupees. Before the Supply Missions were shut down in 1989, they purchased naval spares from Britain and components from the United States for the Integrated Guided Missile Development Programme, which has spawned the Agni series of intermediate-range ballistic missiles, the Prithvi surface-to-surface missiles and three short-range systems.

From 1989 onwards, firms turned to a fail-safe, officially sanctioned agent: the defence PSUs. Apart from the ARV programme, BHEL has brokered deals for 76 millimetre naval guns from Italy, naval simulators, armour plating for the T-72 and the controversial Arjun MBT. Bharat Electronics Limited, on the other hand, has tied up with Oldeft of Holland to make 18-mm and 25-mm image intensifiers. Very often, the role of the defence PSUs in these deals is minimal, restricted at best to assembling units. In effect, the same old system continues. International manufacturers first negotiate a deal with a defence PSU to buy equipment exclusively from them, and the defence PSU then enters into a purchase deal with the Ministry of Defence. The defence PSU pockets the commission that private arms dealers used to receive.

The system is wasteful and expensive: and these are its least serious problems. Consider the ARV project. The defence PSUs involved in the deal have no real reason to take the job of indigenous production seriously if they can more easily raise revenues by simply acting as importers. It would seem that given the high-level kickbacks involved, it makes sense for senior officials to encourage repeated import orders rather than buckle down to the job of actually making the equipment locally. This, in turn, subverts the whole purpose of having made enormous investments in setting up a massive military equipment building infrastructure. Persistent questions over the quality of equipment manufactured by defence PSUs from the armed forces illustrate a dangerous degeneration of the whole system.

Why, then, does the system persist? The simple answer is that it suits the political dispensation at the Ministry of Defence. Shortly after his resignation as Defence Minister in March 2000, George Fernandes attempted to counter the substance of the allegations R.K. Jain had made to tehelka.com. He claimed that the Indian defence attache in Prague had shot down the ARV proposal made by Czech Bohemia, since it was not an original equipment manufacturer. Fernandes went on to claim that the ARV contract was subsequently awarded to BHEL and BEML. His friends in the Bharatiya Janata Party, notably Law Minister Arun Jaitley and Disinvestment Minister Arun Shourie, even claimed that the Boomer Labedy had not bid for the equipment at all.

In a purely technical sense, this was true. The Ministry of Defence had signed deals with the defence PSUs, not Poland or Slovakia. What Fernandes and his friends did not see fit to tell the people was that demonstrations of the equipment had been carried out by Boomer Labedy and ZTS Martin, not BHEL or BEML. Neither firm contributes more than 10 per cent of the entire manufacturing process. Nor did they mention that the Boomer Labedy bid was the lowest after Czech Bohemia was eliminated. It had asked for $730,000 per ARV, against the $850,000 demanded by their Slovak competitors. Reason demanded that the Polish firm be given the deal. Reason was ignored, for reasons the Tehelka tapes make abundantly clear. The order was split in two, with no reasons assigned.

More than a decade has passed since the Indian Army first sought ARVs for its armoured columns. Almost a decade has passed since the first imports were agreed on, and defence PSUs were charged with manufacturing the equipment locally. Eight major PSUs and 39 ordnance factories, in which enormous funds have been invested, have been unable, for reasons no one can explain, to meet this uncomplicated task. "It is a subtle, well-organised racket," says one senior official, "and unlike rackets of the past, there is very little chance of getting caught." All this comes in a context where persistent allegations of corruption have paralysed the defence procurement system and the Army returns thousands of crores each year to the treasury, unspent. If India does go to war this year, one of the questions a judicial investigation might have to answer is why it was so unprepared to fight it.