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Lockheed offsets mock MoD norms

Ajai Shukla  |  New Delhi 

US defence major Lockheed Martin’s offset proposals, arising from its sale to India of six C-130J Super Hercules transport aircraft for $962 million (about Rs 3,835 crore), are seen by some defence ministry officials as violating provisions of the offsets policy. They say they make a mockery of the ministry’s stated aim of promoting an indigenous defence industry.

Lockheed Martin’s $275-million offset offer was proposed on November 21 and cleared by the defence ministry. However, several ministry officials fear that allowing Lockheed Martin to bypass offset liabilities would invite similar disregard by other vendors.

The largest component of Lockheed Martin’s offset offer is a $121-million proposal to import and operate a “weapons system trainer” (WST), which is a simulator on which instructors from Mahindra & Mahindra will train Indian Air Force (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. For this piece of hardware alone, Lockheed Martin is claiming offsets credit worth $121 million, almost 45 per cent of its entire offset liability.

($ mn)
Defence ministry 
Manufacture of RFID 
119 Does not qualify as not 
military hardware
Simulator import 48 Straight imports cannot be
treated as offsets
Contracts to M&M 55 Relates to import (of simulator)
Aircraft engine  
design services
20 Eligible only for military engines
Technology transfer 15 No provision 
F-16 avionics  15 Eligible for offset components
Travel savings 3 Not permissible

This has been possible because the IAF, for reasons unknown, did not include simulators while actually purchasing the C-130J. Had the WST been part of the C-130J contract, Lockheed Martin would have been liable — in accordance with 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 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 buyer 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 WST was not included under the letter of request 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.”

When contacted by Business Standard for a comment on IAF’s actions, the defence ministry did not respond.

Considered individually, almost every component of Lockheed Martin’s simulator offset proposal violates the defence ministry’s 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 M&M, Lockheed Martin’s Indian offset partner.

Straight imports of defence equipment cannot be treated as offsets under defence offset 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, upgrades, 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.

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 $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 $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 defence ministry is carrying out a major review. But the Indian defence industry, which was supposed to benefit from offsets, is concerned that instead of tightening policy, the ministry is poised to create further loopholes that would benefit foreign vendors.

First Published: Fri, December 10 2010. 00:24 IST