Air Force slams BEL for unfair trade practices - Broadsword by Ajai Shukla - Strategy. Economics. Defence.

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Friday 16 November 2007

Air Force slams BEL for unfair trade practices

by Ajai Shukla
Business Standard: 15th November 2007

Last week, Defence Minister AK Antony presented before the parliament’s Standing Committee on Defence a glowing report on the performance of India’s Defence Public Sector Undertakings (DPSUs). In 2006-07, the eight DPSUs earned Rs 17,855 crores, comfortably exceeding their target of Rs 15,625 crores. Profit after tax was Rs 2445 crores, two and a half times the target of Rs 1,034 crores.

Mr Antony, however, omitted to tell the standing committee about the growing chorus of complaints from the military about being railroaded into buying from the DPSUs, equipment that was actually developed and manufactured by foreign Original Equipment Manufacturers (OEMs). The DPSUs’ role, allege the services, is restricted to importing the equipment from the OEM, adding a hefty percentage to the price, and then selling it to the military, boosting their own profits.

Now the Indian Air Force (IAF) has decided that enough is enough. On the 31st of August, the Deputy Chief of Air Staff, Air Marshall NAK Browne, fired off a letter to the Chairman of Bharat Electronics Ltd (BEL), with a copy to the MoD, complaining that BEL is misusing its status as a DPSU to arm-twist the IAF into buying equipment that is sub-standard, or equipment that has actually been developed by foreign vendors, with BEL incorrectly claiming ownership.

In that letter number Air HQ/S 96135/12/2/ASR(TY BM-IV), which has been reviewed by Business Standard, Air Marshall Browne complains that:

• When BEL equipment fails to meet the IAF’s requirements during field evaluation, the company tries to overturn the rejection by sending representations to the MoD. The letter points out, “In all the cases, these representations have been found to be devoid of merit.”

• In the purchase of a critical electronic intelligence system (called the Ground Based Mobile Elint System), “BEL was importing sizable and critical sub-systems from sub-vendors abroad”. Apparently, BEL was not developing the system, but merely purchasing components, slapping them together, and selling them to the IAF.

• This became evident when the IAF was evaluating the sub-systems, where air force officers were surprised to find that “most of these sub-systems were demonstrated by OEM representatives and not by BEL.”

• That BEL was merely a front for foreign companies like M/s Elisra, Israel, and Ms Indra, Spain was clear from the fact that, “BEL representatives were mere observers and could not participate in the demonstration in any manner.”

• Despite knowing nothing about the equipment, complains the IAF Deputy Chief, “letters are being repeatedly sent by BEL to IAF and MoD extolling BEL’s capability to manufacture and support them.”

• The IAF Deputy Chief’s letter expresses outrage that when the (foreign origin) equipment was found inadequate during testing, it was BEL that represented. 

The letter reminds BEL that the Defence Procurement Procedure 2006 (DPP-2006) treats all vendors equally, implying that BEL should stop expecting favoured treatment. 

Finally, the IAF Deputy Chief points to the sub-standard quality of BEL equipment, suggesting that it “refrain from adopting these types of measures and instead focus more on improving the technical specifications (of equipment).” 

Commenting on the letter, the MoD has not denied that BEL does buy equipment off-the-shelf from abroad. Mr KP Singh, Secretary Defence Production, says that “there is little point in re-inventing the wheel”.

BEL is often praised for reducing reliance on foreign vendors in products like radars, sonars, wireless and electronic warfare systems. It claims to have indigenised 80% of its turnover, but the IAF’s letter places a question mark over that figure. The army, too, has often complained about BEL’s enormous clout in the MoD, which allows it to shape procurement decisions to suit its own interests rather than national security.

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