Lockheed offsets mock MoD norms - Broadsword by Ajai Shukla - Strategy. Economics. Defence.

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Thursday 9 December 2010

Lockheed offsets mock MoD norms

The IAF's first C-130J Super Hercules at a photo-op after making its first flight. This aircraft is slated to be delivered within the month

(A two-part series on India’s defence offset policy)

By Ajai Shukla
Business Standard, 9th Dec 10, has a modified version of this article

Earlier this year, while commenting on India’s poorly framed and inadequately monitored defence offset policy, this newspaper had highlighted the potential for foreign arms vendors to completely bypass their offset liabilities (“India’s next big scam”, 20th Apr 10). That, it now appears, is already happening.

US defence major Lockheed Martin’s offset proposal, arising from its sale to India of six C-130J Super Hercules transport aircraft for US $962 million (about Rs 3835 crores), are seen by some MoD officials as violating provisions of the offsets policy. They say they make a mockery of the ministry's stated aim of boosting indigenous defence industry.

Lockheed Martin’s US $275 million offset offer --- which Broadsword has reviewed in detail --- was proposed on 21st Nov 08 and cleared by the MoD. However, several ministry officials fear that allowing Lockheed Martin to bypass their offset liabilities would invite similar disregard by other vendors.

The largest component of Lockheed Martin’s offset offer is a US $121 million proposal to import and operate a “weapons system trainer” (WST), which is a simulator on which instructors from Indian company, Mahindra & Mahindra will train 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 (the others being a “cockpit procedures trainer”; “avionics systems management trainer”; and a “fuselage trainer”). For this piece of hardware alone, Lockheed Martin is claiming offsets credit worth US $121 million, almost 45% of its entire offset liability.

This has been made possible because the Indian Air Force, for reasons unknown, did not include simulators while actually purchasing the C-130J. the WST been a part of the C-130J contract, Lockheed Martin would have been liable --- in accordance with the 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 the 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 buyers 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 weapon system trainer (WST) was not included under the Letter of Request (LOR) 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.”

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

Considered individually, almost every component of Lockheed Martin’s $121 million simulator offset proposals violates the defence ministry's offsets 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 Mahindra & Mahindra, Lockheed Martin’s Indian offset partner.

Straight imports of defence equipment cannot be treated as offsets under the Defence Offsets 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, upgradation, 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 from Lockheed Martin.

The other credits claimed by Lockheed Martin, in connection with the WST are:

(a) Offset credit for US $15 million, for technology transfer. The DPP-2008 has no provision for technology transfer to be treated as offsets.

(b) Offset credit of US $55 million, for contracts that will be given to the Mahindras to operate and maintain the simulator.

(c) Offset credit of US $3 million, for travel savings, which has been calculated in terms of air tickets, lodging, TA/DA etc, for IAF personnel who would otherwise have had to travel to the US. This is not permissible as offsets in DPP-2008.

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

(Tomorrow, Part 2: MoD poised for a flawed offset policy review)

($ mn)
Defence ministry
Manufacture of RFID
119Does not qualify as not
military hardware
Simulator import48Straight imports cannot be
treated as offsets
Contracts to M&M55Relates to import (of simulator)
Aircraft engine
design services
20Eligible only for military engines
Technology transfer15No provision
F-16 avionics 15Eligible for offset components
Travel savings3Not permissible


  1. Anyone surprised at this development is living in a delusional fantasy land. Consider for a moment India's total military exports. Also consider just what items that India has to offer that would actually be of interest to Lockheed Martin. Not much. The large offsets were bullshit to begin with and were never expected to be fulfilled by any parties involved except for an extremely delusional and gullible public.

    Just be glad that unlike Boeing, they are not counting "$500,000" seat cushions as offsets.

  2. A very good article which points out issues in the defense industry that needs to be ironed out. Ajayji are these processes not public and can they not be reviewed? I am not talking of private contracts only the process and policies. A process cannot become perfect overnight but over time and with serious inputs from people like you it should be possible. Accountability will automatically be a part of it.


  3. The blame squarely lies on MoD for not framing a good enough policy.

    People will always try and find loopholes in policies. Lockheed will do it to US to if they get a chance. This happens in Formula 1, Football, you even see such stuff in IPL. So, all this article shows is failure on the part of MoD. It is childish to think that everyone will follow a policy that is not exact enough.

    One cannot blame Lockheed (or any other company)for trying to find loopholes that make their job convenient.

    This also is in sync with the title of the previous article "arming without aiming". I mean the IAF dudes who okayed the contracts without including the simulators should be courtmartialled (if that is the right word!!). Also i think there should be a concept of CIVILIAN COURT-MARTIAL wherein anyone in MoD caught getting money for defence deals should be punished. Right now they seem to be blacklisting any and everyone without catching those who actually take/demand money.

  4. Blame should go to the MoD and not to Lockheed Martin for not drafting a comprehensive and common-sensical DPP in the first place! Items like flight/tactical simulators are NEVER part of the main contract, but rather come as supplementary contracts inked in the aftermath of the main contract being signed. Even procurement of weapon systems for combat aircraft are always inked under the category of supplementary contracts. The Su-30MKI contract of the late 1990s was followed by at least 22 other supplementary contracts for guided weapon systems. The same was for the MiG-29K as well, and the contract for its flight simulator was inked separately with Rehinmetall Defence. The contract for the Su-30MKI's tactical simulator was inked in 2006 and the first unit arrived only last year. Lockheed Martin has only complied with long-established regulations laid down by the MoD. One cannot blame Lockheed Martin if the MoD doesn't do its homework.

  5. BROADSWORD should ask the venerable Pushpinder Singh (who is a consultant--if not an agent--for RAC-MiG) why was the contract for the MiG-29K's tactical simulator not included as part of the primary contract. The answer will be quite simple: OEMs supplying airborne platforms do not necessarily build simulators as well. Such training aids are built and supplied by separate OEMs with whom supplementary contracts have to be inked. Also, Lockheed Martin, in the IAF C-130J-30's case, is not the prime contractor, since the contract is FMS-administered, meaning the prime contractor responsible for implementing the entire procurement programme is the USAF. If the MoD has any complaint about non-compliance with its DPP's industrial offsets guidelines, it ought to be taken up with the US Defense Dept and DSCA, and not with Lockheed Martin.

  6. Folks, you cannot be so naive. The WST was not left out accidentally. The loophole was indeed created by MoD personnel who have all been bought off. They have set up their own 'offset' program on the side with companies like L-M, Mahindras, Quest, BEL. Without the collusion of those in power, these obvious loopholes dont happen.

    You are right about L-M taking advantage of the corrupt practices in India. Can you blame them? They are already steeped in corruption in the US defense procurement activities. So India is the same thing, just in a different part of the world.

    I guarantee you there will be no scam here. This will go on even on the C17 program. Just wait and watch from the side lines.

  7. Well that was very surprising... isnt it ? What a weak and corrupt nation we are turning out to be...

  8. Dear Col Ajaiji,

    A nice and articulated article on our Defence offset. Yes I do believe that to a large extent MoD is certainly to be blamed for this laxity in our defence offset policy and its poor implementation. It is obvious that many of these foreign defence vendors do not wish to invest even a single dollar in our Indian defence industry on the pretext of discharging their offset liabilities but they do want to have their share of the pie in our defence deals!!

    Ajaiji, can MoD make the whole offset issue transparent ie after a said main contract has been awarded, its offset proposal and Indian offset partners thereof could be made available in the public domain on the MoD website. At least this way this offset menace could be in public domain and may act as a deterrent to these foreign vendors and MoD officials!!What do u say?

  9. Prasun:

    You write: "If the MoD has any complaint about non-compliance with its DPP's industrial offsets guidelines, it ought to be taken up with the US Defense Dept and DSCA, and not with Lockheed Martin."

    You couldn't be wronger! While the sale is government to government, the offset contract is between the Indian MoD and Lockheed Martin.

    Secondly, this is a news report. It does not "blame" anyone, it reports facts. If you are left with the impression that Lockheed is being blamed, that comes from a pre-conceived impression. Go back and read the report again, and you will find that most of the news implicates the MoD and the IAF, rather than Lockheed Martin, which has merely taken advantage of the loopholes left open by the MoD.

    Some visitors here believe that the loophole was left open on purpose, perhaps in exchange for favours received. I can't say for sure!

  10. I do not like this off-set thing. If we want this off-set, let them ask for the same thing when it comes to the software contracts, accounting contracts, etc. etc. I am sorry, we want everything from the world but we run when it's our time to give. I think trade agreements should be on equal footing, if you allows free imports, I would expect the other party to do the same. The moment one party starts being too protectivem, the other will somehow somewhere retaliate... then there is no fun. By the way, I totall expected this because our babus do not know who to write and execute contracts... Vik purchase, Hawk purchase, etc. etc. are all great examples of our failure. I feel all these requirements are just there for the babus to get righ quickly, it has nothing to do with improving our capabilities or helping the average Ramu on the street.

  11. Just another one of the backlash of depending on babus for ahieving indigenisation.

    Offsets had been introducted only as a way to fool the general public and justify large defence deals that come at the cost of Indian programmes. The politician beaureaucratic nexus uses weapons buying as a means to accesing leverage with foreign diplomats, of course with hefty sums ending in coffins of the ruling party, may be not in the FMS case, but most others are susceptable.
    Was c-130 j really necessary since we already have a program of MRTA roughly in the same class.

  12. To BROADSWORD: True, the industrial offsets commitments are a bilateral affair between the OEM and MoD. However, in case of direct industrial offsets concerning military hardware procurements from the US under the FMS scheme, the scope and nature of such direct industrial offsets are always subject to regulations framed by the US Defense Dept and US State Dept. No US-based OEM is authorised to unilaterally offer any kind of industrial offset package in pursuance of bagging a FMS-administered contract. It is for this reason that OEMs from Europe and the US have written to the MoD and requested for the scope of offsets programmes to be expanded to include indirect industrial offsets packages so that the cumbersome US procedures governing the export of weapons technologies (for ndirect industrial offsets) can be done away with for good in India's case. This is also the universal norm, something the 'blind men of Hindustan' sitting in South Block conveniently overlooked when drafting the DPP guidelines.
    Regarding the 'blame' aspect, while nowhere in the article has anyone blamed Lockheed Martin for breaking any DPP_related rule/guideline, there are ample remarks by as yet unnamed Indian officials which show Lockheed Martin adopting a negative or defiant attitude. For instance: "US defence major Lockheed Martin’s offset proposal .......are seen by some MoD officials as violating provisions of the offsets policy. They say they make a mockery of the ministry's stated aim of boosting indigenous defence industry". The impression one gets by reading such statements is that either Lockheed Martin is willfully going against the MoD by not adhering to the offsets policy, or Lockheed Martin has teamed up with some vested interests within the MoD to purposely create loopholes within the existing DPP guidelines governing industrial offsets. While neither of these two suppositions are true, what is also not true is your assertion about "Lockheed Martin, which has merely taken advantage of the loopholes left open by the MoD". I say this because Lockheed Martin is only following long-established
    practices of the MoD when it comes to supplementary contracts in support of the principal contract. It is by no means taking any undue advantage from the prevailing situation. That is exactly why I've given above two specific examples and ff you were to read carefully the two examples I gave above (about the tactical simulators for the Su-30MKI and MiG-29K), you'll realise what is it exactly that I'm trying to highlight.

  13. The only think working in the favor or India or Indian defence is that Pakistan is more screwed up than we are.

  14. Apparently we are no good at defending our country. Our generals are so petty that are neck deep in a housing scam and our ministers cannot drink coffee unless it is part of a kick-back. Just give those americans some bases and lets do what we do best "Create Drama".

  15. The defence agreements by MOD are drawn up the legal cell of MOD. The agreements for international arms contractors are drawn up the the best legal minds in the industry. The outcome is the what we see.

    MOD must involve professional international law firms that are in this business.

    Indeed it is too late on the C130J deal. Perhaps advisable to keep them in default rather than agree to policy that sets precedent for continued subversion of established law. Time to "pat down" LMT. No new deals till you get the offsets right. (Realistically, highly unlikely)


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