MoD nails Finmeccanica, protects current contracts - Broadsword by Ajai Shukla - Strategy. Economics. Defence.

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Tuesday 26 August 2014

MoD nails Finmeccanica, protects current contracts

By Ajai Shukla
Business Standard, 27th Aug 14

Three days ago, Defence Minister Arun Jaitley promised a new policy that would punish dishonest vendor companies without blocking Indian acquisitions and the flow of spares. On Tuesday, the ministry of defence (MoD) issued a directive on how it will deal with group companies of Italian defence giant, Finmeccanica, whose chief executive, Giuseppe Orsi, was arrested in Italy last year on charges of bribing Indian officials to facilitate the sale of VIP helicopters to India.

The Finmeccanica group companies that are covered under this policy include marine specialist, Whitehead Alenia Sistemi Subacquel (WASS); radar and communications specialist Selex Electronics Systems (ES); aerospace giant, Alenia Aeromacchi; armaments major, Otomelara; and AgustaWestland itself.

While the MoD’s directive on the Finmeccanica group does not constitute policy, it suggests a more flexible approach than the rigid blacklisting and banning that the previous defence minister, AK Antony, followed. The new approach attempts to ensure that ongoing contracts and acquisitions be minimally affected or delayed.

The directive prescribes six differentiated MoD responses, depending upon the stage that a procurement contract is at.

First, where a Finmeccanica company is executing a signed contract, it should be proceeded with. This will ensure that work continues on the radar systems that Selex ES is fitting on the indigenous aircraft carrier, INS Vikrant.

Second, where a contract has been fully executed, but spares and upgrades are required regularly, that can continue. This will ensure the continued supply of equipment like the 76 millimetre naval gun, which Bharat Heavy Electricals Ltd (BHEL) builds under licence from Otomelara.

Third, where the vendor has been declared as L-1 (cheapest bidder) after tendering, “all such procurement/acquisition cases shall be put on hold until further orders.” This is the most far-reaching decision the MoD has taken, given that WASS has been declared the L-1 bidder in the tender for 98 Black Shark torpedoes for India’s six Scorpene submarines being built in Mumbai. German company, Atlas Elektronik, had hotly contested the decision. Now, the Seahake torpedo, offered by Atlas, emerges as a frontrunner in the $300 million contract.

Fourth, where the tender process is under way, but no L-1 has yet been declared, Finmeccanica companies will be eliminated from consideration, provided there are alternatives. This relates to tenders like the procurement of multi-role helicopters (MRH) for the navy, where two companies are in contention --- US company, Sikorsky; and European consortium, NHIndustries, which is part owned by AgustaWestland. If NHIndustries is eliminated, Sikorsky emerges as the single vendor --- a situation potentially fraught with other difficulties.

Fifth, Finmeccanica companies are to be eliminated from all acquisitions where tendering is yet to commence, provided there are valid alternatives.

This knocks out Alenia Aeromacchi, and its C-27J aircraft, from the $2.5 billion tender to partner an Indian private company in building 56 transport aircraft in India, to replace the ageing Avro-748 transport aircraft.

Sixth and final, where a Finmeccanica group company is a sub-contractor to another foreign vendor, that contract would continue. This covers upgrades that Selex ES is reportedly handling as a sub-contractor to a Russian company.

Interestingly, the new policy does not cover the procurement of AW-101 VIP helicopters, which is at the root of the current situation. While India has taken delivery of three of the contracted 12 helicopters, it has also recovered most of the money it paid, by encashing AgustaWestland’s bank guarantees worth Euro 228 million. MoD sources say New Delhi is no longer interested in the AW-101, and is looking to sell those.

The MoD directive on dealing with Finmeccanica has already been issued to relevant departments within the ministry. Top ministry sources say delay was caused by the change in government, since the new Attorney General had to be consulted before issuing the directive.

The MoD spokesperson says a copy of the letter has been issued to Finmeccanica. However, Finmeccanica officials tell Business Standard that they have not received the new directive.

Italian prosecutors have alleged that AgustaWestland paid some euro 51 million to middlemen, Guido Haschke, Christian Michel and Carlo Gerosa, to seal the deal for VIP helicopters, funnelling the money through software companies, Mohali-based IDS Infotech and Chandigarh-based Aeromatrix Info Solutions Pvt Ltd. After Orsi was arrested on February 12, 2013, the MoD froze the contract, suspended payment to AgustaWestland, and initiated a Central Bureau of Investigation (CBI) enquiry.

The CBI has filed First Information Reports against 15 people, including former IAF boss, Air Chief Marshal S P Tyagi. However no charges have been filed against Finmeccanica or AgustaWestland, which has invoked arbitration over the termination of the contract.

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