A potential barring of Finmeccanica SpA from future contracts in India would not only hurt the Italian aerospace and defense contractor, but it would also delay efforts to modernize the Cold War-era equipment of the Indian armed forces, some analysts and politicians say.
India’s armed forces are eyeing purchases of helicopters, fighter jets, warships, missile systems as well as submarines to upgrade their existing equipment – much of which was bought from the Soviet Union over two decades ago – as the country is concerned with efforts by China and Pakistan to improve their own military capabilities.
But blacklisting a leading global player like Finmeccanica -amid allegations from Italian prosecutors that the company bribed Indian officials to secure the sale of 12 helicopters – may hurt New Delhi’s efforts to revamp its military equipment, as it would bring down the number of suppliers and reduce price competition.
“We don’t want to overreact because we don’t want to let this issue affect our defence preparedness,” Indian foreign minister Salman Khurshid said in an interview with The Times of India, with reference to the helicopter deal.”We need to examine why corruption has happened on a defence deal like this. I can understand it when a poor quality product has been pushed through as a result of corrupt practices. But this chopper is not a poor quality product. So we need to get to the bottom of this,” he added.
Analysts agreed that, if the deal with Finmeccanica fell through, India’s defense equipment could suffer. “In all probability, yes, it will delay the modernization plans of the armed forces. And that is a matter of great concern for the nation,” Dhiraj Mathur, an aerospace and defense analyst at PricewaterhouseCoopers India, told the Wall Street Journal. He said a likely slowdown in defense spending “will be a natural and unfortunate collateral damage” resulting from the Finmeccanica FNC.MI +0.55% episode.
With India planning to spend tens of billions of dollars in the coming years to buy new weapons from Russia, the U.S., Israel and Europe, the country has become a magnet for the defense industry – especially as this sector has seen as slowdown in spending from the West.
India relies on imports for more than 70% of its defense purchases despite the government’s push for local manufacturing. The country depends heavily on Russia for its arms purchases, although it has of late been diversifying its supplier base through increased deals with the U.S, the U.K., France and Israel.
India’s defense ministry has put in place strict guidelines to prevent bribery and other corruption activities at a time when the country is increasingly heavily on defense purchases. Middlemen are officially barred in defense deals although analysts allege corruption in deal-making continues.
In March 2012, the Indian defense ministry barred six companies, including Rheinmetall Air Defence–part of Germany’s Rheinmetall AG–and Singapore Technologies Engineering Ltd., from doing any business with state-run Ordnance Factory Board for ten years for alleged bribery. Rhinemetall and Singapore Technologies had denied any wrongdoing.
India’s air force plans to acquire up to 400 planes and helicopters until 2022 to replace its aging fleet of MiG fighter jets, helicopters and transport planes. The plan includes a potential deal with Dassault Aviation of France to buy 126 Rafale jets for more than $10 billion.
Although the Indian defense minister A. K. Antony said the defense budget for this financial year through March has been cut, the country remains one of the world’s top defense spenders.
New Delhi has earmarked 1.93 trillion rupees ($36 billion) for defense for the year ending March 31, 2013. India is on track to becoming the fourth-largest defense spender in the world by 2020, behind the U.S., China and Russia, surpassing France, Japan and the U.K., according to IHS Jane, which added that India’s defense spending will reach $65.4 billion by then despite planned cuts.
India’s increasing spending on defense comes even as arms sales by the world’s 100-biggest companies, excluding China, fell 5% in 2011–the most recent comparative data–to $410 billion, the Stockholm International Peace Research Institute said in a report Monday.
The Swedish think-tank said factors such as “austerity policies and proposed and actual decreases in military expenditure as well as postponements in weapons program procurement affected overall arms sales in North America and Western Europe”. It added that troop withdrawals in Iraq and Afghanistan, and sanctions on arms transfers to Libya also contributed to the decline in overall arms sales.
Finmeccanica retained its position in 2011 as the eight-largest arms producer globally with total arms sales of $14.56 billion, according to SIPRI.
Finmeccanica–which has been present in India for more than four decades–is currently pursuing defense and security contracts in India worth more than $12 billion, according to IHS Jane’s defense industry analyst Guy Anderson. He said Finmeccanica’s helicopter division, AgustaWestland, is a contender for the estimated $250 million light utility helicopter of the Indian Navy, as well the navy’s multirole helicopter program estimated at between $1.9 billion to $2.7 billion.
Also, Alenia Aermacchi, a unit of Finmeccanica, is a contender for India’s medium-range maritime patrol reconnaissance aircraft program estimated at $3 billion to $6 billion with a variant of the ATR-72MP maritime patrol turboprop aircraft, Mr. Anderson said. It has also offered the C-27J medium-sized airlifter for a potential India contract of $2.5-$3 billion to replace its vintage fleet of Avro turboprops.
Other companies in the Finmeccanica group such as Selex Galileo, WASS and Oto Melara are also seeking deals in the India, while signaling and railway traffic management unit, Ansaldo STS, has also won contracts for railway projects in India.
“Long-term suspension from the Indian defense and security markets would have significant consequences for Finmeccanica in general and its aerospace units in particular,” said Mr. Anderson. He said Finmeccanica has set a target of achieving 500 million euros in orders each year from the Indian government and 300 million euros in annual revenue by 2015, “a target that could potentially be put in jeopardy.”
Finmeccanica’s worries worsened after the detention last Tuesday of Finmeccanica’s chief executive Giuseppe Orsi, who later resigned, following allegations of bribery by Italian prosecutors in a 2010 deal to sell a dozen AgustaWestland’s AW101 helicopters worth 556 million euros to India. In that deal, AgustaWestland was chosen ahead of U.S.-based Sikorsky Aircraft Corp., a unit of United Technologies Corp.
Soon after the arrest, the Indian government ordered the Central Bureau of Investigation, to launch an investigation on the helicopter contract. Officials from CBI and the defense ministry are traveling to Italy week to continue their investigations.
India’s defense ministry on Friday announced it had taken steps that could lead to it canceling the contract for the helicopter sale under a so-called “integrity pact” signed between the two parties. The ministry also suspended further payments for the helicopters, three of which have already been delivered.
AgustaWestland on Sunday denied that it had lost its contract with India, and said it would respond to the notice by the Indian defense ministry within the stipulated seven days.
“AgustaWestland is confident that the full compliance with the relevant laws as well as the good conduct of its past and present senior executives and managers will be demonstrated as soon as practicable,” the company said in a statement.
In addition to its activities in the Indian military sector, AgustaWestland has also a joint venture called Indian Rotorcraft Ltd. with India’s Tata Sons –which controls the diversified Tata Group–to build a facility in India to assemble the AW119 helicopter for customers worldwide.
An executive at Indian Rotorcraft said the company doesn’t “envisage any impact on the proposed joint venture” due to the ongoing investigations against Finmeccanica group. Indian Rotorcraft is scheduled to start operations in April 2014 at a facility in Hyderabad city to assemble the AW119KE helicopter, for export to customers worldwide by AgustaWestland, the executive added.
“Indian Rotorcraft business remit does not include any selling activity for defense related entities,” the executive said, adding that the joint venture company has “no connections” with the Indian order for AW101 helicopters.
Mr. Mathur of PwC said that since India relies on imports for its defense equipment, it must ensure that the number of qualified vendors in a particular defense contract doesn’t fall to one. This, he says, would “limit [India’s] options to equip [its] armed forces with the latest and best equipment.”
“No price discovery is possible and we are at the mercy of the single supplier,” he said.
