Warship deal runs aground
Defence Ministry flags irregularities in purchase of mine-sweepers
Sandeep Unnithan | | September 5, 2014 | UPDATED 12:59 IST
A South Korean Navy minesweeper ofthe type India hopes to acquire.India's first major defence hard-ware import from East Asia is in jeopardy after the defence ministry flagged irregularities in a Rs.2,300 crore deal to buy eight mine counter-measure vessels from South Korea.On May 29 this year, the ministry encashed a Rs.3 crore bank guarantee furnished by the Kangnam Corporation, which had been shortlisted to supply the minesweepers to the Indian Navy. The liquidation of the guarantee came after an inquiry by the ministry found that the South Korean shipyard may have hired middlemen to facilitate the contract. Employing middlemen in defence deals is banned.
Vendors have to sign a pre-contract Integrity Pact stating that they will not offer bribes and are required to furnish a bank guarantee of Rs.3 crore. "There are questions about the people who the Korean shipyard hired and we are looking at whether their presence in negotiations can be construed as vitiating the process," a defence ministry spokesperson told India Today. The ministry is now awaiting the opinion of Attorney General Mukul Rohatgi to whom the case was forwarded in July.
Amit Cowshish, a former financial adviser to the defence ministry, says the quantum of the deviation from the agreement will determine the Government's next course of action. "Breach of the pre-contract Integrity Pact is a very serious matter and it will be difficult for the Government to compromise its own stand."
Kangnam Corporation was shortlisted as it was the cheaper of two firms that had bid for the proposal that was floated in 2008. The Navy wants eight 800-tonne vessels with composite anti-magnetic hulls that can clear sea mines laid by enemy warships, submarines and aircraft to blockade harbours during war. Two vessels would be imported from the foreign vendor for Rs.2,300 crore, a cost that covers technology transfer to build the remaining six vessels at the Goa Shipyard Ltd (GSL).The Navy plans to eventually get 24 such vessels over the next decade at a cost of Rs.24,000 crore. GSL is expected to build 16 more minesweepers in two batches of nine and seven, for a total Rs.16,000 crore. In 2008, Kangnam had bettered Italy's Intermarine Shipyard to close the deal, and by October 2011 it concluded price negotiations with the defence ministry. Kangnam's closest competitor, Italy's intermarine also approached the central vigilance commission with allegations of a lack of transparency in procedure. But sometime in 2012, a BJP MP who is now a cabinet minister in the Narendra Modi Government, wrote to then defence minister AK Antony, raising questions about the presence of defence agents hired by the South Korean shipyard at every stage of negotiations with the government. The ministry launched an internal inquiry which established deviations in the procedure.
As a consequence, the ministry did not sign the contract with the Korean shipyard. (Kangnam Corporation did not respond to a detailed questionnaire sent by India Today). Defence ministry officials believe that the agents were camouflaged as Kangnam's 'offset managers' to handle the mandated defence offsets in the deal, or the reinvestment of 30 per cent of the Rs.2,300 crore contract back into India. The name of a prominent Delhi-based arms agent has been doing the rounds as one of the possible beneficiaries of a three per cent commission in the deal.
Initially though, the defence ministry chose not to act on the findings of the inquiry. It just put the deal in limbo, not unlike the Army's case for acquiring 197 light utility helicopters where procedural deviations had been noticed in 2012. The case remained dormant till it received a fresh impetus when South Korean President Park Geun-he visited New Delhi in January this year. In a joint statement with Prime Minister Manmohan Singh, she flagged the pending deal and asked "for his interest in support for the export of Korean minesweepers to India".
After a nudge from the political leadership, the acquisition wing of the defence ministry held a series of meetings between January and April, in which they finally discovered deviations in procedure. This led to the Kangnam bank guarantee being encashed in May.
When the NDA Government took over, it reviewed the UPA's blacklist of global defence firms. In two major decisions, the defence ministry lifted the 2005 ban on South Africa's Denel as well as the ban on dealings with Italian conglomerate Finmeccanica that was imposed after allegations of bribery in the VVIP helicopter deal came to light in 2012. The minesweeper deal also figured in the new Government's first Defence Procurement Board meeting on July 11 but a final decision on it is pending.
The Navy, meanwhile, distraught over gaps in its minesweeping capabilities and the possibility of procurement delays, has strongly pitched for a relook at the Kangnam deal, arguing that its requirement of the minesweepers is extreme and urgent. "We don't have sufficient minesweepers to protect even one harbour in a crisis," a senior naval officer said. Only seven of the 12 minesweepers that were acquired from the erstwhile Soviet Union between 1978 and 1988 are in active service. And only four of them were considered fit for a mid-life upgrade. Delay in the Korean deal, therefore, may compromise the Navy's minesweeping potential.
For the defence ministry, it is a case that can no longer be swept under the carpet.
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