A Boeing P8I Maritime Aircraft of the Indian Navy

Pratyush Kumar, chief of Boeing India, says contracts with local partners need reform

Boeing has called for India to rewrite its rules on buying foreign weapons as Narendra Modi’s government battles to contain the controversy surrounding India’s €8bn purchase of 36 fighter jets from France’s Dassault.

New Delhi on Saturday rebutted comments by Fran├žois Hollande, the former French president, that suggested India pushed Dassault to sign a subcontract with the Mumbai-based tycoon Anil Ambani. The government said in a statement: “The government has stated earlier and again reiterates that it had no role in the selection of Reliance Defence [Mr Ambani’s company] as offset partner.”

But Pratyush Kumar, the president of Boeing India, has said India — the world’s biggest arms importer — should revamp its procurement system entirely, arguing the current rules are costly and self-defeating. He has argued that so-called “offset contracts”, which are subcontracts handed to local partners such as Reliance to boost the Indian economy, are not doing what ministers intended.

In an interview with the Financial Times, Mr Kumar said: “The offset programme has not really worked, because of the way it has been administered. We think it needs to be reformed, rethought and reset.”

Offsets are used by 82 countries around the world as a way to force foreign defence companies to invest in their economies when selling weapons made abroad. Once an arms manufacturer secures a purchase from a government, it must then award local subcontracts that will generate economic activity worth a certain percentage of the original deal.

The worldwide market for such contracts is worth around $300bn and is forecast to grow to $425bn by 2021, with 40 per cent of them being signed with US companies.

But defence executives say the system has been especially problematic in India, where a lack of reliable local partners and heavy bureaucracy has made it difficult for companies such as Boeing, Lockheed Martin and Textron to fulfil their offset obligations.

According to Boeing, only $2bn worth of offset contracts had actually been certified as complete of a total of about $11.5bn signed across the industry.

Meanwhile, the system has also led to political controversies.

As well as the Rafale case, offsets were also involved in the AgustaWestland controversy in 2014, in which the Italian company was accused of bribing ministers at the top of the Indian government to win a $560m contract to supply luxury helicopters for VIPs. Investigators accused the company of siphoning off money from its offset fund to pay the politicians involved.

The company denied the allegations and an Italian court cleared two former executives of corruption charges earlier this year.

Some analysts say the opaque nature of the Indian contracting process makes it vulnerable to accusations of fraud.

“Part of the problem in India is that foreign companies have to second-guess what the government actually wants from its offset contracts — it isn’t made clear,” said Grant Rogan, chief executive of Blenheim Capital Services, which advises defence companies on offsets. 

Mr Kumar said there were four specific problems — finding a reliable enough local partner, going through a two-year registration process for them to qualify as an offset partner, making sure they fulfil the contract and getting it certified as completed by the government.

“There is so much paperwork involved that on occasions the ministry of defence has had to hire special vehicles to carry all the documents,” he said.

Boeing was recently criticised by the national auditor for not fulfilling offset contracts worth $641m, despite having signed them in 2009, as part of a deal to sell eight P-8I aircraft to the Indian navy for $2.2bn. The company says, however, that the contracts have been completed but are awaiting final sign-off from the MoD.

Subrata Saha, the director-general of the Society of Indian Defence Manufacturers, said: “Foreign companies have had issues because of the backlog with the ministry of defence — they should have been assigned their offset credits by now but many are still waiting for the documents to be signed.”

The MoD did not respond to a request to comment, though local reports suggest the government is considering rewriting its rules, for example by setting up a fund in which foreign companies can invest rather than awarding separate contracts.

Mr Kumar said India should look instead to the UK, where foreign defence companies are not obliged to award contracts to local partners, but if they do they are given credit for doing so in future bids.

“We need some more common sense in the whole process,” he said.