Scorpene project snagged in government web, because contract with Armaris was manipulated to convey impression of greater indigenisation

The first Scorpene hull being fabricated in 2007. Today, that hull is complete but the MoD is still negotiating with DCNS to bring down the prices of critical systems for the submarine.

Minister of State for Defence, Pallam Raju: “French government is shirking their responsibility”

by Ajai Shukla

Business Standard, 19th Dec 09

An air of resignation hangs over the East Yard, a giant workshop shed in Mumbai’s Mazagon Dock Limited (MDL), where six Scorpene submarines are to be fabricated for the Indian Navy. Two years ago, when Business Standard visited this facility, it hummed with activity as welders assembled the hull of the first Scorpene, which was to join the Indian Navy in 2012.

Since then rumours of delay, of as much as two years, have swirled around Project 75, under which the Scorpenes have been acquired. Now, Business Standard has learned that work on the first Scorpene submarine has ground to a halt, and it is unlikely to be ready before 2015. And, most disquietingly, that delay is due to a contracting blunder, stemming from the MoD’s propagation of a myth that significant parts of the submarine were being built from Indian components.

This led the MoD to create a special category called Mazagon Procured Materials, or MPM. Of the total project cost of Rs 18,798 crores, some Rs 2700 crores (Euro 400 million) were set aside for MDL to contract directly for submarine materials. But the impression created --- by giving MDL a budget for locally procuring materials and systems from multiple vendors --- was false. The bulk of the MPM budget, as the MoD knew, would go straight to a single vendor: French company, Armaris, with whom India signed the Scorpene contract. This would pay for critical submarine systems, including the engine, the generators and special submarine steels.

There was no question of competitive bidding for these items. Since they affected crucial aspects of the Scorpene’s performance, such as noise levels, they had to be bought from the original vendor, Armaris, for performance guarantees to be valid.

It is not clear why the MoD left these crucial Scorpene systems unpriced. What is clear is that French company DCNS, which took over Armaris in 2007, is now demanding close to Rs 4700 crores (Euro 700 million) for these items, almost twice what was budgeted.

Minister of State for Defence, Pallam Raju, has told Business Standard that DCNS is basing its higher demand on cost inflation since the contract was signed in October 2005. The MoD is asking the French government to intercede with DCNS, but Paris is unwilling to help.

Mr Raju says, “We expect the French government to play a role in ensuring that it (the MPM items) is not priced abnormally high. We understand their need to make a profit, but the price should not be abnormally high. But we feel that the French government is shirking their responsibility.”

The MoD has pleaded its case with a range of French officials, but in vain. Says Pallam Raju, “I visited Paris (in June 09) and I had a meeting with DCNS. They assured us that they will hold our hand, but we are not getting that comfort level. I projected [the case] to the French defence minister as well. [In November] we had a senior French MoD bureaucrat… come [to Delhi] and I reflected it to him as well.

The MoD blames DCNS’ takeover of Armaris for further complicating negotiations. But that does not answer why a contract that took nine years to finalise failed to fix prices for materials worth Rs 2700 crores.

Senior naval officers who are familiar with the negotiations point out, “The inclusion of so many crucial systems in the MPM package --- systems that everyone knew had to be bought from Armaris/DCNS --- was a grave contracting mistake. This was done to give the impression of greater indigenisation… since these would apparently be items that MDL was procuring. But this scheme has backfired badly.”

Naval planners are struggling to deal with a situation where the induction of Scorpene submarines remains far away. Only after the MoD and DCNS agree on a price will production begin in France of the engines, generators and other systems that are included in the MPM category. Technicians working on Project 75 estimate that, once a price is fixed and a contract signed, it will be 33-36 months before the items are delivered to MDL and fitted on the first Scorpene. Then will start the painstaking process of outfitting the rest of the vessel, fitting weapons and sensors and carrying out lengthy trials before handing over the submarine to the navy.

But work in the East Yard has not entirely stopped. Having completed the first hull, MDL is going ahead with fabricating the second and the third. Officials involved in Project 75 say this will allow submarines to be delivered at 9-month intervals, rather than the planned 12 months.

But until the MPM contract is signed, and the systems delivered, MDL’s East Yard will not be producing submarines, but 200-foot-long metal tubes for a project that began two decades ago, and has gradually become a symbol of ineffective defence planning.