Leasing of equipment can only be a temporary measure and not the solution to our poor state of defence preparedness
Gp Capt AK Sachdev (retd)
Stockholm International Peace Research Institute (SIPRI) released its (much anticipated) annual report titled ‘Trends in International Arms Transfers-2020’ in March this year. India has been the second largest importer in the world for the period 2016-20. India also has a podium position as the third largest military spender (behind US and China) for the year 2020 and indeed, has increased its spending by 2.1 per cent over 2019, despite being in the throes of a pandemic.
The fact that the world’s third largest military spender should be the second largest arms importer is not only a cause for embarrassment but also a pointer to deep dents on an economy that can ill afford the patently high costs of foreign defence wares. The dismal state of our defence budget is lamentable and so is our priority as a nation to defence spending; the defence budget as a proportion of GDP has been shrinking steadily and, last year, the overall defence budget was 2.1 per cent of the GDP, the lowest since 1960s.
Consequently, as a nation, we have a defence budget that is inadequate to affording the defence equipment we need. With capital expenditure demands overwhelming the budget, lease has become the pragmatic, albeit less dignified, stratagem. This article addresses the enshrinement of ‘Leasing’ as a new category for acquisition in the current defence acquisition philosophy, the services’ exploitation thereof, and the benefits and shortcomings of defence equipment leasing.
Leasing as A New Acquisition Category
The Defence Procurement Procedure (DPP) was first promulgated in 2002 and, while retaining that title, has undergone several mutations since then. The draft of the latest version, DPP 2020, was uploaded on the ministry of defence (MoD) website on 20 March 2020 and comments, recommendations and suggestions were invited from all stakeholders. The final document (to be effective October 1 last year) was titled Defence Acquisition Procedure (DAP) 2020 (and not DPP 2020). The subtle change in nomenclature possibly reflects the almost imperceptible difference between ‘procurement’ which conveys a purchase process and ‘acquisition’ with the accent on obtaining it.
The inclusion in DAP 2020 of a whole new chapter (running into 34 pages and called ‘Chapter IX: LEASING’) underscores that nuance and opens up a whole new gambit for the services. The document states that ‘leasing provides means to possess and operate the asset without owning the asset and is useful to substitute huge initial capital outlays with periodical rental payments’. Two types of leases are laid down: Operating Lease where ownership is not gained anytime over the lease period, and Finance Lease where the cost of the equipment leased is paid over the period of lease with an option to take ownership at the end of it at a predetermined payment. The chapter stipulates two sub-categories: Lease (Indian) and Lease (Global) and goes on to lay out cases where lease may be preferred to outright purchase. As a counter to budgetary outlay deficits, the introduction of leasing is an innovative reform, much needed at this time. Let us address the disparate approach of the three services to leasing.
The Indian Navy: The navy’s brush with leasing precedes the DAP 2020 by more than two decades as it leased its first Charlie class nuclear submarine (INS Chakra) in 1988; this was returned to Russia in 1991. After a huge hiatus, it leased an Akula Class nuclear submarine in 2012 for a ten-year period. This was also named INS Chakra and should have gone back to Russia in 2022 but may be retained for another three years.
This is because a new submarine for which a ten-year lease has already been signed is due to be inducted in 2025. The new inductee will also be named INS Chakra. All three are SSNs (short for Submersible Ship Nuclear) as distinct from SSBN (which is Submersible Ship Ballistic Missile Nuclear) which carries nuclear ballistic missiles; the current and future INS Chakras have strategic weapon capability which has been kept out of the lease deal in deference to Missile Technology Control Regime (MTCR).
India is building its own SSBNs (the first one INS Arihant was inducted in 2016) and the leased SSNs have had immense training value for the navy. Although not armed with ballistic missiles, they are nuclear powered and carry missile systems and torpedoes. The present INS Chakra has Russian weaponry and command systems but the next one (whose lease starts in 2025) will have indigenous systems to test them out for Indian submarines. The lease for the third INS Chakra has been signed in 2019 and so, all three INS Chakra leases have pre-dated the DAP 2020. It is unlikely that the 2019 deal will be revisited in deference to DAP 2020. As leasing is spawned by budgetary pressures, it may be pertinent to point out that, while the 2012 lease cost USD one billion, the 2025 one costs USD three billion.
The navy has leased two non-weaponised, Medium Altitude Long Endurance (MALE) MQ-9B SeaGuardian Unmanned Aerial Vehicles (UAVs) last year from California based General Atomics Aeronautical Systems, Incorporated (GA-ASI) for a period of one year. This is the naval version of the better known MQ-9A Reaper UAV. Maintenance and technical support are being provided under the lease arrangement by GA-ASI, while the navy has full operational control over the deployment and surveillance data harvested by the UAVs.
The UAVs arrived in India in the beginning of November last year and were inducted into the navy on November 21. As the DAP 2020 was unveiled on October 1, it is doubtful that the SeaGuardian lease was processed under its provisions. It is more likely that the Communications Compatibility and Security Agreement (COMCASA) signed by US and India in September 2019 and Basic Exchange and Cooperation Agreement (BECA) signed by the two in October 2020 paved the way for the lease deal which India had been pursuing for two years. However, the arrangement sets the scene for future lease deals without the need for huge capital expenditure.
In 2017, the navy had issued a request for information (RFI) for procurement of 111 Naval Utility Helicopters (NUH); the title of the RFI included the words ‘Through Strategic Partnership’ as strategic partnership was the buzzword at that time. However, the quest has gone unrewarded so far. In April this year, the navy set off the process for leasing 24 NUH by issuing a fresh RFI to vendors and leasing firms; understandably, the RFI for procurement of 111 NUH has been removed from the navy’s official site. The lease includes maintenance support and training of air and maintenance crew. The platform sought is below 5 ton with search & rescue, medical evacuation, communication duties and low intensity maritime operations (LIMO) as the roles. A wheeled landing gear, folding blades (for stowage), two pilots and twin engines are the requirements the RFI stipulates.
Interestingly, the bidders are required to provide costing information for both operational and finance lease for durations of 5, 10 and 15 years so that a cost benefit analysis can be carried out to arrive at the optimum duration of lease (and possible ownership at end of lease period). The cost of acquisition of assets at the end of 2nd, 3rd, 4th and 5th year is required to be indicated separately by the bidders, thus leaving the navy the option to acquire the NUH at any pre-determined times during the lease period at costs agreed upon in the lease document.
In May 2004, MoD approved a plan to procure 24 Mine Counter Measure Vessels (MCMVs) to replace the navy’s 12 Soviet-made Karwar class MCMVs which, having spent more than three decades with the navy, are no longer operational. India has been trying to construct MCMVs at Goa Shipyard Limited (GSL) which was awarded a USD5 billion non-competitive contract in 2014. It floated a global Expression of Interest (EOI) from companies willing to transfer the technology to build the vessels; South Korean Kangnam Corporation was the sole respondent to the EOI, leading to a single vendor situation which was accepted by MoD. The construction of the first vessel was expected to begin in April 2018 with deliveries to be completed between April 2021 and April 2026 but the programme was cancelled by the Indian government in 2018 due to issues with cost and transfer of technology. The South Korean defence minister General Suh Wook visited India during March this year and had discussions with our defence minister. Details of the issues deliberated upon are not available, but it is conjectured that the leasing of an unspecified number of MCMVs from South Korea may have been on the agenda.
The navy has also been leasing, from Shipping Corporation of India (SCI), a Multi-Purpose Supply Vessel (MPSV) called SCI Sabarmati for conducting sea acceptance trials of its recent acquisition—Deep Submergence Rescue Vehicle (DSRV), a highly specialised under sea vehicle for rescue from grounded submarines. Decidedly, the navy has a lead over the other services as far as leasing of equipment is concerned.
The IAF: The IAF is woefully short of combat aircraft with its squadron strength having fallen to around 30 against a sanctioned strength of 42. Combat aircraft leasing is unprecedented so far (barring exceptional circumstances like, say, from one NATO member to another) but to alleviate the budgetary pressures on combat aircraft purchase decision making, IAF is looking at leasing other equipment. Aerial Refuelling aircraft, trainers and Light Utility Helicopters (LUH) are in the limelight for this purpose while SeaGuardian type of UAVs could be next in consideration.
The IAF currently holds six IL-78 aerial refuelling aircraft inducted almost two decades ago (2003) while its requirement, as assessed now, is 18. Attempts to procure at least six more aerial refuelling aircraft to fill that gap have been in vain so far (largely because of financial constraints). Even before DAP-2020’s arrival on the scene, the IAF had issued the RFI for wet and dry lease of aerial refuelling aircraft; the RFI sought interest in wet and dry lease, the idea being that wet lease could be used for peacetime use and dry lease for operational purposes. However, lessors may not show interest in the dry lease option for wartime purposes. Anyway, the use of leased aircraft is envisaged only for training purposes while the IAF-owned IL-78s would be conserved for actual operations.
The Multi Role Tanker Transport (MRTT), based on the Airbus commercial A-330 airframe, is being considered for a lease. A wet lease is being contemplated as the crew training and allied costs for just one aircraft would not be cost-effective. In March this year, Boeing also offered its KC-46 tanker (based on Boeing 767 airframe). Both aircraft are multi-role and have comparable speeds but the MRTT is nine metres longer than the KC-46 and can carry more fuel over longer ranges. The KC-46, on the other hand, can land on smaller runways. MRTT is more expensive than the KC-46 and so its lease rentals may be more too. IAF is considering both options; its French connection is a robust one but the recent upsurge in US-India cooperation may tilt the balance in favour of KC-46. In April, this year there were reports that IAF was considering leasing the aerial refuelling aircraft based on a new methodology that looks at the availability of the number of hours per year as the guiding criteria. Whichever aircraft is selected, it is unlikely that the lease agreement will make it available for actual operations in war and thus, the lease remains only an interim arrangement (until outright procurement of our own) necessitated by budgetary constraints.
In 2012, the IAF had contracted for 75 Pilatus PC-7 Mark II aircraft with an option to order more. However, amidst allegations of malpractices in the deal, the follow-on order was abandoned after the initial 75 had been delivered in 2015. IAF’s Kiran trainers are falling away due to old age and so more trainers are needed. In August 2020, the Defence Acquisition Council (DAC) had accepted the procurement of 106 HTT-40 trainers from HAL. A Request for Proposal (RFP) was handed over by IAF to HAL during the Aero India Show 2021 in February this year. HAL has submitted its financial bid for 68 HTT-40 and cost negotiations are under way with an order anticipated by October 2022.
The HTT-40 is planned to be built at Nashik where the facility is to come up ab initio; it will produce only 20 HTT-40s per year and so, if another 38 are ordered, the assembly line could take more than five years to produce the IAF’s requirement of 106. With the intent of filling this anticipated gap, in November last year, the Deputy Chief of Air Staff, Air Marshal Sandeep Singh had stated in a webinar organised by Federation of Indian Chambers of Commerce and Industry (FICCI) that the IAF was in the process of sending out an RFI for leasing 20 trainer aircraft for a period of four to five years until the HTT- 40 trainers being developed by HAL are ready to be inducted. Given the track record of HAL and the fact that the HTT-40 programme is already inordinately delayed, the lease for these trainers may have to be extended beyond the initial four or five years; in all probability, the IAF would build such a clause into the lease agreement.
The IAF has also shown interest in leasing UAVs (especially after the navy’s delightful experience with SeaGuardians) and surveillance aircraft needed for its impending role in the Air Defence Command (ADC) in addition to light helicopters.
The Indian Army: In January this year, the army has signed a lease agreement with Israel Aerospace Industries (IAI) for four Heron Mark II MALE UAVs which are expected to be delivered before the end of this year. The lease period is three years with an option to extend it by another two years. The lease was signed under the emergency powers granted to the Army Chief (and the other service Chiefs) in June 2020 as an effort to speed up acquisition of shortfalls in equipment which had become a focus of attention after the Chinese. Not much has been heard of any other lease plans the army has.
Advantages of Leasing
The most momentous implication of the leasing option is the deferring of large initial capital outlay and this point has already been belaboured earlier.
The saga of defence acquisition in India is sordid. A ‘normal’ acquisition process can take three to 10 years on a bureaucratic obstacle course with the added hazard of newer obstacles appearing on an entity’s horizon during that long period of agony. Moreover, the higher the cost of acquisition, the more prolonged the process with the added peril of total cancellation just as the final lap is concluding. This was the case with the IAF’s 126 MMRCA pursuit for which the RFI was issued in 2001 and which struggled for a decade and a half before being strangled in 2015. Thus, the services look forward to leasing in the fond hope that the process would be simpler and quicker.
The DAP 2020 itself says that leasing would be the preferred mode of acquisition in cases where procurement is not feasible due to time constraint, or where the asset is needed for a limited time or would be underutilised if procured, or where the small numbers needed do not justify the overheads of procurement, or where lease rentals are more attractive than one time costs, or due to operational necessity, or to gain experience for operational exploitation of equipment. This last point is noteworthy and, as a case in point, perhaps the IAF could wet lease one MRTT and one KC-46 and then over the lease period, decide which one it wants to procure for itself.
Also, while one time procurement is usually for a factory-new equipment, leasing can be considered for new or used platforms without significant loss of efficiency. As Vice Chief of Naval Staff, Vice Admiral G Ashok Kumar reportedly said, “Leasing is a path-breaking change that provides an opportunity to mitigate short-term capability gaps, considering the long gestation period of shipbuilding contracts”. He also feels that the navy should lease multi-role platforms on to which specific capabilities can be slapped on in preference to using high end platforms for low end tasks. The advantages of leasing over procurement are many and will definitely outweigh the hold backs that some have over the option.
Disadvantages of Leasing
One persuasive argument proffered to deprecate leasing is the fact that as the ownership of leased assets lies outside of our reach, strategic autonomy in use of leased equipment could be adversely affected. That is no doubt a point to consider—one which would definitely be woven into the lease agreement. Another contention (reportedly voiced by former secretary, defence finance, Gargi Kaul at the FICCI webinar mentioned earlier) is that the leasing policy would tie the hands of defence ministry bureaucrats behind their backs inasmuch as in most cases there would be a single vendor situation. One hopes that practice will overcome policy in such situations and leasing under single vendor circumstances would still be consummated.
Chapter IX of DAP 2020 lays down the process for leasing at Para 22. A quick glance shows that the steps to be gone through are the same as for Buy and Make acquisition processes (although Para 31 stipulates that the process is to be monitored with maximum delay periods defined therein). One hopes that, in practice, leasing processes will take less time than the other two but, at face value, the process has all the makings of bureaucratic delays.
Reportedly, Gargi Kaul also averred at the webinar that leasing would always be more expensive than outright purchases if the maintenance and insurance costs are considered. Given her background, that statement should be taken at face value and making a case for leasing to be a cheaper option may be difficult. However, to cater for that, the Navy’s RFI for NUH (details mentioned above) seeks comprehensive information designed to decide whether a lease option was indeed preferrable to outright purchase (or to a mid-lease purchase).
One practical (and undesirable) fall out of the leasing option could be that the procurement (for which leasing was being resorted to as a stop gap arrangement) may get further embroiled in delay. Yet another danger is that due to the shorter processing time of lease deals (in contrast to procurement ones), the delays in final sanctions may get lengthier as the cash strapped establishment postpones lease decisions until the last possible moment.
There is also the risk that a service may become dependent on a leased equipment to an extent that it may finally end up procuring it even if it was not the best buy (while being acceptable for a short period lease arrangement).
Extolling the inclusion of leasing in DAP 2020 is a bit facetious as it is more of a necessity ordained by our defence budget than a virtue of that document. India is not the first military power to lease defence equipment; US and UK et al have resorted to it in the past when driven to do so.
Endangering strategic autonomy could be a risk attendant upon leasing some types of high-end equipment but other areas like training equipment, simulators and logistic support platforms are suitable for leasing arrangements. Another possibility is leasing support equipment for expensive equipment already procured or being procured, thus splitting the cost between one-time payment (for main equipment) and lease rentals (for support equipment) spread out over time.
It could be argued that leasing may work counter to ‘Make in India’ and ‘Atmanirbhar’ philosophies inasmuch as the services would be filling their gaps with existing technologies from foreign vendors with minimal incentive to indigenous R&D. The obverse of that argument is that the money saved by leasing (contrasted to outright purchase) could be channelled for R&D.
Two realpolitik considerations nudge us towards leasing. Firstly, the present government appears to have more faith in its foreign policies to safeguard the nation’s geopolitical interests than in acquiring the military means to do so. Thus, defence budget can be expected to be ungenerous and inadequate in the near future. Secondly, the government’s commitment to self-reliance in the area of defence technologies is counterproductive as our R&D is still pretty low on the learning curve. It will take a long time before we have leading edge equipment. But we need it now, and we need it urgently. Both these impelling forces appear set to push our military towards favouring leasing as the easy (but not necessarily the most suitable) expedient to meet our defence needs.