Arms and the Middlemen

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BENGALURU, FEB 21 (UNI) :-Wing Walkers of Breitling aerobatic team performing during the 4th day Aero India 2015 at Yelanhanka Air base in Bengaluru on Saturday. UNI PHOTO -26U
BENGALURU, FEB 21 (UNI) :-Wing Walkers of Breitling aerobatic team performing during the 4th day Aero India 2015 at Yelanhanka Air base in Bengaluru on Saturday. UNI PHOTO -26U
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Josy Joseph describes the world of defense dealers and how major deals are struck in his book, A Feast of Vultures

In modern India, national interests are served by men and women who operate below the radar, ensuring that multi-billion-dollar deals in various sectors are not derailed, and that the Indian economy continues to spend and expand. Ensuring that a clean deal goes through is a difficult game and a corrupt deal is even more complex. This means that even the most transparent Western firms operating in sectors such as defence, construction, highways, power, oil and natural gas are forced to engage people who have a deep knowledge of the systems. These are the players who will deploy tactics, often illegal, to ensure that the company wins lucrative contracts.

DRDO’s Agni V missile is one of the few successful indigenous experiments
DRDO’s Agni V missile is one of the few successful indigenous experiments

Professional middlemen manage and manipulate huge contracts, run large offices, hire retired government officers and other such experts to manage the system, and are on a first-name basis with not just Indian leaders but many key players around the world. They have offices not just in India, but in cities around the globe. These are people who have sophisticated financial strategies to cover their tracks, who might be among the biggest account holders in many of the tax havens of the world.

They are also the least known players in the Indian system—and the most important. They play a critical role in sustaining many Indian political parties by pumping them with black money, yet do not figure in the list of their donors. Even if criminal cases are registered against them, the most credible evidence will eventually just disappear into thin air.

These are not the political fixers down the street or typists guarding their bosses but men, and occasionally women, who can swing multi-billion-dollar deals, manipulate files and procurements, throw governments out and swing global opinions. The most powerful middlemen in India… decide the very fate of the country’s democracy.

At the highest levels, middlemen can make or break a company’s prospects in the market. From the moment a contract proposal is prepared, the middleman’s influence is visible. The parameters detailed in a bid are often tweaked to qualify their client; trials are manipulated to bring up their client to the list of winners; negotiations are deftly manoeuvred to the best possible situation for the client; and the final parameters ensure that political decisions go the right way. Not everyone involved in the selection is on the payrolls of the agent. However, at every stage, there are key people on the take. For those who do their bidding, the rewards are huge—scholarships for their children in famous Western universities, sports coaching camps for children in foreign locales, a villa in Portugal, millions stashed in a secret account in a tax haven, and much else.

Prime Minister Narendra Modi at DRDO Bhawan in Delhi. Photo: PIB
Prime Minister Narendra Modi at DRDO Bhawan in Delhi. Photo: PIB

To understand these powerful middlemen, one must shed preconceived notions about intermediaries in a free market. This is not just someone doing quantifiable work, like assisting a client to make sense of the market or identify the best partners, help efficient transfer of technology, protect intellectual properties, complete legal requirements, or otherwise assist in navigating the system. In India, that aspect is only a small part of the intermediary’s work—the key engagement is beyond it, and below the radar. He must ensure that the system keeps working, a contract is not scuttled, decisions are taken in time and a particular company wins a contract.

By 2012, India had displaced China as the world’s biggest importer of arms…. India’s share of the volume of international arms imports increased from 7 per cent to 14 per cent during 2009-13 compared to the previous five years….

In short, he must ensure that the government keeps running in the sinister and corrupt way that has become the norm. It would be no exaggeration to say that these powerful intermediaries play a critical role in ensuring that the Indian government does not grind to a halt, its armed forces modernize regularly, that highways are constructed, and the economy keeps growing at a robust rate rather than stagnate. In a perverse way, these middlemen are the answer to an inept and stagnating government.

The accusations of kick-backs in the Bofors deal caused a huge setback to Rajiv Gandhi
The accusations of kick-backs in the Bofors deal caused a huge setback to Rajiv Gandhi

The middleman, or intermediary, is actually a legitimate function in any modern economy. The defence industry is a particularly good example to understand what differentiates an Indian middleman from his counterparts in most other economies. In this sector, the intermediary normally provides a set of legitimate and important services, mostly to a foreign company that finds it difficult to navigate the procurement process of the host country. He could, for instance, be assisting a small firm which cannot afford to open a dedicated office in a country that is carrying out small-sized procurement. In most countries, offsets—stipulation to procure or spend a significant part of a contract in the buyer country—are integral to defence contracts, and a local intermediary plays an important role in executing them. These intermediaries are paid legitimate fees, and often a part of their fee is built into the contract making them offset or maintenance partners.

There is another critical function to be carried out in a fiercely competitive economy, which is to ensure that a company’s views, not always wrong, are heard and understood by decision makers. For this function, the United States of America has a flourishing lobbying industry, and several economies officially permit lobbying with the government. Their task is not to pay bribes or manipulate, at least not officially.

In the Indian economy, middlemen play out their roles in the dingy back rooms of decision making. They carry bribes, pay whoever needs to be paid, intimidate someone if required, and ensure that their clients have insider information on a contract from the very beginning of the process. They provide undue and unfair advantage. India has no formally recognized lobbying industry, nor does it allow agents in government contracts. But influential middlemen are an essential ingredient in any major government contract.

The Kargil war of 1999 heralded a new era of arms procurement from international players
The Kargil war of 1999 heralded a new era of arms procurement from international players

Some of India’s richest businessmen make their big profits playing the role of intermediaries. It is not uncommon for a foreign diplomat or executive to ask one about a particular industrialist—quite likely, he has offered his services to help swing a mega deal. At the highest echelons of Indian decision making, it is hard to figure out who is a mere middleman and who is a mere industrialist.

When I was ushered in to meet a senior official of a European military consortium on an afternoon in February 2009, he was already a little high on wine and a little low because of the Indian heat. We were an earshot away from the thunderous take-offs and landings of the world’s leading fighter aircraft at Aero India, a biennial aviation exhibition in Bangalore, now called Bengaluru. All the major aircraft manufacturers were present to exhibit their latest to impress India, which had put out a Rs 60,000 crore contract to acquire 126 fighters for the Indian Air Force. Taking off and landing with fury were the finest and most expensive fighters in the world: F-18s and F-16s from the United States, MIG-35 jets from Russia and Euro fighters made by a European consortium. A host of business and transport jets were also vying for the attention of potential buyers. Aero India has become one of the world’s largest aviation shows, thanks to the country’s status as the largest importer of military-ware and its growing club of billionaires who prefer private transport in the sky.

Some of India’s richest businessmen make their big profits playing the role of intermediaries. At the highest echelons of Indian decision making, it is hard to figure out who is a mere middleman and who is a mere industrialist.

The European official had known me for some time and was relaxed and open. He was visibly upset about the failure of his consortium to win a major contract in India for almost a decade. ‘I would blame it all on Choudhrie,’ he declared. Their long association with Sudhir Choudhrie had come to a bitter end because a haughty senior executive in the company had not liked the methods and practices of the most powerful arms dealer in India. The European executive was not the first, and definitely not the last, to confide his fear of, and loathing for, Choudhrie.

Arms dealer Sudhir Choudhrie
Arms dealer Sudhir Choudhrie

Yet, since they cannot overtly engage in back-room negotiations, power brokers such as Choudhrie become critical. Almost every foreign firm operating in India has middlemen assisting them in some form or the other. Some of them, fearful of backlash and punishment back home, are careful not to be seen to be engaging middlemen. Instead they deploy expensive consultants, or structure their bribes through layers, via trusts and tax havens.

Firms from countries where anti-corruption laws are relatively lax tend to be opaque, because they can run their business without too much fear of prosecution by their respective governments. Not surprisingly, they tend to be among the foreign firms that most often pocket the big government contracts.

The abject failure of its indigenization efforts, combined with the recurring conflicts India has had to deal with—several with Pakistan, one with China, and the many insurgencies—is what has turned the country’s military into a highly sought-after shopper in the international arms market.

The middlemen operating at the highest levels of the Indian economy enjoy monopoly, if not complete control, over the sectors they operate in. The huge resources at their command give them the power to prop up governments and political parties. Senior civil servants who are not corrupt say that all they can do is ensure that they remain clean personally. The CEO of a foreign defence firm told me once that he had to spend a million US dollars just to get an appointment with a defence minister some years ago.

Every aspect of economy—and not the defence sector alone—where the government has a role is trapped in the crushing embrace of high-level corruption. The defence sector, however, is most instructive in our attempt to understand the power, influence and growth of powerful middlemen like Choudhrie.

Let’s begin with a brief history of India’s military modernization.

Since Independence, India has been heavily import-dependent for defence equipment, and in the initial decades, up until it collapsed in the early 1990s, most of the purchases were from the Soviet Union. In the next decade, India did not make many purchases. Then the Kargil conflict with Pakistan in 1999 churned things up. India went back to the global arms bazaar with such vengeance that, by 2012, it had become the world’s largest importer of arms. Arms dealers flourished, weaving cosy relationships with political leaders, senior military and civil officials, as well as other stakeholders in the system. There has been much speculation about where they meet, how they benefit and how such huge kickbacks are moved around. To date, no Indian investigation agency has been able to nail a major arms dealer or senior official for paying bribes or accepting them. Many big names have been dragged into public scandals in the defence sector, but none went so far as conviction.

This is surprising in a country where a single defence scandal dramatically changed the political landscape in the 1980s. On 16 April 1987, a Swedish newspaper broke a story alleging that artillery manufacturer Bofors had paid kickbacks to people in several countries, including Sweden and India, to secure a Rs 1,500 crore contract the previous year from the Indian Army to supply 410 155-mm calibre howitzer guns. Those close to the incumbent prime minister, Rajiv Gandhi, were accused of receiving kickbacks. In the huge political upheaval that followed, the Congress party lost the 1989 election by a significant margin. However, it has had no visible impact on India’s voracious appetite for foreign military-ware.

By 2012, India had displaced China as the world’s biggest importer of arms, as the Middle Kingdom took a sharp turn towards self-reliance. According to the Stockholm International Peace Research Institute (SIPRI)—the most dependable assessment data available—India’s share of the volume of international arms imports increased from 7 per cent to 14 per cent during 2009-13 compared to the previous five years. Informal estimates say that India could end up spending around Rs 6,70,000 crore on importing arms during this decade alone.

Indigenous military production accounts for a pitiful 30 per cent of the country’s total armament requirements. The Indian government’s Defence Research and Development Organization (DRDO) has been a massive failure, despite the eulogies that the political and bureaucratic class regularly pay it. It has not been able to successfully master a single major military platform, except missiles. India does not have an indigenous battle tank or a fighter aircraft, both mainstays of its military operations.

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Military manufacturing here has insipid factories churning out crude products and working at the lowest end of the value chain. The few sophisticated systems that they make involve importing parts from abroad, assembling them into systems and stamping their tag on it. A few private players are now beginning to take baby steps in the weapons manufacturing industry, but it is too early to assess their effectiveness.

The abject failure of its indigenization efforts, combined with the recurring conflicts India has had to deal with—several with Pakistan, one with China, and the many insurgencies—is what has turned the country’s military into a highly sought-after shopper in the international arms market. Many firms in the United States, Israel and Europe, including Russia, have come to depend on Indian orders to sustain their profits. These foreign companies, in turn, need deal makers to ensure that the procurement process stays on track and to provide them with the smokescreen of deniability regarding the paying of bribes.

In the corridors of the MoD, most officials speak of Choudhrie with reverence. A former defence secretary recalled that someone once wanted to introduce him to a certain ‘Mr Choudhary’ at a party. ‘I didn’t know which Choudhary it was, but for a moment I was mortified,’ he said. While Choudhary is a common surname, the unusually spelt Choudhrie bothers honest officials.

Choudhrie’s footprints can be found in arms sales… also in China, Indonesia, Israel, several European nations and in some African countries. In Israel, the state has used court interventions to prevent journalists from writing about him.

He is admired—and loathed—not just for his ability to swing deals, but also for scuttling those of his clients’ competitors.

Lead picture: Aero India shows have become prominent in the world and leading manufacturers compete for attention here. Photo: UNI

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