Opinion is divided on whether leasing provides a viable acquisition option for defence equipment.Opinion is divided on whether leasing provides a viable acquisition option for defence equipment.Opinion is divided on whether leasing provides a viable acquisition option for defence equipment.

By Raaj Nair

DAP 2020 defines leasing as a ‘means to possess and operate [a military] asset without owning the asset’ and says it provides a useful way ‘to substitute huge initial capital outlays with periodical rental payments’. DAP 2020 permits leasing in two categories: Lease (Indian), the preferred category, where the lessor is an Indian entity and owns the asset; and lease (global), which refers to lease of equipment from foreign or Indian lessors.

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The new DAP stipulates conditions where leasing – of either new equipment – could be a better option than outright purchase. These include circumstances where:-

(a) Traditional procurement is not feasible due to time constraint

(b) The equipment is needed only for a limited time or would be under-utilised if purchased.

(c) Where only small numbers of the equipment are needed and it would require expenditure to set up the infrastructure for those limited numbers.

(d) Leasing is also recommended for when leasing rentals would be more economical than paying large one-time acquisition cost

(e) Or to gain experience in the operational exploitation of a particular equipment.

Opinion is divided on whether leasing provides a viable acquisition option for defence equipment. The forces see leasing as a win-win situation because they are able to get past the long procurement process that moves at a very sluggish pace.

The recent statement of the Defence Minister Rajnath Singh where he said, “More a nation acquires a credible combat capability and related political resolve, the lesser the probability of a potential adversary going down the path of adventurism”.

Capital leasing allows the Government to receive and use assets immediately and spread the cash outlays over the lease period rather than frontloading 100 percent of the cost. Thus, leasing can provide the Government with an extremely powerful tool to provide financing alternatives that normally would not be available. However, leasing by the services will not only pressure their shrinking capital budgets but also impact their revenue budgets which will have to bear the expense of maintaining the leased equipment.

In the fiscal year 2020-21, for instance, the MoD was allocated Rs 1,24,203 crore towards capital expenditure for all three services against the Rs 2,01,286 crore which they had demanded. Even for operating revenue expenditure, the allocation was Rs 48,298 crore less than what was claimed.

Leasing as a function is not new to the armed forces since as early as 1988, India obtained a nuclear submarine, “Chakra” from the former Soviet Union on lease. Advanced talks between the two nations are on to get another nuke powered submarine, as India signed a $3 billion deal with Russia last year. It is expected to arrive by 2025. Last year, India inducted two American high-altitude long endurance drones into the Navy — Sea Guardian, the unarmed version of the deadly Predator series — on lease. Last month, the Navy had invited responses from overseas vendors by June 18 regarding its planned five-year lease of 24 NUHs and related support equipment to replace its fleet of legacy licence-built Chetak helicopters of 1960 vintage. The Navy’s Request for Information to original equipment manufacturers, authorised leasing firms and government-sponsored export agencies stated that five-ton rotorcraft were needed to execute search and rescue and medical evacuation missions from ships at sea and to perform communication tasks and low-intensity maritime operations by day and night. The proposed helicopters — to be delivered to the IN within two years of the contract being signed — would need to have a residual service life of 15 years at the commencement of the lease. The lessor would also be responsible for training the rotorcraft’s air and technical crew in keeping with the delivery schedule.

The Navy will lease vessels for coastal security patrols, minesweeping, seabed mapping, and auxiliary vessels such as tankers, barges, tugs in addition to operational enablers such as utility helicopters, unmanned solution and high-speed aerial and surface targets for operational preparedness.

The MoD is also in advanced negotiations with the French Government to lease one Airbus Defence and Space A330 multi-role tanker transport aircraft for the Indian Air Force (IAF) for training purposes. The proposed tanker that would be operated by the IAF, but maintained by the French Air Force, would in all likelihood be succeeded by leasing five more A330s to augment the reach and, hence, combat capability of the force’s combat aircraft.

The A330s have been under consideration after these tankers, operated by the French and UAE air forces, had refuelled 21 Dassault Rafale multi-role fighters to India from France since July 2020. The IAF’s remaining 15 Rafales will also be similarly refuelled by the A330s. The IAF is also considering leasing 20 basic trainer aircraft. The Indian Army leased four Israel Aerospace Industries MALE UAVs in response to the continuing face-off with China’s People’s Liberation Army that began May 2020.

Areas of Concern:-

Leasing also has certain areas of concern which must be looked into as otherwise the entire function of investing in assets can become counterproductive. The first as some experts believe that the option to lease has always turned out to be a costly affair compared to outright purchase. The equipment leasing by the services will not only pressure their shrinking capital budgets but also impact their revenue budgets which will have to bear the expense of maintaining the leased equipment. Maintaining the equipment to standards stipulated by the lessor too would be the respective service’s responsibility, unless otherwise specified. This cost could even be higher if the equipment were to be serviced and maintained by the lessor as such an eventuality would entail stationing an upkeep crew in India for extended periods.

Other than lease amount payable over predetermined intervals, the high cost of modifying platforms to meet operational requirements is also to be thought about. Insuring the leased equipment and platforms would have to be borne by the respective services from their annually shrinking outlays. As, of course, would the eventual cost of rendering the equipment, upon its lease expiry to its original state in keeping with the accepted standard international practice.

Services largely welcome the leasing approach, some fear that it could become an easy way out for the government to cater to the needs of the Armed Forces. They argue that the urgency of the actual procurement process could further take a back seat because the critical gap will be fulfilled by leasing. Once the leased assets are commissioned, the resultant outcome will also be reduced pressure on Govt agencies like DRDO & DPSUs to innovate and deliver products on cutting edge & world class products. This will continue to feed the existing technology void. Then the larger issue to ponder is what happens to MoD’s Capability Development programs through Indigenisation/Atmanirbharta under Make in India initiatives in the Defence Sector.

The process of the already existing heavy dependency on foreign OEMs via imports in the defence sector will continue to exist, however in a different format. This process could pave the way for foreign companies to get in through the back door and forces will become dependent on the procured system or machinery and eventually end up buying them in large numbers from the same manufacturer rather than being open for any other similar systems. The option for a lease must be kept for meeting the emergency operational requirement and not a path of least resistance.

(The author is a former Naval Officer. Views are purely personal and do not reflect the official position or policy of Financial Express Online.)

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