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  • IN FOCUS: Finmeccanica crisis casts shadow far beyond AW101 deal

IN FOCUS: Finmeccanica crisis casts shadow far beyond AW101 deal

Just days after receiving a grilling from journalists about delays to much-needed procurement programmes at the Aero India show in Bengaluru in early February, senior Indian defence officials returned to their New Delhi desks to face one of the biggest acquisition scandals in years.

On 12 February, just two days after the show closed, Italian news reports emerged that Finmeccanica chairman and chief executive Giuseppe Orsi and Bruno Spagnolini, his counterpart at AgustaWestland, had been arrested following allegations of corruption related to India's order of 12 VIP-configured AgustaWestland AW101 transports in 2010. Orsi headed Finmeccanica's helicopter unit at the time of the deal.

Although concerns about alleged corruption had surrounded the sale for more than a year, they had largely died down by the time of the 2013 show. Not a single question addressed to defence minister AK Antony during his Aero India press conference mentioned the AW101 programme. As such, news of Orsi's arrest was all the more dramatic.

Finmeccanica and AgustaWestland deny the allegations, which are now being investigated in Italy and India. The defence ministry in New Delhi, wary of the faintest whiff of corruption, immediately went into full damage-control mode, issuing a flurry of statements on the matter and suspending payments to AgustaWestland.

Following Italian news reports of Orsi's arrest, Antony referred the case to India's Central Bureau of Investigation. On 14 February it released a detailed statement on the acquisition process, including its efforts to learn more about Italian investigations into the case. The document included strongly worded passages emphasising that New Delhi has a contractual right to cancel the programme should wrongdoing be proven.

"The contract and integrity pact signed with AgustaWestland contains specific provisions by which strict action including cancellation of contract, recovery of payment, blacklisting and penal action can be taken against the vendors."

It added that the government had ordered a thorough probe by CBI.

On 15 February, the ministry said it had issued a "show cause" notice, requiring AgustaWestland to respond to its request for an explanation into the deal within seven days. Speaking at a joint press conference with UK prime minister David Cameron on 19 February, Indian PM Manmohan Singh said he had conveyed to Cameron India's "very serious concerns" regarding possible "unethical means" used to secure the contract for the UK-built AW101s.

Although the show cause notice is considered the first step along the road to cancelling the deal, it is too soon for investigators to provide conclusive proof on whether the allegations have merit. Separately, it announced that it would send a high-level emissary to Italy to "gather evidence of bribery in the AW101 chopper acquisition".

AgustaWestland, for its part, insists the AW101 deal is still on. "Regarding recent investigations by an Italian prosecutor into alleged improprieties concerning the contract for VVIP helicopters for the government of India, AgustaWestland is confident that the full compliance with the relevant laws as well as the good conduct of its past and present senior executives and managers will be demonstrated as soon as practicable," it says. Three AW101s have already been delivered, with the next batch of three aircraft due to be handed over in the spring.

Still, the sale could face a long, tortuous road ahead of it in the coming years, with the eventual outcome deeply uncertain.

Were Finmeccanica to be blacklisted by New Delhi following an unfavourable conclusion to the AW101 investigation, this could remove it from a number of major acquisition programmes. Not the least of these is an upcoming competition worth $2.4 billion to replace the Indian air force's Hindustan Aeronautics-built Hawker Siddeley HS 748 transports, for which Finmeccanica unit Alenia Aermacchi plans to pitch its C-27J Spartan.

And if Finmeccanica was to be left out in the cold, that could also throw New Delhi's multirole helicopter programme for 16-18 naval helicopters into disarray. The rivals for this deal are the Sikorsky S-70B and the NH90 produced by NH Industries (NHI). Although NHI is a joint venture between AgustaWestland, Eurocopter and Fokker, export examples of the NFH naval variant are assembled in Italy by AgustaWestland. Even worse, it could also remove AgustaWestland from India's planned 120-aircraft naval multirole helicopter competition.

"India has had a really bad tradition of taking bribes," says Richard Bitzinger, senior fellow of the Military Transformations Programme at Singapore's Rajaratnam School of International Studies. He stresses, however, that the government is working hard to change this environment - even to the point of over-reacting to even the slightest indication of malfeasance.

He notes that in 2012 India blacklisted five defence firms following allegations of bribery in a 2009 scandal. "The allegations were neither proven or disproven, but in the meantime they are not allowed to compete," he says.

The Finmeccanica scandal is also likely to delay several contracts now being negotiated, including the purchase of 126 Dassault Rafale fighters under the medium multirole combat aircraft acquisition. At Aero India, Antony stressed that negotiations for this requirement were proceeding with the utmost care.

New Delhi is also in final negotiations with Boeing for 15 CH-47F Chinook heavy lift and 22 AH-64D Apache attack helicopters. Airbus Military, meanwhile, hopes to complete the sale of six A330 multirole tanker transports to the nation.

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