No Rat In The Rafale Deal

Quite unexpectedly, Prime Minister Narendra Modi, while on a tour of France in April 2015, announced that India had decided to negotiate the purchase of 36 “ready-to-fly” French-made Rafale fighter jets in a government-to-government contract to meet emergent requirements of the Indian Air Force (IAF). It was claimed that the terms of the deal would be better, deliveries would be faster, maintenance responsibility of France would be longer and the configurations would be as had been earlier approved by the IAF. Detailed terms and conditions were to be mutually discussed and finalised between the officials of the two countries.

As the urgency of the acquisition was well appreciated by all, no questions were ever raised about the appropriateness, earnestness and sanctity of the deal for over two years. After prolonged negotiations, the deal was concluded in September 2016. The deal carries the stipulated offset obligations of 50 per cent of the contract value and contains a five-year maintenance guarantee.

However, the announcement of the Anil Ambani Group’s association with the deal has stirred up a hornet’s nest. Terming the deal to be a sign of increasing crony capitalism, the critics are accusing the government of favouring an industrialist friend.

During election time, allegations take the form of mud-slinging, in the hope that some mud would definitely stick and, if nothing else, seeds of doubt would get sown in the minds of the gullible public. For that reason, a concerted vilification campaign has been launched through media and public statements to corner the government. Although no detractor has been able to question the deal for its honesty and no one has been accused of taking bribes, attempts are being made to fault it for alleged irregularities.

Urgency and the Impasse

Ideally, the IAF should have a fighter strength of 45 squadrons; with the minimum inescapable requirement being 39.5 squadrons. With dwindling assets (all MiG-21s and MiG-27s are due for phasing out), the IAF projected a requirement for 126 Medium Multi-Role Combat Aircraft (MMRCA) in 2001. Consequent to the issuance of a request for proposals (RFP) in August 2007, six manufacturers submitted their proposals. While 18 aircraft were to be purchased in fully-built-up condition, the balance quantity was to be manufactured in India by Hindustan Aeronautics Limited (HAL) under transfer of technology. After extensive trials, two platforms (Rafale and Eurofighter Typhoon) were found technically acceptable. Finally, Rafale emerged the winner due to its lower life-cycle cost. The announcement was made on 31 January 2012 and contract negotiations commenced.

By 2014, negotiations had reached a total impasse with no signs of a possible breakthrough. In addition to overly escalating cost (from $10-12 billion to $25-30 billion), two critical issues proved highly problematic. One, Rafale’s manufacturer Dassault declined to stand guarantee for the 108 fighters to be built by HAL. According to the media reports, Dassault felt that HAL was too mired in mediocrity to be able to produce ultra-modern fighters.

Two, differences emerged regarding the interpretation of scope and depth of technology transfer. India wanted complete and unrestricted access to the latest technologies as it was paying for it. Reportedly, Dassault was ready to part with limited technology for licence manufacture only and not the design technology.
As the IAF was pressing hard for new fighters, the only viable course open to the government was to abort the MMRCA proposal formally and start anew with the issuance of a fresh RFP. That would have meant a delay of 10 years. Hence, Modi’s order for 36 Rafale aircraft was a desperate measure to boost the IAF’s diminishing strength. A number of India-specific improvements, avionics and weaponry have been sought in the new deal.

Analysis of the Criticism

As per articles appearing in the media and statements made by some political leaders, the Rafale deal suffers from several major infirmities. Let us look at what these allegations are.

Allegation 1: The deal for MMRCA was prematurely closed by the Modi government.

By 2014, it had become evident that the deal was beyond redemption. Without total technology transfer and Dassault’s guarantee for the aircraft built in India, the deal had become meaningless and hollow as these two aspects were the keystones of the proposal. With no solution in sight, the then defence minister A K Antony rightly considered it prudent to let the deal stay in deep freeze. By the time the Modi government came to power, both sides appeared reconciled to the impasse. The deal was dead to all intents and purposes, except for an official announcement to that effect.

Allegation 2: The new deal is far more expensive compared with the previous bid.

It is quite ridiculous to compare the two deals. Further, it is an accepted fact that major defence deals are an instrument of a nation’s foreign policy goals. They do not take place in isolation and are not negotiated purely in terms of commercial activities.
Therefore, the Rafale deal should not be viewed as a standalone agreement. In addition to this Rafale deal, a total of 17 pacts were signed between India and France during Modi’s visit. They included agreements on the stalled nuclear project in Jaitapur in Maharashtra and French investment of 2 billion euros in India. One is not aware as to what other assurances the French government has given India. Needless to say, a great deal of quid pro quo is inherent in such packages; it is always a win-win situation for both sides. The operational capability of a strategic platform depends on its configuration and it has to be a closely guarded secret. No country reveals such details. It is strange that some experts want the government to release an item-wise comparative cost table. Demand for transparency cannot be carried to such ridiculous limits.

Allegation 3: Modi violated the laid-down procedure.

Every Indian government has been resorting to an inter-government agreement (IGA) with foreign countries. No questions have ever been raised. Even the first version of the defence procurement procedure (DPP) of 2002 extols the benefits of IGA and reads: “In cases of large value acquisition and especially those requiring product support over a long period of time, it may be advisable to enter into a separate IGA... Such an IGA is expected to safeguard the interests of the Government of India and should also provide for assistance of the foreign government in case the contract runs into an unforeseen problem.”

Every single review of DPP, including the latest version, contains the above mentioned provisions, albeit in greater detail. According to paragraph 104 of DPP-2016, “there may be occasions when procurements would have to be done from friendly foreign countries which may be necessitated due to geo-strategic advantages that are likely to accrue to our country. Such procurements would not classically follow the standard procurement procedure and the standard contract document but would be based on mutually agreed provisions by the governments of both the countries.”

It is also alleged that Modi announced the deal without consulting the Union Cabinet. Two points need to be flagged here. One, Modi only announced his intent to pursue this route. Neither had the terms been finalised nor the contract concluded. This is standard methodology followed in the world of diplomacy. Heads of the governments express concurrence on broad policy issues and the officials work out the details later on. Two, it is naive to assume that Modi could have announced such a decision without prior consultations with his colleagues and advisers. Considerable spade work would have been done in advance between India and France. In any case, it is quite a bizarre point. Whether Modi takes prior or post concurrence of his Cabinet can hardly be an issue of public debate. It is an internal matter of the government’s functioning.

Allegation 4: HAL was unfairly kept out of the contract to help a private firm.

Unfortunately, the uninformed do not understand the difference between joint production and fulfilment of offset obligations. In joint production, a foreign manufacturer joins hands with an Indian production entity to produce the equipment in India, as was mandated in the aborted MMRCA proposal. On the other hand, fulfilment of offset obligation entails compensating the buyer country for the outflow of its resources through designated offset programmes.

The current Rafale deal does not entail manufacture/assembly of the fighters in India. All 36 aircraft will be manufactured in France and delivered to India fully configured. Hence, the question of having an Indian production partner does not arise. Thus, HAL has not been replaced by any other entity.

On the other hand, the Rafale contract carries offset obligation equal to 50 per cent of the deal value. As the onus for the fulfilment of offset obligation is entirely on the vendor, he is at liberty to select his Indian offset partner (IOP). This has been the policy since 2006, when offsets were formally introduced in defence purchases. Paragraph 4.4 of DPP-2016 reiterates that the overall responsibility and liability for the full discharge of offset obligations shall continue to remain with the main vendor; and for any shortfall, he shall be liable for penalty and debarment as stipulated in the offset guidelines. It needs to be recalled here that India signed a contract for 22 Apache attack helicopters and 15 Chinook heavy-lift choppers from the US with offset obligations. Boeing chose Tata Advanced Systems, Dynamatic Technologies, Rossel Techsys and many others as IOPs. Similarly, in the Rafale deal, it was entirely Dassault’s prerogative to choose IOPs.

Allegation 5: The Anil Ambani Group is ill-equipped for the aero-defence sector as it possesses no experience.

It was in early 2015 that Anil Ambani’s Reliance Infrastructure made its foray into the defence sector by purchasing a controlling stake in Pipavav shipyard, which was struggling under a debt of Rs 7,000 crore. In a short period of two years, it has established itself as a serious player in the defence sector with 11 subsidiaries. It has already won contracts for five naval craft and 14 fast patrol vessels and training ships through competitive bidding. It has also been approved for the manufacture of hull and turret of Arjun tanks.

Reliance Infrastructure and Russian arms maker Almaz-Antey (manufacturer of S-400 air defense missile systems) are negotiating to have a manufacturing and maintenance partnership. Reliance and Abu Dhabi Ship Building plan to build frigates at Pipavav. Reliance is also trying to manufacture, maintain and refit Russian submarines and frigates in collaboration with Rosoboronexport of Russia. It has also signed strategic partnership agreements with state-owned Ukroboronprom of Ukraine, Spetstechno Export and Antonov.

It must be remembered that it is not the first case in which a private sector company has been able to bag a major contract. Last year, India signed a deal with the US for 145 M777 ultra-light howitzers for Rs 5,000 crore. Whereas 25 guns would be delivered in a fully manufactured state, the balance will be assembled in India by Mahindra Defence.

In any case, lack of previous experience is a highly wicked stratagem of the public sector to forestall the emergence of competition. How can any company acquire experience unless it is accorded a fair chance to develop and demonstrate its competence? There has to be a first time.

Public Sector Employs Devious Tactics to Safeguard Monopoly

HAL straddles the Indian aerospace sector as a giant. It enjoys an unbridled monopoly. Past performance of HAL has been a saga of false claims, tall promises, protracted delays, huge cost overruns, sub-optimal products and poor quality control. Every move to induct the private sector in defence production is opposed tooth and nail by the public sector. Two recent cases are recounted here.

With a view to replace the ageing fleet of Hawker Siddeley (HS) AVRO 748 aircraft, a global RFP was issued on 08 May 2013. The proposal entailed procurement of 16 transport aircraft off-the-shelf from a foreign vendor and manufacture of 40 aircraft in India with complete transfer of technology. Notably, it was stipulated that the foreign vendor had to select a private sector entity to be the Indian production partner. The Tata-Airbus combine was finally selected.

Exclusion of HAL from the deal was a well-analysed and thought-through policy decision. There were two major reasons for this. One, HAL was already overloaded with orders and was not in a position to accept additional work. Two, a need had been felt for a long time to develop alternate facilities for aerospace manufacture. Lack of competition had made HAL complacent. Threatened by the entry of the private sector into its monopolistic domain, HAL cleverly converted the proposal into a public sector versus private sector duel. Overplaying fears of likely closure of factories, the trade unions were urged to put pressure on the political leadership to rescind all decisions that promote the private sector. The proposal has since been lying mired in bureaucratic quandary and no further progress has been made.

The second case pertains to the manufacture of Kamov (Ka-226T) light utility helicopters in India. HAL arm-twisted the Russians to drop their preferred private sector company and select HAL as the Indian production partner.

Finally

In the case of large value deals, the government-to-government route is by far the best way of doing business. Such deals carry an assured cost advantage with a certain degree of sovereign guarantee for quality-cum-performance features. In addition, the seller government provides logistic, training and exploitation support. Most importantly, there are no middlemen and no slush money. The Rafale deal is no exception.

India enjoys the dubious distinction of being the largest importer of conventional weapons in the world with 14 per cent of the world trade share. The indigenous defence industry is in a dismal state. The sole reason for such an appalling state of affairs is the absolute domination enjoyed by the public sector. Every effort to integrate the private sector is thwarted by the patrons of the public sector.
As has been seen in the past, controversies are deliberately generated by losing competitors and other stake holders to stall or abort contracts by alleging irregularities. At times, stories are planted by them to raise suspicions regarding the earnestness of the entire evaluation process. It is a highly widespread ploy in the world arms market. Indian media should remain wary and not let itself be used by vendors to settle scores. It owes it to the nation to encourage private sector companies to make India self-reliant in defence production.

Most unfortunately, adverse coverage in the media, wittingly or unwittingly, deters decision making and delays procurements. No functionary wants his honesty and diligence questioned. Even the boldest and the most conscientious officers fear subsequent enquiries. The media must certainly highlight acts of corruption and misdemeanours, but it is not necessary to smell a rat in every defence deal.