Defence deals in India are mired in controversy. Post Bofors, Ministry of Defence (MoD) wanted to bring in a reasonable degree of transparency in their purchase of defence equipment. Defence Procurement Procedure (DPP) was introduced in 2002 for purchase of capital equipment. Since its implementation, a number of revisions have been made, the last one in 2016. But in the last two decades, in spite of following the DPP in letter and spirit, controversies haven’t left behind the defence forces. Replacement helicopters for Cheetah/ Chetak had to be tendered out thrice causing enormous delay in acquisition. The process to procure 197 helicopters to replace the ageing and accident prone fleet was initiated in 2003. Fifteen years later, during which there has been a spate of accidents causing death of several pilots, the MoD finally resorted to G to G agreement for Kamov-226T which was signed during Modi’s visit to Russia in 2015. Procurement of 12 VIP choppers finalised with Agustawestland in 2010 had to be cancelled four years later, in 2014, on the grounds that integrity pact was violated.
Since the implementation of DPP, the MoD has failed to purchase any aircraft through tendering route. Rafale is, therefore. no exception. Rafale, as part of Medium and Multi Role Combat Aircraft (MMRCA) project, started its journey in 2007. It’s interesting to see the timeline of the procurement.
- 2007- MoD sanctioned 10.50 billion dollars for procurement of 126 MMRCA.
- 2007- Tender issued to six international firms.
- 2008- Offers received, technical bids opened.
- 2012- Acceptance of technical bid of Dassault Aviation for Rafale and EADS for Euro Fighter Typhoon after an involved process of flight testing of fully laden aircraft with weaponry at various altitudes.
- 2012- Commercial bid opened. Dassault emerged as lowest bidder
- 2014- Proposal put on hold by the then Defence Minister as Contract Negotiation Committee failed to reach any agreement.
Finally the proposal was cancelled in 2015. Forget the approval. It has taken nine long years for MoD to cancel a proposal. Who is to be blamed for such an act of procrastination and indecisiveness? Nobody takes the onus in our country. The media and the politicians are busy in a fault finding mission in the 7.87 bn Euro G to G contract signed with the French Govt. to buy 36 Rafales in 2016. Issues are afloat ranging from crony capitalism to payment of inflated price and probability of kick back. Allegations and counter allegations are taking us nowhere. We need to dig deeper to find out reasons for the inability of MoD to finalise any contract with the foreign suppliers. A closer look into the the Request for Proposal (RFP) issued by MoD for procurement of MMRCA indicates that some of the terms and conditions included therein are not workable. In all earlier contracts, such as, Jaguar, Hawk, Su 30, two separate contracts used to be signed- one between foreign supplier and MoD for fly away aircraft and the other between MoD and Hindustan Aeronautics Ltd (HAL) for supply of balance aircraft for licence production. Contracts between MoD and HAL are finalised based on an exclusive pricing procedure approved by the Ministry for HAL built aircraft. HAL, in turn, will enter into a collaboration agreement with the foreign supplier for licence production.
In a significant departure, MMRCA proposal stipulated only one contract to be signed between Dassault and MoD for all the 126 aircraft. Thus the responsibility to meet the delivery schedule, warranty for the 108 aircraft built by HAL will rest with Dassault. Dassault, of course, will sign a work share contract with HAL, but HAL will delink from MoD as far as price, delivery, warranty are concerned.
This became the foremost contentious issue with Dassault at the negotiation table. They expressed unwillingness to accept any responsibility on behalf of the state run PSU which was fully owned by MoD. The other important issue was the cost factor. Since the cost of HAL work share was already included in the overall quote, Dassault desired to finalise the agreement with HAL based on their estimate. The major point of dispute arose in respect of man hours. HAL’s estimated man hours were 2.70 times of the man hours earmarked by Dassault for the work share of state run PSU. As the problem could not be resolved from 2012 to 2014, the proposal was put on hold by the then Defence Minister, A K Antony. And he could never visualise that his decision to play safe would cost the country so dearly.
In a significant move, after coming to power, Modi Govt. decided to to cancel the MMRCA proposal abruptly in 2015. It’s amazing that such a major decision was taken unilaterally by NDA Govt. without taking the issue to the parliament for a debate or discussion. Enormous amount of money and effort for eight long years were thrown into the dustbin at one stroke. Again no responsibility accounting! Had it been debated in the parliament, Rafale issue would not have become such a hot potato. Congress party could never take such a decision to scrap a major defence deal, such as this, in their stride. The objections came thick and fast. The major issues flagged are on the price and work share front.
The attack on Rafale deal was spearheaded by none other than Rahul Gandhi, the Congress President who thought this to be a wonderful opportunity to score a point over Modi. The ignominy faced by his father after Bofors gun purchase was always at the back of his mind. He alleged that Modi Govt. committed to pay three times the price for an aircraft that UPA negotiated with Dassault. According to him the unit price of Rafale finalised by UPA Govt. was Rs.540 crore, whereas, Modi accepted a price of Rs.1660 crore for the same aircraft. Rahul’s disparaging comments on Rafale have, however, failed to convince the defence analysts and expertise in the field due to three reasons. One, he hasn’t mentioned the year in which the unit price of Rafale was Rs. 540 crore . There is a built in escalation clause in Dassault’s quote. Dassault, obviously won’t keep the 2008 (when initial quote was submitted) price level valid till 2014 or 2016. Two, When you compare prices for different years in Indian currency, you got to factor out the exchange rate variation which is substantial in the present case. Indian currency has depreciated by almost 30% against Euro in between 2008 and 2016. Three, the composition of Rs. 540 crore, i.e., break down into bare aircraft, weapon system, India specific enhancements is not known, without which a meaningful comparison between two set of prices can not be worked out.
In the mean time, the entire NDA cabinet is on the street to counter Rahul’s statement as false, nonetheless, they haven’t also come out with a fact sheet. Nirmala Sitharaman’s argument that “Secrecy clause in the agreement prevents us to disclose the details” is no reason to avoid publishing the composition and price break down of two separate deals. When the prices of the aircraft sold to Qatar and Egypt are in the public domain, not revealing the price in India is devoid of any logic.
In the absence of any published data on the cost comparison, we could at best conjecture about the two set of prices, but any attempt to do so would obfuscate readers in the process. We better refrain from doing that till we get a comprehensive report from CAG.
Crony capitalism, the other issue in the controversial deal, has become more prominent now a days. Rahul Gandhi has proclaimed that Rs. 30000 crore has been siphoned off from the deal to benefit Anil Ambani in the name of offset. The state run company HAL has been deprived of a business of Rs. 30 thousand crore in order to favour Reliance group. It’s a serious allegation. Let’s examine the fact sheet.
Dassault is manufacturing and supplying all the 36 aircraft in fly away condition. As there is no co-production, the question of HAL partnering Dassault does not arise at all, neither is HAL management interested to get a share of offset business in this deal. Further, we must have clarity of thought as to what this offset business means in defence procurement. Offset clause was introduced in DPP 2005. It has undergone many revisions, as the MoD was unable to administer offset obligation to exploit any tangible benefit from foreign suppliers. Appendix D, chapter II of DPP deals with the offset policy. As per para 4.3 the foreign vendor is free to select its offset partner in India. Annexure VI of Appendix D contains a long list of items eligible for offset obligation. It’s not necessary for Dassaault to meet their offset obligation from manufacture of Rafale components. In fact, Dassault have already started loading components for their Falcon aircraft project in the joint venture formed with Reliance group.
Secondly, Dassault is not the only company to fulfil the offset obligation valuing Rs. 30000 Crore. Safran (for engine), Thales (avionics) and MBDA (missile) are the other three companies to fulfil the offset obligation towards their work share in the deal. In an exclusive interview with India Today, air Marshal Raghunath Nambier, Deputy Chief of Air Staff has clarified that the quantum of offset obligation of Dassault works out to Rs. 6500 crore. The balance offset obligation has to be met by the other three companies. The exact quantum of offset business going to the Dassault- Reliance Aviation Limited, the Joint Venture company is still not known, but it will be less than Rs. 6500 Crore. There are more than 70 Indian Offset Partners in this deal, the list of which has been handed over by the French Govt. to Indian Govt. As things stand today, DRDO is going to be the biggest beneficiary in this offset business. However, in a dynamic business scenario, the offset pie is bound to undergo many iterations once the MoD progresses with the deal.
The rafale slugfest has raised two major issues concerning a defence deal. First of all, the politicians have proved that they are blindfolded. The fleet strength of Indian Air force is down to 32 squadrons against the required strength of 42. We have failed to finalise a contract in the last ten years. In stead of analysing the cause of failure and procedural lapses, they are embroiled in unproductive controversies to gain a mileage over each other for electoral gains. Raising issues devoid of merits have an adverse impact on our credibility and reflect a poor image of our country. The other issue which is a cause for serious concern is the ineptitude of our bureaucracy. Failing to finalise any contract through tender route has always prompted the successive Govt. to adopt G to G route. This is no solution as this can give rise to favouritism to selected foreign companies in a clandestine way. The Govt. need to consider seriously about issue of engagement of professionals and management experts for effective contract management.