Rafale and the Reliance Conundrum

Rafale and the Reliance Conundrum

                                                                      

Major General Mrinal Suman

The debate on the recent no-confidence motion in the Lok Sabha will long be remembered for two notables. One, reprehensible hug-and-wink antics of an immature leader. Two, serious allegations were levelled against the government as regards the probity of the Rafale deal. The first aspect concerns the dignity and decorum of the house; and the posterity will remember it with due repugnance. It is the second aspect that is of much graver concern. For, the Rafale deal, if embroiled in political slugfest, has the potential of harming India’s security and derailing the modernisation programme.

Broadly, the government has been accused of (i) declining to reveal details of the deal under the allegedly sham clause of secrecy; (ii) negotiating a costlier deal; and (iii) ignoring the public sector to favour a private Indian company. All are serious charges and merit scrutiny.

To recall, on the urgent demand of IAF, tenders were issued for 126 Medium Multi-Role Combat Aircraft (MMRCA) in August 2007. 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 (Dassault’s Rafale and Eurofighter Typhoon)  were found technically acceptable. Finally, Rafale emerged winner due to its lower life-cycle cost. The announcement was made on 31 January 2012 and contract negotiations commenced thereafter.

By 2014, negotiations had reached a total impasse with no signs of possible  breakthrough. In addition to overly escalating cost (from USD 10-12 billion to USD 25-30 billion), two other critical issues proved highly cantankerous. One, Dassault declined  to stand guarantee for the 108 fighters to be built by HAL as it had found HAL to be totally incapable of producing ultra-modern fighters. Two, differences emerged regarding the interpretation of scope and depth of technology transfer. Reportedly, Dassault was ready to part with limited technology for licence manufacture only and not the design technology. With no solution in sight, the then Defence Minister Antony had decided to let the proposal die by default.

Secrecy Clause

It is an accepted fact that major defence deals between the two countries are an instrument of a nation’s foreign policy objectives. They do not take place in isolation and are invariably a part of a larger package agreed to between the two nations. Hence, it is incorrect to view them as standalone commercial contract. Needless to say, many  commitments made as quid pro quo carry serious security implications and are never made public.

India is buying Rafale as a complete fighting system and not just the platform. The real punch lies in the weaponry, avionics, electronics and radars that it carries. Operational capability of a strategic system depends on its configuration and it has to be closely guarded secret. No country reveals such details as the surprise element gets negated and the prospective enemies can initiate counter-measures in advance. It is strange that some knowledgeable experts are wanting the government to release an item-wise comparative cost table. Demand for transparency cannot be carried to such ridiculous limits.

As regards the seller, France has already confirmed that it does not want to reveal the commercial terms of the deal as it has to market the product to other nations as well. Commercial confidentiality is inherent in all government to government deals. There is no MRP for the defence systems.

    

The Negotiated Deal is much Costlier

It is being alleged that the deal negotiated by Modi is at a much higher cost than the one under the UPA regime. It is quite a childish prank. How can one compare a non-deal with a deal. As stated earlier, the earlier negotiations never fructified due to fundamental disagreements. A non-starter aborted arrangement cannot be used as a datum for price comparison?

In addition, the earlier quote was for the platform as such and the negotiations for the add-ons never reached conclusiveness. The current deal includes  large number of India specific capabilities which no other aircraft possesses. To quote an example, the base model of a sedan may cost only 11 lacs while the price of the fully loaded top-end model with all features could well exceed 16 lacs. Can the two costs be compared?

About Favouring the Private Sector Company

The government has been accused of favouring Anil Ambani’s Reliance group by ousting HAL. This is by far the most ridiculous allegation. One does not know whether it is sheer ignorance on the part of the critics or a deliberate plan with malicious motives.

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. Reliance is not going to manufacture any aircraft. Dassault has selected a number of Indian Offset Partners (IOP) to fulfil its offset obligations and Reliance is one of them, albeit a major one.

Fulfilment of offset obligations entails compensating the buyer country for the outflow of its resources through designated offset programmes. India’s offset policy has been spelt out at Appendix D to Chapter II of the defence procurement procedure. Provisions related to the current discussion are as follows:-

•  Quantum of Offsets. As per Para 2.2, all ‘Buy Global’ cases of estimated value of more than Rs 2,000 crores have to carry offset obligations equal to 30 percent of the contract value. Interestingly, India has managed to obtain offsets equal to 50 percent of the contract value, despite stiff opposition by the French. It is a huge gain as Dassault has to incur considerable additional expenditure to fulfil extra offset obligations.

·   Selection of IOP.  Para 4.3 unambiguously states that the foreign vendor is free to select IOP and the government has no role to play at all.

·  Responsibility for Fulfilling Offsets. Para 5.1 categorically states that the foreign vendor will be responsible for the fulfilment of offset obligations. Failure invites huge penalty (five percent of the unfulfilled offset obligation with a cap of twenty percent) and even debarment from future contracts. It is a huge punishment by all accounts.

·    Avenues for Discharge of Offset Obligations (Para 3). The policy specifies six avenues for the discharge of offset obligations and the foreign vendor is free to choose any one or a combination of them. The avenues include direct purchase of eligible products and services; FDI in joint ventures; and investment in kind/technology. Eligible products/services  cover the complete range of defence, inland/coastal security and civil aerospace products. It is a vast choice.

The above provisions make eminent sense. If the vendor is responsible for offsets, he must have independence to select IOP in whom he has faith. The government cannot dictate IOP and yet hold the vendor responsible for timely completion. Dassault has chosen Reliance as a major IOP. No one can question it.

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 IOP. Hence, accusing the government of favouring Reliance in the Rafale deal defies logic.

Finally

In the case of large value deals, government to government route is by far the most cost effective with sovereign guarantees. 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. However, every attempt at acquiring game-changing defence capability is deliberately embroiled in controversies by disparate inimical forces.

As has been seen in the past, controversies are deliberately generated by the losing competitors by planting negative stories through paid sources to coerce the decision makers into aborting the deal. In the case of Rafale deal, media reports suggest that the government is considering procurement of additional Rafale fighters, especially the naval version. Apparently, efforts are being made to deter the government from going ahead. The current storm being kicked may well be a manifestation of the same. It is also alleged that some corporate entities are purposely targeted by the politicians to extort election funds.

Every move to induct private sector in defence production is opposed tooth and nail by the public sector. Past performance of HAL has been dismal. With a view to develop alternate facilities for aerospace manufacture in the private sector, the UPA government had initiated a proposal for the manufacture of transport aircraft by a private sector entity in collaboration with a foreign vendor. Tata-Airbus combine was finally selected.

Threatened by the entry of the private sector into its monopolistic domain, HAL cleverly converted the above proposal into a private sector versus public sector war. The proposal has since been lying mired in bureaucratic quandary and no further progress has been made. Every effort to integrate the private sector is thwarted by the patrons of the public sector. In the same vein, in the Rafale case, one has seen some conniving media personnel deceitfully claiming that HAL has been replaced by Reliance.

To criticise and fault the government is fully justified provided the facts support allegations. It is grossly unfair to invent wild allegations, in the hope that some accusations may stick. False accusations to score brownie points vitiate the environment and India’s defence modernisation suffers.  Even the boldest and the most conscientious leaders and officers fear subsequent enquiries. The media must certainly highlight acts of corruption and misdemeanours but it is not necessary to fault every defence deal. Anti-government posturing should not degenerate into anti-national rhetoric.*****