Home » Rafale deal : Why Dassault Reliance Aviation won the offsets contract & some unanswered questions

Rafale deal : Why Dassault Reliance Aviation won the offsets contract & some unanswered questions

Rafale deal : Why Dassault Reliance Aviation won the offsets contract & some unanswered questions Claims and counterclaims are flying thick and fast over India’s deal to buy 36 Rafale fighter aircraft as the Congressled opposition is relentlessly raising questions over the financial terms of the agreement and alleging crony capitalism while the government is rubbishing the accusations.

A closer look is in order to establish whether there is any merit in the opposition’s charges that the BJP-led National Democratic Alliance government ended up paying a lot more for the Frenchmanufactured jets than the price which was being negotiated by its predecessor, and that Anil Ambani’s Reliance Defence will be a key financial beneficiary at the expense of the state-owned Hindustan Aeronautics Limited (HAL).

The NDA government, in April 2015, announced the deal to buy 36 Rafale fighter jets off the shelf, about three years after the then Congress-led United Progressive Alliance government had selected Rafale for purchase from among competing aircraft. However, the UPA government had planned to buy 126 fighter jets, 108 of which were to be made in India by HAL.

Therefore, the NDA government has argued that the final deal with Dassault Aviation, which manufactures Rafale fighter jets, is not comparable with the UPA’s original negotiations. It has also dismissed the charge of favouring a private company over HAL, saying the government had no say in Dassault Aviation in choosing to partner Reliance Defence to meet itoffset, or export, obligations.

IS INDIA PAYING TOO MUCH?

The Congress has maintained that the government bought the jets at an inflated price of 7.87 billion euros (about Rs 59,000 crore). Congress president Rahul Gandhi had alleged in a tweet in March that the NDA government paid Rs 1,670 crore per aircraft while the UPA government had negotiated a price of Rs 570 crore. However, the defence ministry’s internal calculations, accessed by ET, show that each Rafale jet works out Rs 59 crore cheaper than what it would have cost under the UPA deal.

The notes state that with the Indiaspecific enhancements, under the UPA’s terms the Rafale jets would have cost Rs 1,705 crore per jet, compared with the Rs 1,646 crore the NDA government negotiated for the purchase of 36 combat aircraft. A big component of the cost is attributed to India-specific enhancements to the jets, from the ability to take off from high-altitude stations such as Leh to an enhanced infrared search and track sensor and a potent electronic jammer pod. The cost of these enhancements has been taken as standard – they will cost the same for 36 jets as they would for 126 – since these are one-time research and development costs.

Given the complexity of the deal, the Congress could argue that the 36 jets should have been way cheaper since they were being bought off the shelf. The government, on its part, says that not only are the jets negotiated by it cheaper but also armed with cutting-edge weapons and more efficient with a performance guarantee clause.

Will Reliance Defence Gain at HAL’s Expense?

The Congress has alleged that the deal “gifted” offsets to the tune of 3.9 billion euros to Reliance Defence, which has no experience of making jets or defence equipment, inflicting massive losses on HAL. As per the UPA deal, the jets were to be made in India by HAL. Since this was never finalised and subsequently cancelled by the NDA government, an offset clause kicked in for the direct, off-the-shelf purchase. The clause mandated that French companies invest at least 50% of the contract value in projects or work given to Indian entities. Offsets are designed to help nurture local manufacturers to absorb global technology and imbibe best practices and technology to be able to compete with the world’s top companies.

So, What’s the Real Deal?

The offset clause kicks in only three years after signing of the contract. This means, the French companies will have to deliver on offsets from October 2019. The government, therefore, is making a technical argument that no offset contracts have been approved, simply because the work is to start next year and Dassault Aviation would be obligated to take permissions from the defence ministry to approve its Indian partners only then. However, there is little doubt that the Dassault Reliance Aviation Ltd (DRAL) joint venture has been acknowledged and supported by both the Indian and French governments.

In October 2017, French defence minister Florence Parly, India’s road transport and highways minister Nitin Gadkari and Maharashtra chief minister Devendra Fadnavis were present at the inauguration of DRAL’s first facility in Nagpur. The government’s point is that the Congress could not seal the deal when it was in power because Dassault Aviation and HAL could not strike a deal. The talks to make the jets in India broke down irreparably in 2012-14. The only way to have bought the Rafale jets after this impasse was to cancel the old deal and negotiate afresh. That HAL was the casualty in this reworked deal is clear.

Unanswered Questions ::

Amid the raging debate over pricing and offsets deal, a number of questions are yet to be fully answered. Will the Jets be Delivered Earlier? The government has claimed that it struck a deal for buying the fighters off the shelf – at the cost of sacrificing the Make in India concept – so as to get quicker delivery of the aircraft and secure the country’s defence. However, the 36 Rafale jets are to be delivered within 67 months of the signing that took place in October 2016. The first of these jets will not arrive before October 2019. The time frame is similar to the delivery schedule under the UPA-negotiated deal, which envisaged getting 18 jets off the shelf. Internal documents show that the government’s assessment is that it saved “five months” in the delivery schedule with its offthe-shelf purchase. Given that not a single jet is being made in India, this does not amount to a significant saving on delivery time.

Can Sovereign Guarantee Replace Bank Guarantee?

In the Rafale deal, the French negotiated a mechanism as per which its government would act as guarantor. This was a departure from regular commercial purchases, where the winning company is required by law to furnish guarantees from an international bank that can be encashed by the purchaser in case deliveries are not made on time after payments have been made. There was significant discomfort on the Indian side when this was being discussed as the French assurances were not “watertight”, according to a section of the bureaucracy.

Significantly, among the seven reasons cited for withdrawing the UPA version of the deal in June 2015 was Dassault Aviation’s failure to furnish performance and warranty bonds and its refusal to act as a single point of responsibility. It’s unclear how the government resolved the issue of absence of bank guarantee given clear reluctance in the bureaucracy. Moreover, it is not clear whether adequate safeguards have been built into the contract to ensure that India can penalise the manufacturer for violations such as delivery delays or a failure to meet offset obligations.

Why was Cheaper Option Rejected?

The government’s internal notes show that a key reason for scrapping the UPA’s Rafale deal was that the French aircraft, though initially thought to be cheaper, was turning out to be more expensive than the Eurofighter after detailed commercial discussions. So it is unclear why the government selected the Rafale jets for purchase. The Indian Air Force had selected the Rafale jets after an elaborate process during the UPA regime. But it was not the only aircraft to be selected – the air force had also found the Eurofighter, built by EADS, as compliant with the requirements. When the NDA government decided to buy 36 new jets, it did not consider the Eurofighter, which was cheaper, as per the government’s analysis, as per the terms of the previous deal. In July 2014, Germany had even made an offer to the NDA government to further reduce the price of the Eurofighter by 20%, but India didn’t respond.

The Germans had also promised to divert deliveries of Eurofighter Typhoon jets from Britain, Italy and Germany to meet India’s needs on an urgent basis. However, no negotiations were carried out after it became clear that only the Rafale was being considered by the Indian government. Critics argue that detailed discussions with Germany could have at least forced Dassault to offer a more competitive price for Rafale jets. That’s why, they say, talks with only a single vendor are avoided as much as possible under the defence procurement rules.

Why Only 36 Fighter Jets?

The biggest mystery has been how the government decided to strike a deal for 36 Rafale jets and not more given the much larger requirement of the Indian Air Force. After all, the figure of 126 aircraft was arrived at after much analysis to replace older generation Russian jets that are being retired. Even when discussions with the French side started for a fresh deal, the air force held on to its minimum requirement. It is believed that at one point, the top leadership projected that to maintain a viable fleet, it would require at least 72 fighter jets of the type and that anything below this would be suboptimal.

However, the final deal for 36 fighter jets was struck without even a followon clause to purchase a similar number in the future (if required) at similar prices. As a result, the air force is now hard pressed for resources. Limiting the purchase of the cutting-edge fighter jets to 36 and the near cancellation of the fifth-generation fighter aircraft programme with Russia have left the air force at a dangerous precipice. If its plans to acquire 116 fighter jets under a Make in India programme do not take off within a year, 2022 will see its aerial combat edge dropping to an all-time low.

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