Thursday, 23 November 2017

Rafale deal faces turbulent weather: Part 1

Four questions over India’s most expensive recent acquisition

By Ajai Shukla
Business Standard, 23rd Nov 17

Prime Minister (PM) Narendra Modi – on April 10, 2015 in Paris -- stunned the global military aerospace industry with the announcement that India would buy 36 Rafale fighters in a government-to-government arrangement with France, effectively ending an eight-year global procurement process for 126 fighters. There is controversy too over how the deal was announced – by the prime minister himself, during a state visit to France – without clearances from his cabinet or defence ministry.

That announcement resulted in a Euro 7.8 billion ($9.2 billion, Rs 58,000 crore) contract for 36 Rafale fighters, signed in June 2016. It has led to charges of corruption and nepotism, levied by the opposition Congress Party against the Bharatiya Janata Party (BJP)-led government. The Congress alleges that Dassault, which builds the Rafale, is being paid far more than the price earlier negotiated. And that largesse, in the form of defence offsets, is flowing to Reliance Defence, headed by Anil Ambani, a Gujarati industrialist with no experience in aerospace manufacture, but perceived to be close to the PM.

The BJP’s riposte, delivered last Friday by Defence Minister Nirmala Sitharaman, accuses the Congress of delaying the Rafale procurement for ten years from 2004-14, while heading the United Progressive Alliance (UPA) government. Sitharaman says that Modi, worried about a precariously under-equipped Indian Air Force (IAF), boldly went ahead in the national interest, following all procedures, to buy the Rafale.

Questions still arise

Beyond political mud slinging, four major questions arise.

First, did the PM follow due procedure in announcing, alongside French President Francois Hollande, that France would supply 36 fully built Rafales? Or was this Modi’s decision alone?

Second, rather than serving the deal on a platter to a single vendor – private French firm, Dassault – could the PM have brought in another vendor, creating a competitive environment for price discovery and cost negotiation?

Third, was the UPA guilty of a full decade of foot-dragging between 2004-14 on the eventually aborted procurement of 126 medium multi-role combat aircraft (MMRCA), leading to such a fighter shortage in the IAF that an emergency purchase of 36 Rafales became essential.

Fourth, does the per-fighter cost in the 36 Rafale contract work out lower than what France had offered in its MMRCA bid, which was a key condition of the purchase?

Due diligence done?

Addressing the media on Friday, a feisty Sitharaman insisted the PM had followed due process, with the purchase of 36 Rafales having been cleared by the Cabinet Committee on Security (CCS). “In September 2016… the Inter-Governmental Agreement for buying 36 Rafales was signed in the presence of the defence ministers of France and India”, she stated, underlining that one of her predecessors, Manohar Parrikar, was on board.

In fact, Parrikar wasted no time in distancing himself from the decision after the Modi-Hollande announcement. “Modi-ji took the decision; I back it up”, he told Doordarshan on April 13, 2015. Elaborating to NDTV, he described the decision as “the outcome of discussions between the prime minister [of India] and the president of France.”

In fact, Parrikar had learned about Modi’s impending announcement precisely a week in advance. As Business Standard reported (September 23, 2016 “As Rafale pact is inked, many concerns remain”), Parrikar was driving to the airport on April 3, 2015 to catch a flight to Goa, when he received a call on his mobile phone summoning him to the PM’s office. There, Modi sprung the bombshell about the proposed announcement and tasked Parrikar to manage the media during Modi’s nine-day tour of France, Germany and Canada.

Both Sitharaman and Parrikar point out the defence procurement procedure (DPP) permits regular procurement procedures to be bypassed on strategic grounds. Indeed, Paragraph 71 of the DPP caters for “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.”

However, Paragraph 71 also stipulates that this requires prior clearance. It says: “Such procurements will be done based on an Inter Governmental Agreement after clearance from CFA (competent financial authority)”, in this case the CCS.

Further, Paragraph 73 of the DPP says: “Decisions on all such [strategic] acquisitions would be taken by the Cabinet Committee on Security (CCS) on the recommendations of the DPB (Defence Procurement Board)”.

No ministry or cabinet body was consulted before Modi committed India to the Rafale purchase on April 10, 2015. The CCS sanction was processed and obtained only later.

Putting Dassault in the driving seat

A key criticism of this procurement is that Modi’s Paris announcement effectively handed Dassault a single-vendor contract, ignoring the readily available option to bring in one more vendor.

Says a senior defence ministry official of that time who has recently retired but requests anonymity: “The PM chose Rafale based on the IAF’s technical evaluation and flight evaluation trials in the MMRCA process. Why did he ignore the second fighter, Eurofighter Typhoon, which had also passed that IAF evaluation? If the government wanted to truncate the MMRCA contract into a 36-fighter buy, India’s interest clearly demanded that both Eurofighter and Dassault be asked for new price bids. That would have created a competitive procurement, with two rivals bidding against each other. Instead, the PM inexplicably handed Dassault a walk-over with a single-vendor contract”.

Interestingly, Eurofighter had kept its India office open, even after India declared Dassault the winner of the MMRCA procurement in 2012. Asked why, a top Eurofighter official told Business Standard in 2013: “If India decides, for whatever reason, to re-evaluate its MMRCA decision, it is our duty as the L-2 (second lowest bidder) to provide India an alternative option.”

As it turned out, India did re-evaluate that procurement, but inexplicably ignored the opportunity that Eurofighter presented. The resulting financial loss is hard to assess, but aviation industry analysts assess it was at least in the hundreds of million dollars.

Why did UPA stall Rafale?

Sitharaman cites the UPA’s “inability” to conclude the MMRCA deal as justification for Modi’s buy of 36 Rafales. Repeatedly blaming the Congress Party for having failed to buy fighters “for an entire decade between 2004-2014”, Sitharaman alleged this “act of omission” led to severe fighter depletion in the IAF.

In fact, Sitharaman’s accusation of a decade of neglect is chronologically inaccurate. The MMRCA tender was issued in 2007. For the next four years, the IAF conducted technical evaluation and flight trials; only in 2011 were the Eurofighter Typhoon and Rafale declared to have met IAF criteria. Only on January 30, 2012 was the Rafale declared the L-1 bidder. If there was Congress foot-dragging on the Rafale, it was for two years and three months till the May 2014 transfer of power, not for a full decade.

Notwithstanding Sitharaman’s exaggeration, the question remains: why did the UPA drag on cost negotiations for over two years with Dassault? And why did two NDA defence ministers – Arun Jaitley, then Parrikar – also fail to conclude the contract for a year.

The incredible answer – given that Modi bought 36 Rafales based on the logic that Dassault had won the MMRCA tender – was that the defence ministry had realised as far back as 2012 that Rafale might have been erroneously declared the lowest bidder.

Defence ministry sources in the Cost Negotiating Committee (CNC) – a multi-member body that evaluated Dassault’s commercial bid – say the sketchiness of Dassault’s bid forced them to make certain costing assumptions in declaring its bid lower than Eurofighter’s. These assumptions related to a new model of bidding based on Life Cycle Costing, which was being tried out for the first time in a tender.

This sharply divided the CNC in 2012-13, when three members wrote a dissenting note demanding that the costing assumptions made for Dassault’s bid should be officially approved at the competent level, rather than leaving the onus on the CNC.

When Dassault itself presented different costing figures for Rafales built in Hindustan Aeronautics Ltd – a tender stipulation – it became clear, including to then defence minister, AK Antony, that Dassault had been incorrectly named the L-1 vendor.

Parrikar himself has substantiated this account. On April 13, 2015, three days after Modi’s Rafale announcement, Parrikar stated on Doordarshan: “There is another reason why the [tender] for the Rafale is stuck. When the CNC determined the L-1 vendor, many people raised questions on the Life Cycle Costing model that was used to compare bids. In this connection, the last defence minister issued a directive to go ahead with the CNC negotiations, fix a price, and then come back and verify whether L-1 determination was correctly done.”

Asked to confirm this during her press conference on Friday, Sitharaman declined to comment.

Says a retired secretary-level defence ministry official about the CNC’s assumptions that led to Dassault being declared L-1 in the MMRCA contest: “In my view, a vendor’s commercial bid that has serious gaps should be treated as an incomplete bid and the vendor disqualified. Costing assumptions can be made only on minor issues.”

The question of cost

Said Parrikar on Doordarshan on April 13, 2015, explaining the conditions of the 36-Rafale buy: “Our deal is being finalized on very clear terms: ‘Better terms than those existing’. It will be on cheaper terms than those quoted in [Dassault’s bid in the MMRCA tender].”

The BJP insists this condition has been met. However, the government has released no figures for Dassault’s earlier quote, nor a cost breakdown of what Dassault is being paid for 36 Rafales.

On Friday, asked for cost breakdown by the media, Sitharaman promised: “We will give you the figures that you want”. She ordered Defence Secretary Sanjay Mitra, who was sitting beside her, to provide them. Despite repeated enquiries, no figures have been released so far.


[Tomorrow, Part II: “Was the Rafale bought cheaper?” A financial analysis of the price paid to Dassault]

14 comments:

Northstar said...

Dammed if you do , Dammed if you don't
We can't make in 30 years ; We cant buy in 10 years
No wonder China did not adopt so called Democracy .
We have one excellent skill , pull down everyone, progress be dammed.

Anonymous said...

well, I have great respect for you, I hear you always.
I must say 3 things.
great aircraft, PM not corrupt, HAL needs to be sorted out.
sam

Saaf Baat said...

Excellent analysis Sir.

I think there are these factors to consider:

1) Strategic needs of the country - We were getting a full ToT with the old deal, would have helped develop indigenous ability.

2) Needs of IAF - if IAF needed 11 squadrans of MMRCA's, was getting 7, how could it operate with just 2, with no clarity about the plans about the remainder? Wouldn't getting planes of the other partners (Grippen/F16) become a logistical headache for IAF? (Spare parts, staff training)

3) Costs - the base model costs may not have escalated a bit, but if the cost breakdown in some media reports is to be believed, the strange bit is the excessive amount being paid for HMDS integration? (Elbit-Adani JV)

4) Expertise of the chosen private sector partners - Why not sell off some stake in HAL, get some private management in, if efficiency was a concern? Also, why not get companies such as L&T involved, a professionally managed firm with a track record in precision engineering, and having public sector Financial Institutions as its largest shareholders. Why are we giving this to a conglomerate from oil & telecom?

Teewsbby said...

Hi Ajai,

1) Due dilligence done? Maybe or Maybe not. But context is always important.

2) Why did French get it on a platter? Again context is important

3) UPA took a decade? Guilty written across all governments, but let us not forget IAF is an equal culprit

4) Did NDA buy it more costly? Context, Context, Context

Telling a narative or having a preamble is always important. So let's look at the above 4 questions with facts.

A) It was a known fact in year 2000 that IAF wanted more Mirage 2000s in lock, stock and barrel. But government (gov) went with multi vendor for what was essentially a single engine fighter to a mix of single and double engine fighter. That was the start of the problem.
B) We wanted the French and we got the French. It happened across UPA and NDA
C) The discussion started in 2000, but what took the UPA government another 3 years to issue the tender for what was essentially a critical requirement due to falling squadrons. Both gov were at fault because no gov in India wants to carry forward any of the good work
D) IAF is the biggest culprit here along with the gov. Their requirement, their ask, their criticality, their falling squadrons and they couldn't plan this across a decade better? And most importantly, their fault in coming up with a winner who everyone knew was not cheap. If it isn't their fault since they are only support to select a winner, then why cry that it is expensive when you knew that both the winners were going to be expensive?
E) At the end, the current NDA gov had to take a decision on the strategic requirement without going bankrupt. This was also probably why Antony said that he would not sign on the dotted lines when he knew Rafale was the winner
F) And finally cost! I am in a business world and I can prove it that Rafale is cheap or expensive depending on which side my affiliation lies, UPA or NDA. True cost of Rafale is always flyaway cost + Support + Armament + Setting up new lines + etc. Unless we know that, everything else is just a narrative either supporting UPA or NDA.

From my point of view, no one is discussing the strategic compulsions in any of this discussion. If NDA cancelled the deal and not signed 36 Rafales, what was the strategic outcome of our relationship with French? What was it's impact on the world with respect to our standing? What was our answer to the replacement of our Nuclear delivery which today is dependent on Mirgage 2000and had to be replaced? Should we have signed an expensive deal for 126 Rafales by claiming losing squadron strength which is at a critical level?

Without context we cannot say if UPA or NDA took the right or wrong decision. But IAF has to be a party to this discussion when we are debating this.

Wg Cdr (Retd) D M Puranik said...

Dear Colonel,

I gets the muddle that is being created.
If I remember my reading of Broadsword earlier, there used to despair at indecision that 'St Anthony' was prone to. Under his leadership the MoD just sat on its back, actually doing nothing at all.
The negotiations between HAL and Dassault broke down on certifying the HAL built airplanes and later, the money. We actually did not see the unit costs of them acs as the result.

Is the breast beating that is now happening is because of the Guj elections or maybe Lokheed Martin or their ilk seeing opportunity or your news(?)paper policy suddenly changing?

Dileep Puranik

VIKRAM PRASAD said...

Compare rafale with su mki wrt life cycle costs.

1 Now that brahmos has been integrated with su mki we have a formidable defensive option wrt CHIN-PAK

2 Why were the euro fighters not asked to match the L1 Price.? Else 64 euro fighters and 64 Rafales with TOT WOULD HAVE AUGMENTED OUR SQUADRON STRENGTH

Anonymous said...

Very well articulated Ajai. The current deal leaves a lot of unanswered questions on probity and due process undertaken. Most of the counters by the government to criticism have been personal attacks and obfuscations. A basic apples to apples comparison of both the new and old deal would show we are overpaying and the other mmrca contenders should have been given the same opportunity to bid for the new 36 aircrafts deal.

Avik Nayak said...

IF BJP govt take a decision on buying a aircraft which airforce so badly need then media and reporters have a big problem , i think the author of the article would have been happy if BJP had slept over the file like the congress . As a indian citizen i dont care if we paid more or less , what i care is our air force has fighters to face the enemy.Decision paralysis is not going to help the nation .Any decision is good decision if the alternate is NO decision ..Indian News Media is biased and paid

anil rao said...

Pathetic article.... requirement for aircraft was identified in 2002...

Vulkan85 said...

was that the defence ministry had realised as far back as 2012 that Rafale might have been erroneously declared the lowest bidder.

sir with all due respect dont you think this seems to be the bigger scam???
why was such a situation allowed to arise...???
plus mmrca requirement is as old as 2000s.... deal for more mirages was being worked out by NDA 1 but mirage assembly line finally shut....

Krishna said...

The questions you are raising have been added by Nitin Gokhale in the excerpt of his book reproduced in Swarajya.

On CCS approval
The Cabinet Committee on Security (CCS) also gave its approval to the new proposal before Modi left for Paris on 9 April 2015.

On negotitations with L2/Eurofighter
Under the circumstances, there was no alternative but to withdraw the original tender, Parrikar told Modi since the CVC (Central Vigilance Commission) guidelines provide that negotiations cannot be held with the competitor who has come second in the contract (L2 vendor in officialese).

Anonymous said...

It was Modi ji's first major tour of europe and he had the sword of being behind the killing of muslims hanging over his head. He had to offer something to France with a left wing President. A major power, that smoothed his entry and be accepted by the rest of the Europeans without them being embarrassed by being in the company of a rather undesirable PM.

He had no other choice. It was a card he had to play to be treated as an equal and he played it well. After his term(s) is/are over, he will be liable for prosecution again in europe for genocide against humanity. His days of world wide travel will again be over.

Prasun

Anonymous said...

the timing of this article itself is suspect. what were you and the opposition doing for the last 14 months, when the contract was signed. suddenly congress is smelling a scam.
Congress had 2+ years time, they should have closed the deal or scrapped it and not passed on messy and dodgy calculations to NDA govt. This govt realised that starting all over again would have been a bigger disaster. who cares if CCS was bypassed, we all know PM is the boss and he took a call for 36. what they could have done is to avoid the modifications which jacked up the costs. that could have come in the follow on order if any. anyways its too late to do anything. Would be nice to see how the offset amount is fulfilled. best is to give orders to all companies so that no one can raise a scam. next scam in the making is single engine contract and then naval contract. some things will never change.

Anonymous said...

Reason is simple,

France is the only reliable defence partner for India, from fighters or submarines. It is in our strategic interest to support French Defence research, whether we like it or not.

Russia is with China
US is not reliable
Israel don't have full spectrum competence
Euro zone. Too much of complexity. Even a Italian marine case may stop your Eurofighter flying as Italy is supplying some stuff in Eurofighter.
All this cannot be discussed in press because of obvious reason. Simple tables of figures will not add up to cost of aircraft.

As far as technology transfer is concerned, nobody is going to teach you how they developed the product or process. Reverse Engineer if you are smart. That option is still available with 36 aircraft also. China us doing the same with Russia.