27/05/2015
The Refashioned Rafale Deal
Vivek Mishra
From the outset the reworked Rafale deal that India struck with France, during the recent visit of Prime Minister Modi to France, appears to be nothing more than an attempt to salvage the original MMRCA deal which went awry due to a host of factors including pricing and guarantee clauses. However, at the altar of the possibility that the MMRCA deal would have completely been cancelled, the Indian government’s move to buy 36 Rafale fighter aircraft on a government-to-government basis as opposed to its previous global tender basis is as impinging on the India-France defence relations as political ties.
The MMRCA deal that has lingered for about a decade has witnessed intense lobbying and negotiations. The fructification of the mega deal through its erstwhile tender basis, analysts feel, would have been extremely difficult as the stakes on both sides had risen. If the deal would have gone through on its initial terms, middle-men would have stood to gain in many ways than they will on government-to-government basis.
What’s the New Rafale Deal?
India’s decision to buy 36 Rafale fighter jets on a off-the-shelf/government-to-government/ready-to-go basis has not only obnibulated the clarity on the erstwhile understanding to buy 126 Rafale aircraft but has also left little scope for speculations on its own course forward. In normal circumstances and as per defence procurement guidelines, it would have taken at least three years for the aircraft to arrive after a government-to-government deal. But in the case of the latest deal, Dassault Aviation has given a timeline of two years only before it delivers the aircraft, thereby diluting clarity.
Speculations on whether the deal has been inspired by, the need to save the political ties from plummeting, by the need to honour the initial commitments of the MMRCA, the need to cut out middle-men, red-tapism and lobbying or the need for an immediate fillip in the IAF in the face of depleting squadron strength still rage on. The fact that the government has not disclosed the pricing of the deal has added fire to the speculations. In most reckonings, the government is believed to have paid much more per aircraft, than it would have through the MMRCA commitments. The counter argument to the above is that since there is no transfer of technology involved in this government-to-government deal, India could well have paid less per aircraft, than it would have through the MMRCA process. The latter argument tends to hold more ground, as it is very normal for the government not to disclose the price involved in a government-to-government defence deal.
Offset Rules
An interesting question is as to why did the Indian government shift to government-to-government route after Dassault Aviation had emerged as the Lowest Bidder (L1) in global tendering? A possible reason why the government might have bought Rafael jets on a ready-to-go basis is the applicability of the offset clauses. The issue of the applicability of offset clauses in the case of current Rafale purchases, in all probability, remains out of question. As the aircraft have been bought off-the shelf, the offset clauses under the Indian defence procurement policy are simply not applicable, at least until the aircraft are ready for mid-life upgrades. It is important to point here that in some cases even off-the-shelf deals have offset clauses attached to them. For instance, in the case of C-130J Super Hercules bought from Lockheed Martin by India, running of simulation centres in India was attached as an offset clause even though the aircraft was bought on a ready-to-go basis.
Therefore, there remains a high degree of ambiguity as to what kind of terms has been agreed to in the purchase and whether at all there are offset clauses attached.
What happens to the old deal?
The old deal for now is likely to remain in limbo, albeit not dead. Since the total scrapping up of the MMRCA deal will have severe financial implications; scrapping a tender for 126 jets would mean a possible loss of business from defence offsets worth Rs. 27,000 crore, it is likely that the government will rethink its strategy. Defence Minister’s assertion that government-to-government deals are better than going through the competitive bidding route for “acquisition of strategic platforms”, could be a pointer towards more Rafale purchases on that basis.
What’s the likely way forward?
For now, it should be a wait and watch policy until the finalisation of the government-to-government buying process for the 36 Rafale aircraft. The buying process of the rest of the 126 aircraft will depend on largely on the degree of satisfaction and success emerging out of the government-to-government buying process of 36 Rafale aircraft from France.
One proposition doing rounds is a joint venture between India and France to jointly produce rest of the Rafale aircraft together with an Indian company. This step will offset the criticism that the 36 Rafale purchase is nipping in the bud India’s domestic manufacturing agenda “Make in India.” Since the Prime Minister himself is leading the “Make in India” campaign, he would have thought about the loss incurred in the manufacturing sector, when he approached the Rafale purchase through a off-the-shelf mode. The other option, albeit unlikely, is a fresh competitive bidding through a fresh tender for the rest of the aircraft.
It will also be important to see if the government rushes on the purchase of the rest of the aircraft or go for it after two possible changes; a revision of the number of aircraft to be bought and a change in its defence procurement policy. There is a possibility that the government could revise the number of the rest of the aircraft. The defence minister has also hinted that that changes in the defence procurement policy is soon likely. A likely change that could impact the government’s rest of the purchase is a revision of the Lowest Bidder (L1) clause. The government might go with the view that the L1 system - choosing the cheapest product after it passes the basic technical evaluation - is not ideally suited to acquiring strategic and cutting edge systems for the military.
Vivek Mishra is an Associate with Indicia Research & Advisory.
