Murky deal

The controversy over Narendra Modi’s unilateral decision to purchase 36 Rafale aircraft will not die down until the government gives clear and convincing answers to a raft of questions.

Prime Minister Narendra Modi with French President Francois Hollande in Paris during his visit in 2015. Modi made the surprise announcement regarding the supply of 36 Rafale jets during the visit.

“If you can pick and choose whobelongs amongst communities, you can also pick and choose who belongs within communities, and it leads to a breakdown of the market system. Identity-based politics eventually go towards crony capitalism.” —Former RBI Governor Raghuram Rajan

In 1999, the Indian Air Force (IAF) arrived at the understanding that if it did not revamp its fleet of fighter jets, it would be in a situation where it would not have sufficient fleet strength within a decade. Apart from the contract signed with Russia in 1996 for Sukhoi fighters, there was no new jet to be added; most of its fleet was very old and about to reach the end of the service life cycle. The IAF top brass informed the Ministry of Defence that they needed 126 fighter aircraft (for six squadrons) to fill the gap and, as a stop-gap arrangement, sought to induct 50 Mirage 2000 aircraft. They chose that model because the IAF was already operating the aircraft and was satisfied with its performance and said to be happy with the support it had received from its French manufacturer, Dassault Aviation, at the time of the Kargil war.

However, fearing a single-vendor situation that might lead to allegations of corruption, the then Atal Bihari Vajpayee-led National Democratic Alliance (NDA) government asked the IAF to invite tenders from multiple vendors. The first Request For Information (RFI) was floated in 2004. By then, Dassault Aviation had shut down the Mirage 2000 assembly line in order to move to its new product, Rafale.

Within a couple of months, the initially floated RFI was cancelled. The newly elected United Progressive Alliance (UPA) coalition government under Manmohan Singh asked the IAF to consider the most modern fighter aircraft that would have a prolonged service life and could be upgraded whenever the manufacturer introduced an upgrade. This changed everything. Until then, the IAF was planning to induct the lighter ‘Multi Role Combat Aircraft’ (MRCA), which it was already operating, into the fleet to replace ageing aircraft.Under the new plan, it was decided to acquire ‘Medium Multi Role Combat Aircraft’ (MMRCA) and the actual MMRCA procurement saga began.

Indian defence procurement has always attracted allegations of corruption from opposition parties. Most of the time nothing could be proved, but the allegations never died down. The best example is the Bofors scam allegations. To streamline the capital procurement for armed forces, the NDA government, in 2001, constituted a committee of Ministers on reforming the national security system. Its responsibility was to identify, in consultation with the armed forces and the bureaucracy, a transparent procedure that could be followed by all the three forces. The basic idea was to keep the allegations of corruption away from the political brass of the time when the purchases happened.

The committee came up with a “Defence Procurement Management Structures and Systems” by severely amending the Defence Procurement Procedures laid down in 1992 and called it Defence Procurement Procedure (DPP) 2002. By June 2003, the government amended it again to include “procurements flowing out of the decision to buy and make through imported transfer of technology (ToT)”. In 2004, the UPA government asked the IAF to prepare a detailed Request For Proposal (RFP) based on the guidelines set out in DPP 2003.

In 2005, the government amended DPP 2003 to include “offset” clauses in it. The aim of DPP 2005 read: “The objective of this procedure is to ensure expeditious procurement of the approved requirements of the armed forces in terms of capabilities sought and time frame prescribed by optimally utilising the allocated budgetary resources. While achieving the same, it will demonstrate the highest degree of probity and public accountability, transparency in operations, free competition and impartiality. In addition, the goal of achieving self-reliance in defence equipment will be kept in mind.” The last line pertaining to achieving self-reliance in defence equipment was related to offset.

The Indianeconomy.net web site explains the definition of offset in defence parlance in the simplest manner: “In the defence procurement context, it is an element of ‘compensation’ made by the manufacturer that mostly takes place in the form of placing a minimum per cent of value addition in the ordering country.” So, defence offset means “a supplier places work to an agreed value with firms in the buying country, over and above what it would have brought in the absence of the offset”.

The DPP was amended again in 2006 and the detailed offset guidelines were put in place. The IAF now had to incorporate the offset conditions mentioned in the DPP into its RFP.

On June 29, 2007, the Ministry of Defence said in a release:

“The Defence Acquisition Council (DAC) headed by Defence Minister A.K. Antony has cleared the process for the procurement of 126 Medium Multi Role Combat Aircraft (MMRCA) for the IAF. During its meeting here today, the DAC debated various issues related to the initial purchase, transfer of technology, licensed production and lifetime maintenance support for the 126 MMRCA and gave the final go-ahead for the project.

“Pursuant to the recent assurance given by the Defence Minister for an early issue of the much awaited RFP for the 126 fighter jets, the Ministry of Defence and IAF officers have been working overtime to scrutinise all aspects of the RFP. In view of the size and operational importance of the likely purchase, the criteria for selecting the final MMRCA contender from amongst some of the best combat aircraft offered by American, Russian and European companies, has been fine-tuned. The RFP would contain a selection model that would involve an exhaustive evaluation process as detailed in the Defence Procurement Procedures 2006.”

Two months later, on August 28, 2007, India officially sent a 211-page RFP to six global manufacturers for combat aircraft: MiG-35 from RAC MiG of Russia, JAS 39 Gripen from Saab of Sweden, Rafale from Dassault of France, F-16 Falcon from Lockheed Martin of the United States F/A-18 Super Hornet from Boeing, and Eurofighter Typhoon, manufactured by a consortium of British, German, Spanish and Italian firms.

Defence publications the world over were aghast. One wrote that “the most elaborate and detailed RFP in the history of defence aviation business” was floated by India for “the mother of all deals in defence aviation”.

The government release detailed the selection process to be followed in simple words: “The 211-page document deals with various issues relating to initial purchase, transfer of technology, licensed production and life-time maintenance support for the aircraft. The RFP contains the selection model that would involve an exhaustive evaluation process as detailed in the DPP 2006.”

The proposals from likely contenders would first be technically evaluated by a professional team to check for compliance with the IAF’s operational requirements and other RFP conditions. Extensive field trials would be carried out to evaluate performance. Finally, the commercial proposal of the vendors, short-listed after technical and field evaluations, would be examined and compared. The aircraft would likely be in service for over 40 years.

The release also said that care had been taken to ensure that only determinable factors, which did not lend themselves to any subjectivity, were included in the commercial selection model and that the selection would be transparent and fair.

“Under the terms of purchase, the first 18 aircraft will come in a ‘fly away’ condition while the remaining 108 will be manufactured under ToT. The vendor finally selected would also be required to undertake 50 per cent offset obligations in India. The ToT and offset contracts would provide a great technological and economic boost to the indigenous defence industries, which would include Defence public sector undertakings, Raksha Udyog Ratnas and other eligible private sector industries. Foreign vendors would be provided great flexibility in effecting tie-ups with Indian partners for this purpose.” The last date for the submission of complete proposals was March 3, 2008. But citing the enormity of the information sought in the RFP, the contenders requested for an extension and the Ministry extended the deadline to April 28. Some media reports at that time suggested that certain proposals were up to 8,000 pages long. As set out in the DPP guidelines, the IAF started the technical evaluation of the submitted proposals and submitted its report to the Ministry towards the end of May 2009. The flight evaluation tests started in August that year. In December 2010, the IAF submitted its flight test reports and analysis of all six contenders to the Ministry.

In April 2011, it was announced that the Eurofighter Typhoon and Rafale were the two final contenders. This set out a chain of events. The then U.S. Ambassador to India, Timothy J. Roemer, resigned. Although he cited personal reasons, media reports suggested otherwise. His messages to the U.S. government, released by WikiLeaks, put things in perspective. Reports suggested that the four ousted contenders questioned the methodology adopted by the IAF. The Ministry sent their individual product test reports in comparison with IAF-set parameters to settle the issue.

In October 2011, the IAF chief said that the two final contenders were asked to submit their final financial bid including the initial purchase cost for 18 aircraft in fly-away condition, life cycle cost, offset value, value of ToT, etc. The Ministry opened the final tender on November 2011 for evaluation. On January 30, 2012, more than four years after issuing the RFP, Rafale was selected as the IAF’s choice based on the lowest financial bid (L1).

Dassault and the Government of India started negotiations soon after. Sources from both sides insisted that negotiations were progressing well, despite some stray reports suggesting otherwise. In January 2014, a report published by the newspaper Mint , quoting unnamed sources, said that the total value of the deal had gone up from $10 billion to $30 billion. The price estimation had been done years ago, for MRCA, and it was only an estimation. Also, the deal changed from MRCA to MMRCA. Still, a trebling of the price was unimaginable.

Around the same time, Defence Minister A.K. Antony told reporters that the deal negotiations were progressing well but added that the government could not sign the contract in that particular financial year as the capital acquisition budget had nearly been exhausted.

In March 2014, the NDTV channel reported that Dassault Aviation had signed a work-share agreement with Hindustan Aeronautics Limited (HAL), according to which HAL would undertake 70 per cent of the manufacturing and Dassault the rest.

In May 2014, the Bharatiya Janata Party (BJP) and its allies led by Narendra Modi came to power with a historic mandate. Corruption-free India was one of the main slogans of the BJP in election campaigns.

On August 8, 2014, the then Defence Minister, Arun Jaitley, in a written reply to Members of Parliament Ram Charitra and Y.V. Subba Reddy in the Lok Sabha, said: “As per the RFP for procurement of 126 MMRCA, 18 aircraft are sought to be procured in fly-away condition and 108 aircraft are to be licence manufactured in India. The process of negotiations with the L1 vendor, Dassault Aviation of France, for procurement of MMRCA is on.”

The next time there was prominent news of the deal was in January 2015, when reports quoted the then Defence Minister, Manohar Parrikar, as saying that the price negotiations with Dassault Aviation had hit rough weather. So, Indian-built Sukhoi (SU-30MKI) were a credible and viable option. Two weeks later, he repeated the same claim. But this time he added that SU-30MKI would actually be a better option after HAL upgraded them with state-of-the-art electronic warfare systems.

In February 2015, the Business Standard newspaper, quoting an unnamed Defence Ministry official, reported that the MMRCA deal was effectively dead. In the three years of negotiations, the contract negotiation committee understood that technically Rafale was not L1 and the quote for it was actually higher than that of the Eurofighter Typhoon. Many media reports then said that the main point where the negotiations were stuck was the guarantee of 108 aircraft manufactured by HAL.

India wanted Dassault to guarantee the quality of the products, but Dassault was not willing to do so since 70 per cent of the work would be done by HAL and it could not give guarantee for a product not completely manufactured by it.

On February 19, on the sidelines of an air show in Bengaluru,Dassault Aviation CEO Eric Trappier told reporters that their quoted price had never changed since day one. That clarified the speculation of the deal cost reaching $30 billion.

On March 11, 2015, after presenting his company’s annual financial results of 2014, Trappier told media personnel that Dassault Aviation had signed a “firm work-share agreement” with HAL to manufacture 108 Rafale aircraft in India. He reiterated what NDTV had reported a year earlier—HAL would do 70 per cent of the work and Dassault the rest. But there was one clause added: HAL would give the guarantee for the 108 aircraft, not Dassault Aviation.

He also reportedly said that this was the first time Dassault Aviation had agreed to be a co-contractor. On the price escalation, he said that in euros the cost had not risen since 2012. The euro’s depreciation compared to the U.S. dollar made Rafale more competitive than its rivals. These points, though widely reported in the French media, did not find much space in Indian media.

In its 2014 annual financial results, published on March 10, 2015, under the sub-head '“Defence Programs”, the company mentioned “the continuation of exclusive negotiations with Indian authorities and Indian industrial partners to finalise the contract for the sale/licensing of 126 Rafale…”.

On March 25, 2015, while handing over the first two upgraded Mirage 2000 aircraft to the IAF in the presence of the Indian Ambassador to France and senior IAF and HAL officials, Trappier said that Dassault had a very long association with India and HAL and that the company was very happy to work with HAL as the rest of the Mirage 2000 fleet of IAF would be upgraded by HAL with the help of Dassault in India itself.

This connection would get stronger once HAL started manufacturing Rafale, for which 95 per cent of the contract negotiations had already been completed. As the contract document ran into thousands of pages, to avoid any future misunderstandings, both Dassault and Indian authorities were reviewing them and he expected the contract to be signed soon. The same day, the Ahmedabad-based Adani Group, led by the billionaire businessman Gautam Adani, entered the defence manufacturing business by incorporating Adani Defence Systems and Technologies Limited. Three days later, another billionaire businessman and chairman of Anil Dhirubhai Ambani Group (ADAG), Anil Ambani, incorporated Reliance Defence Limited.

According to informed sources, on April 3, less than a week prior to his departure on a three-nation visit, Narendra Modi summoned Defence Minister Parrikar to the Prime Minister’s Office (PMO). Parrikar was on his way to the airport to go home to Goa.

At the PMO, reported the veteran defence journalist and analyst Ajai Shukla, Modi told Parrikar that the ongoing negotiations for 126 Rafale would be scrapped. People close to Parrikar said on condition of anonymity that the Defence Minister was in a state of shock when he came out of the PMO.

On April 8, at the customary briefing to the press before the Prime Minister’s foreign visit where the Foreign Secretary usually explains the Prime Minister’s programmes, schedules and agendas in the visit, the then Foreign Secretary, Dr S. Jayshankar, told journalists: “In terms of Rafale, my understanding is that there are discussions under way between the French company, our Ministry of Defence, and HAL. These are ongoing discussions. These are very technical, detailed discussions. We do not mix up leadership-level visits with deep details of ongoing defence contracts. That is on a different track. A leadership visit usually looks at big picture issues even in the security field.” He clarified that there were no plans for any announcement on Rafale purchase during the Prime Minister’s visit to France.

On March 10, a few hours before meeting Modi, the then French President Francois Hollande told the Dassault Group-owned Le Figaro newspaper: “The negotiations have been going on for months, not to say for years, we should not cut corners, a hasty announcement would go against our objective, we are not far from it , we probably have to review several terms set initially in a certain framework, that can be imagined in another framework, I will talk about it with the Indian Prime Minister…but the reason he comes is also for other reasons than the Rafale… we have a partnership between France and India that goes beyond the sale of this equipment…but it’s true that if he happens to make an announcement…and we are trying our best to know when …it would a good news for France and India.” (Emphasis added.) Thus, Hollande clarified that there was no plan for any announcement on the purchase of Rafale aircraft as far as he knew.

That afternoon, after meeting Hollande, Modi, to the utter dismay of everyone, announced in the press conference (in Hindi): “I have asked President [Francois Hollande] to supply 36 ready-to-fly Rafale jets to India.”

The joint statement of the two leaders read: “The two leaders agreed to conclude an inter-governmental agreement for supply of the aircraft on terms that would be better than conveyed by Dassault Aviation as part of a separate process under way , the delivery would be in a time frame that would be compatible with the operational requirement of the IAF; and that the aircraft and associated systems and weapons would be delivered on the same configuration as had been tested and approved by the IAF, and with a longer maintenance responsibility by France .” (Emphasis added.)

It came as a shock to many, including many senior Cabinet Ministers, senior BJP functionaries and many senior bureaucrats. The joint statement created an impression that the announcement to purchase 36 aircraft in fly-away condition was a separate deal altogether, which was beyond the scope of the then ongoing RFP negotiations for 126 Rafale aircraft. The media in India went gaga over the decision, praising Modi’s bold decision. Journalists wrote pages explaining the “out-of–the-box thinking” and prompt decision-making capabilities of the Prime Minister. But senior analysts like Ajai Shukla and D. Raghunandan and a few independent journalists questioned this decision and pointed out the futility of such an order.

Interestingly, a business delegation had accompanied the Prime Minister to France to attend a meeting between the CEOs of French and Indian businesses to explore the possibilities of attracting investments and Modi had to chair the meeting. In the list of participating CEOs shared by Indian officials with the Indian media, two big names—Gautam Adani and Anil Ambani—were missing. Curiously, these two names were present in the list shared by the same Indian official to the French media.

Just two weeks after Modi’s announcement in France and less than a month after incorporating Reliance Defence Limited, on April 2, Anil Ambani created Reliance Aerostructure Limited as a subsidiary of Reliance Defence Limited.

Manohar Parrikar had a tough time since as Defence Minister he had to face all the questions. When Modi was announcing the deal, Parrikar was in Goa, inaugurating a mobile fish stall, which spoke volumes. The Congress party launched a scathing attack on the government, saying that the Modi government was undermining the Defence Ministry.

After Modi’s announcement, Parrikar gave a few interviews to television channels and in most of them he said the decision to purchase 36 Rafale in fly-away condition was taken by Modi alone.

Speaking to IBN 7 on April 13, 2015, he not only said that it was Modi’s unilateral decision, but added that he came to know about the announcement a few hours later when the National Security Adviser (NSA) informed him. In the 26-minute interview, Parrikar said thrice that the decision was Modi’s.

According to him, India did not have the money to purchase 126 jets as it would have cost Rs.90,000 crore, all included. Under the RFP negotiations for 126 Rafale aircraft, every aircraft would cost Rs.650-750 crore, all included. He also assured the interviewer that under the new 36-aircraft deal announced by Modi, the price would be lower. Two months later, Parrikar informed Parliament that the government formally withdrew the RFP for 126 MMRCA.

Parrikar was actually in a confused state of mind. Many of his statements were contradictory. Days later, the Defence Minister, who had complete information on the RFP and price negotiations for the 126 Rafale jets, changed the cost from Rs.90,000 crore to Rs.1 lakh crore, which then rose to Rs.1,20,000 crore, and he finally settled on Rs.1,30,000 crore.

It took another 17 months for the government to sign the formal contract, on September 23, 2016. A Ministry of Defence release said that India had signed an inter-government agreement with France to purchase 36 Rafale fighter jets in fly-away condition. The deal value was announced as 7.9 billion euros or $8.7 billion, approximately Rs.59,000 crore.

All hell broke loose. Opposition parties mocked the government and alleged corruption. But the government explained that the price was “inclusive of everything” and that it was cheaper than what was getting negotiated under the RFP and that the Modi government could extract a better deal because the price was inclusive of a five-year maintenance warranty. Over a few months, as the government expected, the allegations lost steam.

On November 14, 2017, the Janta Ka Reporter news website published a story on the Rafale deal that was picked up by the Congress party, which held a press conference. However, it did not get enough mainstream media coverage. Two days later, Congress leader Rahul Gandhi tweeted the article alleging Modi’s direct involvement and massive corruption in the deal.

That changed everything. Until then, although there were allegations of corruption and cronyism, nothing was there to point a finger to Modi directly. The government was now forced to defend the decision and Defence Minister Nirmala Sitharaman held a press conference to deny all the allegations.

Four days later, The Wire news website reported another story on Rafale, which pointed out that 15 days prior to Modi’s announcement in Paris, Dassault Aviation CEO had said that the deal was 95 per cent completed. Parrikar had no idea that such a deal was happening. And just two days prior to the Prime Minister’s announcement, the Foreign Secretary said that negotiations were on for 126 Rafale. That put the government on the back foot because the article carried a video of Eric Trappier’s speech.

Since then, the government has tried its best to defend its decision. Numerous press conferences were held and media campaigns undertaken. However, till date the government has not been able to answer the actual questions that will clear the mystery surrounding the deal. The first and basic point in any defence procurement is the related service raising a request with the approval of the chief of the service and the headquarters submitting it, after relevant approvals, to the Defence Ministry. In this particular case, senior IAF officials, on condition of anonymity, confirmed nothing of that sort had happened. Rather, the IAF was not happy with the withdrawal of the RFP for 126 aircraft.

Even if the Prime Minister is the head of the Cabinet, he cannot take unilateral calls on anything. The question is: why did Modi take a unilateral call to purchase 36 aircraft in fly-away condition? By doing so, did he not undermine the authority of the Defence Minister? And by announcing such a unilateral decision, Modi made the authority of the Defence Acquisition Council irrelevant and showed his irreverence for set procedures in a democracy.

The second question that was never satisfactorily answered is the variation in price. When Parrikar said that the total value of the deal would be Rs.90,000 crore and every single aircraft would cost Rs.650-750 crore, how did the price reach Rs.1,660 crore per aircraft? The government and journalists keep saying that what Parrikar said was the price of bare aircraft and that it did not include India-specific changes, weapons and maintenance. This is a juvenile argument, for many reasons. The initial press release immediately after the RFP was floated in 2007 clarified that the cost would include “initial purchase, transfer of technology, licensed production and life-time maintenance support for the aircraft”. The joint statement from France put out by the Ministry of External Affairs immediately after Modi’s announcement said (in paragraph 14): “…and that the aircraft and associated systems and weapons would be delivered on the same configuration as had been tested and approved by Indian Air Force , and with a longer maintenance responsibility by France.” (Emphasis added.)

It is widely acknowledged that the testing of aircraft, systems and weapons was done and approved by the IAF in 2010-11.What is this new and extra “India-specific changes”? This stand of the government also raises another question: does our political leadership want to say that when the IAF floated the “most elaborate RFP” in the history of defence aviation purchases, it did not consider the changes needed to be made in the aircraft?

A difference to the tune of nearly Rs.900 crore per aircraft for the same configuration, but with an added new-generation missile, is mind-boggling.

In normal course, an aircraft purchased in fly-away condition must be cheaper than the one locally manufactured in India for the following reasons: i) The company which developed the technology will charge a hefty licence fee to transfer it to any other party; and ii) the country which is buying the licence to manufacture the aircraft will have to invest heavily to develop a manufacturing facility and both these costs will add up to the price of the product.

The government said that Modi’s announcement was based on the emergency need of the IAF. When the IAF projected the requirement of a minimum of 126 aircraft, who decided that 36 aircraft (not even two full squadrons) could fill the gap?

And how will delivery of these 36 after six years from the date of signing the agreement cover the IAF’s urgent requirement? If the government had taken interest to conclude the 95 per cent negotiated RFP, perhaps the IAF could have inducted more aircraft in a shorter time frame.

Nirmala Sitharaman, the current Defence Minister, said a few times that the government was not aware who the offset partner of Dassault in India was. If what she said is true, then the Modi government and Dassault violated the offset policy clauses set out in the Defence Procurement Policy, which makes it amply clear that the vendor must specify its choice of partner much in advance. But Nirmala Sitharaman says, even after the vendor formed a joint venture and started the construction of its manufacturing facility, that she was not aware of the vendor’s partner choice.

In September 2018, Hollande told a French media outlet that the Indian government had suggested the name of Anil Ambani’s Reliance group as Indian offset partners and that Dassault did not have any other choice but to accept the name to conclude the deal. Now the Indian government and Dassault say it was Dassault’s choice and the government had nothing to do with it.

But a release from Dassault clearly states it “created the joint venture with Reliance Aerostructure Limited in April 2015”. The government and Dassault Aviation must explain this in detail.

As on March 31, 2015, ADAG’s total debt was reportedly around Rs.1,20,000 crore. The particular company with which Dassault Aviation created a joint venture was formed on April 24, 2015. That means Dassault Aviation chose a company that existed only on paper, was less than six days old, and was floated by a group that was more than Rs.1,20,000 crore in debt, as one capable enough to be its joint venture partner. It beggars belief.

If this was an “emergency purchase” as the government projected, why did Modi decide to go for a single-vendor approach without prior approvals from the Cabinet and other authorities? EADS, the manufacturer of the Eurofighter Typhoon, kept its Indian office running until 2016. It sent a detailed letter and a proposal to the Government of India to consider its renewed offer, which it said was 20 per cent lower than Dassault’s. Why did the Modi government not consider that offer? Why did it ignore the letter altogether?

As a last resort, Nirmala Sitharaman says that Dassault was not ready to work with HAL. But a former chief of HAL claims that Dassault and HAL had signed a work-share agreement.

The DIPP (Department of Industrial Policy & Promotion) licence issued to Reliance Aerostructure Limited shows that it was applied for an address in Mehsana, Gujarat, for manufacturing aircraft and aircraft parts for military use. But, in clear violation of the licence conditions, Reliance Aerostructure Limited was allotted land in Maharashtra and it was manufacturing nose cones of an executive jet. What action has the government taken against this violation of licence terms?

How did cancelling the 95 per cent negotiated RFP for 126 aircraft to float another RFP for 115 single-engine aircraft, which was rejected by the IAF, and cancelling it again to float another RFP on the same lines of the initial one issued in 2007, help the IAF?

When the initial RFP was cancelled and floated again after three years, did the Modi government consider the time it would take to go through the same process once again? If it had to float the RFP again to invite the same six manufacturers, why did it cancel the first one?

Until the government gives clear and convincing answers to these questions, the controversies over Modi’s unilateral decision to purchase 36 Rafale aircraft will not die down.

Ravi Nair is a consultant and tweets at @t_d_h_Nair.