Defence

L’affaire Rafale

Print edition : February 15, 2019

A Dassault Aviation Rafale fighter jet on an assembly line in Merignac, south-western France, on January 14, 2019. Photo: MEHDI FEDOUACH/AFP

N. Ram, Chairman, THG Publishing Private Limited. Photo: K. MURALI KUMAR

Nirmala Sitharaman, Defence Minister. Photo: SHIV KUMAR PUSHPAKAR

As the controversy over the Rafale deal continues to simmer, the question is whether it will turn out to be Narendra Modi’s Bofors.

The Narendra Modi government’s fond hope that the favourable judgment by the Supreme Court on petitions questioning the Rafale deal would quieten the controversy have been rudely belied by the continuing flow of information that give the lie to its claim that the deal was in the national interest. In particular, the recent publication of an article by N. Ram in The Hindu (January 19), which provided details of various cost elements, including of the much-touted India Specific Enhancements (ISE) on the basic Rafale aircraft, has triggered yet another spate of articles and TV programmes that have kept the controversy alive. The flurry of revelations has also exposed the government as being economical with the truth.

Although much of the information in Ram’s article has been around for some time in the media, the interest it has evoked goes beyond its news value. This is probably because both the writer and the publication have a formidable reputation carried over from their rigorous investigation and pursuit of the Bofors scandal that first hit national consciousness in the late 1980s. In particular, the article has drawn renewed attention to the issue of the unexplained higher costs of the 2016 Rafale deal, the hasty top-down decision-making and violation of due process involved, and the efforts at concealment, misdirection or obfuscation by the government regarding all these. It is obvious that l’affaire Rafale is not going away any time soon.

However, it needs to be emphasised that many important issues arise from the Rafale deal that go far beyond the possibility of malfeasance, although that would be bad enough. Many aspects of the deal, including the manner in which it has been arrived at, point to an even bigger national scandal, one that reflects a now-systemic and dangerous malaise afflicting India’s defence industry and related R&D (research and development) efforts. These larger issues of national security demand concerted, mission-oriented and long-term remedial measures undertaken with a strategic vision, all of which have been hopelessly belied in the Rafale deal. It is clear that any future government needs to adopt a perspective that is completely different from the one pursued hitherto if such a goal has to be accomplished.

But let us first deal with the immediate issues at hand.

There has been considerable discussion about the final contracted price and the different elements that comprise it, such as the basic aircraft, weaponry, avionics and radar, and the somewhat mysterious “India Specific Enhancements”.

Pricing

The components of the ISE have been cited by the government time and again to justify cost differentials, relative advantages and, therefore, what is claimed to be the much better terms of the Modi deal of 2016 compared with the 2007 tender or RfP (Request for Proposal). There is, of course, no definitive way to verify the different figures being cited by critics, such as in the above article, or in rebuttals by government spokespersons or pro-government commentators since the pricing details have supposedly been revealed only in a secret note submitted to the Supreme Court. These have also supposedly been shared with the office of the Comptroller and Auditor General (CAG), which is still studying the entire case. Nevertheless, while some discrepancies in the details revealed in The Hindu article have been pointed out, government spokespersons have not disputed the main numbers, which also correspond to numbers for the basic aircraft confirmed earlier by government spokespersons, as cited in Ram’s article itself. In any case, it is not the exact prices that are of main interest for the purposes of this article, but what they broadly convey about the 2016 deal, the way in which it was decided and negotiated, and where it leaves the Indian Air Force (IAF) with respect to defence preparedness in the short and long term.

In brief, Ram points out that the winning bid in the 2007 tender was for €79.3 million per basic aircraft, which had escalated to €100.85 million by 2011, bargained down in 2016 with a 9 per cent discount to €91.75 million per aircraft. However, a flat, non-recurring development cost for the ISE components of €1.3 billion had been agreed upon irrespective of the number of aircraft acquired which, when calculated for 36 aircraft instead of 126 as earlier, pushed up add-on cost per aircraft from €10.32 million to €36.11 million. In other words, a huge penalty had been incurred because of the reduction of the size of the order from 126 to 36 Rafale fighters. Thus the price for the 2016 deal is at least 14.2 per cent higher than the negotiated price arrived at in 2011, which was based on Dassault’s response to the 2007 tender.

We will come to the ISE later, but let us look at the overall price and related issues first.

Defence Minister Nirmala Sitharaman has also frequently argued, including in her long speech to the Lok Sabha on January 4, that a major reason for the Modi government’s scrapping of the 2007 tender was that the number of man-hours stipulated by Hindustan Aeronautics Limited (HAL) for making the Rafale aircraft in India was much more than Dassault’s and hence would have pushed up costs. But this claim lacks merit because the higher costs of manufacture by HAL had in fact been factored into the price quoted by Dassault in its winning bid for the 2007 RfP. HAL employees have also clarified that man-hours come down with time, and besides, cost less in India than in France. Government and Bharatiya Janata Party (BJP) spokespersons have been arguing that if at all comparisons between the 2007 tender and 2016 deal are to be made, the price quoted for 18 fly-away aircraft in the 2007 tender should be compared with the price quoted for 36 fighters in 2016.

Quite apart from the difficulties in extricating the price for 18 fly-away Rafales from Dassault from the price for the 108 aircraft to be made in India by HAL, there is a glaring fallacy in the BJP argument on higher costs for HAL-made fighters. If HAL-made fighters indeed cost more than Dassault-made ones, then the price for 18 Dassault-made Rafales in the 2007 RfP should be less than the total price per aircraft, in which case the price per aircraft in the 2016 deal would turn out to be even more than 14.2 per cent higher than the price negotiated with Dassault in 2011.

Also, if the 2016 deal for outright purchase of 36 Rafales was actually beneficial to India financially, or even only with marginally higher costs together with co-benefits such as more training and longer maintenance support, as argued by the government, then why reduce the order from 126 to 36? Why not order all 126 made in France with the provision of staggered deliveries to suit budgetary allocations? Does this argument not make the smaller-sized order even more inexplicable, especially when the dire shortage of fighters with the IAF is getting perilous by the day?

Critically, the 2016 deal has no provision for technology transfer at all, unlike the 2007 RfP, which spelt out in considerable detail the various technologies that the winning manufacturer was required to transfer to HAL. By cancelling the 2007 RfP, the Modi government has demonstrated its disdain for technology transfer, which ensures that the high-value purchase of big-ticket military hardware would be leveraged to acquire advanced technologies so that serial dependence on foreign manufacturers is reduced over time. Indeed, this principle is accepted even in the provisions of the Defence Procurement Procedure (DPP), but clearly this has been taken to be mere lip service. In fact, Nirmala Sitharaman has categorically stated that “transfer of technology from France to India made no economic sense” (India Today, November 17, 2017). To weigh technology transfer in purely money terms and to devalue it in this manner betrays a staggering non-comprehension of the long-term strategic importance of technology acquisition and domestic capacity building in defence-related technologies. This must surely delight foreign military hardware majors and their governments, for such an attitude will keep India perennially dependent on imports and on foreign geopolitical interests. In contrast, one would argue that even a higher price would have been worth it had it resulted in HAL and India acquiring valuable know-how in advanced aviation technologies.

As soon as the Rafale controversy erupted, the government started harping on various “special” add-ons to the basic aircraft—some of which, it was claimed, even the French Air Force’s Rafales did not possess—and which made the 2016 deal far superior to the 2007 tender. As brought out by several commentators, including Ram in his recent article, it turns out that most if not all the 13 ISEs for the 36 Rafales under the 2016 deal may well be the same as specified in some detail in the 2007 RfP (see, for example, Business Standard, November 10, 2018), although the government will not officially confirm details citing confidentiality.

The issue of immediate relevance here is that the development cost quoted for these ISEs as an additional cost element is €1.3 billion, negotiated down in the 2016 deal from the originally quoted €1.4 billion in the 2007 RfP. This is an R&D type cost and, of course, the cost per aircraft would come down as the order size increases, resulting in a substantial premium being paid by India for the 36-aircraft deal in 2016 compared with the 126-aircraft deal in the RfP. Further, in the 2016 deal India even gave up the option for 18 additional aircraft whereas the 2007 RfP had provided for an option to acquire 189 aircraft with the ISE, which would have brought down the amortised development cost per aircraft even further.

Ram and several others have revealed that three officials who sat on the Indian Negotiating Team had objected to this higher price but were overruled by the other four members on the surprising grounds that these were one-time costs irrespective of the number of aircraft involved and therefore no objection was called for. But that precisely begs the question, adding to the many reasons for questioning the rationale of reducing the order from 126 to 36 when the former order would clearly have resulted in a lower unit price.

Surprise announcement

It appears that Modi’s penchant for making headline-grabbing announcements has locked India into an agreement in which it was left with little bargaining strength vis-a-vis Dassault. After his public announcement of the new deal at a press conference in Paris in 2015, in the presence of the then French President, which caught everyone in India—including his colleagues in the Cabinet— by surprise, India was left with little room for manoeuvre. This was particularly because the IAF was breathing down the government’s neck with publicly aired laments about depleting fleet strength and capability. During negotiations, therefore, Dassault simply refused to budge, and India was boxed in.

But there is yet more to the ISE, besides the price mark-up. Evidently, Dassault gained in more ways than one. If India had paid for development of the ISE, then the technologies involved should belong to India either wholly or in part, but there is no mention at all in the contract of any Indian share in the intellectual property for these ISE technologies.

These new or upgraded technologies, such as the AESA radar compared with the earlier RBE2 radar, helmet-mounted display and weapons targeting system, laser guidance pod, infra-red tracking system, electronic jammer, high altitude take-off capability, and so on, would henceforth be available to Dassault for building them into all subsequent versions of Rafale fighters whether for supply to the French Air Force or for export. Has India then ended up paying for Dassault’s R&D, which it can deploy for higher returns on numerous subsequent aircraft deliveries, while India gets only 36 for the princely sum of an additional €1.3 billion?

High development cost

Further, how was this development cost arrived at and what does it cover? It should be noted that the basic aircraft price worked out to be €3.3 billion for 36 aircraft in the 2016 deal. This means that the R&D costs for the ISE amounted to almost 40 per cent of the basic aircraft price—a huge proportion indeed! It is striking that the first Rafale destined for India, designated RB008, with all the ISE on board, was ready for test flights in France commencing in October 2018, not too long after the deal was signed. This suggests that Dassault did not need much time to develop these supposedly critical enhancements.

Without a look into technical details, a closer analysis of the various ISE, based on information available in the public domain, suggests strongly that most of the ISE technologies had already been developed either by Dassault itself or by other vendors, and that what Dassault was doing for India was chiefly to customise these and integrate them with the Rafale aircraft. Does such adaptation warrant an additional cost of €1.3 billion?

It may also be noted that many of these add-ons are also part of the configuration envisaged for the Rafale F3R standard. The Dassault website mentions an active array radar, integration with the Meteor missile, a laser designator pod, etc. The F3R standard has been qualified in 2018 and is being tested and prepared for certification by 2022.

Coincidentally, that is also when the India-specific Rafale is due to be certified. In fact, owing to this certification schedule, the ISE will not arrive fitted on to the 36 Rafales due to be delivered to India by mid 2022, starting from 2019, but will be retro-fitted on to the Rafales in India after the contracted delivery period! (It is interesting that the more advanced F4, standard for which the French government has paid Dassault €2.3 billion towards development costs, would, by 2030, cover 58 new fighters yet to be delivered and presumably subsequent retrofits to the earlier 150-odd Rafales with the French Air Force.)

Important lessons

Many more revelations, and much analysis, around the 2016 Rafale deal are definitely around the corner. Much smoke is already visible, and there is too much of it to not have some fire somewhere. If there has been corruption, that will be the hardest to prove.

But that apart, there is already sufficient evidence of other wrongdoing, and all the convoluted and utterly unconvincing defence and justifications are only making things worse for the government and those at the very top. Yet there are many lessons that have, or should have, already been learned from l’affaire Rafale.

The complicated and, in the typically Indian way, highly bureaucratised DPP has been thoroughly compromised and deserves to be overhauled both in what it seeks to achieve and in terms of the institutional processes involved. The DPP evolved against serial scams in defence acquisition. However, the procedures involved are convoluted and, given the functioning of Indian career bureaucrats and their complex relationship with the political class, hinder rather than promote effective and corruption-free decision-making. The Rafale case has shown that a key to open even the most sturdy lock will always be made, and ways to circumvent the most complex rules can always be found and actors to do so will readily appear.

If acquisition decisions, such as cancellation of tenders or announcement of new deals, can be taken at the highest levels of government on a whim, the entire edifice of a hierarchy of decision-making committees or bodies can be inveigled into post-facto ratification. The Rafale deal has demonstrated the need for an urgent overhaul of the entire DPP structure and processes it prescribes.

Starting from basic principles is, in any case, also warranted because the DPP, the Defence Production Policy of 2018 and related policies have drifted far away from their original goals. India is today the world’s largest importer of defence hardware. It is shameful that India, in its eighth decade after Independence, given the size of its economy, the depth of its industrial base, the strength of its scientific and technical manpower, and its traditional commitment to self-reliance, still depends so heavily on foreign entities for its national security.

It is obvious that the country has been misled into trying to apply in the defence arena what is probably fundamentally mistaken even in civilian-industrial technologies. The underlying logic seems to be that there is no need to painstakingly acquire one’s own capability when one can simply buy what one wants from abroad. No country has advanced up the economic and technological ladder in this way, certainly not in military capability. The United States, which has emerged as India’s leading defence supplier, even has laws prohibiting defence acquisitions from other countries.

India is unfortunately going in the opposite direction. The relaxation of foreign direct investment (FDI) regulations in defence industries, despite which only a tiny trickle has come in, is one such step. The creeping undermining of provisions for offsets in the DPP is another. The original goal of using offsets as a method to strategically identify and acquire advanced know-how has been virtually abandoned.

In the Rafale deal, the entire government, including the Defence Minister, has repeatedly stressed that offsets are a purely commercial arrangement between the foreign OEM (original equiptment manufacturer) and its “chosen” Indian partner. That has been the excuse for gifting a lucrative and large chunk of the Rs.30,000 crore offsets in the Rafale deal to a totally inexperienced and financially troubled entity, Reliance Defence, which is incapable of absorbing advanced aviation technology. Further, Dassault CEO Eric Trappier has gone on record saying that Dassault will operate the Indian plant with a 49:51 equity partnership with Reliance Defence, will control the technology, and will recoup its investments from its work share. So much for technology transfer through offsets, and Dassault even walks off with almost half of the offsets contract!

India’s non-existent or haphazard long-term defence planning is yet another scandal. The IAF fleet strength is rapidly dwindling as legacy aircraft reach their end of life. The IAF, the political leadership as well as the bureaucracy are to blame for the sorry state of affairs. With a few exceptions, India’s acquisition of aircraft has mostly been penny wise and pound foolish: just a few squadrons of many different aircraft, a veritable zoo and a logistical nightmare. One thought the 126 aircraft MMRCA RfP would break the mould, but we are back to a two-squadron acquisition and staring at a possible 20-squadron fleet some years from now. A comprehensive rethink of the envisaged composition of the IAF fleet is required, along with systematic measures to bring it about.

In the longer run, this mess can only be cleaned up through a robust indigenous design-development and manufacturing capability, led by the public sector with established capacity, working in close collaboration with the user service(s) and the government in the national interest. This would also ensure the development of a diversified manufacturing ecosystem that has a role for the private sector; HAL, for instance, already works with over 2,000 SMEs.

The revelations in recent weeks show that l’affaire Rafale is not going to disappear any time soon. Indeed, the question is whether the Rafale deal would be Modi’s nightmare, just as the Bofors deal was for Rajiv Gandhi 30 years ago.

D. Raghunandan is with the Delhi Science Forum and has worked with Rolls Royce Aero-Engines (U.K.) and Hindustan Aeronautics Ltd, Bengaluru.

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