Defence

Everything You Wanted To Know About The Rafale Deal But Didn’t Know Where To Ask

Former defence minister Manohar Parrikar and his French counterpart Jean-Yves Le Drian exchange the files of agreements on the buying of Rafale fighter jets. (Arvind Yadav/Hindustan Times via Getty Images)
Snapshot
  • In 2016, India signed a deal with France for the purchase of 36 Rafale fighters for the Indian Air Force.

    The deal, marred by delays under the Congress-led UPA government, is back in the news as the opposition party has accused Prime Minister Modi’s government of tweaking the contract to benefit a particular business house and buying the jets at an inflated price. The government has debunked the allegations.

    In his book Securing India the Modi Way: Pathankot, Surgical Strikes and More, defence analyst Nitin Gokhale details the decade-long journey of what was once described as the “mother of all deals”. Here’s an excerpt from his book:

The competition to acquire 126 Medium Multi Role Combat Aircraft (MMRCA) for the Indian Air Force began in 2007 after the government agreed with the Indian Air Force (IAF) that it needed to replace the aging fleet of MiG aircraft.

Six companies across the world were issued the tender papers. They were: EADS from Germany, manufacturers of the Eurofighter Typhoon; Lockheed Martin (who make the F-16s) and Boeing ((F-18 aircraft) from the USA, Sweden’s SAAB (makers of Gripen); Dassualt Aviation from France (the Rafale manufacturers) and Russia’s Rosoboron Export (MiG-35).

India was looking for 18 aircraft to be bought off the shelf and 108 were to be manufactured in India (with a local partner, in this case, it was supposed to be the state-owned Hindustan Aeronautics Ltd). Required maintenance, repair and overhaul facilities were to be set up. The MMRCA contract was variously described as ‘mother of all deals,’ ‘most complex defence contract,’ etc in the media reports. And it indeed was.

According to official documents that I have had a chance to read, the Ministry of Defence (MoD) had in 2011, bench marked the Total Cost of Acquisition at Rs 163,403 crores. This, it must be pointed out, was different from the total cost of deliverables in the 126 MMRCA contract, which was bench marked by the MoD at Rs 69,456 crores, excluding the offset loading cost, estimated to be anywhere between Rs 2530 crores to Rs 5060 crores.

All this came after the six companies submitted their techno-commercial bids in April 2008, followed by nearly 11 months of field evaluation trial (FET) held in the heat of Rajasthan desert during peak summer months and extreme cold conditions in the high altitude zone of Ladakh. The trials were completed in May 2010. The evaluation committee of the IAF shortlisted two aircraft—the Eurofighter Typhoon and the Rafale aircraft fielded by the Dassault Aviation (DA)—and forwarded the recommendation to Defence Minister AK Antony. Antony took almost a year to accept the recommendation. It was already 2011. After prolonged internal discussions in two sub-committees (the Technical Oversight Committee-TOC, the Technical Offset Evaluation Committee-TOEC), a Contract Negotiations Committee (CNC) was formed in April 2011. By September that year, the CNC had arrived at the benchmarking cost after applying escalation rates by averaging simple year-on-year escalation.

But it was not before July 2012, that the CNC activated four Sub-Committees, the 'Maintenance', `Offset', and `ToT and `Contract' Sub-Committees.

For the next two years, negotiations on Transfer of Technology, Offset and Maintenance went on apace. However, certain aspects related to License Manufacture of 108 aircraft in India with HAL as the lead production agency could not be finalized. Major differences occurred on the aspect of Man Hours that would be required to produce the aircraft from kits in India and who would take the responsibility for entire lot of 126 aircraft. While DA maintained that 31 Million Man Hours that it has proposed should be sufficient to produce 108 Rafale aircraft in India, HAL was asking for mark up of this Man Hours by 2.7 times.

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This point became the bone of contention between the government and the French manufacturer.

Moreover, in the understanding of the MoD, the company that had emerged as the winner in the bid—Dassault Aviation—would have to sign a single contract with the Indian government. The French Company would then need to have back to back contract(s) with HAL and other Indian Production Agencies. Dassault Aviation would also be responsible for the delivery of the complete 126 aircraft to IAF and the single point responsibility for this contract rested with Dassault Aviation because the RFP was issued to them. At that stage, the representatives of Dassault Aviation agreed do their best to meet all requirements of the project as envisaged in the RFP.

However, Dassault Aviation did not fulfil the commitment given in the first meeting and an impasse ensued on the responsibility of delivery of 108 aircraft to be manufactured in India. Another hurdle came up on the point of work share of HAL. Dassault Aviation was asked to submit a 'Responsibility Matrix', clearly defining the role and responsibility of Dassault Aviation and HAL. The `Responsibility Matrix' was to facilitate a back to back contract of Dassault Aviation with HAL.  The CNC was however not able to move the negotiations forward since the interpretation of two fundamental aspects of the case by the French Company was not in line with the terms of the original terms in the tender.

The first aspect related to treating Dassault Aviation as the 'Seller' of 126 aircraft, including 108 to be manufactured in India and the corresponding contractual obligations and liabilities. The second point was about the ‘man hours for the aircraft to be manufactured in India. The UPA government, under the overly cautious AK Antony instead of imposing a deadline for the French manufacturer to comply with the terms of the RFP, dragged its feet and allowed Dassault Aviation to get away with obfuscation. Moreover, in an unusual move, Antony instructed MoD officials to bring the file back to him after concluding the CNC to re-examine the integrity of the process before proceeding to finalise the contract, creating confusion and doubt in the minds of the officials who were negotiating with the manufacturer.

Even as talks got deadlocked, the government changed in Delhi.

Why The Government Was Forced To Buy Rafale Jets Off The Shelf

As the new political leadership was briefed about the impasse, MoD officials were told to try and break the deadlock as soon as possible since the IAF’s fleet of fighter aircraft was depleting alarmingly.

So, during a meeting of CNC on 25 September 2014, Dassault Aviation was told provide commitment on these two issues within 10 days. The Company demurred. As no response was received they were again requested vide letter dated 31 October 2014 that the requisite commitment may be provided within a week. In their response dated 7 November 2014, Dassault Aviation did not provide the confirmations sought by the CNC.

On 10 November 2014 meanwhile Parrikar took over as Defence Minister. While being briefed about the major pending projects and contracts, he realised that the MMRCA contract wasn’t going anywhere. Yet he wanted to give the French sufficient time to comply with the terms of the tender.

In December 2014, the French Defence Minister came visiting and as expected raised the issue of conclusion of contract negotiations in the MMRCA case with Parrikar who told him that conclusion of the contract was held up on account of the vendor not confirming compliance to the terms of the RFP. This was followed up by a formal letter from Parrikar to the French Defence Minister stating that it would be really useful for Dassault Aviation to confirm compliance to the terms of the RFP and the terms of the bid submitted by them at the earliest. It was further mentioned in the letter that the negotiations can be carried forward and concluded thereafter if Dassault Aviation could be asked to depute a fully empowered representative to discuss non-stop with CNC.

Another discussion with the delegation of Dassault Aviation was held on 12 February 2015. A clarification was sought from Dassault Aviation  towards confirmation of compliance to the terms of the RFP and terms of the bid submitted by them specifically. The two crucial points, i.e. (i) the consolidated Man Hours (MH) based on which Dassault Aviation had been declared L-1 would be the same man hours required for license manufacture of 108 Rafale aircraft in India, and (ii) Dassault Aviation as the Seller under the contract for 126 aircraft for the IAF will undertake necessary contractual obligations as per RFP requirements.

The representatives of Dassault Aviation reiterated their stand on both issues and stated that while Dassault Aviation will be responsible only for delivery of 18 aircraft in a flyaway condition, they will not take ownership for the 108 aircraft to be manufactured by HAL as the Local Production Agency (LPA). On the issue regarding Man Hours , the Dassault Aviation representative  stated that the company’s stand has always been consistent that the Man Hours indicated in their proposal correspond to the related tasks performed in French Industrial condition. He also mentioned that only HAL being the Lead Production Agency can talk about the factor of multiplication to be applied to these Man Hours to convert the same to the Man Hours required for license production of 108 aircraft in India. Clearly, Dassault Aviation was using the loophole in the original terms of the tender to get away with shirking its responsibility towards the quality of the 108 jets to be manufactured in India.

Exasperated at the obduracy shown by the French company, MoD issued an ultimatum on 20 March 2015 asking it to fulfill the commitment and confirmation on the two aspects mentioned above, ‘failing which MoD may be constrained to withdraw the RFP issued.’

However, Dassault Aviation, in its response dated 24 March 2015, did not commit on the two aspects mentioned above. Instead, the French Company stated that the estimate of consolidated Man Hours given by them is to be used by HAL to prepare its own quotation with respect to the completion of its (HAL’s) tasks under the MMRCA. The MoD realised that applying a factor of 2.7 on the Man Hours quoted by both Dassault Aviation and EADS (the company that quoted the second lowest price), the Total Cost of Acquisition (TCA), as on November 2011, would undergo a material change to the extent that Dassault Aviation would have no longer remained L1 vendor and would have become L2 vendor.

As the CNC members took the matter to Parrikar he realised the process had been convoluted to such an extent that, it would have been impossible to take it forward. He however knew from the briefings given by the IAF, there was no time to lose in acquiring fighter jets. The number of effective squadrons was going down rapidly. The IAF leadership also told him that they were happy with Rafale’s performance and would rather have the fighter in its fleet than scout of other options. Parrikar realised that another round of MMRCA kind of competition would have taken enormous time and effort. So he took the matter to the Prime Minister and briefed him about the necessity of procuring the fighter. At the same time, Parrikar told Modi, it would be legally untenable to go through with the MMRCA contract since the process had got vitiated completely thanks to Antony’s indecisiveness and a crucial oversight in the original terms of the contract.

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). The only way, the defence minister suggested, was to scrap the tender and buy a minimum number of Rafale jets off the shelf to fill a critical gap in the IAF’s inventory. The Prime Minister agreed and decided to talk to the French President about such a possibility during his upcoming visit to Paris in April 2015. The Cabinet Committee on Security (CCS) also gave its approval to the new proposal before Modi left for Paris on 9 April 2015.

That evening, alerted by a source about the possibility India scrapping the MMRCA tender and going in for off-the-shelf purchase of Rafale jets, I scooped the story on my blog NewsWarrior (www.nitinagokhale.blogspot.in), 10 minutes to midnight on 9 April, almost 22 hours before Modi’s announcement of India deciding to buy Rafale jets off the shelf was in Paris. I however got the numbers wrong. My report said India would buy 63 Rafale directly from Dassault Aviation.

Eventually, Prime Minister Modi announced in Paris that India would purchase 36 aircraft. Shishir Gupta of the Hindustan Times was closer (as far as numbers were concerned). But I had the satisfaction of having reported about such a possibility before anyone else in the world, a fact that gives reporters an unimaginable high. Once our stories (Gupta’s and mine) were out, other news outlets started confirming the possibility. Most reports on 10 April 2015, waiting for the announcement to be made by Modi and Hollande, quoted my blog post and Gupta’s report as the source of the initial information.

India’s decision, announced at a joint Press Conference between Modi and then French President Francoise Hollande on 10 April 2015, took everyone by surprise but under the circumstances, the Prime Minister had chosen the best possible solution. Once the in-principle decision was taken, it was left to Parrikar and his team in the MoD to negotiate the eventual price for buying the 36 jets. Their confidence bolstered by the PMO, the Parrikar-led MoD drove a hard bargain with the French. But it wasn’t until another 15 months later—in September 2016-- that India finally signed the contract and got the state-of-the-art fighters at a competitive price.

Cover of the book <i>Securing India the Modi Way: Pathankot, Surgical Strikes and More</i> by Nitin A Gokhale Cover of the book Securing India the Modi Way: Pathankot, Surgical Strikes and More by Nitin A Gokhale

36 Rafale vs 126 MMRCA Package Comparison

As the contract was signed, inevitable comparisons about the costs India was paying for the 36 jets and the 126 planes India was supposed to have bought under the MMRCA deal, began.

The final negotiated price for 36 Rafale package, along with initial consignment of weapons, Performance-based Logistics (PBL), simulators along with annual maintenance and associated equipment and services was fixed at 7890 million Euros.  The average unit cost of Rafale aircraft thus turned out to be 91.7 million Euros (going by the Euro-to-rupee conversion rate at the time of signing the contract it meant each aircraft would cost Rs 688.30 crore and not Rs 1500 or Rs 1700 crore quoted by some analysts). In any case, officials involved in the nitty-gritty of the negotiations pointed out that the package cost of 126 MMRCA and 36 Rafale cannot be directly compared to work out per unit cost as the deliverables in the two cases were quiet divergent. Obviously, the CCS, briefed in detail about the absolute necessity of procuring the Rafale jets for the IAF and the cost comparisons, did not hesitate for a moment to clear the proposal, Parrikar remembers. “I must give full credit to the negotiating team for having diligently worked out all details to get a good bargain and the Prime Minister’s total trust in us” Parrikar told me.

What the former defence minister doesn’t mention however is his own steadfast belief that the cost had to be negotiated to India’s advantage. Recalls a senior IAF official involved in the hard bargain with the French: “It was Mr Parrikar who backed us to the hilt and even held firm in the face of tremendous pressure applied by the French when their President (Francois Hollande) was in Delhi as the Chief Guest for the Republic Day Parade in January 2016. Mr Hollande was keen to sign the MoU, inclusive of the finalised price, with our Prime Minister while in Delhi. We negotiated through the night until 4 am but the price Mr Parrikar thought was still high. So he took the matter to the PM and requested him to sign the MoU without mentioning the final price, which Modi promptly did. So on 26 January 2016, India and France signed a MoU for India to buy 36 Rafale fighter jets. Newspapers reports the next day said the 9 billion dollars deal would take some time to be finalised. It took another eight months for the contract to be signed. The team drove a hard bargain and obtained a hefty discount. As I wrote on my website, www.bharatshakti.in: “The MoD-IAF negotiating team extracted many concessions and discounts to arrive at a price that is almost 750 million less than what was being quoted by the French side in January 2016, when the commercial negotiations gathered pace, almost seven months after Prime Minister Narendra Modi announced India’s intention to buy 36 Rafales off the shelf from France during his trip to Paris in April 2015. “To bring down the cost, the Indian team asked French officials to calculate the deal on actual cost (Price as on today) plus European Inflation Indices (which varies like stock markets and is currently around 1 per cent per annum). The MoD has also capped the European Inflation Indices to maximum 3.5 per cent a year. In other words, if inflation Indices goes down (chances of it going down are more, looking at the current situation of European markets) India will have to pay less. Even if it goes up India will not pay more than 3.5 per cent increase.

“In the now scrapped process for buying 126 Medium Multi-role Combat Aircraft (MMRCA) floated the confusion reigned supreme in calculating the cost of the contract. After the French Dassault Aviation—makers of the Rafale Jet—emerged winners the UPA government had agreed with French officials to calculate the price on the fixed cost formula that allowed the company to include additional price of 3.9 per cent Inflation Indices from day 1 of the deal. So, had the India gone ahead with the UPA deal and the European Inflation Indices had fallen (as it indeed has), India would have ended up paying additional cost of inflation Indices (@3.9 per cent) which was already added at the initial negotiation itself.”

The lower price apart, the Rafales that IAF will operate will have a weapon suite much superior to the ones proposed in the earlier case. They will include Air to Air weapons METEOR Beyond Visual Range Missiles with ranges more than 150 Km, MICA-RF Beyond Visual Range Missiles with ranges more than 80 Km and MICA-IR Close Combat Missiles with ranges more than 60 Km. The Air-Ground weapons include SCALP missiles with range in excess of 300 Km. The induction of METEOR and SCALP missiles will provide a significant capability edge to the IAF over India’s adversaries.

The Rafale for IAF will have 13 India Specific Enhancement (ISE) capabilities which are not present in the Rafale aircraft being operated by other countries. Three capabilities pertain to Radar enhancements which will provide IAF with better long range capability. One of the specific capability being acquired is the Helmet Mounted Display (HMD) through which the IAF pilots will be able counter many threats simultaneously. Another very significant capability enhancement sought is the ability to start and operate from 'High Altitude Airfields'. The 36 Rafale aircraft are to be delivered to the IAF within 67 months after signing of the Inter-Government Agreement. This delivery schedule is better than the delivery schedule proposed earlier by the French side by five months.

But buying the aircraft is only the first step. After the initial purchase, the effectiveness of any aircraft is in the speed with which it can be repaired and ‘turned around,’ that is readied for another mission the moment it returns to base. In that respect, the IAF could not have negotiated a better deal.

In MMRCA case, the initial PBL support was to be for five years for one squadron. In 36 Rafale case, the PBL is for five years for two squadrons with an additional contractual commitment for another two years with the base year prices kept intact. In the earlier proposed contract, the computation of PBL performance had considered cannibalisation of components from unserviceable aircraft. The Indian side was able to remove this clause without any additional cost. The PBL Agreement now stipulates that the company will ensures that a minimum 75 per cent of the fleet will always be available for operations. Moreover, Rafale has lesser turnaround time as compared to other fighter available. The Rafale aircraft can do five sorties in a day as compared to other two engine fighter aircraft available which have a sortie generation rate of three per day.

Rafale was the biggest of the complicated cases that the MoD resolved but there were other crucial pieces of equipment that India needed and needed as soon as possible. So all the hurdles in purchases of artillery guns (M-777 howitzers from the US), attack and medium lift helicopters for the Army (Chinook and Apache helicopters from the US); frigates and mine counter-measure vessels for the Navy and Akash missiles for the Air Force, were removed in double quick time.

Excerpted with permission from Nitin A Gokhale‏’s book Securing India: The Modi Way: Pathankot, Surgical Strikes And More.

You can get your copy of the book
here.

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