The writer also asks if Dassault tying up with Reliance (Mukesh Ambani) in 2012 and then winning the contract be UPA cronyism? If so, what are the institutional safeguards against such cronyism?

by Abhijit Iyer-Mitra

Much of the recent Rafale controversy seems to hinge around three things: price, propriety and work-share. On price, two questions arise: one, about a significant escalation in the final agreed price; two, about GoI’s claim that this final price saved the taxpayer quite some money.

On the propriety front, a process violation has been alleged on three issues: one, why the runner-up (L2), Eurofighter, was not played off against Rafale; two, why the entire initial contract was dropped abruptly; three, why Cabinet approval was not sought for the new deal, which involved no competition and reduced numbers.

On the work share front, there are two questions: one, why not Hindustan Aeronautics (HAL), and why Reliance?

On closer examination, we find that every one of these seven questions is bogus. But more worryingly, they seem to arise from a complete lack of knowledge of process. 

Price Escalation: In April 2012, I had pointed out in my Institute of Peace and Conflict Studies report (‘India and the Rafale: Anatomy of a Bad Deal’, goo.gl/Pnt8mH) that the final price per plane could not be under $212 million, based on figures put out by the French Senate. Yet, the media reported the official dogma of 126 planes for $10.4 billion — $82.5 million price per unit (ppu).

By April 2013, the same media reported a 50% increase to $15 billion ($119 million ppu). By January 2014, this price had bloated 300% to $30 billion ($238 million ppu). The final total price paid by GoI was $8.7 billion for 36 airframes ($243 million ppu).

Price Savings: On the face of it, the final price was $5 million over the final round of negotiations by the UPA government. But this does not account for drastically reduced volumes: 1/4th the original, which makes a big difference. Also, there are at least three India-specific modifications, a training and five-year maintenance package, plus a 50% offset agreement. Prima facie again, this does indeed add up to actual price savings.

The best way of judging, though, is to look at what other countries paid. Qatar bought its Rafales at $292 million ppu, with an extensive training maintenance and weapons package, but without offsets or workshare. Egypt bought their Rafales for $246 million ppu and India paid $243 million, with a less extensive package than Qatar, but with 50% offsets and significant India-specific modifications. 

On balance, this looks like an exceptionally well-negotiated deal. 

Eurofighter: It would be sensible for those questioning the propriety of this deal to refer to the 2013 Defence Procurement Policy (DPP), drafted under the UPA and in force when the contract was signed in 2016, the NDA 2016 DPP coming into effect in 2016-17. Despite allegations flying thick and fast, none has been able to quote exact sections of where the DPP was violated. For good reason. As there was no violation.

As per the 2013 DPP, there is no provision for bringing in the Eurofighter (L2) except in production. So, if Dassault was unable to deliver at the stated price, Eurofighter would get a work share in the Rafale. This, as any businessperson knows, is laughable, involving, as it does, handing over trade and production secrets to an arch-competitor.

Yes, Eurofighter did give a last-minute revised bid at 20% less value than cited, which was rejected by the UPA government as there was no provision for triggering a price war at any point in the stated DPP. In fact, bringing in Eurofighter at any point, except to co-produce the Rafale, would have been a process violation.

Dumping the Contest: Faced with a$30 billion contract for 126 fighters that would have wrecked the capital outlay for years, if not decades (since no one in the previous government did due diligence on actual costs or available funding), abandonment of the competition was the most fiscally prudent thing to do. Moreover, while not provisioned in the DPP, it doesn’t disallow it specifically either. Which begs the question: what process violation?

Cabinet Committee on Security (CCS) Approval For New Contract: The relevant sections that deal with the Inter-Governmental Agreement for the Rafale purchase in 2016 lie in Articles 71and 72 of the 2013 DPP (goo.gl/U55ytb). Again, those hurling allegations seem to have forgotten how to read the relevant sections, which surprisingly require no Defence Procurement Board (DPB), Defence Acquisition Council (DAC) or, indeed, CCS approval, for any purchase under this category.

All they need is the approval of a competent financial authority (CFA) —in this case, the finance minister. Who evidently was consulted.

Why Not HAL? Why Reliance? Because the final negotiated contract is for offsets of industrial defence goods, not an agreement to co-produce planes, which is HAL’s only competence (sic). The Defence Research and Development Organisation (DRDO) reportedly gets Rs 9,000 crore worth of offset work from Dassault, while Reliance is simply the biggest, not only, beneficiary of the remaining Rs 21,000 crore.

This is apt as Reliance ADAG (Anil Dhirubhai Ambani Group) along with L&T, Kalyani, TATA and Bharat Forge are the only ones actually producing defence equipment currently, and it was Dassault’s prerogative to pick its industrial partner. But this still doesn’t answer the question of alleged cronyism. Would Dassault tying up with Reliance (Mukesh Ambani) in 2012 and then winning the contract be UPA cronyism? If so, what are the institutional safeguards against such cronyism?

There are several germane criticisms to be made on the Rafale deal. Sadly, the only thing we have witnessed this last fortnight is, to quote a senior Congress leader, an “exasperating farrago of distortions, misrepresentations & outright lies”.

The writer is senior fellow, Institute of Peace & Conflict Studies, New Delhi