by Raghav Ohri, Manu Pubby

NEW DELHI: The €7.87 billion deal to buy Rafale fighter jets from France was cleared by a majority in the negotiating team. However, ET has reliably gathered that three members recorded concerns over pricing, cost of India-specific enhancements as well as the non-consideration of a discounted offer by the only other competitor.

A key concern, which appears to have been extensively debated within the team, was that the pricing of the deal was much more than the bench-marked or initial defence ministry estimate of €5.2 billion. The team felt this was too low and recommended that a new cost be worked out from the price discovered in the bidding for 126 fighter aircraft during the UPA regime.

This resulted in the benchmark price being revised upwards to € 8.2 billion. By this yardstick, the price negotiated for 36 aircraft worked out cheaper. The process and the price was then approved by the defence minister-led defence acquisition council (DAC) and cabinet committee on security (CCS).

BENCH-MARKED PRICE

Before contract negotiations of such value, the defence ministry commissions a bench-marking process in which a senior official is tasked with determining — using open source information and any available data from other experts — an estimated price of the deal. 

The officer in charge of the bench-marking process was MP Singh, an adviser (cost) in the ministry. “The bench-marking was done with due process and detailed study was not a number that came out of thin air,” sources familiar with the matter told ET. In the case of the 36 Rafale jet purchase, the bench-marking cost was originally determined at €5.2 billion when negotiations started in 2015-16.

This was subsequently overruled and a new formula was approved to determine the bench-marking price. This used the price discovered during the 126 medium multi-role combat aircraft contest to work out an ‘aligned cost table’ and led to a bench-marked price of € 8.2 billion, sources told ET. These calculations were done using the offer Dassault had made for the older contract and how much it would have cost to procure the 126 jets, most of which would be made in India. This process basically compared the price of the old deal with the new one being negotiated.

The majority view was that the final figure (€ 8.2 billion) arrived by the negotiating team was a better outcome than the corresponding price of the 126 aircraft bid.

It was only when the benchmark price was revised upwards that the Rafale deal could be negotiated to the final stage, given that a significant departure from the bench-marking would have led to a cancellation of the contract as per norms. 

DISSENT NORMAL

Further, the methodology to calculate the new benchmark cost of € 8.2 billion was also approved by DAC and CCS. The two other officials who raised objections were Rajeev Verma, then joint secretary (Air) and AR Sule, then finance manager (Air).

Dissent within a negotiating team for contracts of such value is the norm, however, these differences are usually sorted out amicably with the intervention of higher authorities. In the end, the majority view of the team is taken into consideration.

In the 126 Rafale deal negotiated by the UPA regime, there were similar dissent notes with three members recommending that Dassault’s financial bid should be disqualified as it did not meet all conditions of the original tender.

On Thursday, defence ministry sources said all major government decisions are taken through a “collegiate process”.

“While ensuring utmost integrity and transparency, the process allows for opinions to be freely expressed. recorded, discussed and if necessary, modified,” according to an official source. These sources were reacting to a media report. The MoD did not respond to detailed queries from ET.

Defence minister Nirmala Sitharaman told India Today news channel on Thursday that there may have been different views on the benchmark price but this was normal during contract negotiations. She said that objections raised were clarified and the final decision was taken collectively by the negotiating team and the ministry.


OTHER CONCERNS

The other significant concern was regarding the performance guarantees for the 36 Rafale deal. A contract of this size usually has a bank guarantee clause that can be invoked if the company fails to deliver on time or does not provide systems as per the specification. The members of the team objected that the French side was offering only ‘sovereign guarantees’ for the contract and not enchashable banking guarantees.

This objection was also overruled citing the example of Russian government to government deals that follows the principle of sovereign guarantees.

The third major point of concern was on why the government did not consider the offer by Eurofighter — the only competitor to Rafale which was also qualified on technical grounds — before negotiating with France. The maker of Eurofighter, EADS, had offered to reduce its price by 20% in a direct letter to the defence ministry as well in talks conducted through the German government. 

This too was overruled by the negotiating team that held that the Eurofighter offer was unsolicited and was rejected by the defence ministry in 2014. 

The fourth point was regarding the India specific enhancements for the 36 Rafale deal – these included the ability to start the aircraft from a high altitude airfield, a helmet-mounted sight for the pilots and a new forward looking infra red sensor. The concerns raised alluded to the € 1.3 billion cost for research and development for these enhancements, holding this as excessive. 

This objection was also overruled, as the negotiating team held that in the 126 MMRCA contest, the India specific enhancement cost had been specified as € 1.4 billion by the French side. This was a non recurring cost and was justifiable and was not affected by the ‘number of aircraft on order’. 

Through 2016, these concerns were noted by the defence ministry but were overruled after consultations and recommendations from other members of the negotiating team. The contract was finally inked at a cost of € 7.87 billion that included the weapons package and support for spares and training.