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Posted at: Aug 6, 2018, 12:04 AM; last updated: Aug 6, 2018, 12:05 AM (IST)

Heat and light of the Rafale deal

Cost, competition and cronyism make the Rafale deal highly suspect and has opened a can of worms. India has lost a wonderful opportunity to have state-of-art technology and bolster its credible Make in India campaign.
Heat and light of the Rafale deal
Rafale: The Defence Minister must ensure that transparency is a major template of the acquisition process.

SN Misra

Former Joint Secretary, GoI

India has the dubious reputation of being the biggest importer of conventional weapons. Improving our self-reliance index from 30 per cent to 70 per cent was one of the avowed roadmaps of the Kalam Committee. The country has not moved much in this indigenisation improvement objective despite a large number of defence PSUs, ordnance factories and private sector companies dotting the field of defence production. The mandate to "Make in India" could not have come at a better time as the Prime Minister has the charisma to reach out to global leaders to make India a preferred place of investment by OEMs (original equipment manufacturers) and design houses. It is, therefore, disappointing that he has made the switch from technology transfer to HAL to build 108 aircraft in India, as was envisaged in the Medium Multi-Role Combat Aircraft (MMRCA) contract (2014) to directly import 36 aircraft from Dassault Aviation. 

The Rafale deal has to be viewed from the perspective of three Cs, viz cost, competition and cronyism. It is well known that a competitive process with transparent qualification and award criteria is the motherboard of getting a competitive price. The MMRCA contract was the first defence acquisition, with the principle of "Life Cycle Costing" where two OEMs - Rafale and Typhoon — were shortlisted after elaborate technical trials of six international bidders. Both Rafale and Typhoon had agreed to technology transfer of 70 per cent to Hindustan Aeronautics Limited (HAL) , for subsystems like the engine and AESA radar and radar warning receiver. Since HAL has been receiving technology only from Russia in the past, this was a golden opportunity for it to gain insight into an alternative high-end technology in terms of weapons (air-to-air missile), sensors (AESA radar) and propulsion (Snecma engine) from Rafale. 

It's unfortunate that Rafale found it impossible to work with HAL and take a commitment for the production of 108 aircraft through successful technology transfer. For instance, there was a wide variation in the manhours (MHRs) estimated by DA: 30 million MHRs for each aircraft as against 90 million MHRs estimated by HAL. Also, DA had serious apprehension about the ability of HAL to absorb key technologies. The then Defence Minister Manohar Parrikar in the NDA government was quite prescient in observing in 2015 that the 'deal is as good as dead'; as the obdurate partners were not sure of a satisfactory technological consummation! 

As regards the cost comparison, each aircraft would have cost Rs 521 crore (18 fly by wire) in the 2014 contract as against Rs.686 crore now, without the add-ons to the aircraft. The add-ons seem to cost around Rs 900 crore, which will include the AESA radar, radar warning receiver etc. While the increase in the cost of the basic aircraft seems to have gone up by 30 per cent, what is most disconcerting is that the cost break-up of add-on items is not being revealed by Defence Minister Nirmala Sitharaman under the cover of secrecy clause of the IGA contract. This is indefensible as transparency is a major template of our acquisition procedure. 

When the NDA government changed the terms of the contract from "technology transfer" to "direct import" to fill the void of 6.5 squadrons (ie 30 vs 39.5), it should have given an equal opportunity to Typhoon to also quote its best rates. That would have ensured that Rafale would have quoted its most competitive rate, instead of being complacent as a single tenderer. In the IGA route, "geo-strategic advantages that are likely to accrue" (Para 104 of DPP: 2016) take precedence over 'competition, transparency and accountability'. The NDA government needs to explain why the IGA route was adapted over a competitive route. 

The other disquieting dimension of the deal is the charge of cronyism. As is well known, a new Reliance company was formed in a tearing hurry to act as an offset partner to DA. It has no experience in manufacturing aircraft. Yet it was given a licence for a high services defence product. In the present IGA, this company has been asked to discharge an offset obligation of Rs 30,000 crore, as it has become the India's Offset Partner (IOP). In the earlier contract, the offset obligation was to be met 50 per cent by HAL and the rest by private players like Tatas & L&T.

The offset policy was introduced by the MoD in 2005 to leverage big-ticket acquisitions to augment capacity of R&D and to entice OEMs to outsource manufacturing and fabrication orders to the offset partners in India. The OEMs are free to select the IOP, unless they are banned by the MoD. There is an elaborate process in MoD for approving such offset arrangements by a committee headed by a technical manager (MoD) who will verify the work packages being provided by the IOP and the benefit of credit that could be extended to them. As per the offset provision, at least 30 per cent of such offsets in terms of outsourced orders, FDI, TOT, services and R&D, of the contract value, would make the OEM eligible for offset contract.

Ironically, the press note of MoD on February 7, 2018 stated that no offset partner has been selected by the DA, while RIL has gone on record (February 26, 2017), as also the Annual Report of DA, that "the offset contract is being executed by Rafale". This is clear doublespeak and Sitharaman must clear the air, as the IOP would need to be approved by her, after they are found acceptable by the committee. 

The Ministry of Defence introduced the DPP in 2005 and has been revising it periodically. The latest DPP enjoins upon the need for "expeditious procurement with high quality and appropriate cost". This has to go hand in hand "with highest standard of transparency, probity and public accountability". The country has lost a wonderful opportunity to have state-of-art technology and bolster its credible Make in India campaign. Ruchir Sharma, based on a survey of the rise of dictatorial leaders getting elected, has observed that the youth is more keen on outcomes rather than a fair and democratic process. A morally bankrupt opposition has given a platform to the PM to confuse outcomes with opacity. Cost, competition and cronyism make the Rafale deal highly suspect and has opened a can of worms.

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