Investigative reports by N. Ram on the Rafale deal

Rafale deal not on ‘better terms’ than UPA-era offer

N. Ram 13 February 2019 05:07 IST
Updated: 13 February 2019 08:56 IST

This is among the key findings of the three domain experts on the Indian Negotiating Team

Three senior Defence Ministry officials who were the domain experts on the seven-member Indian Negotiating Team (INT) came to a well-substantiated and clear conclusion that the Narendra Modi government’s new Rafale deal for 36 flyaway aircraft was not on “better terms” than the offer made by Dassault Aviation during the procurement process for 126 aircraft under the United Progressive Alliance government. They also concluded that the delivery schedule of even the first 18 of the 36 flyaway Rafale aircraft in the new deal was slower than the one offered for the 18 flyaway aircraft in the original procurement process.

Contrary to claims

These findings are directly contrary to the two central claims made by the Indian government of a cheaper deal and faster delivery of fighter aircraft, claims that have been affirmed before the Supreme Court of India in official submissions.

Further, the three officials registered serious concern over the Indian government’s acceptance of a ‘Letter of Comfort’ in lieu of a sovereign or government guarantee or bank guarantees, legal issues relating to the IGA, offset issues, and Dassault Aviation’s restrictive trade practices.

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The three domain experts on the INT were M. P. Singh, Adviser (Cost), a Joint Secretary-level officer from the Indian Cost Accounts Service; A.R. Sule, Financial Manager (Air); and Rajeev Verma, Joint Secretary & Acquisitions Manager (Air). They recorded their views in a strong note of dissent, dated June 1, 2016, submitted at the end of the negotiations to the Deputy Chief of Air Staff (DCAS) in his capacity as chairman of the negotiating team.

Click here to see all eight pages of the note of dissent by domain experts in the INT

The INT was for a firm and fixed benchmark price, but the French side converted the initial commerical offer of a fixed price into one based on an escalation formula.

 

Their eight-page note expressing deep concern and unease over the terms of the new deal is an important document and is reproduced here. It was written more than a month after the INT’s negotiations with the French side were completed and three months before the inter-governmental agreement was signed, on September 23, 2016. (As for the competence of the three officials in relation to the others on the INT to deal with the issues that figured in the negotiations, see this article in ‘The Wire’ by Sudhansu Mohanty, former Controller General of Defence Accounts who was Financial Adviser, Defence Services at the time)

Commenting on the final €7.87 billion cost of the new Rafale deal, the domain experts stated that “the reasonability of price offered by the French Government is not established. Even the final price offered by the French Government cannot be considered as ‘better terms’ compared to the MMRCA [medium multi-role combat aircraft] offer and therefore not meeting the requirement of the Joint Statement.”

Out of sync
  • A dissent note by members of the Indian Negotiating Team found that the French side's offer did not conform to the promise of better terms contained in the joint statement issued by PM Narendra Modi and ex-President Francois Hollande on April 10, 2015. An extract from the joint statement:
  • 14. Government of India conveyed to the Government of France that in view of the critical operational necessity for Multirole Combat Aircraft for Indian Air Force, Government of India would like to acquire [36] Rafale jets in fly-away condition as quickly as possible. The two leaders agreed to conclude an Inter-Governmental Agreement for supply of the aircraft on terms that would be better than conveyed by Dassault Aviation as part of a separate process underway.

Terms and time frame

This was a reference to the Indo-French Joint Statement issued on April 10, 2015 during Mr. Modi’s visit to France. It promised that the new deal to acquire 36 Rafale jets in flyaway condition through an inter-governmental agreement would be on “terms that would be better than conveyed by Dassault Aviation as part of a separate process under way” and that the delivery would be in “a time frame that would be compatible with the operational requirement of the IAF.”

The joint statement also confirmed that the aircraft and associated systems would be delivered in “the same configuration as had been tested and approved by IAF, and with a longer maintenance responsibility by France.”

 

The concerns and differences registered by the three senior Defence Ministry officials in the seven-member negotiating team bring under a cloud the two major defences of the new Rafale deal by the National Democratic Alliance government, namely, that this deal was on better terms and with a faster delivery schedule than the deal under negotiation under the UPA government and also under the NDA government until April 10, 2016. These were also the essential arguments presented by the government in the Supreme Court of India. Whether this note by the three domain experts on the INT was part of the material submitted in a sealed cover to the court is not known, but it could be of relevance to the review petition on the judgment which is pending in the court.

The government informed the Supreme Court of India in documents submitted in October 2018 that Mr. Modi made the announcement on the new deal in Paris because of an urgent need to arrest the decline in the number of fighter squadrons with the IAF. However, the three Defence Ministry officials had noted that “in the MMRCA process, the first 18 flyaway aircraft were delivered between T0+36 months to T0+48 months whereas in the delivery schedule offered by the French side, the first 18 aircraft will be delivered between T0+36 months and T0+53 months.” Significantly, the Rafale aircraft delivered to the Indian Air Force will not have full operational capability: the 13 India Specific Enhancements (ISE) will be fitted in India “in batches after April 2022, when the 36th Rafale is delivered, 67 months after the signing of the IGA (see report by Dinakar Peri in The Hindu).

55.6% more than the benchmark price

 

One of the most contentious issues about the Rafale deal, which went up for resolution to the Cabinet Committee on Security (CCS) chaired by the Prime Minister, was the benchmark price. This is a number discovered in advance by financial experts which acts as a ceiling on the finally negotiated price of the whole package. The three officials pointed out in their note that the Defence Procurement Procedure (DPP) stipulated that in all cases the Contract Negotiating Committee “should establish a benchmark and reasonableness of price in an Internal Meeting before opening the Commercial Offer.” In this case, the Defence Acquisition Council had directed on August 28 and September 1, 2015 that the benchmark price should be decided and finalised by the INT before starting price negotiations. Following a detailed technical process, which factored in the necessary equalisations and adjustments, the benchmark price determined for the aircraft and weapons packages in the new deal was €5.06 billion.

 

Here the note from the three domain experts provides crucial and hitherto unpublished information on how the final price for the whole Rafale package shot up to €7.87 billion: “It is highlighted that the initial commercial offer from the French side was for firm and fixed price which was converted to price based on escalation formula during the price negotiations. The benchmark price prepared by INT was for firm and fixed price and not adjusted to price based on escalation formula. The final price offered by the French Government (which is escalation based) is 55.6% above the benchmark (which is for firm and fixed price). Considering the future escalations till the time of delivery, the gap in the benchmark and the final price would further increase. Minor adjustments towards costs of Technical Publications, Advance Training of IAF Pilots and Technicians and Role Equipment would not make much dent to this huge gap.”

Eurofighter offer is much cheaper

The offer which also figured in the determination of the benchmark price was from M/s EADS, the maker of the Eurofighter Typhoon, the only other aircraft to qualify the UPA-era trials along with Rafale. “During the benchmarking exercise,” the note reveals, “the INT had noted that the offer of 20% discount by M/s EADS was absolute without any escalation factor except some modifications in the payment terms.” Factoring in an additional 5% discount as the negotiating margin, the Indian Negotiating Team applied a discount of 25% on the M/s EADS cost as one of the inputs for the benchmarking exercise.

“Even without taking this discount into consideration, the offer of French Government is still substantially higher than the price offered by M/s EADS (adjusted to the scope of 36 Rafale Aircraft Procurement) when compared on firm and fixed price as per broad assessment carried out with the MMRCA Cell.”

Cost of bank guarantees

Contrary to the argument put forth by the government that the UPA-era commercial offer and the deal signed by Modi government are not comparable, the note states that in the DAC on May 13, 2015, where the case for the 36 Rafale flyaway aircraft was first approved, G. Mohan Kumar, the Defence Secretary, “suggested that the ‘Benchmark Price’ and comparison of how much lesser it was, vis-à-vis the earlier Price (since this was a commitment to the PM by the French Government) should be arrived at and placed on record before proceeding any further.”

“To establish ‘better terms for price’,” the note goes on to narrate, “the French side was repeatedly asked to align the commercial offers submitted by Industrial Suppliers in MMRCA process to the scope of supplies as per 36 Rafale procurement.” However, “the French side refused to take cognizance of this aspect.”

Did the PMO undermine Rafale negotiations?
 

“The commercial offers in the MMRCA process were aligned by the INT after factoring in the scope of supplies as per 36 Rafale procurement and compared with the final offer made by the French side,” the note adds. While the commercial offers submitted by Dassault Aviation during the UPA government were based on the submission of bank guarantees against advance payments, the final price offered to Modi government was without any sovereign or government guarantee or bank guarantees.

The aligned cost, which included the bank guarantee cost, was €8.059 billion, which came down to €7.48 billion after the commercial impact of bank guarantees of 7.28% was deducted. The final price offered by the French to the Modi government was “still 5.3% higher than the Aligned Cost of the commercial quotes submitted by M/s Dassault Aviation and M/s MBDA in MMRCA procurement process.”

Delivery schedule

The other claim made by the NDA government is that it has negotiated for the Indian Air Force a better delivery schedule than what was under prolonged process during the UPA government. The note says that “as per the DAC meeting held on 28-08-2015 and 01-09-2015 the delivery schedule incorporated in draft IGA is T0+37 months to T0+60 months,” but “the delivery schedule finally offered by the French side is T0+36 months to T0+67 months.”

But the clinching evidence for the three officials is the delivery schedule of the 18 flyaway aircraft in the UPA-government contract. Their note says that “in the MMRCA process, the first 18 flyaway aircrafts were being delivered between T0+36 months to T0+48 months whereas in the delivery schedule offered by the French side, first 18 aircrafts will be delivered between T0+36 months and T0+53 months.”

Exorbitant cost of ISE ‘design & development’

As reported in The Hindu of January 18, 2019, the big difference in the per-aircraft price between the two deals – one being negotiated under the original MMRCA procurement process, the other concluded by the NDA government – was the distribution of the exorbitant cost for the “design and development” of 13 India Specific Enhancements over 36 instead of 126 aircraft. More details have emerged in this note which, while validating The Hindu’s investigative findings on this issue, provide greater clarity on what this “design and development” cost of the ISEs was all about.

“During the MMRCA procurement process,” the note of dissent reveals, “the aircraft offered by M/s Dassault Aviation did not meet certain ASQRs [Aerospace Supplier Quality Requirement] stipulated in the MMRCA RFP. M/s Dassault Aviation offered to meet these deficiencies at an additional cost. M/s Dassault Aviation termed these deficiencies as India Specific Enhancements (ISEs) for which an Additional Commercial Proposal was accepted from M/s Dassault Aviation in the MMRCA procurement process with the approval of the DAC.”

Watch: How a decision by Prime Minister Modi raised the prices of Rafale jets by 41%
 

However, the note clarifies that “the MMRCA offer of M/s Dassault Aviation, including the Additional Commercial Proposal, was an un-negotiated offer and reasonability of all elements of cost was yet to be established.”

The note goes on to say that “it was particularly noted by the INT that the Additional Commercial Proposal of 1400 million Euros towards NRC for Design and Development of ISE was exorbitant and unrealistic. The price has been further escalated in the final offer and then reduced factoring in global discounts given by the French side and also the financial impact due to alignment of advance/stage payments schedule with the MMRCA offer.”

A comparison with the mid-life upgrade of Mirage-2000, supplied by Dassault Aviation, was highlighted by the three members: “The Mirage MLU Contract of July 2011 wherein price for D&D was only 348 million Euros; therefore, the price quoted for ISE in the final offer is exorbitantly high.”

The report by the Comptroller and Auditor General of India on the deal is long overdue. The institution is constitutionally empowered and proudly terms itself the ‘Supreme Audit Institution of India’ at its website. Whether the rich information in this note of dissent by the three domain experts on the INT, and other documents that have come to light through independent journalistic investigation, will find its way into the CAG report and the conclusions drawn will be widely followed across the media and political spectrum.

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