MMRCA Deal For 36 Rafale Fighters: A Game Changer or a Blunder

A global Request for Proposal (RFP) for 126 Medium Multi Role Combat Aircraft (MMRCA) for Indian Air Force was floated in 2007 (although the Request for Information was initiated in 2004) with the idea of filling the gap between the future Light Combat Aircraft (LCA) and the in-service Sukhoi Su-30MKI air superiority fighter. There was a provision of direct purchase of 18 planes in a fly away condition and the remaining 108 planes in various configurations were to be manufactured by Hindustan Aeronautics Ltd. (HAL) in the form of licensed production after absorbing the Transfer of Technology (ToT). A total of six world renowned companies were in the fray, however after a detailed technical and field evaluation only two namely, Eurofighter Typhoon of UK and Dassault Rafale of France were left in fray. M/s Dassault Aviation of France with their Rafale Fighter Jets emerged as the lowest bidder on 31 Jan 2012 owing to their lower life cycle cost.

It was anticipated that after conclusion of contract and commercial negotiations, the contract would be signed by March 2013. However with the Defence Budget for FY 2012-13 having already been exhausted, the conclusion of the contract got delayed. Also due to an impending change in the government in India, the same was further delayed. This delay resulted in M/s Dassault Aviation expressing their inability to hold their price, which from the estimated cost of US $ 12 Billion in 2007 was raised over 100% to US $28-30 Billion approx in Jan 2014. Another hitch that occurred during the course of negotiations was that neither Dassault Aviation nor HAL, which was to produce the Rafale Jets in India as part of ToT agreement, were willing to issue written guarantees on delivery schedules, a condition which the MoD insisted upon before signing the contract. Dassault remained unwilling to be held liable for the 108 Rafales to be manufactured under licence by HAL. These two issues of pricing and the guarantees resulted into a continued deadlock in the contract negotiations.

In the meanwhile the holding of Fighter Squadrons in Indian Air Force had reached a critical stage with only 34 functional Fighter Squadrons. With a minimum acceptable strength for a two front war being 39.5 Squadrons and an ideal being 44, the present strength of 34 Squadrons was indeed a cause for concern. Budgetary constraints resulting in non refurbishment of the planes held and non induction of new planes has resulted in further depletion of combat potential of IAF. With most of the fleet being from erstwhile USSR, the breakdown of USSR had posed additional challenges in maintaining the serviceability of the Fighter Fleet of IAF and thus was resulting in alarmingly high rate of air crashes.

With this as the background, India’s Prime Minister, Mr Narendra Modi and French President Mr Francois Hollande, on 10 April 2015, reached an agreement of direct purchase of 36 Rafale Fighter Jets in a fly-away condition as a Government to Government (G2G) deal. This announcement, while on the one hand has indeed infused a new steam into a critical procurement case which had more or less run into a stalemate, on the other hand, has brought in a viewpoint which is questioning the wisdom behind bypassing the laid down RFP route with the so called ‘Out of the Box Thinking’ of a G2G agreement. The major issues being raised are as under:-

• The announcement by the Indian Prime Minister is a knee jerk reaction to appease the French.
• The deal has been suddenly announced without proper forethought and the necessary discussions with all stake holders.
• Since there is no provision of Technology Transfer in a G2G deal, this will be a serious setback to the Make in India Program.
• The advantage of offsets will be lost as there is no provision of offsets on a G to G route.
• Dassault will be free to quote the price of their choice as there are no commercial negotiations in a G2G deal.
• The Defence Minister terms it as minimum oxygen for IAF, whereas in actual it is maximum oxygen for Dassault, which was on the verge of shutting down in case Indian order for the Rafale Jets did not fructify.
• Since there is no technology transfer in a G2G deal, India will have to keep going back to France for future requirements and thus this is an import trap, which will finally result in Indian dependence on France increasing manifold.

The issues being raised that question the move of the Indian Prime Minister in fact appear to be knee jerk reaction in nature; there appears to be ignorance of provisions of the procurement policy and how higher decision making is made for deals of this stature. The G2G provision evoked here is part of India’s Defence Procurement Procedure (DPP) and is provided for at Para 71 and 72 of DPP 2013, as ‘Inter Government Agreement’. Hence it is very much thinking from within the box and an accepted norm as per the DPP. There have been protracted discussions to find a way forward for this operationally critical deal over last 11 months, in which the French Defence and Foreign  Ministers have visited India and met the Indian Defence Minister. Also the French Ambassador to India Mr Francois Richier has been in an active dialogue to resolve the outstanding issues and India’s MoD had constituted four sub-committees from within the Contract Negotiation Committee (CNC) to find a way forward. Hence this decision by the Government of India to go in for a G2G Agreement is a decision taken with a strong geopolitical and strategic understanding after obtaining firm commitment from the French Government of safe-guarding Indian interests.

The view that Dassault Aviation was heading for a close down in case the Indian order did not mature may also be unfounded. The company already has an Egyptian order for 24 Rafale Fighter Jets to be supplied over the next two years, besides the ongoing requirements of French Air Force.  Also Qatar and UAE have expressed interest in buying the Rafale Fighter Jets (UAE is in for 60 jets, Qatar has a requirement for 36). Hence there are enough orders in the pipeline and accordingly to meet the time lines for all these orders plus an Indian order for another 36 Rafale Jets, Dassault has announced ramping up of their production capacity from the present of 1 Fighter Jet per month to 2.5 per month.

What needs to be understood is that the announcement by the Prime Minister is a general direction for the way forward. The fine print of the agreement has to be worked out to our advantage. The economic clout of the MMRCA deal, which at times is also called a mother of all defence deals, needs to be leveraged to further the interests of the Indian side and hence the best of brains in the Defence Procurement business need to sit down together to work out a draft agreement that we need to propose to the French Government. Certain issues that need to be asserted in this proposed agreement are given as under :-

• The provisions of Para 72 of DPP 2013 need to be understood in the correct perspective. These provisions clearly state that the Agreement is expected to safeguard the interests of Govt of India and hence there is no embargo on asking for transfer of technology or seeking of offsets. The provisions read as under:-
  • In cases of large value acquisition, especially that requiring product support over     a long period of time, it may be advisable to enter into a separate Inter Government Agreement (if not already covered under an umbrella agreement covering all cases) with the Govt of the country from which the equipment is proposed to be procured after the requisite inter ministerial    consultation. Such an Inter Governmental Agreement is expected to safeguard the interests of the Govt of India and should also provide for assistance of the foreign Govt in case the contract(s) runs into an unforeseen problem.
• To have uniformity in the maintenance infrastructure in terms of spare parts, workshops and depots, it is essential that the remaining requirement of 90 MMRCA is also met with Rafale Fighter Jets. However the present Agreement should be so structured that it involves the Transfer of Technology to HAL and other selected Indian Private Defence Industry to enable indigenous licensed production for future requirements. 
• The transfer of Technology should ensure provision of all critical technologies and should include the provision of software source codes, which will allow DRDO/ Indian Production Agency to re-programme the weapon systems and equipment on board/ on ground. Without the software source codes, India would have to fall back to OEM to enable configuration of the weapon systems and equipment as per own mission profiles and thus seriously compromise the national security besides increasing dependence on the OEM at all times..
• An in depth analysis for setting up the production facility at HAL for licensed production and for Indian Private Defence Industry should be carried out in consultation with DRDO and the same should be included in the Agreement as part of Transfer of Technology. A special focus on setting up of infrastructure for the desired life-cycle support and the associated cost should be ensured while drafting the proposed contract.
• An offset clause of 50% was built into the RFP issued in 2007. In the proposed G2G Agreement, an offset clause of minimum 30% should be factored in. This will ensure the required push to the ‘Make in India’ programme. Dassault was already in a dialogue with Reliance Industries to set up a plant to manufacture the wings for this project to be set up at Bangalore. An impetus can be given to the same project in consultation with Department of Defence Production. The present procurement of 36 Rafale Jets including the support infrastructure, is likely to cost approx US $ 7.5 Billion and hence the value of the offsets is likely to be US $ 2.25 Billion. A proper road map needs to be prepared to absorb this substantial value addition by the Dept of Defence Production, taking all stake holders on board.
• It is agreed that as a norm there are no commercial negotiations on a G2G route and since there is no competitive bidding and thus the foreign government is free to quote a price of their choice. However in this case, a price quoted by Dassault is available in competitive bidding environment on the RFP route. Hence the same can be used as a base price to leverage the French Government to offer a favourable price lower than the one already quoted by Dassault.
• Since the quantities of direct purchase in fly away condition have been doubled from 18 in the RFP to 36 as per the announcement made for the G2G deal, this becomes an apt case for taking a price advantage on account of ‘Economy of Scales’. A further price reduction from 5 to 10% on the price quoted on the RFP route can be asked for from Govt of France.

There is no denying the fact that the Prime Minister has achieved an outstanding breakthrough by announcing a G2G procurement of 36 Rafale Jets in fly away condition, thus exhibiting utmost ingenuity and the desire to speed up the much required modernisation of India’s Defence Forces. However it needs to be understood that till the India’s Defence Industrial Base matures reasonably, we will have to continue to go in for global procurements with technology transfer for subsequent indigenous production. While in this case, due to a total stalemate on the RFP route, it was perfectly justified to switch the procurement route to G2G, MoD will have to ward off the lure to treat this case as a norm to shelve global procurements in general. The confidence of the worldwide defence manufacturing community should be retained in the fairness of the India’s Defence Procurement Procedure for our future and ongoing endeavors and should not deter the global vendors from participating in global RFPs for fear of the case being closed arbitrarily in the favour of a G2G deal or an indigenous source.

The author is Senior Fellow at CLAWS. Views expressed are personal.