Decoding the deal

Procedural aspects need to be factored into the public discourse on the Rafale and other defence deals. Granular details should be disclosed, to the extent it is possible to do so without compromising security.

Written by Amit Cowshish | Updated: February 12, 2018 1:25:07 am
The details, if disclosed, could also reveal if the benchmark was deliberately inflated to justify the price quoted by the vendor for the 36 aircraft. (Illustration: C R Sasikumar)

The deal for the outright purchase of 36 Rafale aircraft is in the eye of a storm yet again for reasons that look a bit contrived, if seen dispassionately in the context of the existing procedures and practices.

Questions have been raised about the need to discard the negotiations for the acquisition of 126 Rafale aircraft from Dassault, out of which 108 were to be made in India by the state-run Hindustan Aeronautics Limited (HAL), and to opt instead for the outright purchase of 36 aircraft of the same make from the same company.

It may be recalled that Dassault’s Rafale aircraft was selected after a long and unblemished process of evaluations and trials. The commercial negotiations for the acquisition of 126 aircraft started in 2012 but ran into a virtual stalemate by 2014. Meanwhile, the squadron strength of the Indian Air Force kept dwindling, with no immediate prospect of new acquisitions. Given this perspective, it was perhaps a pragmatic decision to call off the negotiations.

There is nothing unusual about it. What can be questioned, however, is the merit of buying 36 aircraft in a fly-away condition, which at least partially arrested the continuing decline in squadron strength. While it is possible to have different points of view on this question, that is not what the present controversy is about. The main issue is whether the deal has been struck at an exorbitant price. The comparisons being drawn between the per unit price at which the contract has been signed and the price at which the deal for 126 aircraft was being negotiated — in order to make the point that the deal is suspiciously costly — are not quite tenable.

First, it has to be kept in mind that the price quoted nearly a decade ago for 126 aircraft was never finalised and no contract was signed, much less successfully executed, at that price. It is, therefore, not appropriate to compare a still-under-negotiation price with the price at which the contract was signed in 2016. Second, we do not know from any authentic source what was included in the per unit price quoted in the aborted deal and whether all that, and nothing else, is included in the per unit price at which the 2016 contract was signed. Unless there is absolute certainty about the similarity of the per unit package, any price comparison would amount to comparing apples to oranges. Third, even if the package is exactly the same, the price can still vary because of the escalation in the cost of raw material, labour, overheads etc over the years. In any case, the procedure does not require that the equipment is bought at the same price at which it was purchased/the deal was being negotiated in the past. The procedure also does not specify the extent to which the price of a deal could vary from the last purchase price. The procedural requirement is only to assess the reasonableness of the price quoted by the vendor. To make this assessment, the contract negotiation committee fixes a benchmark price before opening the commercial offer.

To form a definitive opinion about whether or not the price in the instant case is reasonable, it will be necessary to see how it compares with the benchmark price and the grounds on which the negotiation committee had recommended it. The details, if disclosed, could also reveal if the benchmark was deliberately inflated to justify the price quoted by the vendor for the 36 aircraft.

One will never know these details because the government is contractually bound not to disclose such information. Defence Minister Nirmala Sitharaman has said: “As per Article 10 of the Inter-Governmental Agreement (IGA) between the Government of India and the Government of France on purchase of Rafale aircraft, the protection of the classified information and material exchanged under IGA is governed by the provisions of the Security Agreement signed between the two nations in 2008.”

Let us assume that the secrecy pact should not have been signed in 2008 or that it was not applicable to the IGA for 36 aircraft. Even then, it would not have been unusual to have a non-disclosure clause in the contract. This is one of the standard clauses in all defence contracts. The clause clearly stipulates that “Except with the written consent of the Buyer/Seller, other party shall not disclose the contract or any provision, specification, plan, design, pattern, sample or information thereof to any third party.” It is difficult to recall any instance of the granular details of the price breakup ever being disclosed.

Was it unusual for the deal to be finalised under an IGA? Not really. The Defence Procurement Procedure (DPP) allows procurement under IGAs from “friendly foreign countries which may be necessitated due to geo-strategic advantages that are likely to accrue to our country” and recognises the fact that such procurements do not strictly follow the standard procurement procedure and the terms of the standard contract document. Instead, these IGAs are based on mutually agreed upon provisions between the governments of both countries. The procurement, based on these IGAs, can be made after the clearance of the competent financial authority (CFA).

The DPP also permits procurement on strategic considerations saying that “in certain acquisition cases, imperatives of strategic partnerships or major diplomatic, political, economic, technological or military benefits arising from a particular procurement may be the principal factor determining the choice of a specific platform or equipment on a single vendor basis. These considerations may also dictate the selection of particular equipment offered by a vendor not necessarily the lowest bidder (L1).” Decisions with respect to all such acquisitions are taken by the Cabinet Committee on Security (CCS) on the recommendations of the ministry of defence (MoD). There is no indication that the procurement of 36 aircraft does not have the approval of the CCS.

So, does it finally boil down to the selection of the Indian Offset Partner (IOP) by Dassault? Under the contract, Dassault and its Tier-I/II companies have to discharge an offset obligation of approximately Rs 30,000 crore. They need IOPs to be able to discharge this mammoth obligation. Apparently, Dassault has chosen a particular company as an IOP, which is being seen as odd for a variety of reasons, most of which are not relevant from the point of the laid down procedure.

We do not know if Dassault intends to discharge the entire obligation through only this IOP but the point is that the DPP leaves it to the vendor to choose the IOP(s) subject to certain conditions being met. There is no indication that the company in question does not meet those conditions.

The offset contract, which is incidental to the main contract, is between the MoD and the vendor and the latter enters into independent contracts with its chosen IOP(s). The MoD plays no role in the selection of the IOP(s) by the vendor and by its Tier-I/II sub-vendors or the terms on which the contracts are concluded between them.

Considering that the vendor carries the full responsibility for discharging the offset obligation, it would be odd if Dassault has chosen an IOP who cannot deliver, thereby exposing it to the risk of defaulting on its offset obligation which entails penalties and much more.

These procedural aspects need to be factored into the public discourse on defence and other deals, granular details of which should also be disclosed, to the extent it is possible to do so without compromising security. But this is a systemic issue and not just a peculiar feature of the deal in question. More to the point, this can happen only in future. There is no doubt, though, that the situation could have been — and still can be — handled better.

The writer is former financial advisor (acquisition), ministry of defence

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