Some Clarity Peeping Out of Rafale Haze?

A recent interview by Dassault Chairman CEO Eric Trappier (Mint, October 26, 2018) throws some light on the Rafale deal, even if inadvertently or by reading between the lines. The deal remains shrouded in mystery, mainly due to the stubborn refusal of the government to share information and due to so-called clarifications by government spokespersons, including the Minister of Defence, which have only caused more confusion.

Whatever the motivations of the Dassault CEO, his responses to various questions provide some fresh insights into the transition from the earlier Indian tender for Medium Multi-Role Combat Aircraft (MMRCA), under which 126 fighters were to be acquired, of which 18 were to be delivered by Dassault and the remaining 108 manufactured in India by defence public sector undertaking (DPSU) Hindustan Aeronautics Ltd (HAL), to the new Indo-French government-to-government (G2G) deal to buy 36 Rafale fighters outright after Prime Minister Narendra Modi’s surprising and baffling announcement in Paris to that effect in April 2015.

The interview is also revealing as to how foreign defence manufacturers, such as Dassault Aviation, approach the offsets policy in India’s Defence Procurement Procedures (DPP) and the implications for development of indigenous capability particularly in the private sector, and what this portends for the future of the Indian defence industry. The Dassault CEO’s views in the context of the Rafale deal are of particular interest not only for the specifics, but also because the main controversy revolves around the offsets contract awarded to Reliance Defence of the Anil Ambani Group, widely seen as a classic case of cronyism.

Universal surprise

Trappier admits that Modi’s announcement at the press conference along with then President Francois Hollande that India and France had decided on a G2G deal for outright purchase of 36 Rafale fighters took him by surprise, too, much as it did all other stakeholders in India, such as HAL, not to mention Cabinet Ministers, top bureaucrats and Air Force brass.

When asked if even the French government had not informed Dassault, Trappier states that the decision was probably taken as part of the long discussions between the two governments on many subjects that day, against the background of the IAF’s urgent requirement for fighters. He adds that the decision was very much the Indian government’s, and not due to any discomfort on the part of Dassault with the prolonged negotiations with HAL or the Indian government. He further states that Dassault was at the time still keen on the earlier 126 aircraft deal, toward which the company had put in much hard work. Clearly, Dassault, too, was taken by surprise by the Prime Minister’s announcement. So, once again, we are left with the inescapable conclusion that only the Prime Minister knew of the decision and, therefore, knew the rationale for the same.  

The question, therefore, remains whether the PM’s announcement was in conformity with the DPP which specifies a detailed decision-making procedure involving a Categorisation Committee (which specifies the category under which the procurement is taking place which in turn guides the nature of the deal and the extent of technology transfer and domestic manufacture involved), a Defence Acquisitions Council, which takes the key procurement decisions, a Price Negotiations Committee and the Cabinet Committee of Security.

In an extensive interview given by Raksha Mantri Nirmala Sitharaman (The Hindu, October 10, 2018), she claims that the PM’s announcement in Paris was not the finalisation of a new deal, but was only a declaration of intent, while the actual deal should be dated from actual signing of the G2G Agreement a year or so later. This is a specious argument since the announcement is clearly a de facto decision and was spoken about as such by all concerned, including senior Cabinet Ministers thereafter.

From the same interview, it also becomes evident that the approvals of the relevant committees were obtained after the PM’s announcement in Paris, which the Raksha Mantri felt was procedurally acceptable. This sounds highly improbable since that reduces all these committees and consultative procedures mere rubber stamps. In any case, this particular question currently is before the Supreme Court and one can only wait for its ruling. There may yet be other surprises awaiting us!      

The HAL imbroglio

There has been much discussion about the role of HAL in cancellation of the MMRCA tender and the new outright purchase deal. The Raksha Mantri has gone on record to state that there were problems in the negotiations between HAL and Dassault over costs, delivery schedule and performance guarantees. She has also stated that HAL did not have the capability to manufacture the Rafale. These arguments were echoed by the IAF Chief Air Chief Marshall B.S.Dhanoa, possibly having been persuaded to bat for the government. For all these and some other reasons,Sitharaman and other government spokespersons have stated, the negotiations had gotten irretrievably bogged down and needed to be cancelled, while an outright purchase was conducted to meet the IAF’s urgent requirements, and that the present government had acted “decisively” by doing so.

It has previously been argued in these columns that these appear to be quite flimsy if not downright false grounds. If negotiations were indeed in a muddle, a “decisive” government could well have got the main actors including HAL together and pushed for a mutually agreeable solution, especially if HAL was the stumbling block. When push comes to shove, no PSU has ever been able to withstand government pressure. Criticism of HAL’s capability is laughable, especially in comparison with Reliance Defence, when the former has manufactured thousands of military and civilian aircraft, and is currently the main manufacturer of the indigenous Tejas light Combat Aircraft, and the Reliance company has no experience in aircraft production or any other kind of manufacture whatsoever. The recently retired Chairman and MD of HAL, Suvarna Raju, has also clarified that his company had finalised a work-share agreement with Dassault for the Rafale and was also prepared to stand guarantee for the aircraft manufactured by it, supposedly a bone of contention between HAL and Dassault and one of the main reasons for the deadlock.

The Dassault CEO’s interview nails many of these falsehoods.

In response to a question seeking clarification on then Foreign Secretary S Jaishankar’s statement on the eve of departure for France that discussions between Dassault, HAL and the Ministry of Defence were still ongoing, Trappier seems to suggest that more than HAL, it was the government that was in discussions with Dassault in recent times. Trappier says:  ”HAL was a part of the government of India. We had discussions with the government of India and… a detailed work share with HAL.”

On why the negotiations had stalled, Trappier says: “You have to ask the government of India. For us, if we could have signed a deal, we would have been happy to sign a deal for 126 aircraft.” About HAL, he says: “HAL… has always been a good partner with Dassault and myself. I know HAL very well. I worked with HAL from 1990. So I have great respect for this company.”

As regards the government allegation that HAL guarantee for Rafales manufactured by it was not forthcoming, Trappier clarifies: “Guarantee was an issue maybe between HAL and the government of India. I don’t know that.”

The Modi government has a lot to answer for as regards the stalled negotiations, reasons for the same, and for sullying the reputation of HAL.

On Reliance Partnership

Trappier repeatedly states in the interview that Dassault had first entered into a partnership with Reliance in February 2012, in preparation for a longer-term engagement with India, partly for the Rafale but, since most of the work under the MMRCA contract was to be done by HAL, for Dassault’s civilian executive jet, the Falcon 2000. He says Dassault first chose Reliance because it was “a big group,” and “could help us get what we wanted.” Sounds quite typical for a foreign company looking for a ostensibly large, well-off and well-connected Indian company, but no particular expertise or experience.

Surprisingly, Trappier never acknowledges that the Reliance he is referring to in 2012 was the company headed by Mukesh Ambani, who had soon decided to withdraw from the defence sector, whereas the Reliance Defence with which Dassault forms a joint venture for the Rafale contract, is the highly indebted, financially troubled and unsuccessful company headed by younger brother Anil Ambani. Surely, Trappier must know this, and must also know that Indians are aware of this difference.

There are other revelations too about the offsets contract.

Trappier reiterates that Dassault chose the Ambani company because it had land and that too near the airport in Nagpur. Recent revelations in sections of the press in India suggest that the land in question was, in fact, procured by Reliance after the JV was formed and the first tranche of funds were received from Dassault, raising serious questions about this particular “qualification” of the Ambani company.

The other argument advanced by Trappier that the Reliance property in Nagpur gives good access to the Nagpur airport is laughable since many other companies have land near airports in many parts of the country. In any case, the airport becomes a necessity only if and when, and these are very big ifs and whens, Dassault actually starts making complete aircraft in India. That is a far cry indeed! And by the way, if Dassault had thought of forming a JV with HAL, the latter has its own airport in Bangalore, the old civilian airport formally known as HAL airport which it shares with the IAF!

Government spokespersons, press statements by the Defence Ministry and statements in Parliament by Minister of State for Defence Subhash Bhamre, have all stated or suggested that the offsets for the 36 aircraft deal are governed by the DPP 2016. This is the reason given even by Raksha Mantri for claiming that she did not know anything about who had been awarded the offset contracts since, according to the DPP2016, as amended soon after the new deal was announced, allegedly to facilitate precisely such an offsets deal with uncertain timelines.

But in the Mint interview, Trappier repeatedly clarifies that the operative rules are DPP 2013 (not 2016)! The government should clarify, under which procedure is the 36 Rafale deal governed, DPP 2013 or DPP 2016? If the former, how do the timelines for declaration of offsets contracts and government approvals for the same match up for the Dassault-Reliance JV? If the latter, then how come the Dassault CEO is operating under the impression that it is DPP 2013 with 50% offsets? As with everything Rafale, things keep getting murkier!

One thing that is perhaps getting clearer, and that is the quantum of the offsets that would go to the Dassault-Reliance JV. According to Trappier, this may amount to only 10% of the 40% already decided upon, in which 30 other Indian companies are involved. It should also be kept in mind that the offsets are to be executed by the three main suppliers, namely, Dassault for the aircraft, Safran, for the engine, and Thales for the avionics and radar.

If the Dassault-Reliance JV is getting only 10% of Dassaults share of the 50% offsets, the total amount may be less than what has been estimated so far. Also, since the JV is a 51:49 venture between the two companies, the Reliance company’s share will only be half of the JV’s share. Has Dassault started scaling down the Ambani company’s offsets pay-off due to the whiff of scandal?

Foreign Defence OEMs and Indian pvt sector

Trappier’s interview also makes for really interesting reading as to how the Indian government’s (including the previous one) perspective on courting foreign defence OEMs for FDI or Joint Ventures with Indian partners in India’s defence sector is panning out. These columns have long criticised the measures incorporated in successive DPPs for enticing foreign OEMs through liberalised FDI (foreign direct investment) rules along with suitably tailored offsets policies for the stated objectives of bringing in capital and advanced technological know-how, upgrading indigenous capabilities and building well-grounded private sector participation in the defence sector, as founded on erroneous premises and flawed understanding of how to build self-reliance.

Trappier repeatedly asserts that he regards the Dassault-Reliance JV as a Dassault company in which an Indian partner has been brought in to provide familiarity with Indian conditions. He even compares it with the subsidiary of the sister company, Dassault Systeme, in Bengaluru which works on software and other system solutions. “I wanted to have Dassault India, but we joined with a company which is a big company in India.”   And further: “I wanted it as a factory of Dassault.  So, for me, Nagpur is a factory of Dassault.” And: “We will take industrial lead…” “I send my know-how of industry in this company etc.”

In other words, any foreign OEM setting up a subsidiary or JV in India with substantial investment is not doing so for altruistic reasons to give away its technology. It will bring in technology and know-how into what will effectively be its own company in India, and will therefore keep its technology with itself. Even the money earned will be kept largely with itself!

In the Rafale JV with reliance, Dassault will retain 50% of the offsets that are supposed to be spent in India. All in all, India gains neither financially nor technologically. If the Indian partner is  inexperienced, so much the better, since he will merely be a sleeping partner with no capability to absorb technology, even if he had an interest to do so

The idea of building a large, capable private sector defence industry in India through foreign OEMs is a complete non-starter. If at all, the only way is to gradually build it through a process of sub-contracting and sub-assembly to private sector companies progressively working their way up the value and capability chain. If this can be done successfully in space and even in nuclear power, why not in the defence industry?