An Examination of the Rafale Case: The Old Non-Deal and the New Deal

Questions were raised about the Rafale deal signed between India and France in September 2016. The allegations made went to the extent of issuing warnings about “a huge scam” in the deal and that the earlier 2012 proposal for an aircraft deal with Dassault Aviation (which manufactures the Rafale) was better and cheaper although that was never sealed.

We checked the facts of the case, and in the process also made a comparison between the two deals – the one that was never cleared by the previous administration and the new one signed last year by the current administration. Below are our findings:

KEY TAKEAWAYS

• Acquisition of 36 Rafale is meant to address the IAF’s operational preparedness
• Price of old deal did not include cost of weapons, equipment, tools, documentation, training & logistics. Adding these, the old deal’s cost goes up further
• Total value of new deal includes cost of platform, infra support, supplies, India-specific changes, additional weapons package, logistics support
• Under the old deal, India would have ended up paying more – for underdeveloped aircraft – and kept on paying more as per the vagaries of the European market
• Dassault agreed to make India-specific modifications to Rafale under the new deal
• Additions to Rafale and further concessions from Dassault and France have qualitatively changed the deal
• Units are fundamentally different in qualitative terms
• Under the new deal, Dassault will have to ensure that at any one point of time, 75% of the Rafale fleet is operational

MAIN TAKEAWAY

If there was a deal in 2012, why did India not get the aircraft? The answer is that there was no deal and thus quoting the price of the old “deal” itself and then comparing it is logically fallacious.  The deal was on the verge of cancellation and the last administration’s prolonged delay led costs to shoot up. The current administration revived the deal and addressed a critical shortfall in the operational readiness of the IAF.

Moreover, the deal has been completely customised by Dassault now. If we use the analogy of buying a car, this is what happened: The price being quoted for the old proposal is of a base car unit, the skeleton, without modifications or additions. What we are getting now is a complete car, with all necessary equipment and tools added. The old proposal’s costs did not include anything like equipment, weapons, support & supplies, etc. Adding these, the price of the “old deal” would be nowhere near what has been quoted recently.

Therefore, the deliverables between the old proposal and the new deal are qualitatively very different. (In our study, we have mapped out the approximate costs under the new deal above and the reader can see how it all adds up.)

A Brief History of the Rafale Deal

• Observing the Indian Air Force’s critical need for fighters, the proposal to procure 126 aircraft first came up in 2000.
• Therefore, the idea did not originate in the 10 years of the previous administration. In fact, it is the same administration which could not take a decision.
• The lowest vendor was decided only in 2012, after the Dassault Rafale won the competitive bid. Yet, over the next two years of the negotiations stalled and could not be completed.
• By the time the change of guard happened at the Centre in 2014, the IAF’s squadron shortfall had already created a critical situation in its operational requirements. It was against this backdrop that the decision was taken to purchase at least 36 aircraft in flyaway condition.
• The purchase of the 36 aircraft was decided during the summit between Prime Minister Narendra Modi and then French President Francois Hollande in Paris in April 2015.
• Thereafter, India did not sign the deal as it stood in January 2016 because it did not agree with the price of €8.6bn.
• The inter-governmental agreement was finally signed on September 23, 2016, in the presence of the then defence ministers of India and France.
• India had also announced that if it were to order additional Rafale aircraft after the outright purchase of 36 fighters, it would thereafter go for government-to-government deals.

Approximate Cost Break-Up of Rafale Deal Signed in September 2016

Total Amount (approximate)	€7.8 billion
Cost of Platform	€3.4 billion
Infra Support & Supplies	€1.8 billion
India-Specific Changes	€1.7 billion
Additional Weapons Package	€710 million
Performance-Based Logistics Support	€353 million Comparison Between 2012 Proposal and 2016 Deal on Costs & Savings Old Deal                                                                            New Deal The base price quoted this week in the allegations was $10.2bn (which translates into approximately €7.75bn as per December 2012 conversion rate). The actual price of the 2012 tender turned out to be 2.5 times higher, i.e. approximately $25bn or €19bn Total value of deal is €7.8bn Price did not include cost of weapons, equipment, tools, documentation, training & logistics. Adding these, the old deal’s cost goes up further Total value of deal includes cost of platform, infra support, supplies, India-specific changes, additional weapons package, logistics support 18 planes were to be manufactured in France and 108 in India in collaboration with HAL. It was then found that the cost of 108 fighters would go up by about Rs 150 crore, or €19.5mn, per unit (2012 conversion rate between rupee & euro), with labour man hours being higher in India than in France by about 2.7 times By negotiating to bring the price down from January 2016, India actually saved about €750mn and also negotiated for several additional features and conditions India had agreed that the cost would be calculated on a fixed cost formula. So, Dassault would be allowed to add theadditional cost of 3.9% inflation indices from the beginning of the deal (Day 1). The deal would have made India pay an additional cost of inflation indices which was already worked into the negotiation. Also, there was no clarity about how the base price would be calculated India asked France to calculate the deal on actual cost (price on day) plus European Inflation Indices. MoD then capped the European Inflation Indices to maximum 3.5% a year. Therefore, if European inflation came down subsequently, India would end up paying even less. If European inflation would go up, India would still not pay more than a 3.5% increase. The “vanilla price” per aircraft was roughly €81.8mn, or Rs 629 crore, excluding the €19.5mn, or Rs 150 crore additional cost (at 2012 conversion rates). Together, the two costs would bring the per aircraft base price to above €100mn The “vanilla price” of the 36 aircraft is about €3.4bn, making the per aircraft price €95mn, or Rs 727 crore in today’s prices and Rs 687 crore in 2012 prices. Therefore, the price per aircraft in the new deal works out to be only slightly higher in today’s prices and almost the same in 2012 prices, while with the estimated additional cost of making 108 planes here, it actually works out to be lower than the old price   N.B. It should be clear that the cost of the 36 aircraft cannot be directly compared to the cost of the original MMRCA bid since the deliverables are significantly different. Also, the figures as per the 2012 conversion rates would be higher today as per the current exchange rate. What is “New” About the New Rafale Deal? Renegotiated 50% Offsets Under the renegotiated offsets, Dassault is obligated to re-invest half the money from the deal in India again, which is estimated to create €3bn worth of business for Indian companies and, thereby, hundreds of jobs Delivery schedule, maintenance, product support All more convenient for India India-specific modifications Dassault agreed to make India-specific modifications to the Rafale. This would allow the integration of Israeli helmet-mounted displays. Meteor & SCALP European missile manufacturer MBDA is providing Meteor, an air-to-air missile with a beyond-visual-range over 100 km, and Storm Shadow or SCALP, a 560 km-plus range air-launched cruise missile. Both missiles are state-of-the-art and will add tremendous fire power and penetrative depth to the IAF.With the Meteor, for example, the IAF can hit targets in hostile territory across India’s wester, northern or eastern borders while staying well within Indian territory. Additional clauses Under the new deal, Dassault will have to ensure that at any one point of time, 75% of the Rafale fleet is operational as per a five-year warranty More Concessions to India Training of 9 IAF personnel, (includes 3 pilots plus further guarantee of 60 hours of usage of training aircraft for Indian pilots and six months of free weapons storage without charge pending the development of domestic infrastructure) Delivery Significantly enhanced, with a clear timeframe – the first Rafale jet would be delivered in 3 years from the signing of the deal and the whole lot over the next 30 months We also fact-checked some of the remaining critical claims that have been made against the Rafale deal signed last year. Claim: New Rafale deal does not include transfer of technology (ToT) unlike the earlier proposal. Fact: The new deal on 36 aircraft in flyaway condition does not include ToT. The reason for that is economic. Spread across 126 units, ToT costs would make less of an impact than the same on a base of 36 aircraft. Instead, what is being done now is the consolidation of the Strategic Partnership (SP) model, which goes way beyond ToT and is a much more holistic approach. In the near future, this is expected to enable a strengthened defence manufacturing process through “Make in India” with seamless sharing of technology and more. Claim: The PM’s decision to buy 36 Rafale was “unilateral” and bypassed the Defence Procurement Procedure. Fact: The decision was unilateral. Apart from the Joint Statement, the Inter-Governmental Agreement (IGA) was issued. Thereafter, the IGA was signed after approval from the Cabinet Committee on Security (CCS). Claim: The interests of “one industrial group” or Reliance Defence Limited was promoted, since Reliance tied up with Dassault in October 2016 for a joint venture. Fact: Private players have come into India’s defence production and how two firms choose to work with each other, or not, whether they engage in a tie-up, is entirely a matter between the two parties involved. The Indian government was not involved in this process. More importantly, the acquisition of the 36 Rafale aircraft did not involve any private player. It is completely an agreement between two governments. We know that despite Dassault winning the tender in 2012, the previous administration could not complete the deal, nor even successfully renegotiate it. It was after the change of administration that we saw a fresh impetus being given to the stalled project. In a significant difference, the new government began direct talks with the French government. What emerged from the inter-governmental negotiations was a new deal which, too, India did not sign till further tuning and alterations were made to its satisfaction. When the deal was signed in September last year, we saw a deal very different from the original MMRCA deal. As listed above, the additions to the Rafale and the further concessions from Dassault Aviation and France have qualitatively changed the deal significantly. Factors like the unit price as in the previous deal and current deal simply cannot be compared because the units are fundamentally different in qualitative terms. And yet, when compared, we find that the picture works out to the advantage of the new deal in each case and overall. In fact, it is under the old deal of the last government that India would have ended up paying more – for underdeveloped aircraft – and kept on paying more as per the vagaries of the European market! India had a squadron strength of 42 in 2000 – the full authorised strength. Subsequently, little happened in terms of procurement and the armed forces, the IAF included, ended up with shortages. The acquisition of 36 Rafale is meant to address that fundamental question of the IAF’s operational preparedness. Having wasted several years even in securing the Rafale deal, there did not appear to be any time left for further delay. Courtesy: The True Picture

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