Rafale Row: Did India Get a Bad Government-to-Government Deal?

If the Rafale were to be produced under licence in India, Dassault’s bid would no longer be the L1, or lowest bid.

An image of a French Rafale fighter used for representational purposes.

(Photo: Reuters/Altered by The Quint)

The storm over the Indian acquisition of 36 Rafale fighter aircraft from France has received much attention. Most notably for the impact the controversy has had on the political environment in the run-up to the General elections – with accusations of impropriety, including crony capitalism, being levelled against the government.

In 2015, the Union government scrapped the USD 20 billion Medium Multi-Role Combat Aircraft (MMRCA) project for 126 aircraft for Indian Air Forces’ (IAF) “critical operational necessity” and the need to cut time and costs.

Instead, it opted to buy 36 Rafale aircraft directly through a government-to-government contract.

The G2G Route

The frequency at which the G2G route being taken by successive governments over the last few years in defence procurement is a testimony to the failure of the present defence procurement policy to deliver and reflects India’s inability to procure through an open competitive process in a time bound manner. There have been a number of instances where crucial acquisition proposals have been cancelled mid-way and retendered thereafter, with some having little success.

The G2G route is also indicative of its desperation to bridge the gaps in its defence preparedness by procuring equipment in the quickest time.

Governments chose the G2G route to avoid the perceived malpractices of an open competition, this route raises issues around possibility of malpractice in the commercial advantages to single vendors and the elimination of competition.

Several revelations have emerged from the controversy over the Rafale order.

Was Rafale the Lowest Bidder?

According to an Economic Times report in August 2018, a defence ministry review of the selection of the Dassault Rafale as L1 in the earlier contest for 126 Medium Multi Role Combat Aircraft (MMRCA) was flawed. The review discovered that if the Rafale were to be produced under licence in India (which was an essential requirement of the winning bid under the terms of the original MMRCA RFP), Dassault’s bid would no longer be the L1, or lowest bid. The Eurofighter Typhoon would have then become the effective L1.

The Defense Procurement Procedure (DPP) published in 2016 however says, “In certain acquisition cases, imperatives of strategic partnerships or major diplomatic, political, economic, technological or military benefits deriving 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 on all such acquisitions would be taken by the Cabinet Committee on Security (CCS) on the recommendations of the DPB.”

It may also be important to recall the starting point for negotiations laid down by Prime Minister Modi when he first announced the request for the 36 aircraft. 

It was to be an agreement between the two governments, and listed as a separate process from the original MMRCA RFP.

Why is the government using the original MMRCA bid as a benchmark?

How G2G Negotiations Came to Thrive

The MoD’s inability over the years to put out a set of guidelines to streamline its arms acquisition process has led to a flurry of government-to-government negotiations, with the hope that the procurement cycle becomes less cumbersome, much faster and more importantly less controversial.

For example, military equipment is procured from the US in two distinct ways, Direct Commercial Sales (DCS) and Foreign Military Sales (FMS). Deals under DCS are purely commercial transactions between a buyer government and the US defence industry, where US companies compete with vendors from other countries to sell their defence equipment.

Under FMS, on the other hand, commonly known as a Government-to-Government (G2G) deal, India forwards a Letter of Request to the US government.

If the request is cleared, a Letter of Offer is sent to the requesting government. The buying government is required to submit a Letter of Acceptance (LOA) along with the initial advance.

Thereafter, a legal contract is signed. The US government may supply the item from its own existing stocks or procure it afresh from the concerned equipment manufacturer.

However with the inter-governmental agreement with France, government-to-government elements like the responsibility for the supply of equipment and related industrial services and performance of the entire contract have been transferred from the French government to Dassault.

The French government provided a “comfort letter” to the Government of India to back the deal instead of a “sovereign guarantee” which essentially reneges it’s of any liability. Thus negating the advantages of a G2G deal where a sovereign state guarantees the contract.

Challenges to the IAF

The IAF will continue to face serious challenges till at least 2030. The shrinking military budget and procurement controversy comes at a time when ageing legacy fleets require urgent replacement. The IAF’s acquisition of the Rafale and induction of the indigenously-built Tejas will take time to translate into any tangible operational capability.

Given the current decline in number of aircraft, the IAF will become hard-pressed to deliver on traditional operational roles like air defense, close air support, and strike capabilities.

The old MMRCA Request For Proposal and the piecemeal acquisition of 36 Rafales needs to be taken as a test case, as there are also lessons to be learned to improve the defense procurement process. The frequent use of the G2G route to avoid the perceived malpractices of an open competition needs a revisit as does the practice of sticking to lowest bids or L1 vendors after they are non-compliant to the original conditions of a tender.

(Pushan Das is an Associate Fellow & Programme Coordinator working for the ORF Global Governance Programme. He tracks and analyses developments in Indian foreign and security policies. He is currently working on issues related to Indian military modernisation. He tweets at @Pushan3012. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for them)