Return Of The Rafale Jet Conundrum: Can You Trust Dassault Aviation?

There is unrest in the power corridors of New Delhi, mainly among the country's defense sector experts, ever since the government owned Doordarshan News and ANI first broke the story that the Indian Navy would be purchasing 26 Rafale Marine Fighter Jets at around Rs 50,000 crore. A delegation from France was to meet their counterparts in India's Defence Ministry for negotiations. Officials from defence acquisition wing and Indian Navy would be involved in the negotiations, DD News and ANI said, quoting defense sources. But it is the reported value of the deal for the potential fresh purchase order that has raised eyebrows.

If the value of Rs 50,000 crore for 26 Rafale Marine Fighter Jets is any closer to reality, the Rafale deal this time could again kick up a storm, since defense experts told BW that the Indian Air Force (IAF) had paid nearly 50 percent less base price (approximately Rs 26,000 crore) for the same Rafale Jets when the deal was announced in 2016 and the cost cannot double. Apart from the government news agencies, private news media The Print and Financial Express have suggested that the deal value could be around Rs 40,000 crore.

According to the experts, the cost analysis of the value of the new Rafale deal suggests that France's Dassault Aviation could be taking the Indian Navy on a joy ride. In November 2016, Minister of State for Defence, Subhash Bhamre had informed the Lok Sabha that the cost of each Rafale aircraft acquired under the IGA (intergovernmental Agreement) was approximately Rs 670 crore. But now in the current deal, with offsets and other logistics out of the picture, the base price is more than double for the Indian Navy.

The key thing to note here is that under the new procurement policy, there are no offsets likely under the Government to Government contract involving the Indian Navy. But in the earlier deal, a huge percentage cost of the overall contracts was the value of offsets. Therefore, even if one considers a mean value of 15 percent to 50 percent offset obligations, the current reported deal value of the Rafale deal is way more expensive than what the IAF purchase order. In 2016, the IAF had paid Rs 58,000 crore for 36 Rafale Jets which included 50 percent offsets and other logistics, which are unlikely to be part of the current order by the Indian Navy. Considering this, there is concern among experts that the Indian Navy may end up paying way too high base price for Dassault.

Defence offsets are nothing but an arrangement between a national government and a foreign military equipment supplier (in this case Dassault) to direct some benefits of the contract back into the purchasing country's economy. Between the experts, the estimates vary from 10 percent to 20 percent that the Original Equipment Management (OEM) would charge to discharge offset obligations. Since the current deal is unlikely to involve any offset cost, the overall deal value should be beneficial to India. But the reverse seems to be in the offing.

Tale of Two Orders
Reportedly, In 2016, the Indian Air Force had issued an order for purchase of Rafale 36 aircrafts at base price of Rs.700 crore or under Euro 100 million per aircraft. Accordingly, the cost of 36 aircraft came to less than Euro 3.5 Billion but the total contract value was pegged at Euro 8 billion, since it included payments on account of spares, simulators, training, performance based logistics and armament, amongst other items. Also, add to it the offset cost.

Defense experts say that this time India should be saving on various ancillary costs since just like in France where the Navy and the Air Force operate the Rafale fighters, India may also follow a similar model as the IAF already has 36 jets. In France, the maintenance and stores for the Rafale is common, besides common simulators. Similarly, if India decides to go in for common maintenance and stores, the cost of the overall contract can come down, sources say. In such a deal, it is the cost of maintenance and building of infrastructure for the same, which forms a major pie of the overall cost of the contract. But when the Indian Air Force purchased 36 jets, India is said to have already incurred this cost and hence the cost of Navy's Rafale Jets should not shoot up too significantly.

The IAF has set up two Rafale squadrons — Hasimara and Ambala — which have their own stores and simulators. Thus, training facilities have already been set up, including the simulator. In its last six years of operations, the IAF has a large number of personnel trained on Rafale, including Pilots, Engineers & Technicians. It would be easy for the Naval personnel to train at two Air Force bases rather than going to France since they have more than three years before they get the first aircraft.    

Also, the earlier IAF contract included 50 percent offsets, the highest ever demanded by the Ministry of Defense. But even 8 years after the signing of the contracts, there is little on the ground work in terms of capacity creation, experts say. After winning the IAF contracts on the promise of offsets, Dassault Aviation has paid penalties for under performance on offsets, like many other OEMs (original equipment manufacturers). But the cost of offsets was included in the IAF price 2016.

Thus, under the new procurement policy where there are no offsets under the government to government contract, the price of Rafale Jets should be far lower than what is being projected considering a mean 15 percent to 50 percent value of offset obligation. Also, Naval requirements are unlikely to be way too different from the IAF and keeping in view interoperability of the maintenance and other logistics, the cost of the Navy's purchase order should not be too high, experts say.

IAF paid a higher cost over and above the base price of Euro 3.5 Billion (Approximately Rs 26,000 crore in 2016) due to India specific enhancements, spares, PBL, simulator, training etc. (armament was excluded). But with all the India Specific Enhancement having been paid for and simulators etc in place - the value of India Navy's order cannot be 100 percent higher than IAF.

Questions Remain Over Dassault Aviation
Experts say that assuming a 25 percent hike in the price of spares, warranties, guarantees, project based requirements that the Navy may have, the numbers do not add up beyond Rs. 29,000 crore as the base value per Rafale Jet. There is a view that the Price Negotiation Committee in the deal has to ask some hard questions. Also, Dassault has to answer on its failure to deliver on the offsets agreed upon in the IAF deals. Why should it be trusted on the promises it makes in the new contract with the Navy?

Further, reports suggest that Dassault was running way behind the scheduled deliveries of its aircrafts globally and its current backlog for more than 200 Rafale Jets. In the last ten years, Dassault has delivered far less than 200 aircrafts. How long will it take for the next 200? When will the Indian Navy get its first aircraft? Can Dassault be trusted on the promises it makes on localization given its past record?

Palak Shah

BW Reporters The writer is author of the book: The Market Mafia - Chronicle of India’s High-Tech Stock Market Scandal & The Cabal That Went Scot-Free. Palak has been a journalist in Mumbai for nearly two decades now. He has worked for most premier pink papers including The Economic Times, Business Standard and The Financial Express and The Hindu Business Line. He was drawn to crime reporting at the age of 19 but a few years in the field told him that the fabric of crime had changed and the organised gangs, as Mumbai had witnessed during the eighties, no longer existed. It was business and markets that dominated the scenario. His passion to unravel the intricacies of the ‘white money’ economy led Palak to the world of finance and regulations.