Mr Amit Cowshish is a former Financial Advisor (Acquisition), Ministry of Defence and former Distinguished Fellow, Manohar Parrikar Institute for Defence Studies and Analyses, New Delhi. Click here for Detailed Profile
The news that India will acquire 36 Rafale jets in a fly-away condition from France has created a flutter as much for the surprise it has sprung on the unsuspecting strategic studies community as for the lack of clarity on how this whole thing will play out.
The joint statement issued during the visit of the prime minister to France (April 9-11, 2015) has the following to say on this issue:
“14. Government of India conveyed to the Government of France that in view of the critical operational necessity for Multirole Combat Aircraft for Indian Air Force, Government of India would like to acquire [36] Rafale jets in fly-away condition as quickly as possible. The two leaders agreed to conclude an Inter-Governmental Agreement for supply of the aircraft on terms that would be better than conveyed by Dassault Aviation as part of a separate process underway; the delivery would be in time-frame that would be compatible with the operational requirement of IAF; and that the aircraft and associated systems and weapons would be delivered on the same configuration as had been tested and approved by Indian Air Force, and with a longer maintenance responsibility by France.1
Only two things are absolutely clear from this: 1) that the acquisition is contingent upon the signing of an inter-governmental agreement (IGA); and, 2) that the aircraft as well as the associated systems and weapons will comply with the same configuration on which the Rafale was tested and approved by the Indian Air Force (IAF).
Another thing which has subsequently become as good as absolutely clear is that the ongoing negotiations are going to be called off. The defence minister’s quip that “one car cannot run on two roads” cannot be interpreted in any other way. Though it does not necessarily have to be that way since many people do keep two cars which can certainly run on two roads, there is no procedural or legal bar on calling off the negotiations. In fact, calling off the negotiations might come as a big relief to everyone.
But the list of aspects that are not clear is rather long. To begin with, the joint statement says that the procurement of aircraft under the IGA will be on terms better than those offered by Dassault in the MMRCA deal that has been under negotiation for more than three years. For one thing, it is not clear how the terms for outright purchase of 36 aircraft will be compared with the terms under which 18 aircraft were to be acquired in a fly-away condition followed by manufacture of another 108 through transfer of technology.
More to the point, the terms for acquisition of 36 aircraft will have to be examined by someone before these are accepted. These terms would include price, delivery schedule, training, maintenance, to mention a few issues. Any package that is negotiated by the two parties will have to pass the test of being superior to the one being endlessly negotiated because that is what the joint statement promises. It is not going to be easy as the two programmes are not comparable in terms of their ultimate objectives. Government-to-government deals do not have an inbuilt mechanism to address these issues without labouring on them.
Each of these issues could turn out to be a bundle of complications. Take, for example, aircraft maintenance. According to the joint statement, the proposed outright purchase would involve ‘longer maintenance responsibility by France’. The implication of this statement is not quite clear.
Unless the acquisition of 36 aircraft is going to be followed by the acquisition/manufacture of the same aircraft (possibly under a separate IGA as hinted by the defence minister), the transfer of technology for maintenance (MToT) of just 36 aircraft might not be a very cost-effective proposition. In any case, if India wants MToT, it will have to be decided whether the agency for receiving the technology will be nominated by the Ministry of Defence (MoD) or it will be left to Dassault to choose any agency it wants.
If the agency is to be nominated, MoD will have to decide whether it is going to be a public sector entity (state-owned Hindustan Aeronautics Limited or a Base Repair Depot) or an entity from the private sector. In the latter case, MoD will need to evolve some guidelines for nominating a private sector entity. Such guidelines do not exist at present.
Performance based logistics (PBL) is an alternative worth considering, especially if the story is going to end with the procurement of 36 aircraft in a fly-away condition. It might be more efficient and arguably more cost-effective to make the supplier responsible for ensuring the desired level of aircraft serviceability at all times for a negotiated price. But this could delay the IGA as the MoD has had little experience in working out such PBL arrangements.
There is also lack of clarity about offsets. The existing policy requires the vendor to discharge offset obligation to the extent of at least 30 per cent of the contract value if it exceeds Rs. 300 crore. Irrespective of the price finally negotiated, it is bound to be above that threshold, in which case Dassault will have to come up with an offset proposal in sync with the existing offset policy. Experience shows that negotiating an offset contract is not easy.
To save time, MoD could ask the vendor to discharge the offset obligation in a pre-specified area, though even this is not going to be easy as it will inevitably require the ministry to decide in which areas it would like the offsets to be channelled. In any case, it could mean prolonged negotiations with the vendor who, in turn, will have to talk to its Tier-I sub-vendors and the prospective Indian Offset Partners (IOPs).
The quickest way of clinching the agreement would be to do away with the offsets altogether, especially if there is going to be no further procurement of the same aircraft. MoD will need to take a call on this issue before the IGA is signed.
The joint statement and the subsequent comment by the defence minister clearly signal the end of the road for the ongoing negotiations. This will have to be followed up with another out-of-box solution for shoring up the dwindling squadron strength of the IAF. There are several possible solutions in this regard. Surely, one of the options could be to sign another IGA with France for the indigenous production of the same aircraft as per terms and conditions that are more in sync with the current ‘Make-in-India’ trope.
But that is not the only option. A similar arrangement could well be made with some other country as well for a different aircraft that meets the IAF’s operational requirements. Concerns are often expressed about the IAF having to fly a wide variety of aircraft. Such concerns are valid but the final call will have to be taken by the IAF, which has had long experience of flying a variety of aircraft at the same time.
According to the Defence Procurement Procedure (DPP) 2013, procurement under the IGA “would not classically follow the Standard Procurement Procedure and the Standard Contract Document but would be based on mutually agreed provisions by the Governments of both the countries.”2 This freedom to customize the procedure has the potential of cutting through the proverbial red-tape. But the essential considerations on which any purchase is made, such as price and maintenance, cannot be ducked.
MoD will do well to set up a crack team of experts from all fields to work out the terms of the proposed IGA keeping in view the larger picture of what happens after these 36 aircraft are inducted.
Note: Originally written on 13 April, the commentary has been modified to take into account the comments made on 14 April by the Defence Minister.
Views expressed are of the author and do not necessarily reflect the views of the IDSA or of the Government of India
New Twist in the MMRCA Tail
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The news that India will acquire 36 Rafale jets in a fly-away condition from France has created a flutter as much for the surprise it has sprung on the unsuspecting strategic studies community as for the lack of clarity on how this whole thing will play out.
The joint statement issued during the visit of the prime minister to France (April 9-11, 2015) has the following to say on this issue:
Only two things are absolutely clear from this: 1) that the acquisition is contingent upon the signing of an inter-governmental agreement (IGA); and, 2) that the aircraft as well as the associated systems and weapons will comply with the same configuration on which the Rafale was tested and approved by the Indian Air Force (IAF).
Another thing which has subsequently become as good as absolutely clear is that the ongoing negotiations are going to be called off. The defence minister’s quip that “one car cannot run on two roads” cannot be interpreted in any other way. Though it does not necessarily have to be that way since many people do keep two cars which can certainly run on two roads, there is no procedural or legal bar on calling off the negotiations. In fact, calling off the negotiations might come as a big relief to everyone.
But the list of aspects that are not clear is rather long. To begin with, the joint statement says that the procurement of aircraft under the IGA will be on terms better than those offered by Dassault in the MMRCA deal that has been under negotiation for more than three years. For one thing, it is not clear how the terms for outright purchase of 36 aircraft will be compared with the terms under which 18 aircraft were to be acquired in a fly-away condition followed by manufacture of another 108 through transfer of technology.
More to the point, the terms for acquisition of 36 aircraft will have to be examined by someone before these are accepted. These terms would include price, delivery schedule, training, maintenance, to mention a few issues. Any package that is negotiated by the two parties will have to pass the test of being superior to the one being endlessly negotiated because that is what the joint statement promises. It is not going to be easy as the two programmes are not comparable in terms of their ultimate objectives. Government-to-government deals do not have an inbuilt mechanism to address these issues without labouring on them.
Each of these issues could turn out to be a bundle of complications. Take, for example, aircraft maintenance. According to the joint statement, the proposed outright purchase would involve ‘longer maintenance responsibility by France’. The implication of this statement is not quite clear.
Unless the acquisition of 36 aircraft is going to be followed by the acquisition/manufacture of the same aircraft (possibly under a separate IGA as hinted by the defence minister), the transfer of technology for maintenance (MToT) of just 36 aircraft might not be a very cost-effective proposition. In any case, if India wants MToT, it will have to be decided whether the agency for receiving the technology will be nominated by the Ministry of Defence (MoD) or it will be left to Dassault to choose any agency it wants.
If the agency is to be nominated, MoD will have to decide whether it is going to be a public sector entity (state-owned Hindustan Aeronautics Limited or a Base Repair Depot) or an entity from the private sector. In the latter case, MoD will need to evolve some guidelines for nominating a private sector entity. Such guidelines do not exist at present.
Performance based logistics (PBL) is an alternative worth considering, especially if the story is going to end with the procurement of 36 aircraft in a fly-away condition. It might be more efficient and arguably more cost-effective to make the supplier responsible for ensuring the desired level of aircraft serviceability at all times for a negotiated price. But this could delay the IGA as the MoD has had little experience in working out such PBL arrangements.
There is also lack of clarity about offsets. The existing policy requires the vendor to discharge offset obligation to the extent of at least 30 per cent of the contract value if it exceeds Rs. 300 crore. Irrespective of the price finally negotiated, it is bound to be above that threshold, in which case Dassault will have to come up with an offset proposal in sync with the existing offset policy. Experience shows that negotiating an offset contract is not easy.
To save time, MoD could ask the vendor to discharge the offset obligation in a pre-specified area, though even this is not going to be easy as it will inevitably require the ministry to decide in which areas it would like the offsets to be channelled. In any case, it could mean prolonged negotiations with the vendor who, in turn, will have to talk to its Tier-I sub-vendors and the prospective Indian Offset Partners (IOPs).
The quickest way of clinching the agreement would be to do away with the offsets altogether, especially if there is going to be no further procurement of the same aircraft. MoD will need to take a call on this issue before the IGA is signed.
The joint statement and the subsequent comment by the defence minister clearly signal the end of the road for the ongoing negotiations. This will have to be followed up with another out-of-box solution for shoring up the dwindling squadron strength of the IAF. There are several possible solutions in this regard. Surely, one of the options could be to sign another IGA with France for the indigenous production of the same aircraft as per terms and conditions that are more in sync with the current ‘Make-in-India’ trope.
But that is not the only option. A similar arrangement could well be made with some other country as well for a different aircraft that meets the IAF’s operational requirements. Concerns are often expressed about the IAF having to fly a wide variety of aircraft. Such concerns are valid but the final call will have to be taken by the IAF, which has had long experience of flying a variety of aircraft at the same time.
According to the Defence Procurement Procedure (DPP) 2013, procurement under the IGA “would not classically follow the Standard Procurement Procedure and the Standard Contract Document but would be based on mutually agreed provisions by the Governments of both the countries.”2 This freedom to customize the procedure has the potential of cutting through the proverbial red-tape. But the essential considerations on which any purchase is made, such as price and maintenance, cannot be ducked.
MoD will do well to set up a crack team of experts from all fields to work out the terms of the proposed IGA keeping in view the larger picture of what happens after these 36 aircraft are inducted.
Note: Originally written on 13 April, the commentary has been modified to take into account the comments made on 14 April by the Defence Minister.
Views expressed are of the author and do not necessarily reflect the views of the IDSA or of the Government of India
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