Tuesday , 16 October 2018
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Some Probing Questions On Rafale Deal

BINAYAK DATTA

WE ‘finance men’ have the uncanny urge to put a finger in each pie wherever we see one! I can assure you none of that is here today – least of all, right under the aura of a ‘highly specialised domain of military equipment’ laced heavily with questions of secrecy and national security. I thought at the same time, it would be one of my duties to the society to speak up on a few issues which do irk me as a reasonably educated, freethinking and well-meaning citizen of this great country on matters of pure financial propriety and public governance particularly if it is something as huge as the Rafale deal – a Rs 60,000-crore commitment of taxpayers’ money.

Dissecting a defence deal

I would like to examine this ‘black box’ through four simple questions: questions that arise having extensively studied this interesting subject.  But before I come to citizens’ questions,  just to recapitulate here,  (even at the cost of repetition) the current Rs 60,000-crore deal (€8 billion approximately) for 36 Dassault Rafale medium multirole combat aircraft has been clinched by the present government.  A reference should also be made to the previous two governments’ purchase programme of 2001 finalised in 2007 for 126 fighters at approximately Rs 630 crore each (later on escalated in 2011 to Rs 860 crores each) from Dassault of France (18 of which were to be bought off-the-shelf made in France), and  that 108 would be made in India at Hindustan Aeronautics Limited, a ‘Navratna’ PSU, over six  years, under technology from Dassault.

There was an ‘offset clause’ under which Dassault would reinvest 50 per cent of its earnings in the deal in India in terms of technology and upgrades. There were protracted hagglings for years together after which entered the current government and it exited the programme in 2015 going in for a new deal this time for only 36 fighters at a total approximate value of €8 billion (arithmetically translating to about Rs  1,700 crore per aircraft).

The 50 per cent offset clause was reportedly now reduced to 30 per cent. Union Law Minister Ravi Shankar Prasad’s statement that the current price is around €91.75 million per aircraft (approximately Rs 740 crore, a reduction of 9 per cent) could not be readily understood – unless of course the contentions are that the remaining Rs 1000 crore are enhancements and add-ons!

I may add here that under the International Financial Reporting Standards, the aggregate costs are to be recognised as the cost of the asset in this case. The aircraft would now be manufactured not at HAL (with its 50 years of manufacture of combat aircraft) but by a new joint venture of Dassault with Reliance Naval and Engineering Limited, which  has no experience in aircraft manufacture. I understand that the manufacture would be done in France but the ‘offset’ clause commitments would be carried out through Reliance Naval.

The Opposition predictably smelling blood, threw all caution to the winds going hammer and tongs for pricing details. The demands     were met with a strict no-no, as there are ‘secrecy clauses’ in the agreement which prevent the disclosure of “pricing” details. Furthermore, the secrecy clauses were there supposedly from the days of the erstwhile UPA government itself.

Long-standing  negotiations

I can now come to my set of four questions. i) The entire process of acquiring these aircraft – from the request for information till date – has already taken 17 years, and this has been before the start of manufacture of a single Rafale fighter.  What went wrong with our well-advertised ‘reforms of our defence acquisition process’? I know some committees were indeed formed.   But what have been the results? We still take decades to finalise a deal! ii) How do the numbers evolve – if the NDA-1 in 2001 finalised 126 planes then how exactly does the NDA-2 after 14 years is content with just 36? Who went wrong? Does not the final stakeholder (the taxpayer) need to know? iii) If the erstwhile deal was abandoned and a de novo agreement was made then how can the “secrecy” clause of the UPA government’s negotiations affect the “transparency” of the NDA-2 agreement? A secrecy clause generally relates to sensitive matters of competition. I am not sure under what compulsions, elected representatives (of main stakeholders) under oath, should be barred from broad contours of the pricing. I agree, technical details made public, could indeed result in issues concerning national security,  but what prevents the government to share simple basic information (no technical mumbo jumbo):  “this was the effective total cost in the earlier programme; this is it now;  this per cent is the increase; of which so much is due to enhancements (technical details may not indeed be shared), so much is due to inflation, so much is due to exchange rates and so much due to price increase”.

I say, this is the typical way stakeholders or their representatives should be informed. Why stonewall demands for transparency and unnecessarily allow politics to make hay at the cost of legislative time? Why repeat Dorien Gray’s lines “…I have grown to love secrecy. It seems to be the one thing that can make modern life mysterious or marvellous to us. The commonest thing is delightful if only one hides it.”

  1. iv) Although Dassault has a right to select its partners, I think there is a liability on the Union government in its fiduciary capacity on behalf of Indian citizens to have a proper due diligence made since a significant (30 per cent) of the earnings from this deal shall vest on this JV partner towards offset commitments. I may add here that this company last year did business (mainly shipbuilding) of just Rs 335 crore and incurred a loss of Rs 1100 crore. It has borrowings and financial liabilities of Rs 11,000 crore.

I think prevarications and stonewalling on a crucial and expensive subject of national importance is doing no good – swift professional and tactful handling I think is called for. The world community is looking at us – let’s not follow Gray’s dictum “delight in marvelling in mysteries”!

 

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