Dassault CEO's Interview Digs Bigger Hole for Modi Government on Rafale

Eight issues surrounding the deal have become even more murky despite a concerted effort by Rafale to clear the air.

In an interview to CNBC-TV18 this week that was presumably meant to allay all doubts and misgivings in India about the Rafale deal, Dassault Aviation CEO Eric Trappier ended up contradicting what the Modi government and its ministers have been saying in defence of the prime minister’s decision to purchase 36 fighter jets in fly-away condition from France.

Indeed, on eight key issues that have been the subject of questions and controversy, Trappier has only served to muddy the waters, weakening the explanations that the government, BJP leaders, Anil Ambani and Dassault itself have been saying till now.

1. Questions about timing and process followed

At the start of the interview, Trappier was asked what the status of the talks for the sale of 126 aircraft – as was envisaged at the time – in the run up to Prime Minister Narendra Modi’s April 10, 2015 announcement which effectively scrapped the negotiations on the medium multi-role combat aircraft (MMRCA) contract. “We have been discussing and negotiating since 2012 to 2015,” said Trappier. “During the visit you are just mentioning (of Modi to Paris) that was the discussions between the two governments (government of India and government of France). That was [a] government to government discussion and Dassault was not involved at that stage during the discussion. We were told, like many of us, during the press conference, in the evening, that 36 aircraft should be now an option for both India and France”.

A few moments later, he reiterated the fact that Dassault was told about the Indian decision to purchase 36 aircraft only at the time of Modi’s press conference on the evening of April 10, 2015.

Prime Minister Narendra Modi and French President Frnacois Hollande at their April 10, 2015 press conference in Paris. Credit: PIB

Trappier’s statement is significant because it highlights the fact that the announcement was a unilateral call taken by Modi, a point also made by Manohar Parrikar, defence minister at the time, who told a TV channel on April 13, 2015 that the decision to purchase 36 Rafale in fly-away condition was taken by Modi alone.

Modi’s unilateral decision to scrap an acquisition process that had been duly cleared and replace it with a new deal is the subject of a criminal complaint filed with the Central Bureau of Investigation and a PIL before the Supreme Court.

2. Question about the state of Dassault-HAL relations

Asked about the state of Dassault’s negotiations with HAL at the time the deal was changed, Trappier continues: “The Request for Proposal was very clear in 2007 and we won on the Request for Proposal. The deal was we had to make an agreement with HAL because HAL was officially the Lead Production Agency for manufacturing. So, we had to talk to them because they were in charge of the local production assembly line in their premises. So we had discussion with them for a long time.”

A moment later, he says, “I would not say we were in discussions because in the last few months before this announcement, the discussions were not very active with Government of India where HAL is a part. We had a detailed work share (agreement) with HAL and I have to say, HAL has always been a good partner with Dassault and I myself know HAL very well as I work with HAL from 1990s and I have great respect for this company.”

Incidentally, Trappier had released Dassault Aviation’s 2014 annual report on March 10, 2015, in which  “the continuation of exclusive negotiations with the Indian authorities and Indian industrial partners to finalise the contract for the sale/licensing of 126 Rafale” was noted. Fifteen days later, at a press conference, he said the 126 aircraft Rafale deal with India is 95% negotiated and both the parties are verifying the contract documents once again to avoid any future complications as the contract is too big and runs to thousands of pages. On March 25, 2015, while handing over IAF’s two upgraded Mirage2000 fighter jets, he told a gathering which included the then Indian ambassador to France, senior HAL and IAF officials that he expected to sign the contract for 126 Rafales with India soon and that would make Dassault’s relationship with HAL stronger.

Trappier’s earlier remarks are hard to reconcile with recent statements made by the the current defence minister, Nirmala Sitharaman, and others in the Modi government who have painted a grim picture of HAL by saying on various occasions that the negotiation for 126 aircraft had failed due to Dassault’s unwillingness to work with HAL.

In his latest interview, however, the Dassault CEO has himself clarified that he had signed a detailed work share agreement with HAL for the local production of 108 Rafales as mandated by the RFP and that Dassault never had any reservations about working with HAL. Rather, Trappier said that he and his company have a long standing business relationship with HAL and that he has great respect for HAL.

Asked why the ongoing negotiations prior to Modi’s announcement were scrapped, Trappier said that this question must be answered by the Indian government. He said there was an issue with the “guarantee”, where the Indian government wanted Dassault to guarantee all the 126 aircraft, but Dassault was willing to stand guarantee for the initial 18 aircraft produced by them and wanted HAL to stand guarantee for the 108 to be manufactured in India. When Trappier says, “guarantee by HAL may be an issue for Government of India”, it will be apt to remember the comments of former HAL chief Suvarna Raju who said “Dassault and HAL had signed the mutual work-share contract and given it to the government. Why don’t you ask the government to put the files out in public? The files will tell you everything. If I build the planes, I will guarantee them.”

What emerges from this is that the Modi government has been trying to blame HAL for the failure to close the negotiations for 126 aircraft whereas both the Dassault CEO and the then HAL chief are on the record saying they were comfortable working with each other.

3. Deliberately confusing one Reliance for the other

When CNBC asked Trappier what led Dassault to choose the Anil Ambani-led Reliance group as its offset partner and form a JV with – Dassault Reliance Aerospace Limited (DRAL) – he followed the lead taken by BJP leaders like Ravi Shankar Prasad by deliberately confusing one Ambani brother for the other.

Trappier said: “We signed the first agreement with Reliance in 2011. And to be precise, Dassault signed the first agreement with Reliance in February 2012.”

He added a moment later that their main agreement would have been with HAL as HAL was the main production agency who had to supply the Indian manufactured Rafale to the Indian Air Force with certain responsibility and certain responsibility owned by Dssault. Dassault wanted to work with the “Reliance Group” and the agreement with Reliance was to manufacture wings for Dassault’s business jet Falcon series.

Trappier’s statement is severely misleading for its use of the word “Reliance Group”. There were enough media reports in February 2012 of Dassault signing an MoU with Anil Ambani’s elder brother Mukesh Ambani led Reliance Industries Limited (RIL).

File photo of the Ambani brothers, Anil (left) and Mukesh (right). The two siblings run their own independent businesses and are frequently at loggerheads. Credit: PTI

Immediately after Dassault was announced as the winner of MMRCA tender, the Mukesh Ambani led Reliance Industries decided to enter the defence aviation business. One of the group’s companies – Reliance Gas Marketing, actually incorporated on September 4, 2008 – was renamed Reliance Aerospace Technologies Limited (RATL). Dassault Aviation signed an MoU with RATL in February 2012. On February 13, 2012, while reporting Dassault’s MoU with RIL, the Times of India wrote, “Reliance Industries has been looking to diversify as growth in its core oil and gas business slows”. Note that the Anil Ambani led Reliance group’s core business was never oil and gas, but telecom and infrastructure.

As is known by the government, the corporate world and all business journalists, the word ‘Reliance’ may be common to both but Mukesh and Anil Ambani Anil lead two separate business groups altogether. Mukesh Ambani heads Reliance Industries Limited and Anil Ambani’s group is known as Reliance ADAG (Anil Dhirajlal Ambani Group). Recently, the Economic Times reported that “a memorandum of understanding on the offsets deal was simply allowed to lapse. Also, Reliance is said to have decided to stay away from this business. There were talks and several rounds of discussions where the teams met but nothing much happened beyond that. Things did not even reach the proof of concept stage and when the MoU lapsed, it was not renewed.” The report says that when the Modi government came in to power, Dassault’s interest in partnering with Mukesh Ambani “fizzled out”.

We should not for a moment imagine that Trappier is not aware of the difference between the two Reliance groups when he locates Dassault’s 2012 MoU with Mukesh Ambani’s RIL as the point when his company first decided to partner Anil Ambani’s Reliance. The fact that he persists in this bit of disinformation, originally put out by senior Modi ministers, is an indication of the government’s weak defence against the charge of crony capitalism in the Rafale deal.

4. Did Dassault really choose Anil Ambani because it had land near an airport?

The next question Trappier was asked was why Dassault Aviation – a company with immense experience in a specialised and highly technical field like defence aviation – chose a company like Reliance as its JV partner which has no experience or expertise in any form of aircraft or parts manufacturing, but is in to infrastructure business. The question acquired added salience in the wake of former French president Francois Hollande’s remarks in September that the Anil Ambani group had been imposed on France by the Indian side.

Trappier’s answer to this question has further muddied the waters . The first thing he said was, “It is not only Rafale, but Falcon.” For Rafale, he said, Dassault can’t delay the lead time as it has customers waiting. But, when it has to start from scratch, Dassault prefers Falcon where it can afford time lapse. Trappier repeated what he has said earlier, that he chose Reliance as his JV partner in India because what he wanted was land near an airstrip to set up a factory and assembly line for the Falcon 2000 series. Reliance is a strong group and had land in Nagpur, he said. Bangalore on the other hand was a big and busy city and HAL did not have that (land).

Trappier’s explanation has three elements, each of which need to be examined separately to understand the damaging consequences of what he said.

Dassault Reliance Aerospace Limited is a JV between Dassault Aviation and Reliance ADAG’s Reliance Aerostructure Limited (RAL). According to the Ministry of Corporate Affairs, RAL was incorporated on April 24, 2015 – exactly two weeks after Modi’s announcement from France – as a subsidiary of Reliance Defence Limited, which in turn was incorporated on March 28, 2015, two weeks prior to Modi’s announcement that India was going to buy 36 Rafales.

Dassault Aviation itself said in a press release on April 23, 2018, that it formed its JV with RAL in April 2015 itself. This admission contradicts what Trappier said in this interview. If Dassault formed a JV with RAL in April 2015, this was when the company existed only on paper as it was created only on April 24, 2015. It did not have any land or any other assets. Reliance ADAG group company Reliance Capital, on August 29, 2015, put out a press release related to RAL which mentioned that the company had applied  to the Maharashtra government for allotment of  land on June 16, 2015 – almost one and half months after Dassault says it teamed up with RAL – and RAL received the allotment letter for 289 acres at Mihan, Nagpur, on August 29, 2015.

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The unveiling of a plaque during the inauguration of the Dassault Reliance Aerospace Limited (DRAL)joint venture plant at the Ambani Aerospace Park in Mihan, India, in October 2017. Credit: Dassault

Second, though it was allotted 289 acres, RAL took only 104 acres. The Nagpur edition of the Times of India reported on January 20, 2016 that “ADAG had earlier sought 289 acre land but later reduced its requirements to 104 acres. The board headed by Chief Minister Devendra Fadnavis has given 104 acres and reserved the remaining 185 acre for the company.”

Another report in the same news paper, on July 21, 2017, pointed out there was no taxiway from the land allocated to Reliance to connect to the main runway of Nagpur airport, that Reliance did not pay the complete land price of Rs.38 crore (for 104 acres) to the authorities citing this reason for a long time, and that the payment was made only in second week of July 2017 – a good two years after the land was originally allocated, and at least five months after DRAL was formally incorporated in February 2017.

In other words, Trappier’s claim that  Dassault chose Reliance as its JV partner because it had land at Nagpur connected to the runway does not add up. Neither at the time of Dassault first deciding to partner with RAL (in April 2015) or at the time of formal incorporation of the JV did its partner have land connected to the airport for this project in Nagpur or anywhere else.

Thirdly, Trappier says the fact that HAL did not have the land in Bangalore was another reason for Dssault to choose Reliance ADAG as its JV partner. This statement is also factually incorrect. On March 25, 2012, when the contract negotiation committee (CNC) of the Ministry of Defence was negotiating the details of the earlier, 126 aircraft deal, with Dassault, The Hindu reported that HAL had invited bids to construct a new integrated, green “MMRCA Complex” with runway, hangers, new production unit and residential facilities for employees at Challaghatta near  Bangalore international airport where the company had large tracts of land. And the company was already operating the HAL defence airport. This again shows Trappier was hiding facts which are well within his knowledge to save Modi from facing more questions about the Rafale deal.

5. Questions about the nature of Anil Ambani’s license

Trappier’s answer about his choice of Anil Ambani’s Reliance also raises questions about the extent to which the necessary clearances and paperwork have been completed.

India’s Offset Policy in Defence Procurement Procedure clearly states that selecting an Indian Offset Partner (IOP) is the prerogative of the vendor (here Dassault), but the IOP must hold a valid licence in accordance with DIPP (Department of Industrial Production and Promotion) guidelines.

The DIPP’s “List of Industrial Licences Issued for Manufacture of Items under Defence Industries from January 2011 to 3 July 2018” says that RAL received a licence for “manufacturing and upgrade of airplanes and helicopters specially designed for military applications” on February 22, 2016. Note that this license came 10 months after it created its JV with RAL, as per Dassault’s own admission. This itself shows the casual – or super confident – attitude Dassault adopted while deciding to partner with Reliance ADAG’s RAL, a company which was swimming in liabilities and did not even possess the relevant license at the time.

The Industries (Development and regulation) act 1951, section 11A of Chapter 3 — Regulation of Scheduled Industries — says: “The owner of an industrial undertaking not being the central government which is registered under section 10 or in respect of which a license or permission has been issued under section 11 shall not produce or manufacture any new articles unless — 1) In case of an industrial undertaking registered under section 10, he has obtained a license for producing or manufacturing such new article; and 2) In case of an industrial undertaking in respect of which a license or permission has been issued under section 11, he has had the existing license or permission amended in the prescribed manner.”

In the list of industrial licences issued till July 31, 2018, DRAL did not take any new licence. That means, it decided to operate under the industrial licence issued to RAL to manufacture military aviation products. This raises the question of whether the manufacture of civilian aircraft parts – as Trappier says the JV will focus on – would amount to violating the terms on which RAL was issued a license in the first place.

The same DIPP document shows RAL’s address as “Survey Number 589, Taluka Jafrabad, Village Lunsapur, Amreli District, Gujarat.” This raises another issue. DPP rules categorically state that any change in the place or location other than the one mentioned in the initial registration of a company will not stand valid, and a new registration is required to be done.

6. Questions on eligibility of Anil Ambani’s Reliance as offset partner

Halfway through his interview to CNBC, Trappier said that although Dassault wanted to have a private JV partner in India to set up facilities for them, the Indian Rafale would have been built by HAL if the original MMRCA contract had gone through,

The context was the place of offsets in the deal. Trappier explained that for Dassault to be in India, it was his (Dassault’s) requirement to invest in India to set up production facilities. The offset obligation is 50% of the value of the contract. Dassault will discharge this obligation not only via Reliance but by working with many other companies, he said. “We have to be in line with DPP 2013 rules. We follow those rules. 40%, today, of the 50% of our obligations already identified in order to create the value… Among the 40% we have already signed 30 agreements with companies, not with JV, JV is one. We have 30 other companies with which we have already signed today. And we are discussing with 70 others. And it is all around India. 10% of the 40% will go to DRAL, today.”

Trappier said he can’t disclose the actual value of the total offset because it is a government to government deal, though Business Line has placed the value at Rs 21,000 crore.  “To give you the value of [the] JV, today, the capital of the JV is roughly Rs. 70 crore. It should go up to Rs. 850 crore. 51% by Reliance and rest by us. This is the capital investment. We started our production and we started fast. We created the JV in the beginning of 2017. It was according to our previous agreement including our initial agreement in 2012.”

Trappier’s answers raise some important questions. When he says Dassault has to follow DPP 2013 rules and he is following it for this particular deal, Dassault has likely already violated the offset rule by selecting Reliance.

DPP 2013, Defence Offset Guidelines, Para 4, Indian Offset Partner, clause 4.1 reads: “Indian enterprises and institutions and establishments engaged in manufacture of eligible products and/or provision of eligible services, including DRDO, are referred to as the Indian Offset Partner (IOP).”

Reliance Aerostructure Limited will not fit in here as they were not manufacturing any eligible products or were not engaged in any provision of eligible services when Dassault chose them as IOP in 2015 or formally incorporated its JV in 2017. That itself is a violation of offset guidelines, and officials are bound to point this out as when Dassault formally informs the Ministry of Defence that DRAL is part of its Rafale offset obligations

7. Lots of offset partners or lots of subcontracts?

When Trappier says Dassault signed contracts with 30 companies and is in discussion with 70 more, what he did not elaborate is whether these will be direct contracts or  subcontracts routed through DRAL. A Dassault press release of October 27,  2017 notes that DRAL’s Mihan’s facility “will also attract and house an organic ecosystem of over 200 MSMEs to secure the component and avionics manufacturing needs of Rafale and Falcon Jets.”

Artist’s plan for the Dassault Reliance Aviation Ltd plant at Mihan, Nagpur. Credit: Dassault

Besides, RAL is the JV partner of Thales, which has the second highest offset obligation after Dassault. But, nothing about the JV, its value or its offset obligation responsibilities have been put out in the public domain except  that the JV will be constructing a factory in the same place where RAL has land (Mihan, Nagpur).

While explaining the current capital investment of the JV, Trappier mentions RAL’s investment is just land and we have seen earlier RAL paid Rs 38 crore for 104 acres and alloted 60 acres out of that total to DRAL.

Again, Trappier persists with the disinformation about the “initial agreement” with Reliance going back to 2012. Curiously, CNBC’s reporter fails to point out that Dassault’s 2012 agreement was with Mukesh Ambani’s Reliance and that it lapsed in 2014. And that Dassault’s new understanding with ADAG was formed only after Modi announced his decision to purchase 36 Rafale in fly-away condition.

8. No clarity on price

On the pricing issue too, Trappier’s interview can only end up adding fuel to the Rafale controversy. Firstly, Trappier confirms that there is no change in the specification of the aircraft, weapons and any other ‘India specific package’ associated with it from the original MMRCA deal. However, the Modi government and BJP leaders have been insisting that the price is high due to “India specific changes”.

Second, Trappier insists the base price of the aircraft actually came down after negotiations by 9%, a point Arun Jaitley and others have made in order to suggest the Modi government had better negotiating skills than its Congress predecessor. He was obviously comparing the per unit price of 36 Rafales in flyaway condition with what had earlier been agreed would be the per unit price of the 18 Rafales that were to come to India in flyaway condition under the original deal. Since India is now buying more, it is natural that there should be some reduction in price. In any deal where a manufacturer has invested heavily to develop a product like an aircraft, product development charges are added on to the cost of the product till the manufacturer recover its complete investment. The higher the number of products a manufacturer can sell, the lower would be the development cost added on to the product.

Third, Trappier admits that had India opted for 126 aircraft under the original MMRCA deal, the price in the long run would have been cheaper as the bulk of the aircraft would have been made in India. In other words, Trappier virtually admits that by announcing the purchase of 36 Rafale in fly-away condition and scrapping the Make in India plan altogether, Modi ruined India’s chance of getting its Rafales at a lower price.