As days pass, the Rafale issue refuses to go away. The Supreme Court judgment was very unfortunate.
Even if you go beyond the dizzying legal and procedural intricacies, the judgment bristles with flaws and fallacies.
More materially, there are broader issues that are troubling for the future of all defence capital procurement. These issues sear the very raison d’être of India’s defence procurement procedure (DPP) and impugn every known canon of institutional rectitude and sensibility.
Defence minister Nirmala Sitharaman’s recent response in parliament only makes matters worse. I must confess it left me winded.
The reality is defence capital procurements have always been controversial – some baseless and irrelevant, some genuine and pertinent – regardless of the government in power. This is largely because most orders are big ticket items involving humongous expenditure of taxpayer money.
This is followed inevitably by a protracted timeline, including field trials, technical evaluation and multi-layered stakeholder and committee consultation. Over time, amid all the allegations of shenanigans, the DPP has been codified and, with successive modifications, streamlined to be more watertight.
Within the defence ministry, the DPP has always been treated as the Bible. When deviations are proposed, often arising out of compelling and intractable reasons, they are spelt out clearly and put through the wringer of propriety with care and scrutiny before seeking the approval of the defence minister.
This gold standard of spending taxpayer money is scrupulously followed.
A new low
The Rafale debate in parliament degenerated to a new low. The combative volleying of words was, to say the least, ad hominem and often with no relevance to the issue debated. Not to forget the whataboutery invoked to avert or duck awkward but pertinent questions.
The truth is Sitharaman was on a weak and sticky wicket, in trying to defend the indefensible. Histrionics carry no gravitas in parliamentary debate in a people’s democracy. After the momentary thrill of the political cut-and-thrust, people quickly realise they hadn’t got their legitimate due – their right to know facts.
More sadly, the new Rafale deal impugns the propriety of processes, hard facts and procedures.
Since the case bristles with plenty infirmities and violations, let me highlight just a few.
Request for Proposal (RFP) and Mode of Procurement
Let’s go back to the very start – when the prime minister announced the inter-governmental agreement (IGA) on April 10, 2015.
There already was an RFP of 2007 still alive. The government claims the process to withdraw it began in March 2015, but it was likely officially only cancelled a few months later.
The L1 firm (Dassault) was known to all and sundry. How morally right was it then to announce the IGA in such a scenario – with purchase from the same firm and for the same aircraft? Not to miss out that the IGA was predicated on mere Global ‘Buy’, with an attenuated number (earlier RFP’s 126 reduced to 36), and with no reference to the most vital aspect of Global ‘Make and Buy’ – the category that has the most potential to translate ‘Make in India’ into reality.
If the government was convinced – even prescient and clairvoyant – enough to divine that the earlier RFP was bound to turn into a “non-deal” (the defence minister’s words) and stay that way, the correct thing was to cancel it and make a fresh beginning. It should have done so in order to comply with the DPP 2013 for obtaining the Acceptance of Necessity for a new RFP.
Only thereafter, the nitty-gritty of the “new-deal”, via the IGA, should have been hammered out. That the-then defence minister Manohar Parrikkar, as per media information, was completely oblivious to the IGA would prompt one to deduce that the procedure was not followed.
An inevitable inference thereafter is that the number of aircraft was whittled down without the approval of the IAF and the SCAPCHC (Services Capital Acquisition Plan Categorisation Higher Committee), let alone the Defence Procurement Board (DPB) and the Defence Acquisition Council (DAC), as also the mode of procurement.
If DPP would have been followed and if all these authorized and legitimate bodies/committees could have approved the new RFP, and importantly, recommended the Global “Buy” – and not Global “Buy and Make” as in the RFP 2007 – that would have been kosher, as far as procedural fidelity goes.
Sovereign guarantee and letter of comfort
Sitharaman dismissed the necessity of a sovereign guarantee by alluding to similar purchases made from the US and the erstwhile USSR without any sovereign guarantee.
Not only was she completely off-centre with her remark by comparing apples with onions, as the defence minister, she would be fully aware of the fact that procurement from these two countries are on an entirely different footing.
The purchases from the US under the FMS programme is managed by the Defence Security Cooperation Agency (DSCA), functioning under the US Department of Defence (DoD) and the US government takes complete responsibility for it.
The payments too are made directly to a US government assigned fund agency as per the IGA, with the advances earning interest till the retirement of bills. The risks, if any, are covered in the IGA signed with the US government and with no need for any overweening sovereign guarantee.
Likewise, procurement from Russia today or from the erstwhile USSR are/were administered directly by the Russian government through the state intermediary agency (Rosoboronexport now) as its sole state intermediary agency.
Thus, IGA-backed purchases made from Russia are clearly on a firm government-to-government basis, and with no need for obtaining any sovereign guarantee from Russia, since no private entities are involved.
It is a financial truism that sovereign guarantees are mandatory under an IGA when the supplier is a private company beyond the control of the foreign government and there is a need to secure payments advanced to the firm.
In strict financial terms, there are price advantages: it whittles the cost down by eliminating the need for bank guarantees (BGs) by private companies and correspondingly reduces the liability that the buyer has to bear.
Apropos the Rafale contract, the Indo-French IGA has no meaning without a sovereign guarantee. The ‘letter of comfort’ grants no comfort to protect Indian taxpayers’ money and strategic interests. In reality, it’s a direct contract between India and the private firm called Dassault Aviation (DA), with the decal of the French PM’s ‘letter of comfort’ ceremoniously spritzing on the Indo-DA diptych.
To preempt any risks and to protect public funds, Rule 172(1) of General Financial Rules 2017 is categorical: “While making any advance payment… adequate safeguards in the form of bank guarantee etc. should be obtained from the firm”. Neither has this been honoured nor is there any sovereign guarantee to secure Indian public funds.
Morality of amending offset clauses midstream
How correct is it to amend offset clauses mid-stream? Can this be done retroactively?
How moral is it to amend the clauses after the IGA was announced and when the ‘new deal’ is a work-in-progress? The same spirit of inviolability governs and animates the offset guidelines of DPP 2013 as much as they do with the terms and conditions incorporated in the RFP.
While Sitharaman is right in asserting that considering the discount Eurofighter offer wasn’t in order in the spirit of morality, how fair was it to modify the offset guidelines on August 5, 2015, months after the IGA pronouncement of March 10, 2015?
I maintain that the new Rafale deal was a flawed procurement and shouldn’t have happened in the first place.
Dissent and signing of the Cabinet Note
In her response in parliament, Sitharaman alluded to the concerned joint secretary dissenting on some seminal issues and yet signing on the note sent for CCS approval. Anyone with a nodding acquaintance with official functioning knows that issues are examined on files, views expressed and the same overruled by hierarchical seniors.
The final approving authority’s view ultimately prevails and that becomes the final decision. It is this final decision that is conveyed to their higher authorities. Rather than this glib reply of the same dissenting officer signing the note to the CCS, the government would do well to make this document public to vindicate the views expressed by the defence minister.
Winning brownie points
There were several facetious responses from Sitharaman that amused me no end. One such, related to the ‘new-deal’, was where she claimed that Dassault Aviation has agreed to provide performance guarantee for two squadrons, not one like in the ‘non-deal’.
The pith of the matter is when the so-called non-deal was for 18 Rafale aircraft (one squadron) in flyaway condition, it couldn’t have offered performance guarantee for two squadrons! Apart from the substantive issue that since it was a non-deal (when her responses were replete with reference to it as a non-deal as and when found convenient) harking back to it in this instance was a complete non-sequitur.
The same too goes when she alluded to MoD (Fin) examining the issues of the non-deal after independent monitors had given a go-ahead in 2012. It needs no emphasis that scrutiny, analysis and concurrence of integrated finance under the Integrated Financial Advisory (IFA) System is de rigueur and not to be trifled with.
MoD (Fin) acts as an independent division overseeing all four departments in the MoD. It not only examines but processes and forwards the file to the Department of Expenditure in the Ministry of Finance, and for eventual approval of the CCS, acting as the Competent Financial Authority (CFA) since it exceeds the combined financial powers of the defence minister and the finance minister.
Either Sitharaman is unaware of this process or chose to mislead by reckoning this as redundant – to only add to the delay and non-decision of the “non-deal”.
According approval in February 2014
Now to the non-decision of the previous government in February 2014.
Let’s get real and fair. Would it have been morally right for a virtually lame duck government (the Model Code of Conduct hadn’t been invoked yet, but a vote on accounts for an extended period had been proposed/passed for the FY 2014-15) to commit huge expenditure just before the election, even though the cash outgo in the FY 2013-14 would have been only a small percentage of the contractual value?
Indo-French Secrecy Pact of 2008
Over the last year, the government has refused to disclose information on the Rafale deal on the basis of a secrecy pact with France.
For someone who has had a lifetime association with the defence ecosystem as a career bureaucrat, and vehemently pleaded for openness and transparency, I can’t help but ask if such secrecy clauses couldn’t be sculpted into all contracts – to obfuscate core issues from parliament and the public – and thereby shroud defence deals to avoid debate, deliberation, and criticism!
The plain truth is no one stopped the government from delinking this much-vaunted “secrecy clause” from the IGA. The reality is each contract-signing nation chalks out its independent imperatives in sync with its constitutional architecture and mandate – and quite agnostic to the demands/pleadings of the other agreement-signing party, if any. We can only delude ourselves to such secrecy in the name of strategic security but the truth is it convinces none.
Devil in the detail
Another crucial issue is the aspect of transfer of technology (ToT) and indigenous licensed production in India. How vital it is, not only from the point of view of the Make in India but also for future indigenous defence production, shall show up soon.
How will this bear on the fresh RFP (the RFI has been issued in April 2018) likely to come up for 110 fighter aircraft? Not to lose sight of the cost-sheets of the new deal and the brouhaha over substituting HAL as the IOP by other arriviste companies.
To sum up, a dispassionate analysis of facts available in the public domain on the new-deal for procurement of 36 Rafale aircraft clearly suggests serial and seminal shading of facts. This was likely done to endorse the post-facto legitimisation of a spur-of-the-moment decision taken in the IGA pronouncement of April 10, 2015.
No dumbing down of facts or deigning of details will obfuscate the truth though. The devil is in the details, and as the clamour gets louder for openness and transparency, stonewalling of facts is not the way to go about.
Sudhansu Mohanty worked as Controller General of Defence Accounts and then as Financial Adviser, Defence Services before retiring on May 31, 2016.