Rafale Deal: Nuts And Bolts Of Dassault’s Offset Partner

Amid the loud controversy that has erupted in India in the wake of former French President Francois Hollande’s interview to Mediapart, the political slugfest has already reached a fever pitch. To be fair, this is not surprising. But what is intriguing is that hardly any media attention has been bestowed on the nuts and bolts of defence offsets. It is time for a dispassionate analysis of the Indian Offset Partner (IOP) provisions enshrined in the Defence Procurement Procedure (DPP) 2016 that is said to be the basis of the Inter Governmental Agreement (IGA) between India and France and the signing of the Rafale deal.

To begin with, invocation of DDP 2016 is a touch quizzical. Recall the timelines. Prime Minister Modi’s visit to Paris was in April 2015 when the deal was first announced. As per information available in public domain, the MoU to the IGA (not the IGA per se) was signed in January 2016 and the contract was signed in September 2016. The DPP 2016 came into vogue only from April 1, 2016. If DPP 2016 has been made the basis, then the Rafale contract was signed under this, while the MoU to the IGA was signed under DPP 2013. If indeed it began post PM Modi’s announcement in April 2015 and signing of the MoU in January 2016, one would naturally conclude that the deal was signed as per DPP 2013 provisions, since DPP 2016 hadn’t yet come into play. It will be good for the government to clear this air. However, since DPP 2016 is being talked about by all stakeholders, to avoid any confusion, DPP 2016 provisions are being referred to in this piece. Notwithstanding that, this needs clarification, as much as the secrecy clause invoked by the government to wrap this contract with its omerta on the price.

But let’s look at the provisions of defence offsets and the questions flowing out of the same for better understanding. The Rafale deal falls in the category of ‘Buy (Global)’ under Capital Acquisitions – outright purchase from a foreign vendor as per Para 2.1 of DPP 2016. Para 2.4 stipulates that even for procurement under IGA, the offset condition will form a part of the RFP and subsequently of the main contract and that a “separate offset contract will be executed simultaneously with the main contract.” Was this done? If so when? What were the timelines?

The most talked about provision and perhaps the most relevant is the one contained in para 4.3 of DPP 2016, which states that “The OEM/vendor/Tier-I sub-vendor will be free to select the IOP for implementing the offset obligation provided the IOP has not been barred from doing business by the MoD.” This is the line that the government has taken. There can be no quarrel here. But that the government has not done any “matchmaking” (to use Nirmala Sitharaman’s words in a recent interview to a national newspaper) and hence is unaware about the nuts and bolts of the offset contract needs to be seen in the light of the following relevant paragraphs of the DPP.   

As per Para 5.4, “In cases where the main procurement contract is signed on the basis of an Inter-Governmental Agreement (IGA) under Para 104 of Chapter II (e.g.) through Foreign Military Sales (FMS) by the US Government, but offset contract is signed with the OEM/vendor, the OEM/vendor shall be required to furnish a Performance Bond equal to 5 percent of the offset obligation which is required to be fulfilled during the period of the main procurement contract. An additional Performance Bond would be required in case the period for discharge of offset obligation exceeds the period of the main procurement contract as indicated in Para 5.3 above.” The issue then is: was this obtained from Dassault Aviation? If not, why? Or, was it that this wasn’t deemed necessary in view of the sovereign guarantee provided by the French government? It’ll be good for the government’s credibility to clarify this.

Para 6.1 of the DPP 2016 makes the Acquisition Wing in the Department of Defence responsible for (i) technical and commercial evaluation of offset proposals received in response to RFPs and (ii) conclusion of offset contracts,” while Para 6.2 makes the Defence Offsets Management Wing (DOMW) under the Department of Defence Production responsible for formulation of Defence Offset Guidelines and all matters relating to post contract management.

Few other paras too are of vital importance. One is Para 7.1, which inter alia states thus: “At the stage of submission of the techno-commercial proposal, the vendor will submit a written undertaking in the format at Annexure I to Appendix D to the effect that he will meet the offset obligations laid down in the RFP as per the Defence Offset Guidelines… It will be binding on the vendor and will clearly state that failure on the part of the vendor to comply with the offset guidelines at any stage may result in disqualification of the vendor from any further participation in the tender/contract. It may also result in imposition of penalties indicated in Para 8.13 and render the vendor liable for debarment from participating in future procurement contracts for a period up to five years as indicated in Para 8.14. Failure to submit the undertaking in Annexure I to Appendix D shall render the bid non responsive and liable to be rejected.”

Another relevant para is 8.4: “The Commercial Offset Offer will contain the detailed offer specifying the value of the total offset commitment components, with a breakdown of the details, phasing, IOPs and banked offset credits if any proposed to be utilised. The commercial offset offer will be opened along with the main commercial offer after the TOEC report has been accepted by the DG (Acquisition). The commercial offset offer will have no bearing on determination of the L-1 vendor.”

Para 8.6 perhaps is the most crucial. “All Offset proposals will be processed by the Acquisition Manager and approved by Raksha Mantri, regardless of their value. Offset proposals will also be incorporated in the note seeking approval of Competent Financial Authority (CFA) for the main procurement proposal for information of the CFA. The offset contract will be signed by the Acquisition Manager after the main procurement proposal has been approved by the CFA. Signed copies of the offset contract will be made available to DOMW”. Both the formats – technical and commercial – for submitting offset offers among other things seek for (i) Company profile of IOP/agency;(ii) Details with quantities/values of the proposed offset; (iii) Letter of IOP/agency confirming acceptance of the offset project.

It is easier now for a lay citizen to fill in the details of facts and fictions, lies and obfuscations, allegations and counter-allegations that have raised such a farrago of noise today. The government cannot pretend that it was unaware of Dassault Aviation’s selection of its offset partner through bland pronouncements from time to time. As per DPP 2016, the government has to be – and must have been – apprised of the developments every step of the way. This is not to overlook the fact that there is a detailed procedure laid down for preparation of a Statement of case and a draft RFP by the SHQs to assess the acquisition category against the Defining Attributes including the total quantities required, before it is placed for consideration of the Categorisation Committees (SCAPCC/SCAPCHC), then for subsequent approval of the Defence Procurement Board (DPB) and/or the Defence Acquisition Council (DAC), as the case is, for accord of AoN. Merely explaining it away that Dassault Aviation selected its own offset partner will not suffice to staunch the doubts of the taxpayers’ money. The government needs to come out with more substantive detail to disabuse the billowing allegation of cronyism it is facing today.

It’ll be presumptuous of me to say anything about Dassault Offset partner except that it is an entirely new player in the defence ecosphere. Nor will I like to be judgmental if the aim of offset purported to foster domestic industry and technology, and eventually promote indigenous design and development of defence equipment – the spirit of DPP 2016 – has been achieved here.  What extraordinary expertise Dassault’s Offset partner brought to the table to displace the one and only and time-tested defence public sector undertaking, HAL, only time can tell. But that Dassault Aviation staked its risk very high in opting for its new IOP – when seen against the provision of para 7.1 that binds the vendor that “failure on the part of the vendor to comply with the offset guidelines at any stage may result in disqualification of the vendor from any further participation in the tender/contract... may also result in imposition of penalties… and render the vendor liable for debarment from participating in future procurement contracts for a period up to five years” – is undoubted. That notwithstanding, it must be said that the reasons why an established global firm like Dassault plumped for one partner and not the other, or if the allegation of cronyism can be ever established from official records/documents shall always lie in the realm of conjectures and surmises. Such is the shading we deign to bring on issues in India. It’s only rarely preponderance of facts get a top billing.    

(The writer is retired financial advisor (defence services) in the defence ministry. Views are personal )