Rafale Deal: A 'Letter of Comfort' That Brings No Legal Comfort to India

In his book When in Doubt, Mumble: A Bureaucrat's Handbook Jason Boren discusses the bureaucrat’s constitutional right to fuzzify, profundify… as part of the freedom of speech. The government’s 16-page submission to the Supreme Court in the Rafale case amounts to exactly that – it fuzzifies, it profundifies.

It concedes what was anticipated, and conceals what was expected: that the announcing of the intergovernmental agreement (IGA) didn’t have the approval of the Defence Acquisition Council or the defence minister, let alone the Cabinet Committee on Security, hence it doesn’t fulfil the prescribed rigmarole of defence capital acquisition.

Not to forget that the attorney general had to gingerly concede the non-existence of a sovereign guarantee, in lieu of which the French government has given only a ‘letter of comfort’.

The ‘letter of comfort’ provided by the French government is neither here nor there – there can be no comfort forthcoming! Put simply, it’s a ‘letter of comfort’ that’s not legally binding, falling short of a sovereign guarantee.

A ‘letter of intent’ as used in international contracts is at best morally binding, more akin to a wedding engagement. Either party can renege and go its own way – and with no legal and contractual obligations devolving on it to honour its earlier ‘moral’ commitment. But with mobilisation advance and milestone payments de rigueur in any fabrication and turnkey contracts, it has the potential to imperil the buying nation’s interests.

For there is no certainty that the successor President or Prime Minister of the French government will honour the terms – they may or may not honour the past ‘letter of comfort’, and in the absence of legally enforceable terms in the event of any violation of the terms of contract by the supplier, the buying country is helpless to recover the advances paid.

To preempt such eventualities and to protect government interests, since such contracts involve public money paid out of the Consolidated Funds of India, Rule 172(1) – Advance payment to supplier – of the General Financial Rules (GFR) 2017 prescribes that: “While making any advance payment as above, adequate safeguards in the form of bank guarantee etc. should be obtained from the firm”. This acts as a safety net for the government.

There are other disingenuous claims. For a start, the Defence Procurement Policy 2013 and the DPP 2016 have been mixed up, used interchangeably, fuzzifying the declamations in Para 5: “Defence acquisition is not a standard open market commercial form of procurement… decision making remains unique and complex… Defence procurement involves long gestation periods… delay in procurement will impact the preparedness of our forces… The needs of the armed forces being… an uncompromising aspect, flexibility in the procurement process is required.”

These lines are from the preamble of the DPP 2016. But in April 2015 when the IGA was announced, it was the DPP 2013 that was in effect, and was the basis of signing the Rafale contract. In fact there wasn’t even a preamble in the DPP 2013 – perhaps this is why allusion is made to the preamble without citing the year!

The government’s line of argument in its submission sounds hollow. Questions will always be raised on the procedure followed and why the IGA was resorted to. The government, for all its wordy elaboration of the procedure followed since the IGA announcement (now called ‘intent’), economises on its inputs prior to it. It says “the process for RFP (request for proposal) withdrawal was initiated in March 2015 and the RFP for 126 MMRCA was finally withdrawn in June 2015”, but shares no material details that would support this laconic statement.

No one is questioning the merit of Rafale aircraft or the dire need of the Indian Air Force. Rafale is an excellent aircraft which, along with the Eurofighter, was shortlisted by the IAF after elaborate field trials and technical evaluation.

But the information available and submissions made by the government clearly reveal that due process wasn’t followed. Going by their submission, the streamlining of defence procurement began in December 2002, and over time the DPP was revised and enlarged through several versions – to be followed scrupulously.

Despite this affirmation, the DPP wasn’t followed, and the procedures it lays out were given short shrift. For a government that puts emphasis on observing the highest standards of transparency, probity and public accountability, speaks of self-reliance as a major cornerstone of its policy, and gives a boost to Make in India (Preamble DPP 2016), not to follow these procedures shows it doesn’t walk its talk.

Another concern is the change in the benchmark price. If for the sake of argument we accept the government’s contention that the price details are secret, media reports suggest that the negotiating team came up with a benchmark price, but it was overruled by the ministry. What are the government’s justifications for overruling the recommendations of its own negotiating team?

Again, going by information available in the public domain, the Defence Acquisition Council headed by the defence minister and comprised of all senior functionaries of the Ministry of Defence didn’t approve and recommend the case for procurement. Instead, they left it to the Cabinet Committee on Security to take a decision on a business area allocated to the MoD. Not once, in my fallible memory of defence capital acquisition, can I recall such an instance as this.

The changes made to the offset rules in August 2015 granting vendors no obligations to share offset partners in advance too shall forever haunt the government. The amendment wasn’t a good move – not in the spirit of transparency and fairness so dear to the government. It is morally indefensible, and it adds no ostensible benefits to the government as the conscience-keeper of public funds.

On the contrary, hypothetically speaking, were the Original Equipment Manufacturer (OEM) to introduce an entity with little credibility and zero experience in defence production as the Indian Offset Partner, and the latter fumble to fulfil its offset obligations, with the government in the dark thanks to this amendment it would likely compromise the national interest.

The 5% performance guarantee bond paid by the OEM is a small sum which doesn’t take into account the time overrun and the cascading fallout it would (naturally) trigger for items listed for indigenous development. The ultimate loser will be the Indian taxpayer.

This is why Paragraph 8.6 of the Defence Offset Guidelines 2013 spells it out clearly: “All offset proposals will be processed by the Acquisition Manager and approved by Raksha Mantri [the defence minister], regardless of their value. Offset proposals will also be incorporated in the note seeking the approval of the Competent Financial Authority for the main procurement proposal, for the information of the Competent Financial Authority. The offset contract will be signed by the Acquisition Manager after the main procurement proposal has been approved by the Competent Financial Authority.”

It has been said that the negotiation with Dassault on the 2007 RFP (request for proposal) broke down as HAL sought 2.7 times more working man-hours than Dassault to produce Rafale aircraft. This is a surprise, given Dassault Aviation CEO Eric Trappier’s positive statement on March 25, 2015.

If one were to accept the government’s averment, it’s clear not enough work has been done. To take 2.7 times more working hours would entail two things, time and cost, which would mean more manpower, and consequentially higher cost. Apropos the cost of production, labour costs significantly less in India. HAL’s 2.7 times higher man-hours compared to Dassault’s needs to be put through the formulaic purchasing power parity model or its variant, to equilibrate the labour hours and rates in order to calculate the real difference.

Looking at the difference in cost of living standards and labour rates, the HAL issue seems a non sequitur, because the cheaper Indian labour cost would likely absorb any higher man-hours. Nor could the calculation of overheads have significant effect on the overall cost of production, as it is based on direct labour.

Likewise the issues relating to “contractual obligation and responsibility for 108 aircraft manufactured in India” that the government now claims “could not be resolved” is negated by Eric Trappier’s own words, spoken on March 25 2015, that “We are in agreement on the responsibilities sharing, considering too our conformity with the RFP in order to be in line with the rules of the competition. I strongly believe that contract finalisation could come very soon.”

So, is the government’s submission that “our adversaries inducted modern aircraft and upgraded their older versions” and “an urgent need was felt to arrest the decline in the number of fighter squadrons in IAF and enhance their combat capabilities” a mere post facto excuse? Was it trotted out to segue the “intent” in Paragraph 20 of the Indo-French Joint Statement issued on April 10, 2015?

One hoped the government would clear the air by bringing out the implications of buying 36 Rafale aircraft in flyaway condition as opposed to the 126 aircraft it had earlier agreed to purchase – 18 flyaways and 108 manufactured by HAL under licensed production through technology transfer (ToT). The ToT issue is vital. Technical knowhow is invaluable to Make in India, to indigenous manufacturing and self-reliance.

It also involves a huge chunk of public money and was part of the 2007 RFP. But there is no reference to it in the submission.

The patchy details provided, and the government’s profundification that the price of Rafale is only for defence experts’ eyes – not for the lay citizenry! – and is beyond the pale of judicial review, is dismaying. The government seems to have forgotten that when a country procures defence equipment, it is committing the public’s money drawn from the Consolidated Funds of India.

How this information could be kept outside the ken of public knowledge is intriguing. And how such actions in a constitutional democracy governed by the rule of law could lie outside the ken of judicial oversight is puzzling!

Sudhanshu Mohanty is a former Controller General of Defence Accounts and also a former Financial Adviser (Defence Services) in the Ministry of Defence who retired on May 31, 2016.He is the author of several books including Babudom: Catacombs of Indian Bureaucracy and Anatomy of a Tumour: A Patient's Intimate Dialogue with the Scourge (Hay House).