Home Editor's picks Fact Check: Several arguments made in the Supreme Court in the Rafale hearing were downright fallacious

Fact Check: Several arguments made in the Supreme Court in the Rafale hearing were downright fallacious

A confusion between licensed production and offset obligation was seen in the Supreme Court hearing on Rafale deal

The hearing in the petition seeking a probe into the Rafale deal concluded yesterday at the Supreme Court of India. Both the petitioners and the government presented their arguments, after which court reserved its verdict. The hearing was one of the most keenly followed events in recent times, and it was ‘broadcast’ live by journalists tweeting from the court premises.

Going by the arguments presented in the court as reported by such tweets, and later reports by media houses, one thing becomes clear. That is, people opposing the Rafale deal don’t know some basic facts about the deal and India’s defence procurement policy as a whole, or they are deliberately misleading court despite knowing the facts. We have picked some such arguments presented in the court for a fact check.

The most prominent issue that almost everyone misunderstands seems to be the offset clause. The main opposition to the deal is Anil Ambani’s Reliance on getting a small slice of offset business in the Rafale deal, and perhaps that’s why everyone is keen on misinterpreting the clause.

Buy and Make

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India’s defence procurement from foreign vendors comes under three categories, “Buy”, and “Buy & Make”. “Buy” means outright purchase from the foreign vendor, like the recent deal to purchase the S-400 missile defence system from Russia. “Buy and Make” means initially outright purchase, and then licenced manufacturing in India. The original MMRCA deal that Dassault had won, and also the purchase of MiG, Sukhoi and several other aircraft come under the latter category. Here, after supplying first few batches of equipment, the later matches are manufactured in India under licence production. The Sukhoi Su-30MKI jets, for example, are currently assembled by HAL in India, from parts sourced from Russia.

Please note that HAL is making Sukhoi and other jets under Licensed Production Agreement, and it is not an offset deal. Licensed production and offsets are totally different things, which most people seem to be mixing up. Indian companies are undertaking licensed production of foreign equipment for a long time. In fact, Aeronautics India Limited (AIL) was set up in 1963 to manufacture MiG-21 fighter jets. Later, AIL was merged with Hindustan Aircraft Limited to form Hindustan Aeronautics Limited (HAL). Licensed production is common in the private sector too, the most prominent example being the Apple iPhones being manufactured by Foxconn and other such companies. On the other hand, offset is a very unique concept applicable to India’s purchase of defence equipment from foreign vendors.

What is Offset?

As the cost of defence equipment like aircraft, missile, tanks etc run into thousands of crores of Rupees, it involves lots of foreign exchange outgo. In an effort to bring back some such foreign exchange, and also to encourage the development of defence related industries locally, the government of India had introduced the offset clause in its Defence Procurement Procedure (DPP) in 2005. As per this, the foreign vendor supplying to India has to discharge the offset obligation by direct purchase of eligible products/services from an Indian company, investment in joint venture, investment in equipment and transfer of technology.

As per DPP, the offset obligation is 30%, which was revised to 50% for the Rafale deal. The list of products and services eligible for offset are given in the Annexure VI to Appendix D of the Defence Procurement Policy. Other than a long list of defence and internal security products, it also includes a host of civil aerospace products.

Most important point is, the Offset Obligation is just a financial obligation, and it has no link with the defence equipment bought by India. For example in the case of the Rafale, the offset obligations do not have to involve any products and services associated with Rafale. Dassault and other vendors with offset obligation in the deal can choose any sector from the list given in the DPP.

Experience of offset partner

In the court, petitioners had argued that Reliance has no experience in aircraft manufacturing. But the fact is, Reliance is not even the offset partner of Dassault. The offset partner is Dassault Reliance Aerospace Limited (DRAL), a 49:51 joint venture between Dassault and Reliance. Dassault brings its decades of experience and expertise in the field, while Reliance brings land and other required infrastructure. So, the argument that an inexperienced company has got an offset contract is factually incorrect.

Prashant Bhushan’s argument that Dassault was forced by the government of India to choose Reliance as offset partner also has no basis, no proof, other than wild allegations made by Rahul Gandhi. Reliance is Dassault’s Joint Venture partner, not an Offset partner, so even the basic premise of the allegation is wrong. Dassault has chosen its own joint venture as offset partner, that is its own business interest, why would a company need to be forced to choose own subsidiary as its business partner?

Reliability of Offset partner

The court also expressed apprehension that if offset partners are not able to manufacture in time, there will be a delay in induction of the plane. The court also asked what will happen if the offset partner does not carry out the production. The answer to this question is, the Rafale is being completely manufactured in France itself, and it is not dependent on production by offset partners. For example, DRAL is manufacturing parts for the Falcon civilian jet as part of offset obligation. Even if there is a delay in production of Falcon parts by DRAL, it can’t have any effect on the production of Rafale. Here, the confusion between offset and licensed production was seen, as it was assumed that offset partners will be making Rafale parts.

According to the DPP, the vendor will be responsible for fulfilment of offset obligations. If the vendor fails to fulfil its offset obligation, a penalty of five percent of unfulfilled obligation will be imposed. The penalty can be deducted from Bank Guarantee already provided by the vendor or can be deducted from the payment made to the vendor.

The Dassault-Reliance JV has already started making parts for the Falcon jet, while other offset partnerships are yet to start. But strangely the petitioners are only concerned about the expertise of Reliance and silent about others.

Will Dassault deliver?

Prashant Bhushan also asked what if Dassault gets money from the government of India but does not deliver the planes? This was a rather juvenile question coming from such a senior lawyer. And this question can be asked on any transaction of buy and sell. Again, this proves that the petitioners have not read the DPP. Government is not making an upfront payment in full for the jets, it never happens with such high-value contracts. The payment for such defence procurement is made in a staggered manner, with partial payments made after completion of a particular phase in the order. Appendix B of the DPP provides a broad guideline of payment terms, which includes a total of 15 stages of payment, each either 10% or 5% of the cost.

Dassault is not a fly-by-night operator, they are doing business with India for half a century. If they do not deliver, they will be black-listed by India. Why will they risk getting blacklisted by one of the largest buyers for fighter planes in such a competitive market? Moreover, Dassault has already completed making the first Rafale jet for India and is undergoing flight tests. So the question of Dassault not delivering the jets does not arise.

Selection of offset partner

Prashant Bhushan also contended that Dassault can’t execute offset contract with any company they want without informing defence ministry. Had he read the DPP, he would have known that vendors are free to select any Indian company as their offset partner, provided that such company is not blacklisted by the defence ministry. Finding the right offset partner and finalising agreements with them takes time, the vendor can’t furnish the detail of offset partners immediately after winning the contract. That’s why Dassault has been given a time of 3 years to select offset partners and furnish the detail with the government of India.

The DPP does not say that the vendor will have to take permission from the government before selecting someone as offset partner. After the vendor has selected its offset partners, the details have to be submitted with Defence Offsets Management Wing (DOMW). The DOMW evaluates the offset proposals and decides if the proposal is eligible for getting offset credit. Theoretically, even if DRAL is found to be ineligible to be an offset partner, it can continue its normal activity of producing Falcon parts, and Dassault will have to find another way to fulfil its offset obligation or forfeit its bank guarantee.

Dassault is facing finanvial difficulties?

Arun Shourie told the court the Dassault Aviation is facing financial difficulties. That is a totally incorrect statement. Dassault Aviation is a profit-making company, and its net income in 2017 was $708.95 million, up from $379.03 million in 2016. The contention that Dassault gave in to government pressure to select Reliance as it needed the contract desperately is therefore baseless. Moreover, the same Dassault didn’t sign the earlier contract for 126 jets despite winning the bid because they were not satisfied with terms of HAL. Why will they do something now they don’t want to do for a far smaller contract?

Was government defence in court poor?

Going by the live tweets on the hearing, an impression was created that petitioners were making very strong arguments and the government counsels were unable to counter them properly. The arguments of the petitioners were vividly reported, while there were only a few reports on what the government said in court. Therefore, many people had assumed that the government did a poor job in the Supreme Court.

But the detail reports of the hearing that were published later in the day shows a completely different picture. It shows that government lawyers also presented a very strong case. The report also show that the court was not happy with petitioners because the petitioners had criticised the court for not issuing a notice in the case. Perhaps it was the limitation inherent with live tweets, as many things can be missed while live tweeting.

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