One of the biggest ironies of the manufactured debate on the pricing of Rafale deal is that no one from Indian English mainstream media (MSM) has tried to do a dispassionate analysis and present a complete picture. This is not to say that they’ve not presented data or analysis on the subject. However, what has happened is that either part numbers or analysis has been done or number has been presented in a manner so as to further a point-of-view and a certain agenda. But for the gravity of the subject, it is almost comic that these disparate numbers when looked at together, do give a fairly accurate picture.

In this analysis, I use publicly available data, shared by various newspapers and reporters at a different point in time, to present a comparison between the old and new Rafale deal. Considering that the old deal had 18 Rafale aircraft in flyaway condition and the new one includes all 36 aircraft in a flyaway condition, the price comparison is between these two sets.

Unless required, I have stuck with Euro or Dollar figures. The problem with using Rupee figures is the exchange rate issue. Wherever the sources used in the report have used Euro and Rupee figure using a certain exchange rate, both have been shared as such.

Data Point 1: Fantasy Deal Size – $ 10.4 billion

When the Medium Multi-role Combat Aircraft (MMRCA) deal was announced, for some reason, the deal size was expected to be $ 10.4 Billion. If I assume the average Euro/Dollar exchange rate for 2007 (0.7), this deal comes out to be Euro 7.6 Billion.

Considering 126 aircraft order, this works out to be Euro 60.3 Million per aircraft. Or, $82.5 Million per aircraft. As analysis later-on will show, this is an absolutely absurd number for a full deal covering the unit cost, weapons, logistics, maintenance and other heads.

When we compare this value with what was the winning bid (~Euro 20 Billion; more on this later), we realize how grossly unprepared Ministry of Defence (MOD) under UPA-1 and UPA-2 was for this deal.

Simply because if the actual expenditure is going to be more than 2X of your estimate, how are you going to properly budget and pay for the deal?

Is it any wonder that then Raksha Mantri under UPA-2 had said in February 2014 that UPA-2 did not have money that year for the deal [1]? And that it will have to go into the next financial year?

Data Point 2: The French Connection

While undertaking an internal review of the whole Rafale program, the French Senate in 2013-2014 presented detailed break-up of the costs involved (at 2013 prices).

The total Program Cost has been divided into two broad categories:

• Development Cost – The money spent on Research & Development of the program and to bring the aircraft to a level at which it can be inducted into the French Air Force/French Navy
• Unit Flyaway Cost – The cost of producing a single unit of each type of Rafale aircraft without considering the weapons, logistics, maintenance and other add-ons. Just the plain Rafale fighter.

Key numbers from the French Senate report are as follows:

1. Total program cost: Euro 45.9 Billion
2. Total Flyaway Cost for 286 planned jets: Euro 20.8 Billion (refer to the table above)
3. Average per unit flyaway cost: Euro 72.9 Million
4. Total Development Cost (1-2): Euro 25.1 Billion
5. Average per unit development cost: Euro 87.6 Million
6. Average total cost (flyaway + development) per unit: Euro 160.5 Million

There are three major takeaways from the above numbers:

1. Per unit flyaway cost mentioned above is the lowest which the vendor (Dassault) was giving and this is available only to the French Air Force and French Navy. The same type of Rafale being sold to any other country would be more expensive than the deal available to French armed forces.
2. The development cost per unit is 20% higher than per unit flyaway cost. This is because the development cost is spread across a smaller number of aircraft which were planned to be inducted into the French armed forces. This tells you why French defence equipment, as compared to the US, are more generally more expensive.
3. A part of the above development cost can be expected to be loaded onto the price of Rafale being exported to countries like Egypt, Qatar and India.

One more point – Assuming India was to get 126 fighters at an average flyaway cost per unit of Euro 72.9 Million. The total cost for only the aircraft would’ve been Euro 9.2 Billion. This is 21% higher than the initial estimated price of Euro 7.6 Billion for the whole deal (aircraft, weapons, maintenance, logistic, support) in 2007.

Shows how far off the mark initial estimates were!

Data Point 3: The Escalation Clause

The present government has claimed that the flyaway cost of the Rafale jet in 2015 is 9% cheaper than the flyaway cost of Rafale mentioned in 2007 RFP. How could this be?

In a news report written by Sushant Singh [2] in The Indian Express and dated 1st March 2018, the following explanation was given for this by government ‘sources’:

• The per unit flyaway cost of Rafale fighter in 2007 bid, which was opened in 2011, was Euro 79 Million.
• It further adds and I quote:

“As per the in-built escalation formula, the 2007 bid for each of the 18 Rafale would have amounted in 2015 to Euro 100.85 million (Rs 765.4 crore at 2015 exchange rate of 1 Euro = Rs 75.90), sources said. Similarly, the 2007 bid price for every Eurofighter would in 2015 have worked out to be Euro 102.85 million, higher than that of the Rafale.

In comparison, the price of each of the “bare” 36 Rafale bought in 2016 was Euro 91.7 million (Rs 696 crore at the 2015 exchange rate), lower than both the earlier Rafale and Eurofighter bids”

Looking at the figures given above, it can be surmised that the 2007 bid price increased at the rate of 3.1% per annum (compounding).

Another reference to this escalation clause can be found in an interview by Finance Minister Arun Jaitley to rediff.com on 29th August 2018 [3]. While the finance minister does not mention the exact price and escalation percentage, he gives clear indication that such a mechanism existed and how it worked.

I quote the relevant parts of the answers given by him.

(a) Exhibit 1:

Arun Jaitley:

• The basic price was, let us say X.
• The basic price X had an escalation clause that till such day each aircraft is delivered, the price will keep escalating.
• If in 2012 they had come to an agreement, the first would have been delivered in 2017.
• From 2007 to 2017 the escalations would have gone up, along with a foreign exchange variation.
• So there is India specific add-ons and the foreign exchange variants.
• Let us first see the basic price of the aircraft without add-ons.
• Is the Congress party aware that if you take the 2007 L1 offer and the escalation clause without the add-ons, the price negotiated in 2015-16 is cheaper?
• How did this arise?

Point (7) mentioned above is exactly the methodology mentioned in the report by Sushant Singh in The Indian Express, which has been quoted earlier.

(b) Exhibit 2:

Interviewer– The price that the NDA government negotiated is cheaper than the 2007 one with escalations. How can that be possible?

Arun Jaitley: That is factually correct. I am making an assertion.

Interviewer– Even an apple costs more than what it did six years ago.

Arun Jaitley:

• To the apple, you add the escalation.
• So 2007 price, plus, let us assume this contract is signed in 2016.
• From 2005 to 2016, take the basic price, the escalation and the foreign exchange cost.
• In 2015, the Indian prime minister and French president agreed that you will have 36 fully-loaded aircraft being given to India.
• They will not be manufactured in India, and these will be given on terms cheaper than the 2007 terms, better terms.
• I am asking a basic question, you can take the simple aircraft and the fully loaded aircraft.
• The 2007 offer had both.
• What was negotiated from 2015 to 2016 and finally executed in 2016, with the escalation and the currency variations, the basic aircraft price turns out to be 9 per cent cheaper.

During the recent debate in the parliament on the Rafale deal, the Finance Minister had repeated this very argument again. In addition, the Finance Minister also stated that the loaded/weaponized aircraft was 20% cheaper in the new deal when compared to the escalated price of 2007 winning bid.

To summarize –

• The flyaway cost in 2007 Dassault for Rafale was – Euro 79 Million (this is an important figure and we’ll return to it again)
• Per annum escalation in fly-away cost – 3.1%
• 2015 escalated value of 2007 flyaway cost – Euro 100.85 Million
• The flyaway cost in 2015 deal – Euro 91.7 Million.
• By benchmarking the 2015 deal flyaway cost with 2007 cost (after factoring into account escalation), the government is claiming 9% saving.
• Weaponized aircraft in 2015 deal is 20% cheaper when compared with the escalated cost of 2007 winning bid.

Data Point 4: The New Deal

While the government has refused to give the exact break-up of the Rafale deal citing security reasons, the broad price break-up of the deal has been in the public domain. And has been shared by many journalists.

Writing in Business Standard, dated 27th November 2017, Ajai Shukla had presented a break-up of the Rafale deal. I below reproduce the price break-up table from his blog [4]. For presentation purpose, I’ve modified the format a bit:

• From the above figures, the weighted average flyaway cost of 36 aircraft comes out to Euro 91.7 Million.
• This is the same figure mentioned in the report carried in the Indian Express mentioned earlier. Hence, we’ve corroboration of this figure from multiple sources.
• Further, if we consider the cost of fighters, India specific enhancements and weapon systems, we find that per aircraft value comes out to be Euro 158.4 million.
• Per aircraft deal for the entire contract comes out to Euro 218 million.

Data Point 5: The Old Deal!

The entire debate has been around what the Congress claims the price was as per the old bid, price as per the new deal and how Narendra Modi government has grossly overpaid for the aircraft. This argument, taken to its logical conclusion, insists there is corruption in the deal.

Now, common sense would tell you that since UPA-2 government never managed to close a deal, there is no benchmark price available to undertake apple-to-apple comparison. However, common sense seems to have been the first casualty in this politically manufactured, and patently wrong and absurd, controversy.

However, that has not prevented resourceful journalist like Ajai Shukla to first, get hold of details of the winning bid by Dassault and using that as a benchmark for the price obtained in 2015 deal.

I again quote Ajai Shukla from his blog entry dated 9th November 2018 (this piece also appeared in Business Standard) [5]:

“Two senior defense ministry officials who were directly involved in contract negotiations with Dassault from 2012 onward, have revealed to Business Standard that Dassault’s winning bid amounted to Euro 19.5 billion for 126 Rafale fighters. 

The Euro 19.5 billion quote averaged out to Euro 155 million per aircraft.

In comparison to that Euro 155 million average cost per Rafale, the National Democratic Alliance (NDA) government’s September 2016 purchase of 36 Rafale fighters for Euro 7.8 billion works out to Euro 217 million per Rafale – exactly 40 per cent higher than Dassault’s 2012 quote.

It is not clear how the NDA government – including Defense Minister Nirmala Sitharaman and Finance Minister Arun Jaitley, backed by senior IAF officials – has claimed that the 36-Rafale contract with Dassault in 2016 cost the IAF nine-20 per cent less than Dassault’s 126 Rafale offer”

From the above report:

• Dassault’s winning bid in 2007: Euro 19.5 billion
• Per Plane (for 126 planes): Euro 155 million
• If we use Euro 79 Mn as per unit Flyaway Cost (from Indian Express Report), we get total Flyaway Cost for 126 planes – Euro 9.95 billion
• Balance Cost (for services, maintenance, weapons, other add-ons) – Euro 9.5 billion
• Balance Cost/Aircraft – Euro 75.8 million

Ajai Shukla uses the overall per unit number (Euro 155 million) to compare with the overall per unit cost of the new deal.

For some reason, Ajai Shukla does not mention the escalation clause which we’ve come across earlier. As we’ll see later, this escalation has a massive impact on the actual pricing and benchmarking the two deals.

The article goes on to make other assertions as well. Which in my considered opinion are quite ludicrous. But we won’t be going into them in this article.

Summarizing the Numbers

First, let’s summarize the key figures which we’ve come across so far. I’ll use them to undertake a detailed analysis later on.

Analysis

The most important takeaway from the Indian Express report, interview of Arun Jaitley and recent parliamentary debate are that there was an escalation clause in the winning bid submitted by Dassault in 2007. Because of this winning bid, the basic flyaway cost of an aircraft rose from Euro 79 million in 2007 to Euro 100.85 million in 2015. Working backwards, the escalation comes out to 3.1% per annum.

Does the escalation apply to only flyaway cost?

Considering the figures at hand, the 2007 winning bid numbers can be divided into two broad categories – Flyaway Cost /aircraft and Balance Cost/Aircraft.

We’ve already applied the price escalation to Flyaway Cost/aircraft. What about the price escalation for the balance part? Does it apply to the other components of tender?

The balance component of the 2007 bid would’ve consisted of ammunition, spare parts, logistics, training and other paraphernalia. Common-sense tells you that the price of all these items will also see an escalation. Just like the cost of producing a new aircraft would increase over time, cost of producing ammunition and spare parts would also increase.

And there is enough precedence within India of price increase in defence contracts with time being the deciding factor. For example, when India first envisaged interest in the US made M-777 ultra-lightweight howitzers, the same were offered in 2010 at $647 million. However, the deal could not go through because of myriad reasons. When the deal was revived in 2013, the price had increased to $885 million. However, the deal was not concluded by the UPA-2 government. After the NDA-2 government came in 2014, it revived the negotiations and concluded the deal in 2016 at $ 750 million.

Therefore, if we apply the same escalation per annum, 3.1%, to the overall 2007 Dassault bid, we have the following increase till 2015:

• The per unit flyaway cost increases from Euro 79 million in 2007 to Euro 100.9 million in 2015
• The per unit balance cost increases from Euro 75.8 million in 2007 to Euro 96.7 million in 2015
• The overall per unit cost increases from Euro 154.8 million in 2007 to 197.6 in 2015

Price Benchmarking

• While the government has already claimed and proven that the flyaway cost in 2015 is 9% cheaper than 2007 cost, we also compare the overall per unit cost between these periods.
• The overall per unit cost in 2015 deal is Euro 218.1 million
• This is only 10.2% higher than the overall price per unit of 2007 deal. And not 40% as claimed in the report by Ajai Shukla.
• Another important aspect is the comparison of price break-up between the two deals. The following graphs show the same.

• What we see is that in the new tender, a larger percentage of money has been committed towards India specific enhancements, spare parts, ammunition and logistics support.
• High upfront investment in spares and logistics support means better sustenance and operations of the Rafale fleet by the IAF.
• Especially on PBL (Performance-Based Logistic front), the current deal has a better provision as compared to the earlier deal. To quote the Indian Express article mentioned earlier:

“The IAF told us that because we were buying only 36 Rafale and not 126, they needed them to be more potent. Meteor missiles, 75 per cent serviceability and some special requirements were insisted upon by the IAF.

It even asked for two separate maintenance support flights for redundancy. These imposed additional costs which were not even thought of in 2011. They are two separate packages,”government sources said.

• While in the earlier deal, the high flyaway cost meant that the balance component of the deal was compromised to some extent.
• However, as we shall see in the subsequent section, the biggest benefit is that we’re getting a fighter aircraft with enhanced features.

So, why does the new deal cost a bit more? Because we’re getting the F3R standard Rafale!

• Simply because we’re getting a better plane with more potent systems, capabilities and weapon suite.
• While the government has claimed that the two aircraft in both the deals are same, this statement is both true and false.
• It’s true because the baseline aircraft is the same while the reality is that we’re getting the F3_R standard aeroplane. Compared to this, the earlier deal involved F3 standard aeroplane.
• So, what does F3R standard involve? In the words of Dassault [6]–

In January 2014, the F3R standard development contract for the Rafale combat aircraft was announced. The F3R standard is an evolution of the Rafale “F3” standard. It is part of the on-going process to continuously improve the aircraft in line with operational requirements. It will enable Dassault Aviation to integrate the following equipment and weapons onto the Rafale:

The European Meteor long-range air-to-air missile produced by MBDA. This high-performance missile will achieve maximum effectiveness thanks to the “active array” radar which equips all production Rafale aircraft delivered since mid-2013. The first guided firing of a Meteor was conducted from a Rafale in April 2015. Qualification firing was performed in April 2017, paving the way to service entry.

The Thales Talios new-generation targeting and laser designator pod. Primarily used for air-to-ground strikes, in daylight or darkness, this pod will further enhance the high degree of precision that the Rafale has achieved since its first engagements (in 2007 in the Afghan theater).

F3R also includes upgrades to Rafale sensors and to systems ensuring total interoperability.

• A November 13, 2018 report by Janes [7] says this about the F3R upgrade:

The Direction Générale de l’Armement (DGA), the French procurement agency, on 9 November announced that it had qualified the new-generation F3R standard for the Rafale combat aircraft on 31 October, in line with the January 2014 contract awarded to Dassault Aviation, Thales, MBDA, and Safran.

Earlier in October, the DGA launched the F3R upgrade for all 144 Rafales in service. The first 10 Rafale F3Rs, four of which will be delivered by the end of 2018, will be used by the French Air Force and French Navy to fine-tune the upgrade, as already begun by DGA testing teams.

Like previous versions, the F3R involves major software and hardware upgrades, according to the DGA. The agency said two new capabilities would “change the game”in combat aviation: the use of the MBDA Meteor beyond-visual-range air-to-air missile together with the Thales RBE2 electronic scanned array (AESA) radar, and the Thales TALIOS long-range airborne targeting pod improves target detection, reconnaissance, and identification, day and night, for high-precision air-to-ground strikes.

• France had committed Euro 1 billion for R&D towards F3R standard in 2014; at the time of writing this article, the French Navy had received its first Rafale jet upgraded to F3R standard.
• Basically, we’re a getting a much more evolved fighter aircraft at a marginally increased overall cost as compared to the earlier deal.
• It is important to note that had a deal been signed with Dassault basis 2007 RFP (when we were getting F3 standard Rafale), India would’ve had to pay over and above the bid to upgrade its aircraft to F3R standard.
• And just how capable and potent is the METEOR air-to-air missile? As Shiv Aroor wrote on his website [8]

India’s Rafales will operate the MeteorBVRAAM, which enters service with the French Air Force soon. France’s Direction Générale de l’Armement (DGA) announced two weeks ago that a final live guided firing of the Meteor from a Rafale had been successfully conducted at the Biscarrosse missile test range near Bordeaux in southwest France.

In twin loadouts with the SCALP cruise missile that India has opted for, the two weapons give the IAF an unprecedented stand off air-to-air and air-to-surface capability in conflicts on either front with Pakistan and China.

The timing of Rafale deliveries to India is such that the Meteor will be concurrently operational with both the French and Indian air forces.

Meteor missile is today the most potent medium-range air-to-air missile. Given the capability, it is also a very expensive missile as compared to other medium-range air-to-air missiles

Conclusion

The data available in the public domain clearly shows the present deal represents a beneficial deal for the country and the Indian Air Force. A dispassionate analysis brings forth the fact that we’re getting a more capable fighter aircraft at a very competitive price.

However, with narrow political interests guiding the discourse on the subject, by both political parties and many ‘analysts’, the true picture has got lost. And deliberate misinformation is being peddled.

I hope this article can dispel some of the myths surrounding the deal, counter the misinformation and present a more complete picture.