COCKPIT CRISIS
Former French president Francois Hollande’s hint of crony capitalism in the Rs 59,000 crore Rafale deal sparks a fresh political controversy over suggestions that Anil Ambani was favoured. Will the deal prove costly for the Modi government?
Allegations that Anil Ambani’s company was favoured in the Rs 59,000 crore Rafale deal have the Modi government in a spot
FORMER FRENCH PRESIDENT FRANCOIS HOLLANDE TOSSED A STUN GRENADE INTO AN ONGOING CONTROVERSY OVER INDIA’S 2016 PURCHASE OF 36 RAFALE FIGHTER AIRCRAFT. ON SEPTEMBER 21, HOLLANDE TOLD FRENCH NEWS PORTAL MEDIAPART THAT THE INDIAN GOVERNMENT HAD PROPOSED THE NAME OF THE ANIL AMBANI GROUP AS AN INDUSTRIAL PARTNER. HIS STATEMENTS CONTRADICTED WHAT THE NARENDRA MODI GOVERNMENT HAS MAINTAINED SINCE THE CONTROVERSY BROKE LAST NOVEMBER.
Hollande’s statement seemed to f ly in the face of the government’s assertions that it had nothing to do with Anil Ambani’s presence in the deal. “I’ve not put his name or anyone in the Inter Governmental Agreement nor can I tell a commercial firm to enter into an agreement,” defence minister Nirmala Sitharaman had told the media just three days earlier, reiterating the line the government’s taken since the Congress seized upon Rafale as an issue in November 2017.
The deal now has serious potential for embarrassing both governments. Asked about Hollande’s statement on the sidelines of the UN General Assembly, President Emmanuel Macron spoke of the ‘clear rules’ in ‘a government-to-government discussion’ and of the contract becoming part of a broader military and defence coalition framework between the two countries. Yet, his predecessor’s statement will echo on in what promises to be an unending episodic controversy until the 2019 Lok Sabha polls. With the opposition Congress firing away at the government, alleging corruption, nepotism, crony capitalism and price inflation and demanding a Joint Parliamentary Committee (JPC) for a probe, the Rafale controversy has become a political hot potato. Like most political polemic, there are several misperceptions involved but few facts.
AT WHAT PRICE WERE THE RAFALE JETS BOUGHT?
By now, the utility and lethality of the Dassault Rafale are beyond question. The Indian Air Force itself gave the Rafale’s capabilities a thumbs up in an unusual public endorsement.
On September 13, Air Chief Marshal B.S. Dhanoa defended the purchase of only two squadrons of the aircraft as opposed to the seven squadrons the IAF had projected in 2005, citing past precedent of emergency purchases of Mirage 2000s and MiG23s. A week later, Air Force Deputy Chief Raghunath Nambiar flew a Rafale at a French air base to show that the IAF was on board and in the front seat when it came to the purchase. The Cost Negotiation Committee (CNC), which actually worked out the price of the deal, was headed by Deputy Chief Air Marshal R.K. Singh Bhadauria in 2016 and not the Joint Secretary (Air), an IAS officer, as is the norm. Crucial CNC meetings were held in Vayu Bhavan, not in the defence ministry headquarters in South Block a kilometre away.
The crux of the issue, however, remains the price that the Rafales were bought for. This essentially is the thrust of the “my deal versus your deal” battle between the Congress and NDA even though it is clearly the latter who actually bit the bullet and bought the aircraft. The Congress says they negotiated a cost of Rs 526 crore per aircraft on December 12, 2012, whereas the price of the offtheshelf Rafale the NDA was buying
I THINK HE (RAHUL GANDHI) IS IN SOME KIND OF REVENGE MODE. I WON’T BE SURPRISED IF THE WHOLE THING IS BEING ORCHESTRATED. ON 30 AUGUST, WHY DID HE (RAHUL) TWEET ‘JUST WAIT FOR A WHILE, SOME BOMBS ARE GOING TO BE BURST IN PARIS’” SEPT. 23, 2018, FINANCE MINISTER ARUN JAITLEY TO NEWS AGENCY ANI
works out to Rs 1,671 crore per aircraft, going by the figures in the 2016 company report of Dassault Aviation. This, the Congress says, amounts to an almost 300 per cent escalation in the price of the deal.
The NDA says it paid Rs 670 crore for the Rafales, though this price was, as MoS for defence Subhash Bhamre told the Lok Sabha on November 18, 2016, minus the ‘associated equipment, weapons, Indiaspecific enhancements, maintenance support and services’. The Congress alleges their price (for a deal that wasn’t signed) included these Indiaspecific enhancements, maintenance support and services. The government is unwilling to disclose the fullyloaded price of the jets, citing national security concerns as finance minister Arun Jaitley reemphasised in a September 23 interview to news agency ANI. “If you take a weaponised aircraft as of 2007, add the same two things to it again and bring it to the 2016 level, it is 20 per cent cheaper,” he said. This is an issue the CAG is going through, Jaitley pointed out—adding, perhaps more prophetically than he realised, “the truth will come out”.
WERE STANDARD PROCEDURES OVERLOOKED IN THE DEAL?
The Rafale purchase came as a bolt from the blue when it was proposed by Prime Minister Modi in Paris on April 10, 2015. Very few people knew it was coming and top Dassault officials claim even President Hollande was surprised by the Indian PM’s offer of a government to government deal. “France never does G2G deals and does not have a Foreign Military Sales route like the US has,” says a Dassault official. It took France three months to set up a team headed by an Air Marshal from the Directorate General of Armaments (DGA), the government body that procures armaments for France’s military.
Meanwhile, in India, the Congress has charged the PM with violating the Defence Procurement Procedure (DPP) by bypassing the mandatory prior approval of the Cabinet Committee on Security (CCS) before announcing the purchase of the aircraft. The mandatory Price Negotiation Committee and CNC were also dispensed with. The government’s defence has been to stick to the argument that the joint statement in Paris on April 10 was only an expression of interest and not a formal signing of contract. The Defence Acquisition Council (DAC) approval was taken on May 13, 2015, over a month after the joint statement. The government could be on shaky ground here. There is still no clarity on how the government arrived at the figure of 36 aircraft or whether the IAF was consulted before arriving at this figure.
HOW DID RELIANCE, A COMPANY WITH NO PREVIOUS EXPERIENCE IN DEFENCE, ENTER THE DEAL? The opposition’s charge of crony capitalism and nepotism against the government have to do with the entry of industrialist Anil Ambani. The Congress argues that the Reliance Anil Dhirubhai Ambani Group (ADAG) chairman was a relatively new entrant into the defence business with ‘no previous experience of building aircraft’ and that he was given a contract bypassing the venerable public sector enterprise Hindustan Aeronautics Limited (HAL).
For the Congress, Anil Ambani’s image resonates rightly with Rahul Gandhi’s 2015 ‘suit boot sarkar’ jibe— that the Modi government favoured rich businessmen. In this case, for offsets associated with the deal. A September 24 memorandum submitted by the Congress to the Central Vigilance Commissioner (CVC) K.V. Chowdary enumerates the party’s charges. ‘The deliberate enrichment of a private entity, Reliance Defence, at the cost of HAL by award of Rs 30,000 crore offset contract’ as also Rs 1,00,000 crore ‘life cycle contract’ without any tender and without following any ‘mandatory requirement of the Defence Procurement Procedure’.
That his company was registered only 12 days before the prime minister announced the 36 aircraft deal in Paris adds fuel to the fire stoked by Hollande’s September 21 statement. “We did not have any say in this matter,” he told Mediapart about the choice of the Reliance group as offset partner. “It is the Indian government which proposed this group and Dassault who negotiated with Ambani. We did not have a choice, we took the interlocutor who was given to us.”
The French president seemed to backtrack in a subsequent interview to news agency AFP later that day, but
THE HAS PRIME GIVEN A MINISTER CONTRACT HIMSELF OF Rs 30,000 CRORE TO ANIL AMBANI. ANIL AMBANI HAD A DEBT OF Rs 45,000 CRORE AND WAS BAILED OUT BY PM MODI” RAHUL GANDHI Congress president
I HAVE NOT PUT ANIL AMBANI’S NAME IN THE IGA. I CANNOT TELL A COMMERCIAL ENTERPRISE WHO TO GO WITH. THAT’S A COMMERCIAL DECISION” NIRMALA SITHARAMAN Minister for Defence
another version of the same AFP report carried by French newspaper Le Monde saw him repeat his assertion. The Reliance group had appeared as part of the ‘new formula’ of negotiations on the Rafale purchase, ‘decided by the Modi government after taking office’, he said.
AReliance Defence official says there was no link between the incorporation of the company in March 2015 and the PM’s visit. “The aircraft contract was signed in September 2016, 21 months after Reliance’s decision to get into the defence business and 18 months post the incorporation of Reliance Defence,” he says. The deal’s offsets of approximately Rs 30,000 crore were the largest since the policy was introduced in 2005. As such, a defence OEM (original equipment manufacturer) has to source between 30 and 50 per cent of the value of all contracts over Rs 2,000 crore from the customer’s domestic industry. Under the Rafale deal, French aircraft-maker Dassault and its partners, engine-maker Safran and radar-maker Thales, are to source Rs 30,000 crore worth of purchases from India’s local industry. The key objectives of offsets are to leverage capital acquisitions to develop Indian defence R&D and encourage the aerospace and internal security sectors.
Dassault, on its part, clarified that they had indeed chosen Reliance as a partner as per the defence ministry’s offset policy which allows OEMs to choose their Indian defence partner.
Interestingly, it was Mukesh Ambani’s Reliance Aerospace Technologies Ltd (RATL) which was Dassault’s main offset partner in the 126 aircraft deal under the UPA in 2012. RATL had been incorporated in September 2008 when the IAF was yet to select an aircraft. The Dassault Aviation and RATL MoU was announced in January 2012, days after Rafale won the bid for the 126 jets. As per the contract, 18 jets were to come in a flyaway condition while the remaining 108 would be built in India by HAL under a transfer of technology agreement. Subsequently, the MMRCA (Medium Multi-Role Combat Aircraft) negotiations were stalled for three years. Meanwhile, a rapprochement between the Ambani brothers saw Mukesh exiting the defence business. (RIL did not respond to an e-mail questionnaire seeking comment on their foray into defence.)
Anil announced his entry into the defence business in March 2015 with the buyout of the debt-ridden Pipavav Shipyard in Gujarat. By April of the same year, he had already registered 14 different companies for building land systems, warships and aircraft. Former defence minister Manohar Parrikar, who was himself an entrepreneur once, supplying components to the defence ministry, also privately expressed his surprise at the dizzying spread of the younger Ambani’s business and wondered if the industrialist
was spreading himself too thin.
The Indian military, the world’s largest arms importer with projected buys of over Rs 15 lakh crore of defence hardware over a decade, offered endless potential. What the Powerpoint presentations don’t mention, however, was the bureaucratic maze of the monopsony, where the government is the sole buyer with an interest in preserving the monopoly of its gigantic defence PSUs and ordnance factories.
Time and cost overruns are routine and, contrary to popular perception, contracts are intensely process-driven and subjected to such rigorous scrutiny that several of them are scrapped and retendered at the last leg, even at the cost of national security. It is a business that, as one CEO puts it, requires “tremendous stamina, very deep pockets and enormous patience”.
Anil Ambani’s entry raised eyebrows because by 2015, his group companies were bleeding because of competition and indigestible expansions post 2010 (see Shrinking Star). Ambani possibly saw the defence sector as a lifeline, particularly since the ‘Make in India’ programme announced by PM Modi on September 25, 2014, aimed to make India a global manufacturing hub, including for armaments.
The official at Reliance Defence says the company zeroed in on Russia and Israel for joint ventures. They signed MoUs to make Russian helicopters and frigates in India. “Europe was never our focus,” he says. It became one when PM Modi went to Paris in April 2015 and Anil was there as part of 24-member delegation on the Indo-French CEOs’ Forum. He is believed to have already been in talks with Dassault. In August 2015, Reliance Aerostructure Ltd had been allotted 289 acres in the MIHAN (Multi Modal International Hub at Nagpur) SEZ, where the group agreed to undertake the defence and aerospace project named Dhirubhai Ambani Aerospace Park (DAAP).
Maharashtra chief minister Devendra Fadnavis had handed over the land allotment letter to Anil at a function at the MIHAN SEZ, in the presence of Union transport minister Nitin Gadkari. The group announced an investment of Rs 6,500 crore to set up a greenfield aerospace project. “The project at MIHAN will be the largest greenfield project not only in India but in Southeast Asia,” Anil had said at the function.
The Ambani firm planned to acquire the first land parcel of 104 acres for Rs 63 crore. It paid Rs 25 crore when the project was allotted to them, but missed the payment of the next instalment of Rs 17 crore in mid-2016. The project was a non-starter as the financial dues to Maharashtra Airport Development Company (MADC) ballooned to Rs 38 crore at the end of the financial year 2017. The deal with Dassault Aviation came as a lifeline for a firm struggling to pay its land dues. Dassault Reliance Aerospace Limited (DRAL) was incorporated in early 2017 and announced at Aero India in Bengaluru on February 14, 2017, where Anil posed for the press before taking a sortie in a Rafale aircraft.
Eric Trappier, chairman of Dassault Aviation France, was designated chairman, and Anil Ambani co-chairman of DRAL, in which RAL holds 51 per cent stake and Dassault 49 per cent. In October 2017, Anil and Trappier laid the foundation stone for the facility to produce parts for the Falcon business jets. A senior Dassault official explains why they chose Anil Ambani’s company for the JV despite his firm’s financial woes. “He was the only business house who had land readily available, and an SEZ near an airport from where aircraft could be built and rolled out for testing in future,” he says.
On February 21, 2017, Anil Ambani had met with Hollande at the Élysée Palace in Paris. Photographs of the meeting the President’s office released officially showed Hollande giving Anil a warm two-handed handshake. A Reliance official describes it as a brief meeting and one in which various initiatives by Reliance in the field of energy and defence involving French companies were discussed. “No other discussions whatsoever, including Reliance Entertainment, took place during this meeting,” he says.
By 2018, with creditors knocking on the doors of their debt-ridden shipyard, and the government choosing HAL for a JV partner to make Russian helicopters and state-owned Goa Shipyard Ltd to build frigates, DRAL remains one of the last aces in Anil Ambani’s pack of companies. It’s still an attractive bet for future orders for additional Rafales, another contract for 57 fighter jets for the Indian Navy where the Rafale is a contender or even for assembling Falcon business jets.
HOW MUCH DOES RELIANCE MAKE FROM THE OFFSET PARTNERSHIP? In March this year, the French government submitted a six-page document list of 72 offset partners for the Rafale deal to the Indian government during Presi-
dent Macron’s official visit, showcasing its commitment to the government’s f lagship
Make in India programme. Reliance was one of the firms. Dassault is still negotiating the contracts along with its partners Safran and Thales. The estimated Rs 30,000 crore offset pie will be carved up between Dassault, Safran and Thales, with Dassault getting 40 per cent and Safran and Thales 30 per cent each (see How the Rs 30,000 cr Offsets Will Be Spent). The DRAL JV could account for between 15 and 17 per cent of Dassault’s share of the offset pie or roughly between Rs 1,260 and
Rs 1,428 crore.
The firm started assembling its first aerospacerelated components—nose cones for the Falcon 2000 business jets—this April.
A French team will come in to certify their quality before they can be exported. Once the components are exported, Dassault will take the export documents to the defence ministry’s Defence Offsets Manufacturing Wing (DOMW) set up to vet offset credits. The factory turnover will then be adjusted against Dassault’s offset credits. This process begins by September 2019, three years from the signing of the contract. As far as profits are concerned, Dassault estimates DRAL will take at least a decade to break even. “The aerospace business is a slow grind. Reliance will get 51 per cent of the share of profits, but only if the company makes profits.”
WHO IS THE BIGGEST BENEFICIARY OF THE RAFALE OFFSETS?
The Defence Research and Development Organisation (DRDO), which potentially stands to gain the most from the Rafale offsets. Dassault officials say nearly 30 per cent of the Rafale offsets have been set aside for the DRDO. This could even go up to 50 per cent. For over two years, defence ministry officials and scientists agonised over what to do with the offset windfall brought in by the Rafale deal. The DRDO saw in the Rafale’s M88 engine a chance to revive India’s own flagging Kaveri engine programme. A reliable high-performance aircraft fighter jet engine is a complex piece of technology and its manufacturers can be counted on the fingers of one hand. Even China has been unable to perfect one despite trying for decades. Early this year, DRDO labs GTRE (Gas Turbine Research Establishment) and aircraft designer ADA (Aeronautical Development Agency) began final negotiations with Safran and the IAF to decide how Dassault and Safran could jumpstart the Kaveri engine. If they are indeed able to field an updated Kaveri engine with over 90 kN thrust, they could power the indigenous LCA Mark-2 aircraft and future aircraft like the Advanced Medium Combat Aircraft (AMCA). “We want our French partners to not only give us the knowhow, but also the know why—to vet our designs and certify them,” says a DRDO official.
WAS HAL SIDELINED IN THE 36 AIRCRAFT DEAL ?
It is a fact that HAL did not get to build or assemble the 36 Rafales—all of them are being bought from Dassault in a flyaway condition, deliveries will start in late 2019 and will be completed by 2022. MoD officials say it was ‘uneconomical’ to make just 36 Rafales in India and point to the fact that talks for building 108 Rafales that were under way between HAL and Dassault were deadlocked between 2012 and 2015. Areas of disagreement included work and responsibility share as well as the man-hours required for making aircraft components. The Rs 1.63 lakh crore deal was finally scrapped in 2015 and the PSU, which enjoys a monopoly over aircraft manufacture in India, lost
THE ‘NEW NAME FORMULA’ OF RELIANCE OF NEGOTIATIONS GROUP HAD ON APPEARED THE PURCHASE AS PART OF OF THE RAFALE, DECIDED BY THE MODI GOVERNMENT AFTER TAKING OFFICE. ASKED WHETHER INDIA HAD LOBBIED FOR RELIANCE GROUP TO PARTNER WITH DASSAULT, HOLLANDE SAID HE WAS “NOT AWARE”. “DASSAULT IS THE ONLY ONE ABLE TO SAY IT,” HE SAID SEPT. 21, 2018: FRANCOIS HOLLANDE to an AFP reporter in Montreal
a big business opportunity. They were not a contender for the offsets but for the manufacture.
However, it would be incorrect to suggest that HAL was completely bypassed in offset partner deals for the 36 Rafales. Snecma HAL Aerospace Pvt Ltd (SHAe), a JV between HAL and the French manufacturer of the Rafale’s M88 jet engine, was signed in February 2015 in Bengaluru. The 50:50 JV was set up for the production of engine parts and components of the M88 engine and to facilitate their assembly. This JV will hence be eligible for offsets discharged by Safran in the Rafale deal.
WHY DID RELIANCE ENTERTAINMENT FUND JULIE GAYET’S FILM? On January 24, 2016, just two days before Hollande was to visit New Delhi as a state guest for the Republic Day Parade, Reliance Entertainment circulated a press release headlined ‘Reliance Entertainment, Serge Hazanavicius, Kev Adams, Julie Gayet and Elisa Soussan join hands for unique Indo-French production nOmber One’. Gayet, an actor-producer, was also Hollande’s partner, and their liaison was the subject of considerable tabloid gossip in Paris in 2014. The fact that the film was being financed by an industrialist who stood to gain from the Rafale deal, even if it was as an offset partner, is what Mediapart caught on to in its September 21 story. The film was released in France as Tout la-haut in December 2017. Mediapart quoted a member of the film’s production team to suggest that had Reliance Entertainment not thrown in a financial lifeline—3 million euros, later reduced to 1.6 million euros—the biopic of a young snowboarder who died on Mount Everest in 2002 would not have been possible. “One day, the Indians arrived and the film could be done,” the person said. It was this charge of crony capitalism —which provoked a response from Hollande.
“We did not have any say in this matter. It is the Indian government which proposed this group and Dassault who negotiated with Ambani. We did not have a choice, we took the interlocutor who was given to us. This is why, in addition, this group had no reason to make me any grace of any kind. I could not even imagine that there was any link with a film of Julie Gayet.”
Gayet’s production house Rouge International, in a communication to the India Today Group, denied knowing or meeting Anil Ambani or Reliance representatives. Likewise, a Reliance spokesperson denied having signed any agreement with Gayet or Rouge International. “No payment has ever been made by Reliance Entertainment to either of them in relation to the film, nOmber One,” he said. Reliance Entertainment had paid 1.48 million euros to Visvires Capital on December 5, 2017, about two weeks before the release of the film on December 20, 2017. Hollande had ceased to hold office in May 2017, more than six months prior to the said payment, the spokesperson added. The relationship with Visvires Capital resulted in two other French movie JVs. There was no quid pro quo for the Rafale offsets. “This was part of its normal business for Reliance Entertainment,” said the spokesperson. WILL RAFALE FLY AS A POLL ISSUE? “Gali gali mein shor hai, desh ka chowkidar chor hai (the word in the streets is the nation’s watchman is a thief),” Congress president Rahul Gandhi said at a September 20 political rally in Sargara, Rajasthan. The slogan, directed at PM Modi who captured power in 2014 calling himself a ‘chowkidar’—was a modified version of the one used by the opposition to target Rahul’s father in 1988 at the height of the Bofors scandal. The Congress hopes it can pin the new controversy on Modi, even though, unlike Bofors, there is no smoking gun, no middlemen and no Swiss bank accounts. With the battle lines drawn for the 2019 Lok Sabha elections, it has increasingly become clear that the sleek French fighter aircraft will be the Congress party’s main poll plank to target the BJP even though a recent india today survey which polled 30,000 voters in 80 Lok Sabha constituencies in Uttar Pradesh, a key electoral state, showed that only 21 per cent respondents had heard of the Rafale deal. But as the political slugfest intensifies in the run-up to the 2019 elections, no one can say with certainty how the controversy will play out, particularly as a bitter noholds-barred perception war is fought in the public gaze, in the media and social media.
The BJP’s media machine is confident that Rahul has made a strategic error in calling Modi a thief because the tag won’t stick and would, in fact, help the PM once he picks up the gauntlet. Anil Ambani, meanwhile, has been left to defend himself. In 2006, he had resigned from the Rajya Sabha “to avoid any possibility of controversy, however remote or unlikely” when rumblings over his holding an office of profit in the UP government began. This time round, he possibly finds himself in the slipstream of a controversy without an eject lever in sight.
“WE DID NOT HAVE ANY SAY IN THIS MATTER. IT IS THE INDIAN GOVERNMENT WHICH PROPOSED THIS GROUP AND DASSAULT WHO NEGOTIATED WITH AMBANI. WE DID NOT HAVE A CHOICE, WE TOOK THE INTERLOCUTOR WHO WAS GIVEN TO US. THIS IS WHY, IN ADDITION, THIS GROUP HAD NO REASON TO MAKE ME ANY GRACE OF ANY KIND. I COULD NOT EVEN IMAGINE THAT THERE WAS ANY LINK WITH A FILM OF JULIE GAYET” SEPT. 21, 2018: FRANCOIS HOLLANDE quoted in a report in Mediapart