Military offset part of Rafale deal still pending, flags CAG
Two weeks after the Indian Air Force (IAF) formally inducted five of the 36 Rafale jets ordered from France under a Rs 59,000-crore deal, the country’s top auditor on Wednesday said that the plane’s maker Dassault Aviation and weapons-supplier MBDA have not confirmed the transfer of technology (ToT) to the Defence Research and Development Organisation (DRDO), which was part of the contract.
The Comptroller and Auditor General (CAG), in a detailed report tabled in Parliament, doubted if the ToT for a key engine would even take place, and pointed out that several offset contracts built into multiple defence deals have “not yielded the desired results”.
The critical observations were part of CAG’s scrutiny of the status of a raft of offset contracts — including the September 2016 Rafale deal — between 2005 and 2018.
India’s offset policy stipulates that in all capital purchases above Rs 300 crore, the foreign vendor has to invest at least 30% of the value of the purchase in the country to boost indigenous capabilities. In the case of the Rafale deal this was 50%.
According to the CAG report, the defence ministry stated as recently as October 2019 (the first Rafale was handed over in France on October 8, 2019) that the vendors had not yet been able to confirm their capability for technology transfer.
“In the offset contract relating to 36 Medium Multi Role Combat Aircraft (MMRCA), the vendors M/s Dassault Aviation and M/s MBDA initially proposed (September 2015) to discharge 30% of their offset obligation by offering high technology to DRDO.
The DRDO wanted to obtain Technical Assistance for the indigenous development of engine (Kaveri) for the Light Combat Aircraft. Till date the Vendor has not confirmed the transfer of this technology,” said the report.
HT has reviewed parts of report and a press release issued by CAG.
CAG also said that DRDO should identify the right technologies for transfer, while sharply criticising foreign vendors who made several offset commitments to qualify for a contract but were later not earnest about fulfilling their commitments.
Foreign vendors have to select Indian firms as their offset partners to fulfil their obligations.
To be sure, in case of the Rafale deal, the DRDO’s offset share worked out to 30%, while 20% has been allocated to the private sector, including Dassault Reliance Aerospace Ltd (DRAL) -- Dassault’s joint venture (JV) with Anil Ambani’s Reliance Group. CAG did not pick any loopholes as far as the 20% allocation to the private sector, and asked the defence ministry to get more details about its progress.
The report said the defence ministry stated in October 2019 that the vendors had not been able to “confirm their capability to carry out the requisite upgradation”.
“Thus, it is not clear if even this technology transfer (for engine) will take place, and there is need for the MoD/DRDO to identify and acquire the right technologies in order to comply with the directions of Defence Acquisition Council (DAC) given in September 2016,” the report said.
The defence ministry and DRDO declined to comment on the matter. The response to an e-mail sent to Dassault Aviation was awaited when this report was filed.
However, French industry officials said they had given a detailed list of 10 to 15 technologies that could be transferred to the DRDO and the “ball was in the latter’s court”.
The officials said that the offset obligations as part of the 36 jet deal were progressing as per the timeline in the case of the private sector JV (with Anil Ambani’s Reliance Group) despite the challenges posed by Covid-19.
“The DRDO has to figure out what technologies it wants to take and can absorb,” the officials said, speaking on the condition of anonymity.
In the case of private offset partners, CAG said since the discharge period had started — September 23, 2019, to September 23, 2020 — the defence ministry “needs to get the details of the specific products/services being offered for discharge of offset, to monitor and ensure that the objectives of the offset are achieved”.
The Comptroller and Auditor General of India said that the aim of the offset policy was to develop the Indian defence sector to achieve self-reliance and cut dependence on imports.
However, the audit found that the several vendors were not discharging their obligations as per their commitments.
“From 2005 till March 2018, 46 offset contracts had been signed with foreign vendors, valued at ₹66,427 crore. Under these contracts, by December 2018, ₹19,223 crore worth of offsets should have been discharged by the vendors. However, the offsets claimed to have been discharged by them was only ₹11,396 crore, which was only 59% of the commitment. Further, only 48% (₹5,457 crore) of these offset claims submitted by the vendors were accepted by the ministry. The rest were largely rejected as they were not compliant to the contractual conditions and the Defence Procurement Procedure,” CAG noted.
The auditor said the remaining offset commitments of about ₹55,000 crore would be due to be completed by 2024.
“The rate at which the foreign vendors have been fulfilling their offset commitments was about ₹1,300 crore per year. Given this situation, fulfilling the commitment of ₹55,000 crore by the vendors in the next six years (CAG observation is of 2018) remains a major challenge,” the report said.
CAG said there were no effective means of penalising the vendors on account of failure to meet the offset commitments.
Experts said discharge of offsets by vendors was unsatisfactory and some changes were necessary.
Inter-government agreements and foreign military sales have to be brought under the purview of offsets, said Lieutenant General Subrata Saha (retd), a member of the National Security Advisory Board and a former army deputy chief.
“In 2016 with some deft application of policy, offset was associated with the ultra-light howitzer (ULH) procurement from the US. The number of industries that have successfully discharged offsets are very limited. The major issue here is the fact that we have not mapped industries working in defence sector and their capabilities. The number of MSME’s engaged in defence quoted by different agencies widely vary. Proper mapping of defence industries will help in utilising the offset facility much better,” said Saha, who was closely associated with defence procurement as the deputy chief.
He said ToT must be given the highest priority with due incentives.
“In addition to tightening the avenues for discharging offset, with the aim of improving India’s defence industrial capability, there has to be simplification of process as the multiplicity of agencies involved and sequential process takes too long,” Saha added.
The National Democratic Alliance (NDA) government’s decision to enter a $8.7 billion government-to-government deal with France to buy 36 Rafale warplanes made by Dassault was announced in April 2015, with an agreement signed a little over a year later.
This replaced a previous United Progressive Alliance regime decision to buy 126 Rafale aircraft, 108 of which were to be made in India by the state-owned Hindustan Aeronautics Ltd.
Congress alleged that the new deal entailed buying the fighter jets at a higher price. The government denied this, and the Supreme Court said in a judgment that the deal did not require scrutiny.
The deal also become controversial on account of the fact that one of the offset deals signed by Dassault was with the Reliance Group of Anil Ambani.
The Congress claimed that the earlier deal was scrapped and a new one signed to provide Ambani this opportunity for an offset deal. Both the government and Reliance have repeatedly denied this.
As mentioned above, the problems flagged by CAG are not this part of the offset deal. A February 2019CAG report said the deal to buy the jets was kosher and cheaper than that was being negotiated by the UPA government.