India may need to walk away from Rafale to buy MMRCA

A French Armée de l’Air Rafale at the Langkawi International Maritime and Aerospace exhibition (LIMA) in March 2015 | Photo: Shruti Pushkarna

A little over three years after the declaration of the French Dassault Rafale as the L1 (lowest, technically-qualified) bid for the Indian Air Force (IAF) tender for 126 Medium Multi Role Combat Aircraft (MMRCA), negotiations between Dassault and the defense ministry are yet to be concluded, even as Prime Minister Narendra Modi began his visit to France.

Defense Minister Manohar Parrikar has been forthright about options in the wake of difficulties being faced in the negotiations, with reports of price escalations, discovery of new costs apparently left ambiguous in the original French bid and liability of guarantees for delivery of aircraft by the designated license production agency, Hindustan Aeronautics Limited (HAL).

Parrikar has remarked on the purchase of additional Russian Sukhoi-30MKI aircraft as a possibility if talks with Dassault fell through. The IAF chief, Air Chief Marshal Arup Raha followed with a gentle correction, when he distinguished the utility of the Sukhoi-30MKI aircraft from an MMRCA at Aero India 2015 in Bangalore in February.

Rafale has been selected as L1. It is a replacement. It is important that we have the MMRCA – I would not say Rafale. But we need to have it in the quickest possible time because drawdown is true.

“MMRCA and Sukhoi-30 – the requirements are slightly different. And they have their own capabilities. They complement each other but do not replace each other,” said Raha, also stating, “Rafale has been selected as L1. It is a replacement. It is important that we have the MMRCA – I would not say Rafale. But we need to have it in the quickest possible time because drawdown is true.”

At this point, it is important to note that the Request For Proposal (RFP) was first issued in 2007. According to the RFP, the manufacturer has 36 months to begin delivery. Even if the order were signed today, delivery would not begin before 2018.

The IAF plans to retire four squadrons of MiG-21M, five squadrons of MiG-27M/UPG and one squadron of MiG-21bis aircraft in 2017, losing 10 squadrons in one year, severely shrinking its increasingly vintage fighter aircraft fleet.

How is it that a foreign company could be intransigent enough to drag negotiations on beyond three years for an order that will likely be worth USD 20 billion, even though it was originally estimated to be worth around USD 10.4 billion by the defense ministry?

It is true that negotiations for the Mirage 2000 fleet upgrade took around five years for an order worth USD 3.63 billion. But that was also because, being an upgrade program, options for choice of vendor were naturally restricted to the Original Equipment Manufacturer (OEM); incidentally the same folks who build the Rafale.

The problem lies largely with the procurement process followed by the defense ministry. No one knows how much the government will eventually spend on any given procurement, irrespective of estimates mentioned in the Acceptance of Necessity (AoN) issued by the Defense Acquisitions Council (DAC).

No one knows the price quoted by any vendor until the opening of the commercial bids, which happens only after the conclusion of the lengthy technical evaluation.

A vendor can submit a bid that is low enough for it to be declared L1. After declaration of L1, the vendor is in a stronger bargaining position than the government, being able to ‘clarify’ and change the offer to his advantage and stretch negotiations till the terms of the contract favor him.

The rules, on the other hand, have always anticipated negotiations only in rare circumstances, after the determination of the L1 bid.

Para 51 of the Defense Procurement Procedure (DPP) of 2006 says:

In multi vendor cases, on opening of commercial offers, once L1 vendor is identified the contract should be concluded with him and there would be no need for any further price negotiations.

However, negotiations can be held in exceptional circumstances where valid logical reasons exist and such negotiations should be held only with L1…CNC should establish a benchmark and reasonableness of price in an internal meeting before opening the commercial offer.

Once the commercial offers are opened and the price of the vendor is found to be within the benchmark fixed, in the internal meeting, there should be no need to carry out any further price negotiations.

The RFP in such multi vendor cases, should clearly lay down that no negotiations would be carried with the L1 vendor.

Even the MMRCA RFP says:

There would normally be no need for further price negotiations with the lowest bidder.

The Central Vigilance Commission, in a circular on tenders and negotiations with L1 vendors issued in 2005, directed that:

There should not be any negotiations. Negotiations if at all shall be an exception and only in the case of proprietary items or in the case of items with limited source of supply. Negotiations shall be held with L-1 only. Counter offers tantamount to negotiations and should be treated at par with negotiation.

Clearly, Dassault’s bid was beyond the benchmark established by the Contract Negotiation Committee (CNC).

In case of L-1 backing out there should be re-tendering as per extant instructions.

The CVC’s 2005 circular also said, “In case of L-1 backing out there should be re-tendering as per extant instructions.”

Even if the IAF and the defense ministry were to re-tender with the intent of a (hopefully) short process, and attract the same vendors (or perhaps less 01), they would be faced with revised pricing which would likely be much higher than the prices quoted in the existing MMRCA tender. The same would apply to a straight government-to-government (G2G) order, as well.

Knowing the natural aversion of the IAF and the defense ministry to another ten-year tender of the MMRCA with the escalated price-tags that would result from that their backing out, Dassault can perhaps afford to wait out the negotiations to a conclusion satisfactory to them.

Unless the defense ministry walks away from the table itself, first.

There is nothing that prevents the defense ministry from declaring any or all of the following:

1. Dassault’s bid is no longer L1
2. Dassault’s bid is no longer compliant with the terms of the RFP

Once such a determination is made, the defense ministry is free to negotiate with the new ‘L1’; in this case the European four-nation Eurofighter Typhoon consortium.

The defense ministry is also free to resort to provisions outlined in Para 73 of the Defense Procurement Procedure (DPP) upon approval by the Cabinet Committee on Security (CCS), which allow it to negotiate with and conclude an order from any of the other vendors that participated in the MMRCA tender.

Para 73 of the Defense Procurement Procedure (DPP) says:

In certain acquisition cases, imperatives of strategic partnerships or major diplomatic, political, economic, technological or military benefits deriving from a particular procurement may be the principal factor determining the choice of a specific platform or equipment on a single vendor basis. These considerations may also dictate the selection of particular equipment offered by a vendor not necessarily the lowest bidder (L1). Decisions on all such acquisitions would be taken by the Cabinet Committee on Security (CCS) on the recommendations of the DPB.

And taking the MMRCA as a test case, there are also lessons to be learned to improve the defense procurement process. But we’ll discuss them in a following piece.