Missing Banking Clause in Rafale Deal – Defence

Missing Banking Clause in Rafale Deal

Subject: Defence

Sub-Topic: Defence Procurement

Context:

According to the Report of the Indian Negotiating Team, “No Bank Guarantee” clause made the Rafale deal more expensive.

Controversy over Rafael Jet Procurement:

 

  • First in 2013, the United Progressive Alliance chose to induct new fighter crafts Dassault’s Rafale in the Indian Air Force fleet.
  • The government was towards the end of its tenure and hence the negotiations were stalled.
  • The negotiations were on for 126 fighter jets — including the purchase of 18 off-the-shelf (taken from existing stock or supplies) jets from Dassault Aviation, with 108 others being assembled in India by Hindustan Aeronautical limited — and the eventual transfer of technology to India.
  • However, in April 2016, the National Democratic Alliance government planned to buy 36 aircrafts straight off the shelf stating immediate requirement by the Indian Air Force instead of trying to acquire technology from Dassault and make it in India as proposed in the previous deal.
  • The deal incorporated that 50 percent of the amount will be invested in the Indian defence ecosystem, out of which France is to invest 30 percent of the total order cost in India’s military aeronautics related research programmes and 20 percent into local production of Rafale components.
  • It is the latter 20 percent that is at the root cause of the entire controversy as Opposition alleges that Reliance Defence walked away with the it, while the state-run HAL was left out.

Controversy Clauses:

Government-to-government contract (G2G contract)

 

  • A defence equipment purchase is primarily done in two ways. Either a country’s government directly purchases equipment from a foreign defence manufacturer in a purely commercial transaction, or the governments of the two nations buy/sell equipment wherein the seller government can either sell from its own repository or procure the equipments from another local/ foreign vendors.
  • G2G procurement cycle makes the whole of procurement less cumbersome much faster and more importantly less controversial.
  • However in this Rafale deal case supply of equipment and related industrial services and performance of the entire contract have been transferred from the French government to Dassault.
  • The role of the French government was limited to merely given a letter of comfort to the Indian government, stating that it will ensure that Dassault keeps its end of the deal, but in essence absolving itself of any responsibility if the French manufacturer fails to stick to the terms of the contract.
  • Experts say, that a letter of comfort is merely a moral obligation than a legal one, instead India should have insisted for this instead either Sovereign Guarantee Clause or Bank Guarantee to protect IAF’s interest.

Sovereign Guarantee Clause:

  • Sovereign guarantee is a promise by the government of a state to discharge the liability of the subsidiary, or partner firm, in case of default or failure to adhere to the terms of contract.
  • Sovereign Guarantees are contingent liabilities of the Central and state government’s signatories of such a pact.
  • India did insist that under the G2G agreement, France provides a sovereign guarantee to it, however, the French government stopped on many counts.
  • French denied taking responsibility for the supply of equipment and related industrial services and performance of the entire contract.
  • French also refused to be involved in the dispute resolution mechanism.

Bank Guarantee Clause:

  • Reports suggested that a bank guarantee that India did manage to secure during initial rounds of discussion also dropped off after PMO’s intervention.
  • A bank guarantee is essentially a financial security net for the consumer nation in case the supplier nation fails to stick to the terms of the contract. In case India had managed to procure a bank guarantee, the defence ministry would reserve the right to cash it in if it feels that any conditions in the contract were not met in the quantum promised.
  • The INT report reveals that the Indian negotiators repeatedly pressed the French side to provide bank guarantees.
  • Bank guarantees mandated that five percent of the total offset value be kept as a buffer in case of non-performance.
  • However the French side refused to accept this demand made during the negotiations.
  • Latter the French government has said no bank guarantee is provisioned in the supply protocol and a Letter of Comfort is sufficient.

Way Forward:

  • It is high time the government must deal with this issue on priority and must understand the serious damage to national security its clumsy, incomplete and inarticulate defence is causing.
  • At the same time, the Opposition too needs to understand the core of the India-France pacts and the Rafale specifically. At the very least, they need to understand the enormous implications of their words.
  • Both, however, need to work on an institutional mechanism of private briefings in keeping with international secrecy obligations that balances the competing demands of transparency and security as most mature democracies do.