Rafale explained: From letter of comfort to 'missing' bank guarantee, unmasking technical terms of deal

Opinion poll surveys conducted in September, November, and January indicated that despite the continuous media coverage and sustained political debate on the Rafale row, the issue failed to take off as a major electoral issue.

Business Standard survey conducted in September 2018 revealed that 52 percent of respondents believed that the issue would not matter during the 2019 Lok Sabha elections. Another poll by Times Now-CNX found that only 10 percent think that Rafale deal is an important cause of concern. ABP News-C voter survey said that over 44.9 percent people think Rafale will not have any effect on Modi government's image, while India Today's Political Stock Exchange (PSE) revealed that in politically important states like Uttar Pradesh and Uttarakhand, the issue has very little traction among respondents while many voters said they did not know about the matter enough to form an informed opinion.

File image of a Rafale jet. Wikimedia Commons

File image of a Rafale jet. Wikimedia Commons

While some would argue that this could be taken as affirmation of support for Prime Minister Narendra Modi, it mostly displays that the issue failed to engage the larger public. Both sides either resort to pithy one-liners to glaze over the complex issue, or they threw complex jargon, without adequate explanation, to take cover behind wordplay and avoid closer public scrutiny. Either way the result is that the politicos lose audience on what should have been crucial to national interest.

The Rafale deal, with its many unravelling layers, has been one of the most multi-faceted issues facing the Modi dispensation ahead of the election. To help readers understand where the government enjoys strong-footing and where it has failed to answer pointy questions, here is a lowdown on the technical jargon associated with the debate on the issue.

What is Rafale controversy?

First in 2013, the United Progressive Alliance first chose Dassault's Rafale after floating a tender to induct new fighter crafts in the Indian Air Force fleet. The government was towards the end of its tenure and hence the negotiations were stalled amid noise on various corruption scandals. The negotiations were on for 126 fighter jets — including the purchase of 18 off-the-shelf 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 set aside the progress made so far, stating immediate requirement by the Indian Air Force and planned to buy 36 aircrafts custom fitted to meet India's requirements, straight off the shelf instead of trying to acquire technology from Dassault and make it in India. The deal incorporated 50 percent offset clause, ensuring that 50 percent of the deal's 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 of the entire controversy as Opposition alleges that Anil Ambani's nascent Reliance Defence walked away with the major piece of the offset pie (on Modi's personal intervention), while the state-run HAL was left out.

Rafale lingo simplified

Government-to-government contract (G2G contract)

Context - The Rafale deal, as it exists is essentially a G2G deal, between French and Indian government. This fact has been used by the Modi government to distance itself from the choice of Reliance as one of offset partners, and also in keeping the exact price of each aircraft a secret.

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. The main point that differentiates the former from the latter is that the deal is struck between two governments and hence are seen as a method in which the procurement cycle becomes less cumbersome much faster and more importantly less controversial, according to a report on ORF

However, in this case the clause is part of the controversy, if not the root of it. ORF claims that the reason is that in this particular deal is that essential plus points of government-to-government contract, like the responsibility for the supply of equipment and related industrial services and performance of the entire contract have been transferred from the French government to Dassault. The French government has 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.

Moreover, Indian Defence Review states that defence procurement in India should ideally be done on a competitive tender basis, and the G2G or (inter-governmental agreement) should be used as an exception only under few circumstances. Despite this, almost 70 percent of the defence deals are being concluded by India following the IGA route (Government to Government) but so far the government has always insisted on a sovereign or bank guarantee, Rafale being the only exception.

Letter of Comfort

Context - There has been a lot of noise around the letter of comfort signed by the French government in the deal, with the Opposition arguing that the government weakened India's stand by not insisting on a strong enough guarantee on the deal. BJP rebels Yashwant Sinha and Arun Shourie along with Prashant Bhushan have taken the government to court on this very count.

The attorney-general told the Supreme Court during a hearing of the case that the letter of comfort, which says that if there is any exigencies, it would be taken care of by France, is almost analogous to a letter guarantee. However, even the law ministry did not accept this when the IGA proposal was routed through them. Experts say, that a letter of comfort is merely a moral obligation than a legal one, something an unfriendly government in future can entirely sideline.

Indian Defence Review cites examples from countries like Canada, and US. In the former there are two levels of letter of comfort to ensure that signing of the second tier document means the signatory government has an intention to support the subsidiary. In contrast, US is against ‘letter of comfort’, as its legal enforceability is suspect.

Sovereign Guarantee

Context - Opposition insists that India should have insisted for this instead of settling for a letter of comfort to protect IAF's interest.

Sovereign guarantee is a promise by the government of a state to discharge the liability of the subsidiary, or partner firm, in case of a default or failure to adhere to the terms of contract. Sovereign Guarantees are contingent liabilities of the Central and state governments 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 short on many counts. According to The Wirethe French denied to take responsibility for the supply of equipment and related industrial services and performance of the entire contract, as is customary and transferred it to Dassault. The French also refused to be involved in the dispute resolution mechanism, which is ideally at the government-to-government level only in an IGA contract.

However, in the course of negotiating the French government sought to transfer its own direct responsibilities and obligations to the industrial supplier – in this case Dassault Aviation.

Bank Guarantee

Context - Similar to above. However, a controversy arose after 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.

Initial reports, in November 2018, suggested India may have a €185 million (~Rs 1,477 crore) bank guarantee from Dassault as a safeguard against any violations of the offset policy due to a special clause in the deal, which mandated that five percent of the total offset value be kept as a buffer in case of non-performance. However, a recent dissent note signed by Ministry of Defence officials has surfaced which reveals that this last net of guarantee was also dropped after direct negotiations between Prime Minister's Office and the French government, which the defence ministry officials claimed weakened India's position.

According to the letter, penned by defence ministry deputy secretary SK Sharma, the French had told the Indian negotiating team that, following discussions with the PMO, “no bank guarantee is provisioned in the supply protocol and a Letter of Comfort is sufficient”.

Firstpost is now on WhatsApp. For the latest analysis, commentary and news updates, sign up for our WhatsApp services. Just go to Firstpost.com/Whatsapp and hit the Subscribe button.

Updated Date: Feb 12, 2019 16:31:36 IST

Also See