Rafale Offset Scheme a Failure? Why India Needs Strategy Overhaul

With only three years left for Rafale Offset compliance, ensuring that this is met is likely to be a big challenge.

The audit report tabled by the Comptroller and Auditor General (CAG) of India on 23 September 2020 has raised important observations regarding the Rafale contract by stating that the French firms had not complied with their Offset obligations.

Quite obviously, this has raised a spate of discussions in the media leading to some confusion. Fundamentally, Indian offset schemes have been plagued by implementation problems.

Between 2005 and 2018, Offset contracts worth Rs 66,427 crore ($9 billion) have been signed, of this Rs 19,233 crore worth should have been completed by 2018 but in reality, only Rs 5,457 crore worth offsets have been completed and approved as of December 2018.

This forms a mere 8.21 percent of the total value and highlights the inefficiency or difficulty of ensuring implementation by the vendors. The problem lies primarily with the way in which the concerned agencies of the Government of India, who are tasked with ensuring offset discharge, function.

The Rafale contract worth 7.87 billion euros was signed on 23 September 2016. The vendors signed the Offset contracts along with the main deal and are required to discharge their offset obligations within seven years from the date of the main contract.

The Offset requirement for the Rafale contract was stipulated at 50 percent as against the standard 30 percent as per the DPP. This was a legacy from the original RFP for 126 aircraft and has an interesting history.

Rafale Offset Involves $4 Billion

In the meeting on Medium Multi-Role Combat Aircraft (MMRCA) in 2005, the undersigned recommended that the Offset requirement be raised to 50 percent in order to leverage high technologies and manufacturing for the country. This was accepted by the then Defence Secretary, Mr Shekar Dutt, and was implemented.

The Rafale Offset involves Rs 30,000 crore (approx $4 billion) and is to be discharged within seven years.

While Dassault Aviation is the main agency responsible ensuring compliance of the Offset obligations, the Offset commitments are shared by the four main agencies involved in the manufacture of the aircraft – Dassault Aviation (DA) who is the overall integrator of the aircraft and is responsible for the contractual delivery; Safran, which is responsible for the engines; Thales, which is responsible for the electronics, avionics, and systems such as the radar and electronic warfare; and MBDA, which is responsible for weapons and related equipment.

Each of the four vendors has multiple tier 1 partners who own the design and manufacturing of their systems and aggregates, and hence, are involved in the Offsets.

The Offset implementation is done in compliance with Defence Offset Guidelines of 2013, which delineate the execution by vendors through a partnership with Indian Offset partners by JVs and other tie-ups for manufacture as well as outsourcing of services and related products.

These tie-ups will constitute 70 percent of the total Offset value, while the remaining 30 percent is allowed for tie-ups with DRDO, Public and Private companies for TOT and joint R&D where multiplication factors make it more attractive and beneficial for the vendors.

Implementing JV tie-ups and even direct outsourcing need lead time to materialise and hence, these tend to happen after the first three years. However, TOT and Joint R&D can start immediately. This is the area that has been highlighted by the CAG. The observations are interesting if one links up with past efforts by the agencies involved.

The primary observation relates to Technology Transfer to assist or plug-in some of the gaps that continue to afflict DRDO’s Kaveri engine development program. The agency involved here is Safran, which is the engine group and includes Snecma, the engine manufacturer. MBDA has also been mentioned for lack of progress.

Safran’s problem appears to be related to two issues, type of technology that is demanded and the costs. This is not the first time that Safran and DRDO are engaging on the Kaveri issue. In 2007, DRDO and Safran had arrived at an agreement for assistance in Kaveri engine development.

However, as the proposal emerged it was realised that Safran’s assistance meant that it would replace the Kaveri engine core with Snecma engine core, thus effectively killing the Kaveri work done in the past 25 years. Besides, technology assistance is more of a handholding than real access to design knowledge. Given this past history, DRDO’s desire to acquire critical engine technology from Safran is unlikely to materialise. Considering the fact that there are only three years left in the timeline for Rafale Offset compliance, ensuring that this is met is likely to be a big challenge.

Aeroengine technology is the most complex and top-end technology in the aerospace domain. A number of countries who have mastered this domain will be not more than the five fingers of a hand, and France is one of them.

These nations do not part with critical technologies unless one leverages forcibly through a huge contract and a well thought out offset strategy. China, often accused by the west of coercing their companies to part with technologies, has been the most successful practitioner of this strategy. That India’s Offset contracts completion is a bare 8.21 percent is testimony to the problems in our practice of the Offset strategy.

Apparently, one of the major problems with the original Rafale negotiations for 126 aircraft was on issues of technology transfer. The problem lies with India’s acquisition policy including the offsets.

The original tender was clear in its objectives of technology acquisition. The government needs more options to see who would comply with national technology requirements, and hence, it is time we look at negotiating with not just the L1 or just one G to G but with all who clear the basic stage of meeting the operational requirements. Defence Acquisition should be seen as a critical element of national security strategy.

There are already many voices clamouring for scrapping the Offset policy. The CAG report on Rafale Offset contract non-compliance is likely to strengthen these voices.

Scrapping the policy would be throwing the baby out with the bathwater. The government needs to address the flaws in the offset policy by re-crafting it as a holistic policy, combining direct and indirect offsets, and link it to a well-crafted national technology strategy.

India needs technology inputs in terms of collaboration, joint ventures, joint research, and risk-sharing partnerships to accelerate its defence technology mastery and sovereignty. One of the most important ways to do that is to leverage our huge contracts through well-thought-out offset strategy.

(Air Marshal M Matheswaran AVSM VM PhD (Retd) is a former Deputy Chief of Integrated Defence Staff. Currently, he is the President of The Peninsula Foundation, Chennai. This is an opinion piece and the views expressed are the author's own. The Quint neither endorses nor is responsible for them.)