Friday, November 18, 2011

Fighter bid like no other

European rivals sit at long table as offers are read out.

New Delhi: The only military wing headquartered outside South Block in the capital’s Raisina Hill is the Indian Air Force. A squat multi-storeyed block, the Vayu Sena Bhavan is marked out by a scrapped fighter aircraft mounted on a pillar, its nose skywards as if it were soaring.

Visitors are allowed in only on invitation and after they are frisked, the irises of their eyes checked biometrically to confirm their identities.

Foreigners are rarely allowed into the building and even civilians must have their backgrounds investigated for permission to enter.

Last week, half-a-dozen Europeans were let into the building after going through security and escorted to the fifth floor where they were sat down at the end of a long table in a conference room adjacent to Air Chief Marshal N.A.K. Browne’s office.

The Europeans were from two firms, EADS Cassidian and France’s Dassault Aviation. In one of the world’s largest defence contracts that is hotly contested, Cassidian’s Eurofighter Typhoon and Dassault’s Rafale fighter jets have been shortlisted.

When their executives were invited last week, it was for the opening of the financial bids. The meeting was convened by joint secretary (air) R.K. Ghosh, the “acquisitions manager” for the IAF’s medium multi-role combat aircraft (MMRCA) programme, the exercise to procure 126 fighter jets, an order that may be expanded to 200.

For both EADS and Dassault — as it would be for any other firm — European giants struggling to keep their assembly lines (and thousands of jobs) intact — the IAF order will mean a guarantee for years.

For India and its air force, the MMRCA is the single largest defence contract it would sign. When the Request for Proposals (RFP) was sent out in 2007, the value of the contract was estimated to be Rs 42,000 crore or $10 billion.
Dassault’s Rafale

The order could now well go up to $20 billion, or double the estimate, accounting for cost and forex fluctuations. The spotlight on A.K. Antony’s defence establishment in going through with the acquisition, therefore, is so much sharper.

Not only have Indian defence acquisitions been plagued by allegations of bribery and unaccounted commissions (or kickbacks), the last time a Congress government signed a comparable deal (for 410 Bofors howitzers in 1987), it cost Rajiv Gandhi his prime ministership.

Minutes after the Europeans were sat down at the end of the conference table, the acquisitions manager asked for a metal box containing the financial bids to be brought in. They were asked to confirm that the box was locked. They did. The box was then opened. It contained bundles of papers that the competitors had submitted, each trying to outdo the other to emerge as L1 – the lowest bidder.

The seals on the envelopes were broken after they confirmed that their bids were genuine.

“It was like nothing I had seen in India before,” one of the men present in the room told The Telegraph. He had attended bid-openings before.

“They were always like casual and regulation stuff. But here there were people seated around the long table, each was asked to identify himself, and there were placards with our names on the table and we had designated seats and everything was on the record,” he recalled.

The Typhoon and the Rafale, both twin-engine fighter jets – seen in action over Libya most recently -- that claim to be in the four-plus generation of aircraft, were shortlisted after 643-point technical and flight evaluation tests by the IAF through 2009 and 2010.

The aircraft were tested over the desert in Rajasthan, at Hindustan Aeronautics’ Bangalore establishment and at the high-altitude airfield in Leh, Ladakh. Then IAF test pilots flew the aircraft in their countries of origin to test their weapons’ capabilities in air-to-air and air-to-ground combat.

The tests eliminated the F-16 Super Viper IN and the F/A-18 E/F Super Hornet, made by US firms Lockheed Martin and Boeing; the Gripen NG made by Swedish firm Saab and the Russian MiG-35.

In so doing, India was risking a growing defence relationship with the US. After months during which US envoys to India said there was “an expectation” of the contract being awarded to US firms as a thanksgiving for the civilian-nuclear deal, the Pentagon and the US government were bitterly disappointed.

A day before the bids were opened in that fifth-floor conference room in New Delhi, the Pentagon presented a report to the US Congress, expressing its regret over losing the deal yet again and also offering to “share information” with India on its F-35 Lightning II stealth fighter programme, an aircraft that is a generation ahead of the competitors for the MMRCA programme.

For the IAF, not only was that proposal “too late”, it was also seen as an effort to queer the pitch when it was two-thirds of the way through the acquisition process.

“It was the Pentagon talking to the US Congress. It wasn’t Vayu Sena Bhavan talking to South Block,” said one officer, underlining that the Pentagon’s offer had little relevance to the MMRCA programme at this stage.

The F-35 certainly did not figure around that long table where 13 officials from the defence ministry, the IAF, Hindustan Aeronautics and the Defence Research and Development Organisation who make up the contract negotiation committee for the MMRCA programme briefed the Europeans on the process to be followed.

The acquisitions manager read out in broad terms the financial terms offered by the two sides. As the executives took notes furiously, it dawned that the formulae for pricing the aircraft presented by each was so complicated that it would take weeks to determine the values.

“There is no such thing as a sticker price,” said one officer. “You don’t buy aircraft like oranges, by the kilo.”

He explained why it could take up to six weeks – may be till the end of December -- to determine the lowest bidder. “It’s a price for the whole package,” he said.

For the first 10 to 12 days, Air Headquarters expects there will be much back-and-forth between the IAF and the companies as clarifications are sought. The meeting determined that the financial bids would be tied to the price of the dollar quoted by State Bank of India’s Parliament Street branch on November 4.

The IAF has sought financial quotes in eight categories, called M1 to M8. M1 is the “unit flyaway cost”, the price of each of the first 18 aircraft to be purchased “off the shelf”.

M2 asks for the lifecycle costs – the price of running the equipment over their lifespan of 6,000 hours – of the different components that make up the aircraft (engines, airframe, weapons pods).

M3 is “operational cost”. M4 asks for the lifecycle costs of spares, fuel usage, a “mean time between failures” (MTBF), and lubricants.

M5 and M6 are the estimated costs of overhaul and mid-life upgrade. M7 is the cost of the technology that the maker will transfer to Hindustan Aeronautics that will set up the assembly line were the Typhoon or the Rafale would be made under licence. M8 is the computation of total costs.

The formula for computing the costs has an escalation cost, net present value and discounted cash flow built into it, a financial expert said.

Air force officers, however, worry that formulae have a way of getting disrupted in the acquisition process because they get complicated by the pressures of diplomacy and/or under-the-table processes. On the other hand, they also say that if India were to award such a huge deal to a country or a collection of countries, it would be foolish to not extract diplomatic and political mileage out of the deal. Compounding all of this is the IAF’s dire necessity for the aircraft as it stretches its assets – such as the outdated MiG 21 that make up a bulk of its inventory -- well beyond their prescribed lifespan.

Eurofighter’s chief executive officer Bernhardt Gerwert is on record as having said that the four countries that make up the EADS consortium – Germany, the UK, Spain and Italy – had “offered to make India a partner country” with an assurance of steady equation with the four top west European countries.

France’s President, Nicolas Sarkozy, pushing Dassault’s bid with the Rafale, has extended repeated invitations to Prime Minister Manmohan Singh – who was in Paris for the G20 last week -- and had hosted India as the chief guest at the Bastille Day celebrations, a signal moment for the Indian armed forces when they marched down the Champs-Elysees at the head of the parade.

France is also banking on traditional relations – it supplied the frontline Mirage 2000 aircraft – with the IAF.

In Vayu Sena Bhavan where the airforce wants to insulate itself from the politics of handing out an estimated $20 billion, the search for that precise formula is still on.

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