GS3 - Security

#1: Why the Rafale deal, even though manufactured by Dassault, a private manufacturer- is touted to be a G2G deal?

#2: ""Rafale deal shouldn’t have gone through a global tender in the first place""- Defence Minister. What benefits will bypassing the MMRCA deal which shortlisted Dassault as lowest bidder, bring to our defence imports? Wasn't the process of tendering which was followed earlier- crucial in making sure our import cost was the least?

#3: Can FDI liberalization be applied as one-size-fits-all solution for opening up an hitherto investment starved sector and spurt growth, irrespective of the peculiarities of each sector? Taking an example of FDI in Defence, please help us understand the limitations of FDI as a tool for self-reliance and indigenization." 

#1: Why the Rafale deal, even though manufactured by Dassault, a private manufacturer- is touted to be a G2G deal?

Since the deal is between government to government, this is termed as a g to g deal

lets say BHEL makes ordnance and our govt enters into a deal with some other country even if BHEL is a public sector undertaking, it will be a g to g deal. Alternately BHEL can win a tender

The deal is between the govt of both countries as the govt of france is openly negotiating on behalf of Dassault

how is it different if say- GoI and Dassault would have had a similar deal?

that is not possible within the legal framework.

If french govt is not involved, then it will NOT be g2g. It will be between govt and private and thru tender process.

sir, you mean government and private agencies can't negotiate on strategic sector supplies?

Yes, normal process is through tender negotiations can be held with the lowest bidder. All our government dealings are procedural unless there is an emergency where govt can deal directly with any supplier

If french govt is not involved, then it will NOT be g2g . what are the benefits of dealing with government , apart from procedural requirements?

Dassault is a private firm, but, its shares were once owned by govt. later transferred to private. we are seeing french govt-defence deals with indian eye!! in west, thanks to the WW1 and WW2, the line between the govt and defence companies dissolves!! so, ever company which is manufacturing defence products have a MoU with the govt. a complex MoU, that ensures that the interest of the govt and the defence firm and taken care of.

for example: No defence company in the west can participate in any tender without govt nod                  

what if a private company in france, supplies nuclear submarine to the enemy of france?! get me?

same with USA. What is sikorsky, supplies heclicopter to Cuba?!

So, they have MoU, that regulates the operations of the private companies. Same way, the private companies have the privilege of being supported by the govt.

Quick decision for one - Generally it comes bundled with lot of other items resulting in a relationship building between countries

one more thing - tenders may not always result in the 'cheapest' offer in case of 'cartels' being formed, it may result in escalation of prices too.

Thats why negotiations are held with the lowest bidder

#2: ""Rafale deal shouldn’t have gone through a global tender in the first place""- Defence Minister. What benefits will bypassing the MMRCA deal which shortlisted Dassault as lowest bidder, bring to our defence imports? Wasn't the process of tendering which was followed earlier- crucial in making sure our import cost was the least?

Why he said that no tender for this? because, of the nature of the purchase.

when do we tender something?

1.       when the requirement is specific and stable.

2.       When there are multiple persons ready to supply the same.

3.       When there is a possibility that, we can get a better deal by tender, meaning, our requirement coming at competitive cost.

Now, are these three things are answered positivey here? They are not!! Thats what made the minister exclaim that way!

Why not sir, though I am not aware of how many private defense firms participated in the tender, but surely the requirement is specific?

The requirement cant be stable! By the time the tender comes for finalisation, technology would change! We would ask for a change that can alter the cost significantly! Example: You tender a mobile phone puchase, and after 6 months, you want it along with telegram applciation. But, then samsung says, it cant do that with present chip. It will cost 30% more! Samsuang may say, that it cant do that, as its system may collapse!! so, such purchases, where the technology changes every 6 months cant be tendered so easily!!

its not just teh cost. It may be integration! always remember, when u buy a technical product, your requirement will change rapidly!!

Sir, but that's the nature of defense purchases (cost and integration), if one were to follow the same logic- then it'd be hard to justify any kind of tenders, wouldn't it?

right!!! so, more than 50% of the defence products are not tendered!! we buy directly!!

did we tender the t-90 tanks? did we tender Virat purchase? Did we tender for Mig-30?

defense is a very technological driven sector. So, u cant keep a stable requirement! Yoru req will change rapidly!! imagine the purchase of mobile phone!! How many of us use the same mobile for more than 3 years???

Right sir, a tender on the other hand is very specific down to the nut and bolt

yes, tender has to be very very specific, so that we can compare the offers!!! if its not specific, one cant compare the offiers!!!

second issue is: multiple persons to supply it! Now that our requiremet is not stable, we can tweak it and make it closer to any company!! I can say that, I want a beyond visibility radar, that only israel makes!!! That would bring 2 companies in and 3 out!!! so, there is no real competition!!

When there is no real competition, tenders fail!!  Thats what DM meant!

Sir, one more ancilliary question -

earlier it was supposed to be a deal between HAL (on behalf of Indian Govt. ) and Dassault, and in that deal technology transfer and manufacturing support from dassault was also covered, now, it is not so, as they have commented that even if they transfer technology, still we wont be able to produce the same quality MMRCA. What problems do we see coming because of this for Indian technology market and defence future. Also by doing this rules set of offset agreements are also not followed.

defence deals are highly comples. HAL has a restricted role of manufacturing and servicing what is bought. The purchaser is IAF!!! Its like when you buy a car, you may consult your mechanic, but, then you make the final call, not the mechnic!! that is the difference!!! so, we have equal arguments for having the deal g2g, instead of making it purely commerical. And regarding the performance, lets not forget that IAF has approved it!!

#3: Can FDI liberalization be applied as one-size-fits-all solution for opening up an hitherto investment starved sector and spurt growth, irrespective of the peculiarities of each sector? Taking an example of FDI in Defence, please help us understand the limitations of FDI as a tool for self-reliance and indigenization."

By which method will I get the right price?

This is the question an exective faces while deciding to purchase an item

If the executive decided 'tender' will give the right price (as in this case and thats why the then govt went ahead with tender process) it will do so. But as the process started unveiling, it ran into lengthy process of negotiations and to an extent got proved that the decision of going for tender was in fact 'debatable'

Let's say the tender worked out

And there were competitive bids and our country got a good price, then the situation would have been different. Considering that there was no emergency. And there was to an extent competition as there were similar products available. it should have looked the right procedure.

But as time passed, the requirement became more emergent The competition failed as the lowest bidder has himself quoted higher (than looks plausible - that too is a judgement). With such being the case the decision of G to G started looking attractive (the decision is still debatable).

To sum up, it is a 'difficult' issue. Hence there is no clear 'right' or 'wrong' strategy.

Sir, context is- Immintent benefits of FDI are always thought to be 1) Technological know how will come domestically and 2) More investment = More growth.

whereas the focus for defence has been indigenization. Make in India on the other hand focuses mostly on dometic manufacturing. That technology is being transferred locally isn't a prime mandate

My question is  about contrasting mandates of FDI. FDI usually brings in investment not technology (still highly debated). whereas our focus in Defence sector is on indigenization. How  far will FDI in defence go with that aim , is my question

who said FDI dosnt bring technology?! any restrictions?!

yes sir, 49% ownership for the foreign company, he still wont own the enterprise. IP is very crucial to strategic sector companies. Unless he is given charge of absolute ownership, its difficult to see the pouring in of Defense companies in India.

Ownership is not realated to technology. why you assume so? HAL outsources 80% of its requiremets from abroad! So, FDI may or may not brig tech. But, yes, the current FDI trend is without tech. Manivannan, but, it may change.

We need not have the view that any FOREIGN investment will always look to DEMOTE domestic performance. Foreign investment comes only when the foreign investor expects BETTER returns from the place he is investing.           

second is about indigenisation!

Think about this:

1.India is not a leader in Science and tech. We file less patents. No nobel.

So, indigenisaion can be only a goal, that cant be achieved immediately. It has to happen step by step!!

consider this:

You are a patient. You need to be back to normal and able to jog of your own. You may do that one day! but, now, you need the crutch. So, use the FDI crutch now, till u are able to walk on your own!

FDI is required in all sectors, inlcuding defence.

FDI may not be the 'panacea' for all ills but it is not a BAD pill too. you may not get FDI some day when you cry for it now the environment is such that people are interested in investing in our country. may be most are NRIs or other Asian Investors who are looking for even less than 4% rate of returns.

So my followup to your analogy will be, give me ayurvedic medicines or something of that sort along with FDI (allopathy) so that I can recover faster

you require many things. Good labour laws. Good judiciary. Good work force. And good investment! If that comes thru FDI, why should i complain? Anyway, the company cant be taken over, as 49% ceiling is there!!

Sir can you elaborate on why Technology is NOT equal to ownership?

Simple: technology is no more confined to few companies in this flat world. Reverse engineering is everwhere!

but I can sue you if you try and reverse engg my IP protected by law. can't I?

The unbelievable rate in which information is dissiminated is making the ownership of technology difficult.  Our whole missile technology is reverse engineering!! you can sue only if its like samsung and apple and that case ran in court for years!!

take example of TV - Everybody knows the tech. Its about the cost of manufacturing! china is capturing the world by technology or by cost? Investment and technology are moving away from each other. I can have a technology and get investment! Infact the growth of financial market independently, away from the manufacturing sector is an evidence! Before the fall of berlin wall, financial market was influenced by the manufacturing sector!! Manufacturng sector was still the highest contributor to the GDP of nations!! no more!! Service sector has taken over now!! That has made the financial sector almost independent!! Now, wealth can be created, without production!!! Think of futures market!! So, money is moving away from manufacturing and technology, though they will be always connected to each other!

Sir, but my question had an assumption, which I didn't clarify. In most of the high tech sectors, its not that we're lacking capital it was that we're lackign technology too. So it was assumed that for want of Tech, we'll get investments too. our value addition is abysmal in high tech areas (eg- we use Aluminium to make utensils not Apple phone cases)

I may want both pizza and a good movie. But, I cant expect that one person will take me to movie and buy a pizzza! Though its possible than same man may do both!

hence, I inferred that we as regulators and govt, are restricting a person bringing both tech and capital. ONLy because he sees DDD (Demand, Demography and democracy) and thus high returns in India

We are regulating, as we don't want the 'outsider' to control an indian company!

There are certain type of situations thrown by the technological developments

I am poor, but technology advanced to an extent that I can purchase a mobile. I dont know about the technology behind it but I will buy it and improve my efficiency.

Now I dont have money to start producing mobile phones, hence my mobile phone prices stop receding. I get FDI in that sector (without technology transfer too) but I end up improving my efficiency become richer.