CAG flags Rafale aberrations

The headline conclusion of the CAG report on 36 Medium Multi-Role Combat Aircraft (MMRCA), that the NDA-II Government’s Rafale deal is 2.86 per cent cheaper in overall cost compared to the one negotiated under UPA-II government is a small moral booster to the Modi Government. However, the overall saving of 2.86 per cent in cost worked out by CAG is far below the 9 per cent saving in cost claimed by the Defence Minister. Though the Opposition parties have dismissed the CAG report as not credible, it still has flagged several aberrations that occurred in the deal and the estimated costs of such aberrations or giveaways may be much more than the head line savings of 2.86 per cent .

The most generous giveaway was the waiver of sovereign or bank guarantees. The CAG report notes that in the 2007 offer, Dassault Aviation had provided for “financial and performance guarantees, the cost of which was embedded in the offer because the RFP had required the Vendor to factor these costs in the price bid”. A letter of comfort can’t be legally enforced, nor can it be monetised or encashed in case of a default or dispute. The Defence Ministry’s contention that there was saving to the Government of India because of this waiver, as the bank guarantee charges were not to be paid, has not been accepted by the CAG. At an annual bank guarantee commission rate of 2 per cent, inclusive of confirmation charges by an Indian Public Sector Bank, the financial implication of waiver of bank guarantees for advance payments, stage payments, performance bond and warranty bond would amount to approximately 574 million Euros or 7.28 per cent, members of the Indian Negotiation Team (INT) have reportedly said. Thus, if the financial impact of waiver of bank guarantees was to be taken into account, the final price is still 4.42 per cent higher than the aligned cost (or the price at which the agreement should have been signed after adjusting price variation between 2007 and 2015) of the commercial quotes submitted by Dassault Aviation and MBDA, the manufacturer of missiles to be carried by the Rafale.

Though the CAG report states that the cost savings due to waiving of the bank guarantees had accrued to Dassault Aviation and not to India, the report does not factor in the cost of this giveaway in its table that ultimately arrives at the conclusion that the NDA-II’s deal was 2.86 per cent cheaper.

The CAG report also notes that four of the India-specific enhancements sought “were not needed”, and that the Indian Air Force had acknowledged the same during its technical evaluation in 2010. The avoidable cost on account of these four unwarranted India-specific enhancements was not quantified.

The auditor also flags that the Centre could have used comparative pricing from the Eurofighter’s unsolicited offer in order to negotiate a better price with Dassault Aviation. It is indeed an established practice in Indian PSU’s to use unsolicited offers for the purpose of price comparison to force shortlisted bidders to lower their quoted prices, even though the unsolicited offers are not considered for award of contract.

The choice of Anil Ambani’s Reliance Defence as a significant offset partner by Dassault Aviation raised eyebrows simply because Anil Ambani has no previous experience in defence and heads a heavily indebted group. Though lack of relevant experience and indebtedness per se are not criterion of disqualification, but definitely many wonder about this choice. The present CAG report is silent on this aspect. However it clarifies that “audit is in the process of finalisation of a separate Performance Audit report on Management of Defence Offsets”.

The NDA Government’s claims that the deal was on “better terms” than the one decided by the UPA-II Government, because the delivery of the 36 fighter jets would be significantly earlier have not been confirmed satisfactorily either by the CAG auditor. “Audit noted that the INT (Indian negotiating team) had apprehensions of even this delivery schedule (67 months compared to UPA’s 72 months) because at the time of signing the contract, M/s DA [Dassault Aviation] had an order backlog of 83 aircraft. Considering its production rate of 11 aircraft a year, clearing this backlog itself would take more than seven years” the report says.

Though it seems that CAG Report does not touch upon this aspect, some experts have expressed that the NDA Government has not exercised the option of further purchase of planes, resulting in the full research costs of India-specific enhancements being loaded in the price of the 36 planes ordered, thus further pushing up the cost.

All in all, it seems that the deal of NDA-II government has much to be desired, based on the findings of the CAG report.

(The author is a retired corporate professional and a freelance writer.)