India’s long-awaited national audit report on the politically contentious 2016 deal for 36 Rafale fighter jets has thrown up an expected mixed bag of conclusions, ensuring in short that the storm over the deal continues to rage well into India’s upcoming national election. In a finely balanced report, the national auditor has provided the Narendra Modi government a crucial pass on the issue of price, but criticised it on a series of other factors, not untypical of such reports. With election season at its peak, every word in the audit report, however, stands accentuated to a fever pitch:

But while the incumbent Narendra Modi government and a galvanised opposition led by the Congress Party’s Rahul Gandhi go all out in an attempt to show that the CAG report either favours them (some Congress leaders have claimed exactly the opposite), the true heat in the Comptroller Auditor General (CAG) report happens to be in the scathing background sweep the auditors have provided.

Specifically, the CAG throws new an unforgiving light on the very selection of the Rafale in the original M-MRCA contest between 2008-2012,where it was chosen from a pack that included the Eurofighter Typhoon, F/A-18, F-16, Gripen NG and MiG-35. Key excerpts from the audit report that was tabled in India’s Parliament this morning. The auditor’s take provides a detailed and unprecedented look at how the aircraft were evaluated, and provides many clues about how the Indian government — and the Indian Air Force — have landed in the political soup they are in now. The auditor’s words are especially scathing considering that a former IAF chief once triumphantly claimed that India’s selection process was the envy of the world, and that it was likely to be patented. While the CAG has been known to wield a brutal whip on issues military, often applying standards that go beyond the deviations sometimes necessary to conclude defence deals, the overall import of its analysis provides first insight into a process that was praised, and then came crashing down before the country’s eyes.

Excerpts:

In the Technical Evaluation conducted in May 2008, five of the six aircraft could not meet all the ASQR parameters. The other four aircraft had one to two deviations, Rafale aircraft could not meet 9 ASQR parameters prescribed in the RFP. Further, it did not submit the data for Manufacturers List of Spares and Engineering Support Package. Due to this noncompliance, the TEC rejected Rafale. The Technical Manager Air [TM(Air)], Ministry while examining the TEC report raised certain queries regarding non-compliance of ASQRs of various aircraft and directed the TEC to review its evaluation accordingly. After obtaining clarification from the vendors, the TEC in March 2009 upheld its technical evaluation report which again rejected Rafale aircraft. TM (Air) again sought clarification (12 March 2009) on the warranty and option clause of the Bids submitted by vendors. After obtaining these clarifications from vendors, TEC again reviewed its report and upheld its decision to reject the bid of M/s DA for Rafale aircraft (25 March 2009).

On subsequent clarifications obtained from the vendors, out of the 9 ASQR parameters on which Rafale was rejected, M/s DA offered to modify six of the parameters to meet the ASQR requirements. The firm offered to give additional commercial proposal for making these changes. It stated that the aircraft made to NATO specifications required customisation to meet the needs of IAF. But still it could not meet three of the ASQR parameters. The vendor agreed to supply Engineering Support Package (ESP) and Manufacturer Recommended List of Spares (MRLS) data. However, it still did not comply to the warranty and option clauses specified in the RFP. In view of the above, in March 2009, it was decided by Ministry to reject the technical bid of M/s DA and get waiver of RM on some non-compliance to the ASQRs in the bids of four vendors (EADS, Lockheed Martin, Boeing and Gripen). As this proposal was being submitted for approval of RM, Ministry received (April 2009) a suo moto representation from M/s Dassault for reconsideration of its proposal, stating that it was willing to modify the aircraft to meet all the ASQR parameters and was willing to comply all RFP requirements.

During discussions with the Vendor, deficiencies in additional ASQR parameters were realised by the MoD making the total deficiencies in 14 parameters. Ministry forwarded the representation to IAF for examination by TEC. In the additional TEC report received by Ministry on 13 May 2009, TEC recommended that technical proposal of M/s DA met the requirements of RFP. It further stated that the feasibility and modalities of implementing the modification proposed by the vendor may be verified during field evaluation trials and additional commercial proposal from the vendor may be accepted after due process. Subsequently, waiver on deviations from ASQR and RFP conditions in respect of five vendors and the proposal to accept the additional commercial offer of M/s, DA was approved by RM on 28 May 2009. Audit noted that, Para 35 of DPP-2006, states that the technical offer once submitted should not be materially changed subsequently; however, minor variations which do not affect the basic character/profile of the offer may be accepted. It further stipulates that no extra time should be given to any vendor to upgrade his products to make it compliant with QRs and the original commercial quote submitted earlier must also remain firm and fixed.

Hence, Audit noted that the opportunity provided to M/s Dassault Aviation to significantly modify its technical and price bid was in violation of DPP. Ministry in its reply stated that it was not a violation of DPP and that it was approved by the highest decision making body ‘the DAC’. However, Para 35 of the DPP allows for only minor deviations which do not affect the basis character or materially change the bid. But M/s DA was allowed to bring about enhancements of 14 parameters which, ultimately was to cost over ‘XX’ million €. Hence M/s DA was treated preferentially. The firm attributed these modifications to the unique requirements of the IAF and called them Indian Specific Enhancements (ISEs). However, Audit noted that the Indian requirements, while they might not have been available in Rafale, were not unique because most of these features were available in the other 5 aircraft that were evaluated. For instance, Helmet Mounted Display was available in all modern fighter aircraft including Eurofighter.

Audit observations on the FET and its Staff Evaluation Report are as follows:

IAF conducted Field Evaluation Trials of aircraft offered by all six vendors in accordance with the trial methodology formulated by Air HQ. However: (i) Two aircraft viz., Eurofighter and Rafale were cleared based on their presentation in the lab as to how they proposed to meet the shortcomings in meeting certain ASQRs. Therefore the aircraft were technically accepted without evaluating the significant modification/ enhancements made on them. (ii) Four aircraft viz., “Z1”, “Z2”, “Z3” and “Z4” were rejected in field trials as they could not meet the ASQR parameters of “Growth Potential” and “Design Maturity”. Audit noted that there was no objective, verifiable or measurable criteria prescribed for evaluation of these parameters. Ministry in its reply stated that Growth Potential had verifiable measures like- “Residual Capacity should be greater than 25 per cent” and “spare electrical power” should be greater than 25 per cent”. The Field evaluation was done accordingly.

Ministry’s reply was silent on the evaluation of Design Maturity. However, Audit noted that if the parameter ‘Growth Potential’ did have the verifiable measures as stated above, then it should have been clearly stated in the ASQR and included in the RFP. The trial evaluation Report should also have indicated the actual findings against these parameters. However, none of these steps were taken.

As per the TEC report, Rafale aircraft had failed to meet 14 ASQR parameters. SER stated that the non-compliance of the three parameters viz “W1”, “W2” and “W3” mode of radar would not have any operational impact. In addition SER also recommended for waiver of one more parameters (“W4”). Further, Audit independently noted that two of the ISEs viz. “W5” and “W6” proposed by the vendor were apparently not needed in the first place as the detailed field evaluation trial report 64 had noted them to be satisfactory. Ministry in its response stated that both the aircraft were noted compliant to all ASQRs requirements after having obtained the necessary waivers from the Raksha Mantri. However, Audit noted that Ministry’s response was factually incorrect. In the parameters recommended by the SER, the waivers were not even sought from the RM but MoD recommended them to be discussed by the CNC. Ministry further also stated that two of the parameters viz. “W5” and “W6” were demonstrated in the trials through temporary arrangement and M/s DA had stated that it would properly develop and integrate these features in the delivered aircraft. Audit noted that the contention of Ministry was not supported by Field Evaluation Report. It is seen that the vendor had offered to modify 14 ASQR parameters for an additional “XX” M€ which included four parameters (“W1”, “W3”,”W5” and “W6”). The additional commercial offer was accepted by the IAF/Ministry. The costs of these excess ISEs was to the tune of “IS4” million euros.

Subjecting of technical decisions to the final decision of CNC The Staff Evaluation Report had recommended for waiving of noncompliance of Rafale aircraft to four ASQR parameters as they were not needed in the first place. Three of these parameters were not put up to the RM for waiver by the DG Acquisition stating that they should be negotiated with the L1 vendor during CNC. This was never taken up by CNC during negotiation as recommended by Ministry even though it had significant price implication. Most importantly Audit noted that carrying over technical issues to price negotiation was incorrect. Technical matters cannot be negotiated and technical compliance/noncompliance was to be determined in the technical evaluation. Clear segregation need to be maintained between the mandate of TEC/SER and CNC. Ministry in its reply stated that it was decided to leave the issues to CNC in order to expedite the process and that clear segregation existed between the mandate of TEC/SER and CNC. However, Audit noted that Ministry’s reply was not factually correct as the technical issues were left for the CNC to decide.

Price Evaluation

After Technical Evaluation two aircraft namely Rafale and Eurofighter Typhoon were technically qualified for further price evaluation. Price bids were opened in November 2011 by the CNC. The RFP required the price bid to be submitted for the Life Cycle Cost of the aircraft, and stated that the total life cycle cost would be the criteria for identifying the lowest bidder (L1). The price bid was required to give the detailed cost break up of all the seven components M1 to M7 as detailed in Para 6b. Subsequent to the constitution of Contract Negotiation Committee (CNC) in April 2011, five sub-committees were formed which included one sub-committee for determination of L1 cost. The Audit findings on the process of price evaluation are discussed in the subsequent paragraphs

Prices offered by M/s DA and sub vendors of M/s EADS were not on Firm & Fixed basis. Para 42(a) of the RFP required the price to be offered on Firm and Fixed cost basis with a validity of 24 months. Further Para 14(g) of Part I of RFP specified that for product support an indices based formula was to be provided valid for 40 years with an annual cap. L1 subcommittee in its report stated (Para 2.1) that M/s DA had offered costs with a base price of June 2007 subject to escalation. The L1 subcommittee used the actual values available till June/July 2011 and used provisional values till September/October 2011. Beyond this, till the mid delivery period the committee used an annualized year on year escalation rate based on the historical data. M/s EADS had offered its commercial quote on fixed price basis for main equipment comprising of aircraft. However, its sub vendors had quoted for the weapons on a non-firm cost with index based escalation formulae. Thus, the offers submitted by M/s DA and M/s EADS were non-compliant to RFP and liable for rejection as non-responsive bids. It was specifically mentioned in the RFP that the submission of bids in incomplete format would render the offer liable for rejection.

Ministry in its reply stated that the bids were compliant to the RFP. The CNC determined the ‘Firm and Fixed’ costs from vendor’s proposals by applying escalation as per the Vendors’ provided indices and formulae. The reply of the Ministry is perplexing as there cannot be any escalation if the costs offered were ‘Firm and Fixed’. If the firm and fixed prices is to be taken as quoted price plus escalation till mid point of delivery, then DPP or at least the RFP should have specifically stated so. Audit has not been shown any document that unambiguously demonstrate that ‘Firm and Fixed’ in Defence Acquisition means other than the ordinarily understood meaning. Ministry also did not take any waiver on this major non-compliance to the RFP conditions. It is seen that the Staff Evaluation Report (September 2010) submitted to the Raksha Mantri had stated that the bids of the two vendors were on ‘Firm and Fixed’ cost basis. On the other hand, CNC evaluated these “non-firm and fixed” bids by escalating the commercial offers on the basis of formulae provided by the Vendors. It did not check up if any waiver was obtained on this deviation from the competent authority.