Improvement in delivery schedule was only one month over UPA deal, the government auditor says

The contract signed in 2016 to acquire 36 Rafale fighter jets from France through the Inter-Governmental Agreement (IGA) was 2.86% lower in value than “Audit’s aligned price” of the bid received in 2007 when the then UPA government had sought to purchase 126 Medium Multi-Role Combat Aircraft (MMRCA), the Comptroller and Auditor General (CAG) of India said in its report, tabled in Parliament on Wednesday.

Key points: The 2016 deal for 36 jets through IGA is 2.86% cheaper than the UPA deal.

Savings of 17% in India Specific Enhancements in present deal. However, four ISEs were not required and constitute of 14% of the estimated ISE value.

Savings to the by not having to pay these Bank Charges should have been passed on to Ministry.

In terms of faster deliveries, improvement of only one month in the 2016 contract compared to earlier.

Government could have used the unsolicited offer by Eurofighter to determine a better price with Dassault Aviation.

In case of a breach of agreement Indian would have to first settle it through arbitration directly with the French vendors. French government would intervene only after all legal options are exhausted.

CAG has redacted prices in the report based on the insistence of the Ministry of Defence citing the Indo-French Agreement of 2008 and the provisions of the Inter-Governmental Agreement (IGA).

Unrealistic estimation of the benchmark price by the Indian Negotiation Team (INT). The benchmark price estimated by INT was 57% lower than the initial officer of French team.

On the original Medium Multi-Role Combat Aircraft (MMRCA) deal, CAG pulled up IAF for not defining the Air Staff Quality Requirements (ASQR) properly.

The ASQRs were also changed frequently which effected the competitive tendering.

The CAG also observed that the price could have been reduced further had the benefits of waiving of the bank guarantees for the vendor (Dassault Aviation) been passed on to India.

Varying claims

There have been varying claims from government officials on how much cheaper the 2016 deal was, with estimates ranging from 9% to 20%.

On the delivery schedule, the national auditor found that the 2016 deal’s terms would ensure only a month’s advantage over the timeline offered in the 2007 bid.

The report, which had been widely awaited in the wake of a string of revelations on procedural deviations in the negotiations to acquire the French Rafale jets and political allegations of financial irregularities in the deal, was tabled in the Rajya Sabha on the last day of the 16th Lok Sabha.

In its performance audit report on ‘Capital Acquisition of the Indian Air Force’, the CAG reviewed 11 contracts signed between 2012-13 and 2017-18 with an approximate value of ₹95,000 crore.

India-specific additions

On the Rafale’s India Specific Enhancements (ISE), which cost more than €1.3 billion of the €7.87 billion deal, the CAG stated that there was a saving of 17.08%. However, the audit noted that four enhancements were “stated not to be required in the technical and staff evaluations” and that the cost of these four items constituted about 14% of the ISE estimated cost.

“The Ministry has stated that scaling down the requirement to limit cash outgo cannot be considered as saving,” the CAG said.

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The auditor redacted all price figures from the report — done, it said, at the insistence of the Ministry of Defence which had cited the Indo-French Agreement of 2008 and the provisions of the IGA.

On the overall delivery schedule of the 36 jets as per the 2016 deal, compared with the delivery of 18 jets in flyaway condition plus another 18 produced in India under licence under the terms of the MMRCA proposal, CAG noted that there was an improvement of only one month in the 2016 contract.

Highlights of the CAG report on the Rafale Deal Price comparison: The price of the 36 Rafale aircraft in the 2016 deal was 2.86% lower than the comparable price based on the UPA-negotiated deal. The comparable price as of 2015 (aligned price) was arrived at by applying a price escalation formula to the June 2007 bid.

Transfer of technology (ToT) costs: The CAG did not consider the costs needed to manufacture 108 aircraft in India that was part of the 18 flyaway + 108 ToT aircraft deal in the 2007 bid. Only the 18 flyaway aircraft were considered for comparison.

Delivery schedule: The CAG noted that there was an improvement of one month in the delivery schedule in the 2016 contract (71 months instead of 72 months for the earlier bid).

Absence of bank guarantee: The auditor said that Dassault, not the government, saved a sum by the non-inclusion of a bank guarantee in the deal. This sum should have been passed on to the government, the audit observed.

Government claims: One of the government's claims was that each aircraft (without enhancements) was 9% cheaper in the 2016 deal. But the audit concluded there was no difference between the 2007 (escalated to 2015) and the 2016 offer in this regard

126 to 36: The CAG said that it could not find any proposal with the Ministry for filling the wide gap in the operational preparedness of the IAF (by reducing aircraft to be bought from 126 to 36). It noted that the Ministry of Defence informed CAG that it had issued a fresh Request For Information (RFI) for new fighter aircraft to fill this gap.

The Centre has made repeated assertions that under the IGA, better terms had been achieved in terms of “better pricing, better maintenance terms and better delivery schedule.”

The CAG also observed that in respect of bank guarantees, the French government had not agreed to an escrow account and had contended that the “guarantees already provided by the government of France were far reaching and unprecedented.”

The finally approved Article 5 of IGA by the Defence Acquisition Council (DAC), provided that the advance payments were to be made directly to the bank accounts of the French vendor that were opened in a French government controlled bank, over which the French government was to exercise control and monitoring for effective implementation of IGA and the supply protocols, the auditor noted in the report.

Underscoring the importance of a sovereign guarantee to this deal, the CAG observed that in case of a breach of agreement, the Indian party (Ministry) would have to first settle it through arbitration directly with the French vendors.

“If the arbitration award were in favour of Indian party and the French party fails to honour the award, Indian party should exhaust all available legal remedies. Only then the French government would make these payments on behalf of the vendors,” the CAG noted.