CAG report on Rafale exposes the flawed process

Last Updated: Sat, Feb 16, 2019 15:06 hrs
Rafale

It still remains a puzzle, the Rafale deal, after the Comptroller and Auditor General (CAG) report highlighted the way in which this controversial deal was struck and the fine print. The opposition used several news reports from The Hindu on alleged irregularities in the deal as a hammer against the BJP. All the CAG report gave us was a little more fodder for both parties to use in the run up to the elections, i.e. a mixed bag.

According to the CAG, Dassault, the company that manufactures the Rafale jets was willing to “modify its technical and price bids (submitted earlier) in clear violation” of the Defence Procurement Procedure. The company also did not submit its price bid in the prescribed format which would involve a cost break up under various sub sections to be used for price evaluation.

Costs

The main objective for the CAG was to compare the 2016 deal of 36 jets with the deal for 126 jets in 2007. This would be done by using an equivalent cost for the 2016 deal. The report did not deal with the controversy surrounding offsets which involved Anil Ambani.

For the BJP, as the FE editorial states, the good news is the revelation that the cost negotiated by them is cheaper by 2.8% than the deal first negotiated years earlier under the Congress. The report states that the negotiating team took into considerations three costs – a benchmark cost, an aligned price and the final offer which was made by Dassault in 2016.

The CAG criticized the benchmark price for being unrealistically low and the aligned price that it calculated was 1.2% lower than what the negotiating team managed. This aligned cost included the cost of a bank guarantee which would have been included in the final offer but wasn’t. One of the reasons that the CAG determines that the final cost should’ve been lower is the removal of the banking and performance guarantees.

Choice of Rafale

The report criticised the very choice of Rafale by the UPA government under which the initial agreement was signed. The NDA once it came to power decided to remain with Rafale and finalised the Rs.59,000 crore deal to acquire 36 of their fighter jets.

The report did note that EADS, the manufacturer of the Eurofighter was the only other aircraft to qualify. They had made an offer at a 20% discount. The report refuted the government’s claims of negotiating the Inter-Governmental Agreement (IGA) for Rafale as it stated that no provision for the same existed in the Defence Procurement Procedure.

However, that offer was used as a point of reference for ascertain a better price and delivery. With regards to delivery, the time period that was got in the 2016 deal was only a month shorter, 71months, instead of 72 in the 2007 deal. Hence there isn’t much the government did on that front.

This has now become a source of contention and controversy involving India, France and two large corporations – Reliance and Dassault. The Financial Express editorial states that both parties have enough to take away from the report –

“The Congress has to be happy with the CAG’s observation that, by allowing Dassault to not issue a bank guarantee, this lowered its costs, but the benefit of this was not passed on to the government. The BJP, on the other hand, has to be pleased with the CAG’s finding that, after taking various parameters into account, its deal was cheaper than that by the Congress party…”

The report gave a picture of how India purchased defence equipment and the various flaws that are present in the processes. The report stated that in recent years, with respect to air force acquisitions, there were unrealistic benchmark standards, pricing evaluation delays, poor cost-contract management and shoddy framing of Air Staff Quality Requirements (ASQRs). In certain cases, the ASQR’s were diluted, some deleted and some that were designed with inputs from select vendors which posed a risk.

The report highlights the years taken just to decide the right process of acquisition. It states a couple of examples. First, from 2000 to 2004, only the way in which the acquisition was to be done was being debated – whether on a single source basis or through competitive bidding. Second, in 2004, the government decided not go the bidding route and instead put out a Request for Interest. This, according to the CAG only added to the delays as the request for quotations only went out in 2007.

The report can be used as a roadmap on the best practices that need to be followed in negotiating defence contracts and acquisitions. Defence deals have been murky and laden with accusations of corruption. The Hindustan Times editorial states how flawed the process is –

“Anyone reading the report cannot but be appalled at the way the defence procurement process works in India. It is, at best, inefficient, and at worst, opaque. A reading of the CAG report shows that this isn’t unique to the fighter deal. The government and the opposition need to agree that the defence acquisition process needs an overhaul.

More columns by Varun Sukumar

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