Comptroller and Auditor General (CAG)of India Coverage and Report on Rafale Deal - All You Need to know

The Comptroller and Auditor General (CAG) of India tabled its performance audit report on capital acquisition of the Indian Air Force (IAF) in Parliament on Wed February 13, 2019, the last day of the outgoing government’s session.

The CAG audited 11 capital acquisition contracts starting from 2012-13 to 2017-18 worth approximately Rs 95,000 crore — including the Modi government’s controversial procurement contract for 36 Rafales from Dassault Aviation in France.

Of the 141 pages in the report, 32 are dedicated to the IAF’s fighter jet procurement saga.

Of these 32 pages, 17 are dedicated to the cancelled procurement procedure for the Medium Multi-Role Combat Aircraft (MMRCA) to make us understand why the Modi government cancelled the then on-going negotiation.

The other 15 pages are devoted to making the sceptics understand how the price for 36 Rafale which PM Modi decided to purchase is lower and better.

On what aspects does the (Comptroller and Auditor General) CAG report assess the Rafale deal?

The CAG report has examined the €7.87-bn deal for 36 Rafale aircraft signed between India and France on September 23, 2016 to assess “if the objectives of Indo-French joint statement and the objectives set out for INT by DAC were achieved”.

The joint statement issued by Prime Minister Narendra Modi and French President Francois Hollande on April 10, 2015 stated that: 36 Rafale jets would be acquired as quickly as possible; supply would be on better terms — in price, delivery and maintenance — than the procurement process of 126 Rafale aircraft when was then under way; delivery would be in a time-frame that would be compatible with the operational requirement of the IAF; and aircraft along with weapons and associated systems would be delivered in the same configurations as had been tested and approved by IAF and with a longer maintenance responsibility by France.

This means that the CAG had to compare the deal for 36 Rafale with the price bid by Dassault for 126 Rafale jets in 2007, by converting it into an equivalent cost for 36 aircraft in 2016.

How did the CAG compare the 2007 commercial offer with the 2016 contract?

The comparison between the two prices was done using an “aligned cost”, which fixed the equivalent cost for 36 Rafale in flyaway condition, if the 2007 commercial offer for 126 Rafale was to be converted as per this bid. It was a complex process but the CAG used multiple reference points which included: cost of 18 flyaway aircraft in 2007 offer; cost of 126 aircraft with their warranty conditions, licence production, maintenance etc; cost of basic aircraft and of the “fully loaded” aircraft. This had to be “aligned” with the new scope, reduction in quantity, deletion of licence production and transfer-of-technology costs; options clause and bank guarantees in the 36 Rafale procurement.

This was not the first time that an aligned cost had been fixed because a similar exercise had been undertaken by the Indian Negotiating Team (INT) at the start of negotiations with France in May 2015. The CAG also reviewed I’T’s process for alignment of costs in these two offers and came to a figure for its “aligned cost” which was 1.23% lower than the INT’s figure

In the CAG report, what are the figures for the two “aligned costs”?

The CAG’s “aligned cost” was €8105.92 million. The INT’s “aligned cost” was €8206.87 million.

These compared favourably with the cost of the final deal which is €7878.94 million — aircraft package from Dassault Aviation for €7168.53 million, and weapons package provided by MBDA France costs €710.41 million. Based on this comparison, the CAG has stated that the deal for 36 Rafale aircraft signed in 2016 is 2.86% cheaper than its “aligned cost”

Is there a caveat to this figure of the deal being 2.86% cheaper?
Immediately after stating the savings, the report mentions the fact that the 2007 offer from Dassault had costs of bank guarantee embedded in its offer. But there was no such guarantee in the 2016 contract which was a “saving” that was not passed on to the Indian government. INT had assessed the cost of this bank guarantee to be €574 million, which negates the advantage claimed by the deal being 2.86% cheaper.

Where are the biggest savings in the deal, according to CAG?

The CAG report assessed the maximum savings, of 17.08%, were in the cost of India Specific Enhancements (ISE) but it is silent about the fact that the major component of this cost was for design and development of ISE. This was a fixed or non-recurring cost which was earlier spread over 126 aircraft and in the 2016 contract, is spread over only 36 Rafale aircraft.
The report also mentions that, in view of the huge cost and the reduced number of aircraft being purchased, the INT proposed to reduce the number of ISE. But Dassault stated that since its price was a total package, Indian government would have to take up the matter with the French government. The IAF, with the approval of its chief, intimated the government even in August 2016 that the scope of ISE can be reduced by postponing six enhancements, which could be included if more Rafale aircraft were procured in the future. As it would go against the bilateral statement of April 2015 of having the aircraft with the same specifications as were requested in the 2007 tender

Did the CAG report also deal with offsets?

The question of 50% offsets in the deal, which has been at the centre of a major controversy due to involvement of Anil Ambani, has not been dealt by the CAG in this report.

It will form part of a separate report by the CAG on offsets in all the deals.