Rafale deal

Devil in the details

Print edition : March 15, 2019

The Rafale fighter aircraft at the AERO India 2019 show in Bengaluru on February 18. Photo: Shailendra Bhojak/AP

The Eurofighter Typhoon during an air show in Bengaluru, a file picture. Photo: Bhagya Prakash K.

Congress president Rahul Gandhi with party leaders Sonia Gandhi and Manmohan Singh and party MPs during a protest against the Rafale deal, in New Delhi on February 13. Photo: Sandeep Saxena

Reliance Group chairman Anil Ambani after taking a sortie on a Rafale aircraft, in Bengaluru on February 15, 2017. Photo: Somashekar G.R.N.

The CAG report on the Rafale deal remains silent on several crucial issues, and its meek acceptance of the government’s line of thinking is another troubling pointer to the unhealthy dominance of the political executive.

The much-awaited report of the Comptroller and Auditor General of India (CAG) on the Rafale deal and several other big-ticket hardware acquisitions for the Indian Air Force (IAF) between 2012-13 and 2017-18 was finally tabled in Parliament on the last day of the current Lok Sabha. But no discussion on it could take place in the House. However, plenty of discussion has since taken place on what the report said and what it did not, with much media commentary by journalists, analysts and leading political figures.

In particular, the report came in for sharp criticism for its redaction of all price-related numbers relating to the Rafale acquisition or its predecessor request for proposal (RFP) or tender, in response, as the report acknowledged, to a written request of the government citing confidentiality clauses in the Inter-Governmental Agreement (IGA) for the Rafale deal and in earlier bilateral documents. The report also said that the government insisted on such a redaction despite the CAG’s “reluctance/refusal to carry out the redaction of price information, on account of difficulties in comprehension and lack of precedence of redaction of commercial details in the audit reports”.

This has indeed drastically reduced the utility of the report for understanding the merits or otherwise of the decisions taken, and in furthering transparency and accountability in government functioning. Many analysts and retired government officials have expressed serious doubts whether price information, rather than purely security-related details, is actually covered by these secrecy clauses.

Even President Emmanuel Macron of France initially said that the Indian government could share price details with Parliament if it so desired, according to media reports. However, he later backtracked, perhaps in deference to government sensitivities.

The CAG’s decision to accept the government’s redaction request rather than assert its statutory independence is disquieting.

The report is also silent on the decision-making processes that led to the cancellation of the earlier RFP and India and France entering into an IGA for the purchase of Rafale aircraft. The hope that the CAG would throw light on this has been belied.

Yet, the report contains many significant bits of information and details hitherto not in the public domain. Several of these reveal important details on the Rafale deal, often unflattering to the Modi government and the bombastic or downright untrue claims of its spokespersons, including the Defence Minister, are worthy of investigation.

The considerable detail given in the sub-section on the cancelled RFP, in contrast with the scanty treatment of the IGA, are highly revealing of the intricacies of the various stages of the procurement process. These lead one to draw significant conclusions not only about the Rafale deal but about the entire Defence Procurement Procedure (DPP), its purpose, methods and instrumentalities.

While the Rafale deal is and should be the immediate focus at present, including in this article, these larger questions should not be ignored and ought to be examined at this time, when concerns about India’s defence procurement are prominent in people’s minds, rather than being put off to a later date when attention has dissipated.

Let us first examine what the CAG report says, and does not say, about the 2016 IGA.

Cost comparison

The CAG sets out to compare costs between the 2007 RFP and the IGA deal specifically in order to assess the assertion in the Joint Statement by Prime Minister Narendra Modi and the French President, after Modi’s surprise announcement in Paris of the outright purchase of 36 Rafale fighters, that the new deal would be on “better terms” than in the 2007 RFP.

This declaration was built into the IGA and it acted as a mandate for the subsequent price and other negotiations, and hence, has been taken by the CAG as the benchmark for the audit. As we shall see, the CAG report seems to bend over backwards to arrive at a conclusion that this was indeed the case, despite several of its own findings pointing to ambiguous or even opposite outcomes.

In what was perhaps an editing oversight, as was reported by Newsclick in February, the Preface gives away what the main text has sought to redact, namely the total cost of the Rafale deal. The Preface gives the total cost of all 11 Air Force acquisitions, and costs of the 10 deals other than the Rafale deal, leading to a calculation of the Rafale deal cost as Rs.60,576.54 crore. However, cost comparisons between the IGA and the 2007 RFP, specifically for the 18 Rafales to be procured under the latter in fly-away condition like the 36 under the former, get really tricky afterwards. The CAG report shows that there were so many modifications, interpretations and variability of cost items in Dassault’s RFP that an apples-to-apples comparison is rendered impossible. Further, since the RFP never reached conclusion, final prices were not arrived at.

While all actual amounts have been redacted in the CAG report, estimated differences between the two deals are given in percentage terms, often hedged in by numerous ifs and buts.

The report estimates that the cost of fully loaded Rafales in the 2016 bid under the IGA was 1.23 per cent lower than the equivalent price of the aircraft in the RFP as per the 2007 price bid, although it admits to several “difficulties of alignment” between the two prices. The CAG notes that after negotiations under the IGA were completed—when Dassault might have knocked off an amount as a closing concession—the final price was 2.86 per cent lower than in the RFP.

It must be added that this does not take into account the many price reductions that Dassault may have offered if and when the RFP deal neared conclusion, when any difference between the two prices may well have disappeared. There are, however, several issues which cast doubts on the CAG’s conclusion of cost savings in the IGA.

The issue of the government having agreed to drop the standard requirement for a bank guarantee or at least a sovereign guarantee, and instead accepting a Letter of Comfort from France, has been repeatedly raised by critics on a variety of grounds, such as the disadvantage this puts India in if there is faulty or delayed delivery of the aircraft.

It also, however, has significant cost implications, which the CAG has quantified (redacted in the report) but, surprisingly, in an audit, not factored in to the net gains or losses compared to the RFP, thus supporting the government’s narrative of having effected savings.

According to internal file notings by senior dissenting Defence Ministry officials in the Indian Negotiating Team (INT), recently brought to light by N. Ram (The Hindu, February 13), Dassault gained around 7.8 per cent of the total price by avoiding having to spend on a bank guarantee. The CAG notes that this should have been passed on to the Indian government, but was not. If this is factored into the cost difference between the RFP and the IGA, as the dissenting officials noted, the latter turns out to be about 5 per cent higher.

This clearly belies the claims made by Defence Minister Nirmala Sitharaman in her long speeches to the Lok Sabha on January 4 and 7 that the 2016 IGA resulted in 9 per cent savings for India, a figure repeated by various government spokespersons, perhaps based on Defence Ministry estimates that the CAG report specifically refutes.

Finance Minister Arun Jaitley, who should have known much better, even claimed a 20 per cent price advantage in the IGA deal, while other Ministers made even more bombastic claims.

Even in terms of delivery schedule, said to have been an important aspect of the IGA deal reflecting the “emergency” nature of the outright purchase, the CAG estimates that the difference between deliveries under the IGA, including fitment of the India-Specific Enhancements (ISEs), and deliveries under the RFP adjusted for equivalence in numbers, would amount to a mere one-month improvement under the IGA.

The Defence Minister and other government spokespersons have made much of the ISEs added to the Rafale fighters as constituting a major technical advance over the 2007 RFP. Revelations in the CAG report’s sections dealing with the ISEs contain much information and conclusions that refute these claims.

India-specific enhancements

Many analysts have shown that these ISEs were, in fact, the same as were called for in the ASQRs (aerospace supplier quality requirements) and the 2007 RFP, and therefore did not represent any major improvement in the new deal. It has also been argued that the government accepted exorbitant additional charges for research and development to develop these ISEs, that became even more expensive when amortised over a mere 36 aircraft rather than the original 126. All these points stand vindicated by the CAG report, which reveals several other interesting facts.

In terms of costs, after aligning the prices quoted for the RFP and under the IGA, the CAG estimates that the price of the ISEs was a whopping 17.08 per cent lower in the IGA deal than in the RFP, contributing significantly to the estimated net 2.86 per cent savings in the IGA. Given the redacted figures, and that there is no discussion in the report, it is difficult to say how this cost reduction was brought about.

However, some interesting and disturbing light is thrown on the decision-making processes involved in incorporating them into the final package, especially in the section relating to the 2007 RFP.

The IGA section points out (pages 130-131) that the IAF proposed “postponing” six of the ISEs until more Rafale fighters were procured so as to reduce costs. It may be inferred that these six ISEs were not crucial or essential to the desired operational effectiveness of the fighters. Indeed, the CAG report notes that of these six, four had even been declared as “not required” in the technical and staff evaluations during the RFP processing, and together accounted for a substantial 14 per cent of the sizeable ISE cost, much of which the CAG found to be non-essential or part of the aircraft not warranting additional payment as per the ASQRs. This further undermines the hype around the ISEs by the Modi government and raises many uncomfortable questions, only a few of which are answered by the CAG report.

Additionally, the IAF’s proposal to forgo some of these questionable or unnecessary ISEs, which could have reduced total costs by around 14 per cent of the ISE costs, according to the CAG (or about 200 million euros as per the 1.3-billion-euro price for the ISE revealed in official notings published in The Hindu, January 18), was rejected by the Defence Ministry as “dilution of ASQRs” and “not in consonance with the basic framework… [and] that the aircraft must have the same configuration” as in the 2007 RFP. The Ministry also said that “scaling down the requirement to limit cash outgo cannot be considered as saving”.

In other words, non-essential items must be procured merely to maintain the sanctity of the ASQRs, or enable the government to maintain the myth that it had procured fighters with the “same configuration” as in the RFP.

A detailed examination by the CAG of the cost and other factors in the RFP deal earlier being negotiated makes for surreal reading.

Reasons for RFP withdrawal

Another narrative pushed by the Modi government and by the CAG (page 125) itself, despite detailed information contained in its report, is that the IGA deal became necessary because the RFP negotiations were stalled over two main issues: Hindustan Aeronautics Limited (HAL) demanding 2.7 times the manpower stipulated by Dassault and the latter refusing to provide guarantee for the 108 Rafales to be made in India by HAL.

On the subject of guarantee, former HAL Chairman T. Suvarna Raju has repeatedly stated in interviews that HAL had agreed to stand guarantee for the fighters made by it, and that 95 per cent of the deal with Dassault had been completed.

The CAG report on the RFP tells a very different story of a shambolic selection and approval process to arrive at the winner of the tender, of numerous arbitrary decisions and interpretations, and concessions, especially to Dassault, on many occasions, and a deeply problematic selection of the Rafale as L1 or lowest bidder among the two finalists, the other being the Eurofighter Typhoon made by a European consortium.

The CAG report notes that even at the technical evaluation stage in 2008, five of the six contenders (Rafale, Eurofighter, Saab Grippen, F-16, F/A-18 and MiG-35) failed to meet the over-defined ASQRs, which have been strongly criticised by the CAG. One cannot agree more that ASQRs should be broadly laid down instead of being so detailed that they end up virtually describing a final choice, often even being derived from manufacturer’s brochures (as the CAG notes), rather like a job advertisement with every detail about a particular candidate except his photograph.

The CAG also said that only the MiG-35 met all the ASQRs but, as known from other sources, it was rejected out of hand.

The Rafale failed to meet nine ASQRs and was rejected, after which clarifications were sought, and the company offered to modify the aircraft to meet six ASQRs but was rejected again. In all, the Rafale failed on 14 ASQRs and, in May 2009, Dassault suo motu submitted that it would meet all ASQRs and submitted an additional commercial proposal, quite against all procedure, which, strangely enough, was accepted.

The CAG said that all this toing-and-froing was in violation of DPP 2006 and “against the canons of financial propriety”. It added that many of these ASQRs were not unique: for instance, the helmet-mounted display, which was being provided by the other five contenders too.

The CAG report points to numerous other anomalies—of costs being inferred, of decisions to seek waivers from Raksha Mantri (RM) for non-essential ASQRs but such waivers not actually being sought, and of miscalculation of quotes by parties. Peculiarly, all these seemed to work out in favour of the Rafale against the Eurofighter.

Dassault had quoted 31.2 million man-hours, but stipulated that this was as per French industrial conditions, even though the RFP had called for quotes under Indian industrial conditions. When HAL stated in 2011 that it would require 2.7 times many man-hours, the Defence Ministry felt this had no scientific basis, and the Contract Negotiation Committee (CNC) simply ignored this aspect and proceeded to work out the L1, even though, as per redacted CAG estimates, the HAL stipulation would have resulted in substantial additional costs.

There is no record in the report of any discussions with HAL by the CNC or the Ministry, either in 2011 or until the RFP was cancelled, to arrive at a better understanding of the man-hour issue or to secure a lower multiplication factor.

The CAG also makes no mention of how the Eurofighter’s quote of 25.5 million man-hours was evaluated or whether that took into account Indian conditions. No discussions were held with or clarifications sought from the No.2 contender, unlike with Dassault, so as to align the terms of both the bids, despite all the uncertainties associated with both bids.

When the European Aeronautics Defence & Space Co. (EADS) did offer a 20 per cent price reduction on the Eurofighter, with additional technology transfer and other sweeteners, it was rejected as an “unsolicited offer”.

The CAG report records that declaration of the Rafale as L1 saw many complaints, including from MPs. The then Defence Minister A.K. Antony appointed a committee to look into the process. In March 2015, a Ministry team finally found that “determination of L1 was faulty and not as per laid down procedure… and contract cannot be concluded with them” (page 125), and recommended that the RFP be withdrawn.

It was, therefore, a combination of procedural bungling, arbitrary decisions sometimes favouring one party over another intentionally or otherwise, rigid specifications which compelled gaming of the system, numerous errors in cost calculations, and a cumbersome, bureaucratic and often quite subjective evaluation procedure that led to question marks over the entire RFP process.

It was certainly not merely the issue of guarantee or of HAL which has needlessly been made a scapegoat in the entire controversy.

None of this is to hold a brief for the Eurofighter. It may well be that the IAF tried out and preferred the Rafale, but the DPP should be structured so that it at least opens up the prospect of carefully considering other options and then choosing the best. In the Rafale case, there was no option to seek and obtain clarifications from either party enabling apples-to-apples comparison between the two finalists, who may otherwise have been separated only by a small margin with regard to their comparative merits.

The CAG report shows that the current DPP is deeply flawed. The CAG notes that the acquisition process as it exists now does “not effectively support the Indian Air Force in operational preparedness and modernisation” (page 37), but makes the typical Indian bureaucratic error of wanting “objective” criteria and processes that are presumed to somehow magically lead to the discovery of L1 or even, as the CAG suggests, selection of the contender offering “best value for money”.

Processes ought to enable judicious selection among technically tested finalists across multiple criteria, enabling even the selection of a slightly more expensive option if it delivers more on parameters other than cost.

The DPP needs a thorough overhaul, not just minor tinkering and improvements. Two points on procedure are worth mentioning. As the CAG notes, the formulation of and frequent changes in ASQRs by the IAF have long been a problem, causing delays and repetitive re-evaluations; several instances are cited by the CAG. The IAF, which has been publicly blaming HAL for everything, needs to introspect on this. The CAG also points to capacity limitations in the Defence Ministry regarding price benchmarking, which were seen to be off by over 50 per cent in the MMRCA RFP and the Rafale IGA.

However, the CAG’s suggestion to bring in academics to overcome this weakness is erroneous. Domain expertise in such matters, especially in defence hardware, comes only from active industrial research and experience. Capacity enhancement in the Department of Defence Production, in DRDO and the office of the Scientific Adviser to the Defence Ministry, who are currently mostly out of the loop, need to be seriously considered.

Gains and losses for IGA

The CAG report does not delve into the decision-making process that went into the new deal announced by Modi in Paris, which then transformed into the IGA for the outright purchase of 36 Rafales when the IAF and the earlier RFP had called for 126 fighters. Audits are expected to go into processes and comment on achievement of expected outcomes, but the CAG report does neither with regard to the IGA.

It does note that the audit “could not find any proposal with Ministry for filling of this wide gap in the operational preparedness of the IAF” (page 128). The CAG records that the Defence Ministry said that it had issued another Request for Information (RFI) for 110 fighters and had also issued an RFP for 83 Tejas Light Combat Aircraft (LCA). Yet, the CAG does not ask why the need for 126 fighters was reduced to 36 in the first place. Nor does it discuss why the L1 of the RFP, known to have been so identified through a deeply flawed process, was automatically chosen for the IGA. It also does not record any effort by the Modi government to resolve the contentious RFP issues since it took office, or any discussions it may have had with HAL.

The CAG has completely evaded the major objective of indigenisation and technology transfer from the selected original equipment manufacturer to HAL. The CAG ought to have analysed how that objective was affected by the collapse of the RFP, whether any efforts were made to ensure that such technology acquisition happens, and how the IGA would support that objective.

The CAG does not go into the decision-making processes that led to the IGA and the cancellation of the previous RFP. From all information available in the public domain, it seems clear that the decision was taken at the top level of government, with perhaps the Prime Minister and only a very small group of persons in the decision-making loop. All other steps as envisaged in the DPP seem to have been taken subsequently and retrospectively, merely ratifying decisions already arrived at. The CAG is completely oblivious to this aspect.

The Modi government and the Defence Minister have been at pains to reiterate that all processes laid down in DPP 2013 were followed, but the CAG does not go into this at all. The report does note that “there is no provision for pursuing an IGA with L1” of a cancelled RFP, but it seems to take for granted that it was an executive decision taken by the government and that no further questions need be asked.

The CAG’s meek acceptance of the government’s line of thinking on the redaction of price details and its own decision-making process regarding the IGA is worrisome for the state of institutions in India and the country’s systems of checks and balances, and yet another pointer to the unhealthy dominance of the political executive in the Modi era over all other institutions and branches of government.

Coming as it does on the heels of the Supreme Court’s unquestioning acceptance of the government’s version, to the extent of virtually quoting from the government’s written submission in its own ruling, the CAG’s meek acquiescence is deeply troubling.

D. Raghunandan is with the Delhi Science Forum and has worked in Rolls-Royce Aero Engines, U.K., and HAL, Bengaluru.

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