CAG report

A whitewash job

Print edition : March 15, 2019

A copy of the CAG report that was tabled in Parliament. Photo: Sandeep Saxena

The CAG resorts to selective use of facts and adopts double standards in order to provide a “clean chit” to the Modi regime.

INDIANS hold accountants in awe, especially for their assiduous treatment of numbers. So, when the country’s Super Accountant, the Comptroller and Auditor General (CAG), determined that the Narendra Modi government’s deal with Dassault for the Rafale was 2.86 per cent cheaper than the one abandoned by the previous government, it appeared to provide a clean chit to the government. That single finding by the country’s chief inspector of national accounts appeared to provide the Modi regime with the factoid it needed to stem the simmering controversy. But this hope proved to be futile.

The CAG is not merely the chief inspector of national accountants, although this is undoubtedly an important function. The comptroller’s role extends beyond the book of accounts. Crucially, the CAG is required to examine the processes and procedures adopted in order to ensure that the integrity of institutions has not been compromised in any manner. And this is where the CAG report has gaping holes that threaten to leave Modi mired in a prolonged controversy that could potentially turn out to be his very own Bofors.

Critics of the Rafale deal and military experts have pointed out that the problems of the Modi government’s version of the deal stem from much more than the price of the aircraft (see “L’affaire Rafale” by D. Raghunandan, Frontline, February 15, 2019). First, the redacted numbers in the CAG report, insofar as they pertain to cost details—on the grounds that they would violate confidentiality clauses in the Modi government’s agreement with France—are a major reason why the CAG’s finely tuned estimate of a 2.86 per cent saving lacks credibility.

Opaque methodology

In effect, the CAG compared the earlier version of the deal for 126 Rafales with the one for 36 that the Modi government negotiated with the French in 2016 on the basis of its notion of an “audit-aligned price”. It turns out that this “aligned” price for the base version of the aircraft is substantially dependent on the price worked out by the Indian Negotiating Team (INT). Crucially, this was done by deriving the price of the 36 aircraft from the original 126-aircraft deal that was worked out by the INT. Critically, the overall 2.86 per cent “saving” that the CAG has computed comes only after the factoring of the so-called India-specific Enhancements (ISE). Interestingly, the CAG does not take the INT’s computation of price inclusive of the ISE, which is where the catch is. This is because the CAG has calculated that on the ISE count the government saved 17.08 per cent. The selective use of the INT benchmark is an obvious explanation for how the CAG arrived at an overall saving of 2.38 per cent.

The redacted numbers and the selective use of benchmarks make the CAG’s overall analysis of costs and prices suspect. Defence experts as well as journalists have pointed out that many of the features that were loaded as ISE features in the Rafale were part of standard fare with options available to the government from competitors. In the absence of details about the CAG’s own methodology, it appears that it had taken Dassault’s own quote of 2015-16 (for 36 aircraft) and applied it to the 126-aircraft deal and included some other costs and applied it to its own 2011 version of Dassault’s quote. This is the crux of the pricing issue in the Rafale deal. This was highlighted by N. Ram in the first article of his series in The Hindu on the deal—that the Modi government’s deal was significantly more expensive because the fixed cost of 1.4 billion euros (later reduced to 1.3 billion euros) was spread over 36 instead of 126 aircraft.

Double standards

But the examination of price pertains to only one aspect of the CAG’s duty. Its other function, the examination of processes, is just as important, and here, the CAG blatantly adopts double standards. Throughout the report, it makes a thorough examination of the response and evaluation of the vendors to the original Request for Proposal (RFP) and the tortuous process through which the Rafale was evaluated by the Ministry of Defence. It documents the significant deviations that Dassault was allowed after it was chosen as the winner of that bid. But the CAG completely ignores the processes that the Modi government adopted after the scrapping of the original deal and negotiating a direct deal with Dassault under the auspices of the French government. A senior Indian Air Force (IAF) pilot (now retired), who had been familiar with aircraft acquisition, had this to say about the new deal worked out in 2016: “It is impossible for the IAF to have worked out a fresh purchase order in the short time of a few months between the scrapping of the old RFP and a fresh order for 36 aircraft.” He pointed out that not only was this order “neither here nor there” in terms of the number of aircraft, but the uncertainties of inducting a limited number of aircraft of new vintage would affect the capability of the IAF’s striking power. The CAG’s unwillingness to examine the nature of decision-making pertaining to the fresh order is a major embarrassment to the stature of the institution.

The abandonment of the old RFP effectively meant that this was a fresh deal. Was this deal endorsed with sufficient deliberation from its prime user, the IAF? There is nothing in the CAG report to warrant the conclusion that procedures and processes were followed in deciding on the fresh deal. But even more important from a procedural point of view—with an impact on pricing—is the absence of a bank guarantee. Curiously, the CAG points out that Dassault’s failure to provide a bank guarantee is a “saving” for the company, suggesting that this ought to have been passed on to the Indian government. In effect, if this charge, meant to ensure that India had a hold on Dassault until it fulfilled its commitment to supply the aircraft, had been included, it would have wiped out the 2.8 per cent “savings” that the CAG attributed to the new deal.

But even more stunningly, the Modi government’s failure to obtain a sovereign guarantee from the French government is a serious risk for the IAF. Defendants of the government have pointed to the fact that military supplies from suppliers in the United States and Russia are often without such guarantees. This displays a remarkable level of ignorance about the fact that the supplies from the two countries are actually channelised by their governments. In both cases, this amounts to an implicit sovereign guarantee. The lack of an explicit sovereign guarantee for the Rafale deal means that if Dassault—not in the pink of financial health anyway—reneges on its contract, or even delays delivery of aircraft, the Indian government can draw no comfort from the French government’s Letter of Comfort. The Letter of Comfort gives only a vague assurance that the French government will get involved only after tortuous and prolonged parleys before international arbitrations are concluded. Surely, national defence merits more comfort than this!

But the renegotiated deal introduces even more uncertainties into the IAF’s plans to augment its dangerously depleted fleet. First, what happens to the IAF’s plans after the induction of the Rafale? It appears that the acquisition of 36 instead of 126 aircraft seriously limits the IAF’s options. This would imply that it would have no option but to ask Dassault for another deal for some more aircraft, and in that situation, Dassault would be sitting pretty. “The induction of an aircraft of new vintage into the fleet is a major logistical nightmare for any air force,” the IAF pilot cited earlier told Frontline. Given the fact that the IAF would surely need more planes, this places it in a quandary: should it stick to Dassault, whatever the price, or should it look for some other option? There are cost implications to both options. Managing a fleet of different vintages would surely impose costs; apart from logistical problems for the IAF, continuing to plod the Rafale path could prove to be prohibitively costly. The lack of a French sovereign guarantee in such an eventuality could haunt the Air Force well into the future. The CAG’s utter disregard for this set of issues, and their cost implications, indicates a lackadaisical approach.

One question to ask in the context of the flurry of recent revelations in the media is this: Were the details of dissenting voices within the INT made available to the CAG to enable it to arrive at an informed opinion? It may be recalled that on several key issues the dissenters were outvoted by a wafer-thin margin. Given that the CAG ought to function as a professional body, it should have taken into consideration the issues raised by the dissenters, instead of depending on the majority vote. An examination of the issues raised by the dissenters (and experts) would have revealed significant deviations from prescribed norms that were required to be adhered to in the Rafale deal. Was the CAG short-changed in terms of the relevant facts, just as the Supreme Court appears to have been?

The CAG’s utter failure to examine the process by which the Modi government arrived at the deal with Dassault is a prime case of obfuscation. By holding the United Progressive Alliance’s version of the deal to a far more stringent standard, while letting the incumbent government get away with wholesale violations of due process, the CAG has betrayed its blatant partiality and exposed itself to doubts about its integrity.

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