Either Party Can Break Promise, Ex Defence Bureaucrat Says on Rafale Deal's 'Letter of Comfort'

In a media interview, Sudhansu Mohanty, former Comptroller General of Defence Accounts, also said that the change in the benchmark price was suspicious.

New Delhi: Former defence ministry bureaucrat Sudhansu Mohanty has criticised both the change in benchmark price in the Rafale deal and France’s refusal to provide a sovereign guarantee.

In an interview with the Economic Times, Mohanty, former Comptroller General of Defence Accounts and Financial Adviser of Defence Services, said that the change in the benchmark price was suspicious.

As The Wire has reported, the negotiating team in charge of the Rafale contract had initially pegged the price of the 36-aircraft deal at €5.2 billion. This figure was eventually overruled with the adoption of a new formula that placed the benchmark price at €8.2 billion. This change allowed the €7.87-billion deal to finally go through, because defence procurement rules prohibit any large deviation between the benchmark and final price.

Also Read: Rafale Twist: Why Did France Refuse to Give India a Sovereign Guarantee?

Putting aside the question regarding the jump in benchmark price from €5.2 billion to €8.2 billion, Mohanty stressed that a more relevant inquiry would ask why the benchmark price decided by the negotiating team was overruled by the ministry. In specific, the government should come clean on the grounds for dismissing the benchmark price determined by senior ministry officials who negotiated the contract.

Additionally, Mohanty also asked why the Cabinet Committee on Security had recommended the final change in benchmark price instead of the Defence Acquisition Council.

Sovereign letter of comfort?

On Wednesday, Attorney General K.K. Venugopal also confirmed one of The Wire‘s stories and admitted that France gave no sovereign guarantee that Dassault would meet its obligation of delivering the 36 Rafale jets. Instead, Venugopal noted, the French government had offered only a letter of comfort (LoC).

According to Mohanty, a LoC is the farthest thing from a sovereign guarantee.

“Loosely, it can be said to be a ‘letter of intent’, as is often used in international contracts. Maybe, morally binding but not legally binding and enforceable. Somewhat akin to a ‘sagaai’, betrothal. Either party can break the promise and go their different ways – and with impunity, although the moral aspect will doubtless stick. However, in matters of a buying nation’s commitment based on public funds, it can cause harm to the nation,” the bureaucrat told The Economic Times.

“If there are voices raised over a problem in a contract, for example, the successor government may or may not honour what has been promised in a letter. On the other hand, the cost of the contract with bank guarantees would be different as the vendor would have to guarantee the deliverables as per the contract till the time it is made available to the buyer and other terms are fulfilled, that could stretch well up to seven years and more…,” he added.

Also read: Post-Rafale, Dassault Investment in Inactive Anil Ambani Company Gave Reliance Rs 284 Crore Profit

Asked about the change in offset rules that did not oblige the vendors to share details with the defence ministry, Mohanty pointed out that the government would be ultimately incurring a loss if a foreign vendor picks an Indian company with no experience and credibility in defence production as its partner.

Making the case for Hindustan Aeronautics Limited, he said, “The cost of production, in terms of labour costs, is significantly lower in India. How much this increase in work hours would have impacted the pricing of the deal has to be studied. HAL’s 2.7 times higher man hour requirements vis-à-vis Dassault need to be put through the formulaic PPP model or its variant to equilibrate the labour hours/rates and see the actual difference. Taking into account the difference in cost of living standards and labour rates here, the HAL offer could perhaps have been very competitive.”