Why Does the CAG Have More to Say on the 2007 Rafale Process than the 2016 Deal?

The national auditor appears to have erred on facts and analysis, much as the Hon’ble Supreme Court did in its judgment.

In the past, it has always been a pleasure to read the reports put out by India’s national auditor. The Comptroller and Auditor General (CAG) is often clear and lucid and its reports are written in a manner that makes it easily comprehensible for a layman.

Not this time around though, when the auditor’s report on the Rafale deal was submitted to Parliament.

One important aspect of the CAG’s duties relates to auditing all transactions of the Union and of the states that relate  to contingency funds and public accounts. Being the constitutional auditor, it is imperative for the CAG to disseminate information among citizens whose money it has been mandated to audit, and bring this examination in to the public domain.

Sadly, this isn’t the case when it comes to Rafale. The report on the fighter jets essentially comes in two sections: Part A and Part B.

Part A discusses the Request for Proposal (RFP)-2007 as a prelude to the inter-governmental deal of 2016, while Part B deals with the acquisition of 36 Rafale aircraft through the IGA.  

The second paragraph of the executive summary sets the tone:

“Audit noted that IAF, instead of defining the ASQRs in terms of functional parameters, made it exhaustive and included detailed technical or design specifications. That had several consequences such as none of the vendors could fully meet the ASQRs; user needs were sometimes overridden; ASQRs were changed repeatedly during the procurement process; waivers had to be obtained for some ASQRs; and some ASQRs were shifted to Contract Negotiations Committee (CNC) to negotiate, though these were technical issues. The objectivity, equity and consistency of the technical evaluation process was consequently affected. This created difficulties during technical and price evaluation and affected the integrity of competitive tendering, and also became one of the main reasons for delays in acquisition process.”

It continues:

“Audit noted that the vendor response to solicitation of offers was low, which restricted competition. Number of vendors who responded to the Request For Proposal (RFP) was far less than the number of vendors who were invited to bid. The complexities and delays in the acquisition system, narrow, over defined ASQRs and selection on basis of L1 rather than quantitative methods of best value for money seem to be some of the reasons for poor response from vendors.

“The CNC repeatedly failed in realistically estimating the Benchmark price, making it difficult to establish the reasonability of price. This also caused delay in price evaluation and contract negotiations. The model used for calculating the life cycle cost of acquisitions had several deficiencies and needs to be fine-tuned and improved further.

“Audit, therefore recommends that IAF should improve its process of formulation of ASQRs to ensure that they correctly reflect the users functional parameters. Exhaustive ASQRs with detailed technical or design specifications should be avoided, unless they are functionally necessary. In the process of acquisition, involvement of academic experts, in relevant fields, such as aerospace engineering is advisable in the view of the fact that latest and most complex technologies, evolving rapidly, are being used in almost all defence systems and weapons. It would be impractical to expect that in service officers, doing full time jobs, can keep up with the rapid development to the extent that academicians, devoted to that subject, might.

“Audit is of the view that it needs to be considered whether the present ‘Lowest Price Technically Acceptable (LPTA)’ method of bid evaluation wherein the contract is awarded to the lowest priced offer which is technically acceptable, is suitable for all procurements. For procuring highly technical products use of the Best Value method or a “Quality cum Cost” assessment may yield better value for money. Ministry needs to revisit the entire process of acquisition, to weed out redundant activities and simplify the process. The acquisition wing, headed by the DG(Acquisition) was envisaged as an integrated defence organization. In reality, this has perhaps not happened, with bulk of the acquisition related activities still carried out in the Services’ Headquarters; which is not unexpected and is needed. However, in that case, it needs to be seen if the Acquisition wing is serving the purpose it was set up for, or some Business Process Reengineering is required to achieve the purpose.”

To be fair, many of the suggestions are unexceptionable, but here they cannily condition the mind of the reader to swallow Part B of the Rafale report.

“This volume contains redacted observations by deleting/masking certain details of the acquisition of MMRCA as sought by the Ministry of Defence’s letters dated 15 January 2019 and 06 February 2019 citing reference to Article 10 of the Inter-Governmental Agreement (IGA) for acquisition of 36 Rafale Aircraft and the provisions of an Indo French Agreement “concerning the Protection of Classified Information and Material in the field of Defence” signed on 25 January 2008.”

Part A cites a litany of mistakes in the 2007 RFP:

  1. Delay due to the IAF’s insistence on procurement of Mirage 2000 II as MMRCA.
  2. How though the RFI process did not add much value, it delayed the acquisition process by three years, from the formulation of ASQRs in January 2004 to issue of RFP in August 2007.
  3. How the ASQRs parameters were narrowly defined. In some cases they were also not clearly defined and how significantly these shortcomings occurred despite the fact that seven years were spent in framing of ASQRs and how they impacted the processing of the proposal;
  4. 4. Issues in technical and trial evaluation citing Deficiencies in Technical Evaluation (TEC) and Deficiency in Field Evaluation Trials (FET) and Staff Evaluation Report (SER) leading to Rafale aircraft failing to meet 14 ASQR parameters; Subjecting of (sic) technical decisions to the final decision of CNC; Unrealistic estimation of benchmark price; calculation of the cost of production of the aircraft in India (by HAL) under ToT and reluctance of DA to provide Performance Guarantee of manufacturing at HAL etc.

Also, that in the 2007 RFP “the offers submitted by M/s DA and M/s EADS were non-compliant to RFP and liable for rejection as non-responsive bids. It was specifically mentioned in the RFP that the submission of bids in incomplete format would render the offer liable for rejection.”

Part B on the the Acquisition of 36 Rafale aircraft through IGA refers to the following important points agreed to in the Indo-French joint statement of April 2015:

  • The 36 Rafale jets would be acquired as quickly as possible.
  • An IGA would be signed for the supply of the aircraft on terms that would be better than conveyed by M/s Dassault Aviation as part of a separate process underway
  • The delivery would be in time frame that would be compatible with the operational requirement of IAF
  • Aircraft along with weapon and associated systems would be delivered in the same configuration as had been tested and approved by IAF and with a longer maintenance responsibility by France

The tone, tenor, and approach of the report changes from here on though, not to speak of the many issues that deserved mentioning.

For example:

“Audit examined the acquisition of 36 Rafale aircraft through IGA to assess if the objectives of Indo-French joint statement and the objectives set out for INT by DAC were achieved.”

“Usually, in the IGAs for defence acquisition of Capital Assets, there are no comparable costs. However, keeping in view the Indo-French joint statement of April 2015, which stated that IGA would be signed for supply of the aircraft on terms that would be better (‘Price’, ‘Delivery’ and ‘Maintenance’) than the ones offered by M/s DA in 2007, a comparison has been made with the 2007 offer. This comparison of prices under 2007 and 2015 offers has posed its own difficulties because the package offered in 2007 included the price of License Production of 108 aircraft in India while the 2015 offer included only direct flyaway aircraft, which was compared costs of 18 flyaway aircraft. Costs are fungible: Which part of the overall costs were applied to direct acquisition and which to ToT costs is often difficult to say, as happened, for example in the case of warranty of CKD and IM kits… Difference in volumes may itself affect costs.”

Therefore, for comparing the prices for the current IGA there were multiple cost reference points in 2007 offer of M/s Dassault Aviation, as mentioned below:

i) Costs of 18 aircraft as flyaway aircraft

ii) Costs of 108 aircraft which were to be licensed produced in India by HAL and which itself had following issues.

a) M/s DA had refused to provide guarantee for aircraft to be produced by HAL

b) HAL had advised ministry to multiply the man-hours quoted by M/s DA by 2.7 for Indian conditions

iii) Costs of 126 aircraft as a whole with their warranty conditions, License Production with ToT costs, maintenance etc), Cost of basic aircraft and of the ‘fully loaded’ aircraft

“In view of these complexities related to reduction in quantities, deletion of license production & ToT costs, option clause and bank guarantees in the 36 Rafale procurement, a review was undertaken to examine the Indian Negotiation Team’s process for alignment of costs in these two offers.”

While it is difficult to examine the report exhaustively, a few highlights are in order. They are mentioned here in a little detail so that the context is not missed out in the text.

“Since the pricing of ToT was a distinct package in 2007, comparison of the remaining package which pertained to 18 flyaway aircraft (one squadron) was somewhat possible if constrained by factors mentioned in Para 1, and therefore the INT compared these packages with their corresponding prices in the 2015 price bid for 36 flyaway aircraft (two squadron). For comparing the prices of June 2007 bid with the bid of May 2015 first the scope of both the offers had to be brought at par. The INT had also to ensure that the 36 aircraft along with weapons and associated systems would be delivered in the same configuration as tested and approved by the IAF in 2007.

“The INT therefore aligned the quantities in the 2015 bid with that in the 2007 bid and then the price of 2007 was brought to 2015 price level by applying the price escalation formula which used the industrial cost indices published by the French National Institute of Statistics and Economic Studies (INSEE). This was the Aligned Price i.e. the price of 36 flyaway aircraft in 2015 if the prices were the same as the bid of 2007. Audit also used the same methodology and verified the price comparison made by the INT.

“The contract consisted of six different packages – Flyaway Aircraft Package, Maintenance package, Indian Specific Enhancements, Weapon Package, Associated Services and Simulator Package. There were a total of 14 items under these six packages. Item wise analysis of prices showed that, the contracted price of seven items were higher than the aligned price, three were same and four were lower Also the price of elements could not be compared because the structure/format of the M/s DA bid of 2007 and the offer of 2015 were different.”

Yet another example is given below on how the report is very economical on its assessment and homilies.

“The issue on sovereign guarantee and letter of comfort was finally submitted to the CCS in September 2016 for consideration which approved the acceptance of Letter of Comfort from French Prime Minister “ along with other associated guarantees/assurances provided in the IGA in lieu of Bank Guarantee subject to payments through an escrow account or any other safeguards which the Ministry was to work out in consultation with the French Government with the assurance by the French Government that they shall provide effective oversight on the utilization of payments released to the French Industrial suppliers”. The French government did not agree to an escrow account as it felt that “the guarantees already provided by the Government of France were far reaching and unprecedented”. The finally approved Article 5 of IGA by the DAC, provided that the advance payments were to be made directly to the Bank accounts of French vendor that were opened in French Government controlled Bank, over which the French Party was to exercise control and monitoring for effective implementation of the IGA and the supply protocols.”

What is remarkable is that all that has been done and brought out above has been accepted by the CAG without demur.

So too on another issue that has drawn media attention in the recent past.

Read the paras below:

“In case of any breach of agreement Indian party (Ministry) would have to first settle it through Arbitration directly with the French vendors. If the Arbitration award were in favour of Indian party and the French vendor fails to honour the award (make the payment’s claim), Indian party should exhaust all available legal remedies. Only then the French Government would make these payments on behalf of the vendors.

Ministry in its reply stated that the IGA has been signed between two Strategic Partners who are Sovereign nations with long standing Strategic relationship. Further based on the advice of the Ministry of Law and Justice, responsibility of the French Government and M/s DA was made “Joint and Several” in the IGA. This would make the French Government equally responsible to fulfil its obligations.”

The same approbations still do not end. Here is another such statement that has the tacit approval and implicit imprimatur of the constitutional auditor:

“According to the original delivery schedule offered by M/s DA in 2007, first 18 flyaway aircraft were to be delivered between 37 months to 50 months of signing of the contract. Next 18 aircraft which were to be licence produced in HAL, were to be delivered from 49th to 72nd months of signing of the contract. During negotiations the Indian Negotiation Team (INT) conveyed to the French side that it expected the delivery of first batch of 18 Rafale aircraft in 24 months after the signing of the IGA; and next batch of 18 aircraft in 36 months after the signing of IGA. However, the delivery schedule finally offered by the French side was 18 aircraft by 36 to 53 months after the signing of IGA, and the remaining 18 aircraft to be delivered by 67 months of signing of IGA. This was better than the delivery schedule of 2007 by 05 months.

“However, Audit noted that as against the delivery period of 72 months in the earlier offer the contracted delivery schedule for 36 Rafale aircraft was actually 71 months. The ISE on the first aircraft would be completed by T0 + 63 months and integration on the next 35 aircraft would be completed in 8 months. Thus, there was an improvement of one month in the delivery schedule of the 2016 contract.”

What it missed out here though is the fact that under 2007 RFP, the second lot of 18 Rafale aircraft (beyond the 36 flyaways) was to be manufactured by HAL in India.

I can’t also but help highlight an important aspect that has not received the auditor’s attention: transfer of technology (ToT) that is so crucial to India.

Para 30 of DPP 2013 says thus:

“Normally, TOT will be negotiated along with the first procurement. However, there may be occasions where it is not feasible to negotiate the TOT simultaneously. To cater to such contingencies, the RFP should clearly indicate that Government reserves the right to negotiate TOT terms subsequently and that the availability of TOT would be a pre-condition for any further procurements. In such cases terms and conditions of obtaining TOT would be included in subsequent RFP.”

Apart from all that have been brought out, what is surprising is that the processes, procedures, ex post facto ratification of the April 10, 2015 announcement, and other sundry issues have not been addressed and put under the microscope. This includes the lack of an integrity or anti-corruption clause, sovereign guarantee or bank guarantee and its costs thereof. 

If the report is so long on its homilies, I would have appreciated if the CAG had put the defence procurement processes through the same rigour that it displayed and has bandied about in the executive summary. Giving short shrift to many of the deviations and violations that bristle with seeming infirmities doesn’t reflect well on the constitutional auditor.

A quick read of the report tells me that it is flawed in many places and selective in its attention. It also lacks the gravitas of an audit report we’ve always looked up to – and only because it lacks balance.

As a citizen I feel distraught for these gloss-overs in a report based on documents I can’t access because it is off-limit now for me in the name of secrecy.

Isn’t this then the audit equivalent of the “sealed cover” submitted to the Supreme Court? The question that shall keep lurking in my mind and the mind of other citizens is: Hasn’t the CAG erred on facts and analysis, much as the Hon’ble Supreme Court did in its judgment?