he NDA government is considering the CAG report tabled in Parliament as a victory for their position; the opposition, in turn, is seeing it as vindication of their stand.
The CAG is an independent constitutional authority, with a mandate under Article 149 to scrutinise government accounts and render audit reports on propriety and economy aspects. 1986 was a watershed year for the CAG when it first conducted a performance audit of the Bofors contracts and brought out how agency commission was paid. This became the mother of all corruption scandals in defence and led to the investigation and discrediting of the Rajiv Gandhi government over corruption. The two subsequent performance audit reports on coal auction and 2G spectrum disposal gave considerable heft to findings of the audit report, as they questioned transparency of government contracts and pointed to potential corruption. These reports helped the opposition get a handle on the ruling party.
Letters of comfort are not binding on contractors in the event of default. There has never been a case where the CCS has overruled CNC and MoD recommendations as in the Rafale deal
Against this backdrop, considerable interest has been raised by the CAG audit report on the Rafale deal. The CAG has brought out that the basic price of aircraft in 2015 and the contracted price in 2016 are the same. This rebuts the government’s claim that the 2016 contract price is 9 per cent less than the 2015 price. The audit assessment that the Rafale aircraft is priced 2.85 per cent lower is based on six packages involving 14 items that were part of the composite contract for Rafale.
While the prices are same in three items (including basic price of the aircraft), they are lower in India specific enhancements that cost $1.3 billion. Interestingly, the 17 per cent reduction the audit report is showing is after reducing four items from the earlier negotiation. Clearly, if these deletions are taken into account, the price of the earlier aircraft package and the present package will not be different.
What, however, will provide ammunition to the opposition is the audit finding that the performance bank guarantee, which was earlier given by the M/s. Dassault Aviation, has now been waived by giving a ‘letter of comfort’. Audit has assessed that with this major dispensation, the company benefited by about 25 per cent of the contract price, as almost 60 per cent advance would be paid to the company after complying with different milestones.
This has been the major finding of reports brought out by N Ram of ‘The Hindu’, where the journalist has pointed out that the waiver of performance bank guarantee was done through parallel negotiation conducted at the behest of the PMO.
The advice of the acquisition manager, finance manager and the adviser cost, who were part of the Contract Negotiating Committee, has been overruled by the Cabinet Committee on Security (CCS). The financial adviser, defence services, had also advised the defence secretary that it would be preferable to provide a safeguard of putting the advance payment into an escrow account, which will ensure that the French government would release the money based on satisfactory completion of the milestone by the company.
This advice has also not been heeded. The recommendations of the CNC not to waive performance bank guarantee has been waived by the CCS, headed by the Prime Minister.
The other major deviation agreed to, is the deletion of the ‘anti-corruption’ clauses such as undue influence, agents and agency commission, integrity pact and access to accounts, when there are legitimate allegations that undue payments have been made by the company to bag the contract. These clauses were introduced in the Defence Procurement Procedure in 2005 and have not been dispensed with for any country, including Russia.
The only exception was Russia following the Indo Soviet Strategic Treaty to provide sovereign guarantee in lieu of performance bank guarantee. Quite clearly the concession made for Rafale exceeds that of Russia, with undue price advantage to the French company.
The CAG report has also made an interesting mention that EADS, the makers of Eurofighter Typhoon that technically shortlisted along with Rafale for the earlier contract in 2015, had offered a discount of 20 per cent for their jets. Audit is of the view that the offer should have been used by the CNC to bargain for a better price. It has also come to light that the benchmark price the CNC quoted was much lower than what was finally accepted. The CCS has ostensibly overruled the CNC recommendation on price benchmarking as well.
The defence ministry has conventionally complied with standard conditions of contract and stuck to ‘anti corruption’ clauses. No external interference or parallel negotiation is allowed when the CNC is at work. The defence secretary expressed discomfiture in this regard, which ‘The Hindu’ expose shows was not taken to its logical conclusion by then defence minister Manohar Parrikar. The present defence minister has also been defending the indefensible, under the ruse of secrecy and intergovernmental agreement.
There is a mistaken impression that the IGA need not follow standard conditions of contract. Basic conditions have been deleted and undue price advantage of 25 per cent of contract price has been given to of Dassault Aviation without providing safeguard for recovery of advance payment.
Letters of comfort are not binding on contractors in the event of default. There has never been a case where the CCS has overruled CNC and MoD recommendations as in the Rafale deal. This points the needle of suspicion towards the PMO; it has ostensibly favoured a certain firm under the grab of expediency to fill the vacuum in the air fleet. The audit report, although it is not as acerbic as it was in the Bofors case, has opened a can of worms. Statistics, as they say, is like a miniskirt. It covers just the essentials. The CAG report on Rafale provides a lot of food for thought and more disclosures may come in time.
The writer has worked as finance manager in the ministry of defence.