The CAG undertook a detailed examination of the IGA signed with France for the Rafale jets after the previous negotiations under UPA for 126 jets were scrapped. The CAG noted that the procurement effort, which began in 2000, made no progress even after 15 years and failed on the “twin issues” of manpower costs and non-guarantee for aircraft to be manufactured by public sector HAL.
In fact, the higher manpower costs cited by HAL during UPA-2 meant that Dassault Aviation would no longer be the lowest bidder while an internal report in 2015 noted violations in procurement process for Rafale as well as Eurofighter.
The audit pointed out that the defence ministry was advised by the law ministry to obtain a “sovereign guarantee” from the French government in lieu of bank guarantee from the vendor but the French government only provided a “letter of comfort”. The French side also did not agree to the MoD request for opening of an escrow account to manage the payments as a measure of safeguard. On account of bank guarantee/warranty, the savings could have been further to the tune of 0.06% in the deal cost.
The CAG noted in its report that in the 2007 offer, Dassault Aviation had provided performance and financial guarantees which was about 25% of the total value of the contract. “The vendor had embedded the cost in its bid price. But in the 2016 contract, there are no such guarantees/warranty. This led to saving for Dassault Aviation which was not passed on to India,” it observed.
The auditor found that four of the Indian specific enhancements were not needed at all because in the technical evaluation of 2010, the IAF had pointed out these were not needed. However, they got included in the scope, despite IAF making several attempts to reduce these items, it said.