The 36 Rafale jet deal with France by the NDA Government through an Inter-Governmental Agreement (IGA) is 2.86% cheaper than the earlier un-concluded deal for 126 jets under the Medium Multi-Role Combat Aircraft (MMRCA) by the UPA government, the Comptroller and Auditor General (CAG) said in its audit report on Wednesday. This lays to rest the varying claims of significant cost savings in the deal.

The performance audit on capital acquisition of the Indian Air Force was tabled in the Rajya Sabha on Wednesday in which the federal auditor reviewed 11 contracts signed between 2012-13 and 2017-18 with an approximate value of ₹95,000 crore.

On the Indian Specific Enhancements (ISE) which constitute a significant value of the €7.87bn deal, the CAG stated there was a saving of 17.08%. However, the audit noted that four enhancements were stated not to be required in the technical and staff evaluations.

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“The cost of these four enhancements items was 'IS4' M€ constituting about 14% of the ISE estimated cost. The Ministry has stated that “scaling down the requirement to limit cash outgo cannot be considered as saving,” the report said. CAG has withheld specific pricing details.

 On overall delivery schedule of the 36 jets compared to the delivery of the 18 jets in flyaway condition in the MMRCA deal, CAG noted that there was an improvement of only one month in the 2016 contract.

Sovereign guarantees

The report also made some important observations on the issue of payments and guarantees. On bank guarantees the French government did not agree to an escrow account as it felt that the “guarantees already provided by the Govt of France were far reaching and unprecedented.”

So the report noted, the finally approved Article 5 of IGA by the Defence Acquisition Council (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 government was to exercise control and monitoring for effective implementation of IGA and the supply protocols.

And further on why the issue of sovereign guarantee is important in this deal, the report said, that in case of a 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 party fails to honour the award (make the payment’s claim), India party should exhaust all available legal remedies. Only then the French Government would make these payments on behalf of the vendors,” the CAG stated.

This is an important distinction in claims that IGAs, even with Russia and the US, did not have sovereign guarantees. In the case of Russia, the defence industry is State owned and in the case of the US, in the Foreign Military Sales (FMS) route all dealings are with the US Department of Defence and there is no direct dealing with the US industry.