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CAG's Rafale report: Defence ministry argument on bank guarantees illogical, deal clearly favoured Dassault

On the financial impact of the bank guarantees, the defence ministry said there was a saving to the government because the bank guarantee charges were not to be paid. This has not been accepted by the Comptroller and Auditor General (CAG) as well members of Indian Negotiation Team (INT). In fact, both are on the same page that it benefited Dassault Aviation instead of Indian government. The three-member INT said that final price offered by the French government for the aircraft package, without the bank guarantee was barely 2.35 percent less than the aligned cost, which is inclusive of bank guarantee cost.

The INT argument is that since India, due to an inter-governmental agreement, waived off the bank guarantee clause — for which Dassault would have required to shell out an additional 574 million euros — that is a direct saving for the French company with no benefits to the Indian government.

 CAGs Rafale report: Defence ministry argument on bank guarantees illogical, deal clearly favoured Dassault

Representational image. Reuters

“The INT had computed the commercial impact of bank guarantees for advance payments, stage payments, performance bond and warranty and MTBF bond. The computation was done at an annual bank commission rate of 2 percent inclusive of confirmation charges by an Indian Public Sector Bank based on advice sought from Parliament Street Branch of SBI. The commercial impact of bank guarantees in terms of percentage was worked out to 7.28. This would amount to approximately 574 million euros for total procurement cost of 7,890 million euros without factoring the escalation. Thus, if the financial impact of bank guarantees (even without factoring in the effect of escalation) was taken into account, the final price offered by the French side is still 5.3 percent higher than the aligned cost of the commercial quotes submitted by Dassault Aviation and MBDA in the procurement process," INT members said, objecting on the absence of bank guarantees.

On the queries raised by the CAG, the defence ministry said, "This was a saving to the ministry because the bank guarantee charges were not be paid." The CAG rejected this illogical argument. It is unclear from the report how the defence ministry arrived at the conclusion that the Indian government would benefit through absence of bank guarantees, when in fact the advantage is being provided to Dassault Aviation. The issue gets even murkier because in case of Inter-Governmental Agreement for 36 Rafale, the 2007 Dassault offer included 15 percent bank guarantee against advance payments, 5 percent each for performance guarantee and warranty.

A bank guarantee gets directly and automatically invoked in case of breach of contract by the seller. In the 2015 offer, the French vendor did not furnish any financial and performance bank guarantees. Since about 60 percent advance payments were to be made to the French vendors, Ministry of Law and Justice advised that the government or sovereign guarantee should be requested in view of the value of the proposed procurement. But France and Dassault did not agree and only letter of comfort signed by French prime minister was provided, which was subsequently approved by the Cabinet Committee on Security in September 2016.

The French government also 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.

This illogical move has been criticised by CAG since in case of breach of trust, the Indian government will have to go for a long legal tussle before the money is recovered. “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 favor of Indian party and the French vendor fails to honor 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," CAG said.

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Updated Date: Feb 13, 2019 18:13:58 IST