CAG report on Rafale responds to suspicions raised by Hindu report, says 'non-firm-and-fixed' pricing favourable for govt

The CAG report on Rafale has perhaps answered the two important questions raised by The Hindu report which cited an eight-page dissent note by three members of the Indian Negotiating Team (INT) which had concluded that the NDA deal was not on better terms than the UPA deal and there was no faster delivery schedule than the deal negotiated under the UPA regime.

CAG report, on these two points, is clear — NDA’s Rafale deal is cheaper than UPA and jets will be delivered faster than what was promised under the UPA regime. The Hindu report citing INT members dissent note also observed that the initial offer was for ‘Firm and Fixed’ price which was later converted to price based on escalation formula. This issue has been dealt with in the CAG report too in which Ministry of Defence has defended the agreement and even claimed that it has provided commercial advantage to India.

Ministry in its response (January 2019) had repeatedly stated that initially in the Request For Proposal (RFP) of 2007, Dassault Aviation was required to submit the price offer on Firm and Fixed (F&F) basis and this was interpreted by the Contract Negotiation Sub-Committee as quoted price escalated as per the formula to the mid delivery period. In 2015 also,Dassault was asked firm and fixed price. This time it offered a cost of “AX13” million €. The INT was informed by the French side that it had arrived at the price of “AX13” million euros by applying indices based escalation formula from base of June 2007 till May 2015, and thereafter escalating till the mean delivery period at the annual rate of 3.9 per cent.

Defence Ministry said since the F&F cost of “AX13” million euros was too high, Ministry invited the bid at non-firm and fixed prices.

“This time Dassault Aviation offered a price of “T” million euros which was finally negotiated to “U” million euros. The escalation on the price was to be based on French rates of inflation, subject to a cap of 3.5 percent per annum.

Ministry has stated that it has obtained a commercial advantage of between “AX14” million euros (at the escalation cap of 3.5 percent) to “AX15” million euros as the recent inflation rate in France has been 1.22 percent," CAG report said.

The national auditor has also argued that non Firm & Fixed bids proved to be more favourable for the government in Rafale deal though it has not been a norm in other deals. The ministry in all previous deal had called for Firm & Fixed price bids in accordance with the Defence Procurement Procedure.

CAG said the Ministry of Defence needs to examine whether it is better to invite Non-Firm and Fixed price bids where the quoted prices are based on the prices prevailing at the time of bid evaluation, and indexed to the standard indices applicable to the various factors of production. CAG is of the opinion that actual payments are then regulated according to this standard price variation factor and makes the price bid more transparent.

“Indian Negotiation Team (INT) advised Dassault Aviation to provide a Non-Firm & Fixed offer in 2016, although the RFP of 2007 had invited firm and fixed prices. This change proved to be more beneficial. Initially (15 January 2016) Firm & Fixed price bid was invited by the Ministry and M/s DA had quoted ‘AX13’ Million Euros. This was found to be too high and Ministry called (21 January 2016) for Non-Firm & Fixed price bid. The firm had quoted ‘T’ Million Euros. Audit noted that at this price the total outgo of cash payments to the vendor till the completion of the contract would have been ‘EU’ Million Euros (applying the vendor’s price variation formula). Therefore, when compared to the Firm & Fixed offer of ‘AX13’ Million Euros the cash outgo was ‘BX’ billion Euro lesser in case of Non Firm & Fixed offer," the report said.

Non-Transparent Price Escalation Factor

CAG has questioned the escalation factor in benchmark prices in defence deals recommending for a more transparent price escalation method. CAG said for all procurements from Russia or CIS countries 5 per cent annual price escalation rate was used and even included in the Indo-Russian agreement. Similarly, for European suppliers 3.5 per cent annual escalation was used.

“The actual increase of the respective price indices of these countries has been much less (in the region of 1.35 per cent for the developed European countries). This is also one of the reasons for the estimated benchmark price to be far-off from the bid price," CAG report stated.