'Costs are fungible': CAG report highlights challenges in comparing prices of 2007 and 2015 Rafale deals

The performance audit report of the Comptroller and Auditor General on the purchase of 36 Rafale aircraft by the Indian government from its French counterpart, highlighted heavily the challenges of evaluating the pricing of the jets.

Not only did the CAG report speak on the defence ministry’s negotiation panel failure in estimating a benchmark for pricing , making it difficult for the CAG to establish the “reasonability of price”, the report also noted the hurdles faced in a comparative analysis of the 2007 offer made during the United Progressive Alliance’s rule and the 2015 offer under which the National Democratic Alliance signed the deal.

Page 127 of the CAG report admits that inter-government agreements (IGAs) for defence acquisition of capital assets do not usually come with opportunities to study comparable costs.

The report, however, notes that the comparison of pricing itself formed the crux of the report as a joint statement made by France and India, in April 2015, noted that the terms of price, delivery and maintenance offered by Dassault Aviation in the new agreement would be “better” than those in the 2007 agreement.

This too has offered the CAG its own set of difficulties, thanks to the changed nature of the two deals in the eight years that intervened between them.

“The package offered in 2007 included the price of License Production of 108 aircraft in India while the 2015 offer included only direct flyaway aircraft, which was compared costs of 18 flyaway aircraft,” the CAG noted in the report.

Observing that “costs are fungible”, the report adds that the CAG faced difficulties in determining which part of the overall costs were applied to direct acquisition and which to terms-of-trade costs.

Considering that the two agreements were for differing volumes of service, the CAG mentioned the cost reference points it had considered in the 2007 offer.  These were:

1. Costs of 18 aircraft as flyaway aircraft.
2. Costs of 108 aircraft which were to be licensed and produced in India by HAL. This had the following issues: Dassault had “refused to provide guarantee for aircraft to be produced by HAL,” and HAL had advised the defence ministry to multiply the man-hours quoted by Dassault by 2.7 keeping “Indian conditions” in mind.
3. Costs of 126 other aircraft.

While admitting the hurdles posed in price comparison, however, the CAG report has zeroed in on 11 parameters to prove that the pact inked by the Narendra Modi government was 2.86 percent cheaper than the one signed by the UPA in 2007.