Rafale Scam – the ‘Catch’ in the CAG Report

The CAG report tries to deliberately obfuscate, and provide a misleading “headline figure” for Government propaganda. A careful examination shows it inadvertently reveals & confirms the previous estimates of per plane costs.

Recently released CAG report concludes that “the overall price was 2.86 per cent lower than the Audit Aligned Price” for the Rafale Deal. Unlike some other CAG reports, and even other sections of the same report – which make things clear for the reader,  the Section on Rafale appears to have been written with a deliberate intent to Obfuscate and confuse.

Yet, undeterred, we have given it a hard look, and here are our findings.

Basic Observations

Unusual Brevity over Rafale Deal

Although several former bureaucrats and activists had demanded a forensic audit, it is curious that CAG, totally ignoring the general interest in this matter, has tried to keep it relatively brief.

As an example, the “Acquisition of Heavy Lift Helicopter (CHINOOK)” deal of (6333.11 Cr) has been given 11 pages, the “Procurement of Basic Trainer Aircraft” worth (2895.63 Cr) also deserved 11 pages.

But the 36 plane Rafale deal, worth 58,000 crores, and mired in multiple question marks over procedural impropriety, cronyism and financial loss, has been given just 15 pages. The same amount of space is devoted to the abandoned MMRCA process.

As a result, many procedural issues are either simply ignored, or only mentioned in passing. The sudden announcement of 36 plane deal without the CCS approval, or Defence Acquisition Council’s initiation, removal of “Anti-corruption clause”, the changes to established Offset policy, via a curiously timed circular, that absolve Defence Ministry from any foresight on offset proposals, etc have not been discussed.

Unnecessary and Deliberate Obfuscation.

Saaf Baat has argued previously that this whole drama of secrecy is itself laughable. Even earlier, when Defence Minister suddenly came up with this excuse after herself promising full itemised disclosure of costs (Could the defence minister be unaware of the secrecy requirements!?). The Defence Minister and other Union Ministers were themselves chest thumping about the weaponry details such as SCALP & Meteor BVR Missiles, AESA Radars, Helmet Mounted Display System and so on. Their prices from purchases by other countries are in the public domain, are freely available on the French Senate Website. These prices are also known to Pakistan and China, who themselves buy the same weapons from the same markets. The total cost is already public in Dassault Annual reports, and even the key sub-vendor shares easily deducible by their offset obligations that have been made public. Then, why is this being hidden from us taxpayers – whose money is spent on buying it? The MoD had themselves briefed many Defence Correspondents with the same details, that were published in the media, but are now being suddenly treated as a secret!

Worst is, no one, much of the media, civil society, our defence forces, nor institutions including our SC and our CAG are calling out this blatant bluff!

Why couldn’t the sub-totals for items like “Engineering Support Package” be made public? How does that hurt national security?

Anyways, even if we assume for the moment that the figures CAG has redacted were really such a top secret, It is clear that even the associated figures and data that should not have been secret are deliberately hidden. For instance, had the CAG report given the totals under the same headings for “India Specific Enhancements“, “Engineering Support Package” or “Weapons“, without revealing the actual enhancements done, or the Missiles purchased (although already made public by ministers themselves in the past!), how would it have hurt national security? The barebone basic plane cost has already been made public in the parliament, so why is even that hidden? We do not even know which Production cost index was used by both the Negotiation Team (INT) and the CAG. What is this, if not an attempt to deliberately Obfuscate and create excuses for the government?

The costs for Transfer of Technology, Option to buy more planes, Bank Guarantees are mentioned in passing. But they haven’t been included in table 5 on page 137 which then claims a 2.86% reduction. Even if every claim made in this was true, should there be any surprise if the vendor reduced the price by 2.8% as it gained in interest costs etc elsewhere? Note that these costs were estimated to have saved the vendor, Dassault Aviation, around €574 million, or about 7.3% of the contract price of €7.85 Billion. Should we now be grateful at how “Chatur Modiji’s PMO” saved 2.86%, when it offered goodies worth 7.3% to the vendor? This is at the cost of increased risk to the nation, in case something goes wrong with the deal.

Issues from the Report

Eurofighter issue

As per the first section of CAG report on 126 Plane process, Dassault bid looks weaker as compared to the Eurofighter one. The CAG report mentioned how Rafale did not initially pass some of the Air Staff Qualitative Requirements (ASQRs), but also with respect to various other issues such as Man Hours required by HAL for the production in India. We already know that Eurofighter had already made an offer for 20% discount to India.

If the committee formed by AK Antony to look into these issues already pointed out so many irregularities 1 with Dassault bid, the CAG report now raises fresh questions about this deal. Why did we still do the deal with Dassault? Why wasn’t a fresh Eurofighter bid invited for the suddenly discovered requirement of 36 planes?

If nothing, would it not have been prudent to introduce a competitor, just to keep the vendor Dassault System honest in negotiations? Shouldn’t the correct process have been to get IAF to submit a fresh proposal for a reduced number of aircraft, have a Cabinet Committee of Security Meeting, approve the emergency purchase using the 2007 MMRCA technical evaluation as a guideline, call for bids from the 2 shortlisted vendors – Eurofighter and Dassault? Choose one, and then announce the deal? Here our PM decided to announce the deal first, and force the hand of the ministries to deal with the single vendor with little bargaining position. (which too, he kept undermining, as we have now learnt)

The “benchmark” – what exactly is being compared?

Let us say you were buying a large number of cars for your business and had invited quotes from Tata Motors for 2 models. 18 cars of Model A, and 108 cars of Model B. Tata Motors offered you some lucrative discounts as you were buying in bulk. Unfortunately, you were not able to complete the deal, and a few years later you have now invited the quotes again, this time you are looking to buy just 36 Model A cars. You are trying to judge if the quotes are sensible or not. For some reason, you do not want to invite quotes from Maruti or other suppliers at all.

You decide that you will simply double the previous old quote for 18 cars, and apply some figure for the inflation changes in the past few years, and compare the two quotes. In other words, you have decided to extrapolate the values from the old quote, to make them comparable to your new quote, and use them as the benchmark. Well, the negotiation team and the CAG have both used the same method.

CAG report says:

“The INT, therefore, aligned the quantities in the 2015 bid with that in the 2007 bid and then the price of 2007 was brought to 2015 price level by applying the price escalation formula which used the industrial cost indices published by the French National Institute of Statistics and Economic Studies (INSEE).

 

“This was the Aligned Price i.e. the price of 36 flyaway aircraft in 2015 if the prices were the same as the bid of 2007. Audit also used the same methodology and verified the price comparison made by the INT.”

So, this is basically a comparison of an extrapolated value of “Just the fly away condition 18 planes” from the original 126 plane deal, with the 36 planes in a flyaway condition in the new deal. The report itself tries to hide this in jargon and has deliberately allowed the Propaganda machinery of Modi government to have a field day.

Understand that again, the CAG, after spending 15 pages on the 126 plane MMRCA deal, has not bothered to compare the per plane cost from that deal to the new 36 planes Modi deal. It has merely repeated what negotiation team did to arrive at its benchmark, extrapolate the price from the 18 fly-away condition planes from the 126 plane deal and compare.

So, this whole “Hungama” and Hullabaloo is over the current deal being cheaper than the “Audit estimated price for 36 planes” by 2.96%, this is NOT a comparison of the current deal with the actual 126 plane prices!

Now, why has the CAG restricted itself to merely the “fly away component”, the same methodology? Should this methodology itself not be compared with other possible approaches? How did this deal compare to Eurofighter, for instance? This is merely the Audit of the purchase process of the 36 planes, what about the decision making behind just buying 36 planes, how about Audit of the “decision-making process itself”? What about the numerous dissent notes? Where is that?

By using an extrapolated 36 plane version of the original UPA deal instead of the full 126 planes, the CAG has deliberately made its numbers look comparatively bad. Let us find out how this has been done.

The reduction in India Specific Enhancements (ISE) numbers

First, let us understand the jargon with a simple example.

Your Tata Car comes with some car stereo and screen system (Say made by Tata). You are keen to buy a lot of cars from them, but want to have a specific model of the Stereo & Screen (Let us say a Pioneer one) fitted, not the standard one supplied by Tata. This requires modifications to wiring and dashboard. Tata needs to mould the dashboards of the cars made for you differently, and have to also change the circuits accordingly. Let us say, these changes cost 1.4 lakh irrespective of the number of cars you buy (a Fixed Cost), plus 10,000 for each car you buy (a Variable Cost).

If you buy only one car. The Fixed cost of having this “Specific Enhancement”, will be 14 lakh fixed, plus a variable cost of 10,000 for the 1 car, so 14.1 lakh in total. (14.1 lakh per car)

If you buy 36 cars. The Fixed cost of having this “Specific Enhancement”, will be 14 lakh fixed, plus a variable cost of 36×10,000 = 3,60,000 for the 36 cars, so 17.60 lakhs in total. (~49,000 per car)

If you buy 126 cars. The Fixed cost of having this “Specific Enhancement”, will be 14 lakh fixed, plus a variable cost of 126×10,000 = 12,60,000 for the 36 cars, so 26.60 lakhs in total. (~21,000 per car)

Similarly, there was some “Fixed Integration Cost” involved in doing enhancements to incorporate IAF’s specific requirements to Rafale and a variable equipment cost for the same. The reported total ISE cost in Modi deal was €1700 Million. The Hindu report further says this had a fixed cost of €1300 Million. (which was allegedly reduced from 1400 Million fixed cost earlier, but still made per plane costs in Modi deal go up by 41%).

This implies that the total ISE cost (remember, CAG is comparing merely the 36 fly away condition planes, not 126) for the original deal was nearly 2 Billion Euros for just the 36 planes? Clearly, this calculation is applying the total ISE fixed cost of the original deal to just 36 planes? Doesn’t that defeat the whole point of fair comparison? How does that make sense?

If we go back to the example of 126 cars vs 36 cars above, basically CAG is saying that the cost of “Specific enhancements” are the same for both 126 car and 36 car deals. This is happening because he is still using the same Fixed cost, but not using the full number (126). This defeats the basic point of the saving that is made in any such fixed cost!

While discussing ISE, CAG has also mentioned a change in the Missile configuration (? so we aren’t buying the same configuration?) which doesn’t make it a like for like comparison anyways. This needs to be investigated further. Using CAG figures, we are getting a variable cost of €11 Million per plane in the Modi deal, and €16 Million for the Old deal. While this may itself have been blown up needlessly by this change in Missiles requirement, we are sticking to it as a “worst case” figures for the old 126 plane deal.

A real per-plane cost comparison

So, Let us attempt to do what the CAG failed to do. Namely, try to actually estimate the actual full component-wise cost of the 126 plane UPA deal, and compare it with the 36 plane Modi deal.

Enhanced table from the CAG report. All money figures in Million Euros

Methodology

  1. We have filled in the ‘Contracted Items cost’ (Column 5) based on the MoD briefing to journalists in Sep 2016. This is the price of the Modi Deal
  2. From this, using the CAG report ‘Variation %’ (Column 4-5), we have inferred the ‘Aligned price’ or the ‘CAG Benchmark’ (Column 4) for 36 planes from CAG Audit. As per CAG, this was the price for 36 planes from the UPA Deal.
  3. We have then extrapolated this 36 plane CAG benchmark price, for 126 planes, in Column 6. This gives us the full worst-case price of 126 planes UPA deal.
  4. Note that we have assumed
    1. The same level of weaponry was needed to be maintained for 126 planes as for 36. In real life, this would not be the case, and a lesser number of Meteor missiles etc could have been sufficient.
    2. The price of HAL built planes would be the same as the French build ones. This is an oversimplification, actually, the numbers from the CAG report seem to imply the HAL build planes would have been cheaper.

Findings

This shows that even using the CAG “numbers”, we can arrive at the same conclusion as that made by The Hindu and Ajai Shukla. The per-plane cost in Mr Modi’s deal (€204-224 Million) is still around 40 per cent higher than the worst case per plane cost from the 126 planes 2007 MMRCA deal (€142-162 Million). The biggest component is, no surprises here, the fixed cost of India Specific Enhancements that were not spread over a larger number. This is shown as the dark blue bar in the chart below. Note that this is when we have been very conservative and used the “worst case” approach for several things. In reality, as per statements of ex-Defence Minister Mr Parrikar himself to the media, the total cost of the 126 plane deal was lower.

The dark blue area represents the Fixed cost of ISE, note how it remains the same, thus skewing the comparison.

Cost of HAL built planes?

CAG report says, 77.8% cost in the Dassault Bid was for 108 planes to be built in India, and therefore INT used the rest as the benchmark. 108 is ~86% of 126. Doesn’t this prove that in the original deal, HAL built planes were going to be much cheaper than those imported? So, shouldn’t the CAG Audit have also tried to do a “real per plane” price comparison for the total deal?

Summary

The objective of an Audit is to uncover any irregularities. This CAG Audit, on the other hand, is an attempt at a cover-up. The CAG has not even bothered to mention any rationale behind the act of assigning the fixed cost from 126 planes in the original deal, to just “extrapolated 36 fly away planes”. Its sweeping conclusions of 2.86% lower price, timed and designed to help Mr Modi do some propaganda for the gallery, have lowered the credibility of his office. While yet another institution lies destroyed on the altar of Rafale, the questions about the Rafale deal still remain.

“If you torture the data long enough, it will confess.” – Ronald Coase

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2 comments

  • Would the writer not agree that Qatar got 36 fly away aircrafts almost in the same price as India…the writer must provide a detailed analysis regarding this…as to why we are paying an equivalent amount as compared to Qatar?

    • saafbaat editor

      Qatar Deal had an option of buying an additional 12 planes at the cost of ~$100M per plane. They even exercised their deal, which brought down their per plane cost to be below what India has paid.

      As far as our analysis showed, weaponry was pretty much equivalent in both deals.

      The main point we are trying to raise is that CAG report has treated the “Fixed Costs” in a manner that takes away the basic “Economy of scale” achieved by a large order. Remember, IAF needs ~200 planes of this category and after a double U-Turn, Modi government has issued a fresh tender for 110 planes again. These shall cost anywhere between $15Bn to $20 Billion and delay the acquisition process even more.

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