Tuesday, March 05, 2019

No bank guarantees meant a more expensive new Rafale deal

In its final report submitted to the Defence Ministry on July 21, 2016, the seven-member Indian Negotiating Team (INT) estimated the cost of loading bank guarantees, which the French commercial suppliers with backing from the French government refused to do, as €574 million. This made the €7.87 billion inter-governmental agreement signed on September 23, 2016 by the National Democratic Alliance government for the aircraft and weapons packages for the 36 fly-away Rafale fighter jets more expensive by €246.11 million than the estimated aligned cost of the Rafale aircraft deal initiated by the United Progressive Alliance government.
The “Report of the Indian Negotiating Team on Procurement of 36 Rafale Aircraft for Indian Air Force” is a detailed and revealing document to which The Hindu has access. The report states in paragraph 69: “The final offer of 7878.98 M€ (excluding additional mandatory weapons supplies of 10.55 M€) is 327.89 M€ lower than the aligned cost of 8205.87 M€ with respect of MMRCA [Medium Multi Role Combat Aircraft] offer without taking into account the impact of BG [Bank Guarantees], which has been brought out at Para-23 above [emphasis added].”

In fact, the INT report elaborates in paragraphs 21, 22, and 23 on how it arrived at €574 million as the cost of loading the bank guarantee. The computations were done on “an annual bank commission rate of 2% including confirmation charges by an Indian bank, as communicated by SBI on 02 March 2016,” and the total commercial impact of bank guarantees was worked out to a substantial 7.28% of the contract value.

Table 1, sourced from the dissent note of the domain experts, shows that the aligned cost is lower than the final negotiated price with the financial impact of bank guarantees.

The INT report reveals that the Indian negotiators repeatedly pressed the French side to provide bank guarantees. The Ministry of Law & Justice had advised in writing, in December 2015, that as a legal safeguard government or sovereign guarantees should be obtained from France “in view of the Contract involving huge pay-outs value of procurement price before actual delivery of supplies and services, which de facto meant advance payment.” With the French side flatly refusing to accept this demand made during the negotiations, the Indian negotiators did their best to secure bank guarantees, which had been included in the original MMRCA proposal made by Dassault Aviation.

The INT contended at one point that “the best way to resolve the concerns of the Ministry of Law & Justice and difference in the opinion of both sides with respect to the impact of BG loading is to provide BG and the confirmation charges would be borne by the Indian side.” This again proved to be of no avail.

The final INT report is silent on why the commercial impact of loading the bank guarantees was not factored into its exercise of comparing the costs of the new deal and the original MMRCA proposal (see Table 2). The same failure to explain the substantial missing factor in the aligned cost comparison is encountered in the Comptroller and Auditor General of India’s report on the Rafale deal presented in Parliament on February 13, 2019.
05/03/19 N Ram/The Hindu
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