PM Modi cleared Rafale deal at over €2.5 billion higher than first benchmark price

The Modi-led Cabinet Committee for Security approved the final price of the Rafale deal—over €2.5 billion higher than the initial benchmark. PIB
13 December, 2018

Information available with The Caravan that has been confirmed by a senior serving defence official shows that the initial benchmark price for the Rafale deal was set at €5.2 billion—€2.5 billion less than the deal signed in 2016. In view of apprehensions that the deal would be unviable at this price, the Defence Acquisition Council, or DAC, headed by the defence minister—Manohar Parrikar at the time—prescribed a revised mechanism for pricing. The method used for price revision was a departure from mandatory procedure. The final pricing was ratified by the Cabinet Committee for Security, headed by Prime Minister Narendra Modi. These facts do not form part of the government’s reply filed before the Supreme Court, suggesting that on these crucial issues it has been, at the very least, economical with the truth.

The final pricing for the Rafale deal was directly approved and ratified by the prime minister on 24 August 2016, overruling the pricing arrived at by the official who had the requisite expertise and was first tasked to do the job by the Modi government itself. The method used to arrive at the new benchmark was not in keeping with the procedure set down in the Defence Procurement Procedure 2013, or DPP, a Ministry of Defence document.

In May 2015, in keeping with the DPP in force at the time, an Indian Negotiating Team (INT) was constituted to negotiate the terms and conditions of the procurement of 36 Rafale aircraft after the French and Indian governments issued a joint statement in April 2015, during Modi’s visit to France. The INT, as prescribed in the DPP 2013, consisted of seven members. The government’s reply in the Supreme Court elaborates on this:

An Indian Negotiating Team (INT) was constituted … The INT was headed by the Deputy Chief of Air Staff of IAF and comprised of the Joint Secretary and Acquisition Manager (Air), Joint Secretary (Defence Offset Management Wing), Joint Secretary and Additional Financial Advisor, Finance Manager (Air), Advisor (Cost) and assistant Chief of Air Staff (Plans) as members from Indian Government side. The French side was headed by the Director General of Armament (DGA), Ministry of Defense, Government of France … Negotiations between INT and the French side started in May 2015 and continued upto April 2016. A total of 74 meetings, which included 48 internal INT meetings and 26 external INT meetings with French side were held during the negotiations.

The government reply further stated that, “As mandated by the DAC, the INT undertook a collegiate process involving due deliberations and diligence at various levels during the negotiations. Aspects pertaining to the responsibility and obligations of French Government, pricing, delivery schedule, maintenance terms, offsets, lGA terms, etc. were discussed and negotiated during these meetings.”

The facts are in complete contradiction of these claims. According to the DPP, the job of the INT begins only after a benchmark price for a deal has been established. The DPP states that in all cases, the negotiating committee “should establish a benchmark and reasonableness of price in an internal meeting before opening the commercial offer.” In this case, per the established norm, MP Singh, the adviser for cost on the INT, carried out the benchmarking process. He based it on an evaluation of costs from the bottom up—of the components that go into building a Rafale jet as well as all additional costs, including research and development and India-specific enhancements. Singh set the benchmark price for the 36 jets at €5.2 billion.

The benchmark cost Singh arrived at was also endorsed by two other members of the INT: Rajeev Verma, the joint secretary and acquisition manager (air); and Anil Sule, the finance manager (air). Together, Singh, Verma and Sule were the three officers on the INT with the greatest amount of expertise in dealing with issues relating to pricing.

The chairperson of the INT, Rakesh Kumar Singh Bhadauria, backed by its remaining three members, disagreed with the benchmark price. The matter could not be resolved within the INT. All officials who were part of the INT during these deliberations have been transferred from the posts they held at the time. Efforts to reach them failed in some cases, and in others, the officials chose not to confirm nor deny the nature of the proceedings.

The Caravan submitted detailed questions to the air force and the Ministry of Defence. While the spokesperson of the MoD refused comment on behalf of the ministry, a senior serving defence official who declined to be on record, responded stating that the deal would have been unviable at the benchmark price Singh arrived at. He termed this price “ridiculously low.”

The senior defence official told The Caravan that the DAC, headed by Parrikar, “was approached to resolve the problem of the very low benchmark … Amplification on the directions to the INT was also sought and the basis for the commercial negotiations to progress was asked for.” According to the senior defence official, the DAC directed the INT to obtain “better term from the competitive price of the bid in 2008.” The senior official added, “‘Better’ was also further defined as better price, better maintenance package, better PBL”—performance-based logistics—“and better terms … The first benchmark was without any logic and had collapsed the INT effort.”

This puts paid to the government’s claim that “the INT undertook a collegiate process.” There was nothing collegiate about the proceedings—there were serious differences on every major aspect of the deal, especially the pricing, which could not be resolved within the INT.

The 4-3 split in the INT after the initial benchmark price was set at €5.2 billion meant that the DAC headed by Parrikar had to prescribe a revised mechanism for pricing, which was then finally ratified by the Modi-led Cabinet Committee for Security.

The facts indicate that the primary logic behind revising the benchmark was to ensure the deal went through. According to the senior defence official, the new benchmark—which was over €2.5 billion higher—was calculated considering the 2008 offer and 2015 offer together, taking the lower of the two for each component of the deal, and then considering an additional discount. But this is a direct departure from the DPP 2013 guidelines, which clearly state that earlier prices could be taken into consideration in “cases for which contracts have earlier been signed and benchmark prices are available.” The 2008 offer was not signed, and hence could not be the basis for a new benchmark. Under the circumstances, the method available to MP Singh was the only feasible method to set the benchmark price.

Some of these facts had already been reported in the media before the government’s reply was submitted. A September article in the Economic Times brought some of this information to light, but it did not contain any information on the procedure used within the government to set a new benchmark price. The article sought to suggest that the disagreements within the INT are normal, but failed to note that in this case, the differences over the benchmark price could not be resolved within the INT and the matter had to be sent to the CCS. It must be noted that the CCS itself has no credentials to vet the financial procedures that go into deciding the benchmark price, especially when every official with the expertise to do so had supported the first benchmark price, lower by over €2.5 billion.