Rafale Deal Pricier For Lack of Bank Guarantee: Reports

An INT report reveals that cost of loading bank guarantees, which French side refused to pay, was €574 million.

A Rafale fighter jet prepares to land at the air base in Saint-Dizier. 

(Photo: Reuters)

The seven-member Indian Negotiating Team (INT) submitted its final report on the Rafale Deal to the Defence Ministry on 21 July 2016 in which it estimated the cost of loading bank guarantees as €574 million, reported The Hindu.

This made the inter-governmental deal signed by the NDA government in 2016 for the procurement of more 36 Rafale jets and weapons packages more expensive by €246.11 million than the proposal initiated by the UPA government.

The Hindu has accessed the INT report which states, “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.”

How Was the €574 Million Figure Computed?

In the report which was submitted to the Ministry of Defence, INT stated that the computations were done on an “annual bank commission rate of 2 percent including confirmation charges by an Indian bank”. It further states that the total bank guarantee proved out to be 7.28 percent of the contract value.

According to The Hindu, INT report also reveals that the Indian negotiators pressed the French side to provide bank guarantees – a demand which was refused by the French side during the negotiations.

The report further points out that despite the Ministry of Law & Justice advising in December 2015 that a government or sovereign guarantee should be obtained as a legal safeguard from France, it wasn’t obtained.

The INT report also said states 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 [Bank guarantee] loading is to provide BG and the confirmation charges would be borne by the Indian side.”

Why Was the Cost of Bank Guarantee Not Factored in While Comparing the New and the Original MMRCA Deal?

The INT report doesn't say anything on why the cost of loading the bank guarantee was not factored in while comparing the cost of the new deal that was struck by the NDA and the original MMRCA proposal.

The Hindu also points out that the same is missing from the Controller and Auditor General of India’s report on Rafale that was presented in the Parliament on 13 February 2019.

The report in The Hindu points out that the loading bank guarantees in the cost comparison would have led to a conclusion that the new MMRCA deal was not on “better terms” as compared to the original proposal which would have been in contradiction with the promise made in the joint Indo-France statement.

The Missing Cost of Bank Guarantee in CAG Report

The Government of India, in its submission to the Supreme Court, had argued that it had obtained a Rafale deal on “better terms”.

A claim which appears in the CAG report states that the deal signed by the Modi government was 2.86 percent lower than UPA. The cost of bank guarantee was calculated by the CAG but was not included in its tabulation when it made the assertion.

However, the CAG report does mention:

“In the offer of 2007 M/s DA had provided the financial and Performance Guarantees, the cost of which was embedded in the offer because the RPF had required the Vendor to factor these costs in the Price Bid. But in the offer of 2015 there was no such guarantee as it was an IGA.”

No Guarantee But a Letter of Comfort

The Quint had earlier reported on 16 November 2018 that the French government did not agree to provide bank guarantees for the Rafale deal, despite six months of negotiations by the INT. But the French side gave a legally non-binding "Letter of Comfort".

A Defence Ministry document accessed by The Quint also read:

“The French Government assured that as signatory to the IGA, it takes responsibility for deliveries.”

However, the means for this assurance was supposed to be the sovereign guarantee. With only a Letter of Comfort, it is unclear how the French government has a binding obligation to ensure deliveries if there is a problem with Dassault, a view supported by Sudhanshu Mohanty (the former head of finance at the Defence Ministry) in an interview with the Economic Times.

‘Parallel Negotiations by PMO’: Reports

The Hindu had earlier reported that there were “parallel negotiations” conducted by the PMO with the French side. The report said that MoD had objected to these negotiations which purportedly “weakened” India’s negotiating position in the Rafale deal.

According to latest investigation, the INT report reveals the extent of these “parallel negotiations” which continued into 2016 and till the time of signing the IGA.

The daily also points out that post the report which spoke about “parallel negotiations and weakening of India’s position”, former Defence Secretary Mohan Kumar claimed that his note had “nothing to do with the pricing and it was about sovereign guarantee and general terms”.

Kumar had further said that “It was not about parallel negotiations, but about parallel viewpoints” and he further said that “there was nothing serious”.

The Hindu further argues that the INT report, the dissent note by the three domain experts, the legal advice from the Ministry of Law & Justice, and also the CAG’s report say that Kumar was being “economical with the truth”.

The issue of bank guarantee was mentioned in the Defence Ministry note of protest that reportedly “weakened” India’s negotiating position. Further, the French side’s refusal to provide bank guarantee had a serious bearing on the new Rafale deal pricing.

(With inputs from The Hindu)