Five Reasons Why the CAG Report Isn’t the End of the Rafale Saga

CAG report on the Rafale deal fails to rebut revelations in recent articles, lack of transparency weakens claims.

Associate Editor (Legal) Vakasha Sachdev analyses the fallout of the CAG’s report on the Rafale deal.

(Photo: Erum Gour/The Quint)

Video Editor: Abhishek Sharma

Cameraperson: Sumit Badola

After months of waiting, Comptroller and Auditor General Rajiv Mehrishi – the CAG – submitted his report on the Rafale deal to Parliament on Wednesday, 13 February.

We all remember how the CAG played a huge role in publicising the scams allegedly committed by the UPA-II government: 2G, Coalgate, you name it. After all, the CAG is THE auditor of government deals, the expert meant to assess whether public money is being well-spent or instead being khao-ified by politicians and their bankrupt but somehow-still-filthy rich friends.

So did the CAG vindicate Rahul Gandhi and the Congress’s claims that the Rafale deal is a scam, that the deal is exorbitantly priced, that it is meant to benefit Anil Ambani? That in fact, ‘Chowkidar Chor Hai’?

Err... no.

The CAG report makes no mention of impropriety or illegality when it comes to the Rafale deal, and it even says that the deal for 36 aircraft, signed in 2016, is 2.86% CHEAPER than the deal being negotiated during the UPA tenure, after making relevant adjustments. BJP leaders have of course been quick to capitalise on this in interviews and on social media.

That being said, were all the media reports that have alleged PMO interference, the dropping of anti-corruption clauses, and convenient meetings between Anil Ambani and the French, pointless? Not really – the CAG report doesn’t actually refute any of those revelations.

Here are five reasons why the CAG report isn’t the end of the Rafale saga.

REASON 1 – The ‘Unresolved’ Anil Ambani Connection

First off, the CAG report says nothing about the alleged Anil Ambani connection since it does not deal with the offset contract aspect of the deal. There will eventually be a separate report on that, so this report is not a clean chit for those allegations – not yet, at least.

Which means, for example, the Indian Express report on Anil Ambani meeting French defence ministry officials before the announcement of the Rafale deal, isn’t affected by the CAG Report.

Before I get slapped with a defamation suit in Ahmedabad for thousands of crores, I should make it clear that neither this report nor any others prove any sort of connection between the deal and Anil Ambani’s Reliance.

The point is just that allegations about the offset contract process and who will be getting these contracts are not foreclosed by the CAG report.

REASON 2 – The ‘Unanswered’ Pricing Question

Next, the CAG report doesn’t reveal any of the actual prices, after the Defence Ministry asked for these to be redacted. Yes, it does specify differences in percentage terms, but without the actual numbers, we can’t really do any verification or assessment of these.

This is kind of crucial here, since the findings in the report are based on a comparison between the actual price of the contract agreed on in 2016 on one hand, and an ‘Audit Aligned Price’ on the other. Now this isn’t as easy as it sounds.

While the actual price in the 2016 deal is the cost of 36 aircrafts in “flyaway” condition, the Aligned Price is an estimated figure that makes a bunch of adjustments to tell us how much 36 aircraft would have cost us for the original 2007 deal.

Why these “adjustments” you may ask?

1. Because the original 2007 deal was for 126 aircrafts while the 2016 deal was for 36.
2. There were technological transfers in the 2007 deal since most of the planes were to be made in India, which is not there in the 2016 deal.
3. It’s been a while... So, inflation + exchange rate fluctuations.

So, the only way you can compare the deals and see if our current deal is cheaper or more expensive, is to have a properly-calculated Aligned Price. And did the CAG get these calculations right?

Well, we have two problems here.

• Problem No 1 is that we don’t know any of the actual numbers, so we have no clue whether the Aligned Price was correctly calculated or not.
• Problem No 2 is that the CAG Report does not actually tell us HOW they calculated the adjusted price. According to the report, this is what they used:

“a price escalation formula which used the industrial cost indices published by the French National Institute of Statistics and Economic Studies.”

To simplify that: They used a formula they don’t reveal to us to adjust the figures. Something, something, inflation. And voila, deal cheaper.

REASON 3 – Unclear, How the CAG Overlooked Dissenters’ Concerns

This lack of transparency about the numbers and calculations is precisely why some of these recent articles are relevant.

On the same morning as the CAG report, The Hindu’s Bofors-busting veteran N Ram revealed the details of a dissent note filed by three members of the team who negotiated the contract.

Their first and foremost objection to the deal was the fact that it was vastly overpriced. According to their calculations, the actual deal is some 55% more expensive than what it would have been had the 2007 price been adjusted.

So did the CAG consider this view? Yes, he did. And then he called the negotiators’ adjusted price “unrealistic” since it was way lower than what the French were willing to offer.

The thing is, this doesn’t mean the dissenting negotiators were wrong.

By the CAG’s own admission, something like 78% of the original 2007 price was for the technology transfer that was supposed to happen, so that HAL could manufacture the bulk of the planes. The new deal has no technology transfer since HAL isn’t going to be doing anything, so the price per aircraft should be significantly lower, you’d imagine.

The negotiators looked at this, they also looked at Dassault’s annual reports and how much they were selling the jets for to others, and so arrived at their adjusted figure, which sounds like a reasonable approach.

The CAG does some jiggery pokery to separate the tech transfer price out and adjust the price, but it’s not clear how.

He also did a similar exercise, by the way, for the cost of one of missiles that was part of the original deal, but which we no longer need to buy from abroad since the DRDO is now making them. The alternative missiles now being bought from abroad are significantly cheaper – in fact the entire 17.08% “savings” on India Specific Enhancements, comes from this one thing.

The India Specific Enhancements savings.(Source: CAG Report on Capital Acquisitions in Air Force)

This is important since the savings on the Enhancements are basically the only reason the deal is ‘cheaper’. Certain aspects of the deal are actually more expensive, like engineering support and pilot training.

Table of cheaper and more expensive items in Rafale deal.(Source: CAG Report on Capital Acquisitions in Air Force)

As long as we don’t know how these numbers were adjusted and why the dissenters’ numbers were wrong, questions can still be raised about the pricing of the deal.

REASON 4 – CAG Politely Calls Government Bluff on Procedure

From the very inception of the deal, the manner in which it has come about has been dubious, and the CAG Report doesn’t rebut this – if anything, it makes things worse.

It shows how Dassault didn’t fulfil the criteria to supply the aircraft in the first place for the original 2007 deal – a bit of a slap in the face for the Congress, actually, as well as the BJP.

Despite this, PM Modi decided to switch from the original deal to this new one, even though Dassault weren’t actually offering the best price. On top of that, this was done without following any of the relevant procedures.

Now the Centre has tried to say that what they did was compliant with the Defence Procurement Policy, but funnily enough, the CAG has itself said this was not true.

Findings of CAG regarding consonance with DPP.(Source: CAG Report on Capital Acquisitions in Air Force)

So what we have here is the CAG’s own report very politely calling the government’s bluff on procedure, which means this also becomes a bit of an embarrassment for the Supreme Court, which had said the procedures were broadly followed.

REASON 5 – CAG Reserves Comment on Modification/Dropping of Key Clauses

The final reason why the CAG report isn’t the end is because of the mysterious way in which key clauses and requirements were modified and dropped, against the wishes of the official negotiators, the Defence Ministry and the Law Ministry.

According to N Ram, these even included the anti-corruption clauses, which were removed at the very last minute, after the deal had been approved by the Prime Minister’s Cabinet Committee on Security. The CAG report says nothing about this.

Another big one was the dropping of a requirement for a sovereign guarantee or a bank guarantee, which the Defence Ministry and Law Ministry had insisted on. Even their alternative option, routing payments through an escrow account, was dropped.

The CAG acknowledges that this happened, but doesn’t give us his opinion on it, which is strange since it’s in a section called ‘Assessment of terms and conditions’.

Interestingly, like the Supreme Court, the CAG seems to have been informed that the decision to drop the guarantee requirement was made by the Cabinet Committee on Security in September 2016.

But N Ram has revealed in The Hindu that the decision was actually made by the Prime Minister’s Office in October 2015 in discussions with French counterparts. The Quint was able to confirm this from our conversation with Air Marshal SBP Sinha, the initial head of the negotiating team who has defended the PMO’s actions.

What’s more, the CAG report actually notes that the absence of a bank guarantee should have meant savings which were supposed to be passed on to the Ministry. Instead, the CAG expressly says that Dassault alone benefitted from this.

CAG findings on savings from bank guarantee.(Source: CAG Report on Capital Acquisitions in Air Force)

In conclusion, CAG report or no, the Rafale saga isn’t going away. So stay tuned for more revelations, more exposés, and lots more drama.