Rafale Deal — Behind Cag Math, Three Costs: Benchmark, Aligned, Final
The CAG’s calculation that the final deal for the Rafale aircraft is 2.86 per cent lower than what was negotiated in 2007 is based on the final offer of Euro 7878.94 million for the aircraft including weapon systems as per figures discussed by the Indian Negotiating Team (INT).
These discussions by the seven-member INT spanned 26 rounds of negotiations with France between May 2015 and April 2016.
There were three costs considered by the INT during its deliberations: a benchmark cost fixed by it which sets the maximum ceiling price for the deal (Euro 5062.11 million); an “aligned price” to estimate the equivalent price based on the commercial offer made by Dassault in 2007 for 126 aircraft (Euro 8206.87 million); and the final offer which was made by Dassault in 2016 at which the deal for 36 aircraft was signed between India and France (Euro 7878.94 million).
The CAG, which dismissed the benchmark pricing as “unrealistically low,” said that its own aligned price was 1.23 per cent lower than the INT’s version.
Interestingly, the final offer did not include any bank guarantees as has been noted by the CAG. But the INT’s aligned cost included the cost of the bank guarantee. Three members of INT had argued that this made the Dassault offer in 2016 at least 5.3% higher (Euro 574 million) than the aligned cost.
The INT had fixed the benchmark price based on multiple inputs. These included the benchmark cost in August 2011 for the 126-aircraft bid, the commercial proposals of Dassault and EADS in the same bid, and data available from annual reports of Dassault Aviation. As per procedure, the benchmark cost is the ceiling price for any contract negotiation but sanction was given by the CCS chaired by PM Modi in this case to go ahead with the aligned costs, instead of benchmark cost.
More in Explained: What the CAG report says on Rafale — your questions answered
Consider the key elements of the cost breakup, as per official records:
* The two most important components of the total amount were the 36 flyaway aircraft, which cost Euro 3302.12 million and “Associated Services” for Euro 1705.98 million. The Associated Services referred to the 13 India Specific Enhancements (ISE) which were proposed by Dassault during the case for 126 Rafale aircraft under the UPA government. These were the deficiencies from IAF’s requirements which were not met by flyaway Rafale, and it gave an additional commercial offer for ISE.
* Tools, Testers and Ground Equipment: Final offer of Euro 318.41 million, down from INT aligned cost Euro 320.58 million and the benchmark cost of Euro 537.73 million.
* Spares: Final offer Euro 776.60 million down from aligned cost of Euro 799.06 million and almost Euro 200 million higher than the benchmark cost of Euro 542.22 million.
The cost of design and development of ISE was proposed to be Euro 1400 million in 2011 which was escalated to Euro 1560 million in 2016. This cost was to be distributed over a minimum of 126 aircraft, with possibly an additional 63 Rafale. In 2016, the design and development cost of ISE was brought down to Euro 1313 million but this had to be spread over only 36 aircraft which made the Rafale aircraft more expensive than the one in the bid for 126 aircraft.
As reported by The Indian Express on September 6, 2018, one Rafale aircraft produced in France has already been fitted with ISE and will be the last of 36 fighters to be flown to India in April 2022. But the other 35 aircraft will be fitted with ISE in India, which would be completed by August 2022.
Immediately after the signing in September 2016, The Indian Express had reported that top Defence Ministry officials had given a break-up of the Euro 7878-million deal: the basic cost of the 36 aircraft was Euro 3402 million (approximately Rs 670 crore per aircraft), the weaponry was for Euro 710 million, terrain compatibility fits for Euro 1,700 million, and performance-based logistics support for Euro 353 million.