Modi and Rafale: Ram to the rescue?

Prime Minister Narendra Modi should be thanking N Ram. The Hindu Group chairman and veteran journalist has provided the government, and particularly Mr Modi, a get-out-of-Rafale-jail-free-with-honour card through his disclosures.  That, of course, was the farthest from Mr Ram’s intentions.  But the government lawyers seem unaware of this godsend, or else they would not have threatened to invoke the dreadful Official Secrets Act.

The Hindu revelations over the last several weeks are based on leaked documents.  Reports of the Indian negotiating team (INT), dissenting minutes, and notings in the defence ministry files are among these.  The instalment published on March 6, 2019, provides Rafale price details, including an oranges-to-oranges comparison of the present deal and the offer made to the United Progressive Alliance government (UPA). The government has so far refused to provide cost details citing security concerns.  Its claim that it had negotiated a lower price than the earlier offer was shrouded in a needless and counterproductive fog. The rebuttals of this assertion were also based on conjectures and assumptions. Even the recent report of the Comptroller and Auditor General had conveniently masked the relevant information. Mr Ram’s latest article makes possible an informed, fact-based, discussion.

The INT used a construct of “aligned cost” to compare the NDA and UPA deals, according to The Hindu articles.  Working out the aligned cost involved the prices of the basic aircraft and those of the various add-ons, including weapons systems and navigational and logistical aids.  In essence, it meant a reworking of the last offer to the UPA for 36 Rafale aircraft for the same configuration as in the NDA deal and updated to 2016.  

Cutting to the chase, Mr Ram cites the INT report saying that “The final offer of 7,878.98 M€ (excluding additional mandatory weapons supplies of 10.55 M€) is 327.89 M€ lower than the aligned cost of 8,205.87 M€.”  This is 4 per cent of the aligned cost.  There is, however, a major catch.  The NDA final offer is without a bank guarantee, while the aligned cost is with guarantee. To make correct comparisons, the cost of the bank guarantee needs to be worked out and taken into account.

The INT had estimated the guarantee cost to be 7.28 per cent of the value of the contract based on a communication from the State Bank of India. This amounted to 574 M€. Thus, the new contract cost including the guarantee would be 8,453 M€, or about 3 per cent higher than the aligned cost.  Mr Ram then cites from the dissent note of some domain experts on the INT to the effect that the aligned cost could be further reduced to 7,486 M€ due to “optimisation of spare parts offered by the French party.”  The present offer with guarantee then becomes about 5 per cent higher than this revised aligned cost.  Mr Ram calls this difference “substantial.”  P Chidambaram, in his column in The Indian Express (March 10, 2019), calls the guarantee charges “stiff.”

Bank guarantee charges are often negotiable, depending on the nature and the size of the contract and the parties to the contract.  A respected financial domain expert who is an independent director on the board of one of the largest private banks confirmed this to me.  He suggested that in the instant case they could be as low as 5 per cent or even less.  At 5 per cent, the imputed cost of a bank guarantee would be 394 M€, with the new contract value becoming 8,272 M€.  That would be about 0.8 per cent higher than the aligned cost worked out by the INT.

The bottom line is that the present contract is between 1 and 5 per cent more expensive than the aligned cost, depending on which assumption is closer to the reality.  Does this create an odour requiring a Supreme Court monitored investigation, as the petition before the court pleads?  That would require a plausible suspicion, çui bono (who benefits) to be addressed.  So far, investigations of neither Mr Ram nor various others have been able to establish even the slightest trace of a money trail, unlike in other well-known corruption cases.  
 

The most likely reasons for the cost difference is obviously the bank guarantee forgone as well as the smaller size of the present order (the earlier one was three-and-a-half times as large).  That in turn could be because the government was keen to establish a faster delivery schedule. The supplier, Dassault Aviation, is not among the largest or resource-rich corporates.  It could find it well nigh impossible to meet tight supply targets without a sizeable advance from the buyer.  Thin margins probably meant that it could not absorb the guarantee costs.  The government therefore perhaps chose to forgo the guarantee for a post-haste contract execution. That could be a border-line unwise procedure, but hardly a case of corrupt practices or loss to the exchequer.

Finally, could the gist of the above have been disclosed right at the outset?  Absolutely, and the Modi government could have saved itself many an embarrassing situation.  Ancient wisdom has it that truth remains the best defence against allegations: Transparency works at all times, while any attempt to hide facts only breeds suspicions. 

The writer is an economist