CAG report flags vendors’ ‘dilly-dallying’ on offsets deals, cites Rafale as example

Indian pilots climb out of a Rafale fighter jet that was operationally inducted into the IAF on 10 September 2020 | Photo: Praveen Jain | ThePrint

New Delhi: Foreign vendors often make offset commitments to win contracts but dilly-dally once they are won, the Comptroller and Auditor General (CAG) of India has said, citing as example a proposal from French defence major Dassault Aviation and European firm MBDA that was struck as part of the Rafale deal. 

The CAG made the observations in its latest report, which was tabled in Parliament Wednesday. 

Offset contracts are those struck as part of a defence deal involving imports. Under this arrangement, a vendor chosen for a contract is required to invest a certain share of the purchase sum into the importing nation. The offsets proposal in question dealt with technology-transfer for the development of an indigenous engine for light combat aircraft (LCA).

“For instance in the offset 4 contract relating to 36 Medium Multi Role Combat Aircraft (MMRCA), the vendors M/s Dassault Aviation and M/s MBDA initially proposed (September 2015) to discharge 30 per cent of their offset obligation by offering high technology to DRDO,” the CAG noted in its report.

The DRDO, it added, wanted to obtain technical assistance for the indigenous development of an engine, Kaveri, for LCA. “Till date the vendor has not confirmed the transfer of this technology (ToT),” it said.

Safran, the engine manufacturer that serves as a supplier to Rafale, had earlier this year said it remains committed to the ToT, and has restarted negotiations with the DRDO. The offsets deal had flown into a rough weather due to pricing issues.

From 2005 to March 2018, CAG said, 46 offset contracts had been signed with foreign vendors that were together valued at Rs 66,427 crore.

According to the auditor, by December 2018, Rs 19,223 crore worth of offsets should have been discharged by the vendors under these contracts. However, only offset claims worth Rs 11,396 crore, or 59 per cent, were submitted by that time.

“Further, only 48 per cent (Rs 5,457 crore) of these offset claims submitted by the vendors were accepted by the ministry. The rest were largely rejected as they were not compliant to the contractual conditions and the Defence Procurement Procedure,” the CAG noted.

Not the first report on Rafale

It was in 2005 that India adopted its Offset Policy for defence capital purchases of above Rs 300 crore made through imports. In such cases, the foreign vendor was required to invest at least 30 per cent of the value of the purchase in India.

In case of the Rs 59,000 crore Rafale deal, offsets agreements constitute 50 per cent of the contract value.

According to sources, offsets rules allow vendors the flexibility of completing their liabilities.

This CAG report submitted Wednesday is not the first time the auditor has made observations about the Rafale deal.

A CAG report submitted last year said that, a month before Prime Minister Narendra Modi announced India’s intention to buy 36 Rafale fighter jets from France, a Ministry of Defence panel had found that the deal could not be signed in 2012 because Dassault Aviation, the jet’s manufacturer, was not the lowest bidder.

This flew in the face of the Modi government’s claims that the deal was signed as an emergency purchase because Dassault had emerged as L1 (lowest bidder) in the UPA government’s Medium Multi-Role Combat Aircraft (MMRCA) tender.

Sources in the MoD, however, sought to explain the contradiction by saying that the deal for 36 Rafales was a government-to-government contract, and L1 or any other company does not come into play.