New Delhi: The Comptroller & Auditor General (CAG) has flagged the Rs 2,895.63 crore contract for 75 Pilatus PC-7 Mk-I basic trainer aircraft from Switzerland signed in 2012, citing incorrect price calculations that worked in the firm’s favour.
In a report released Wednesday, the CAG claimed that Switzerland-based Pilatus Aircraft got the deal despite failing to commit to transfer of technology for maintenance, and was allowed to tweak its offer at a later stage for an advantage over competitors.
The firm also didn’t offer a seamless supply of spares, the report added.
Alleged arms dealer Sanjay Bhandari, who is said to have had close links with Congress leaders as well as businessman Robert Vadra, Congress president Rahul Gandhi’s brother-in-law, was an agent of the Swiss firm.
The 2012 deal to secure Pilatus trainers for the Indian Air Force (IAF) has been under the scanner of the CBI since it was flagged by the defence ministry while it was under Manohar Parrikar.
However, in January 2016, the Defence Acquisition Council (DAC) approved the procurement of 38 PC-7 Mk-II trainers from the Swiss company, but the contract is yet to be signed.
Life cycle cost
The Request for Proposal (RFP) in the 2012 deal was floated in 2009 by the Congress-led United Progressive Alliance (UPA) government.
In February 2009, the Defence Procurement Board had decided to adopt the same life cycle costing (LCC) model as used for the Medium Multi-Role Combat Aircraft (MMRCA) project, the predecessor of the Rafale deal.
Life cycle costing is the estimate for the cost a product entails through its working life.
However, the report says the ministry excluded a crucial component, “M3”, pertaining to spares for scheduled and unscheduled maintenance. The reason cited was that the cost of such spares was already taken care of under the ‘manufacturer-recommended list of spares (MRLS)’ header in the direct cost of acquisition, but the CAG found the argument wanting.
“Audit considers this to be unjustified because MRLS is part of the aircraft package and M3 is a separate component. As a result, the total life cycle costing remained incomplete,” it added.
Another facet pointed out by the auditor is that the defence ministry sought a clarification from Pilatus before the determination of the lowest bidder, which secured an undue advantage for the Swiss firm.
According to the report, of the three vendors shortlisted for the contract — Hawker Beechcraft of the US, Korea Aerospace Industries Ltd of South Korea, and Pilatus Aircraft Ltd — the contract negotiation committee (CNC) found the Swiss firm’s bid to be the lowest (L1).
However, the CAG pointed out that Pilatus had not made provisions for some supplies in its April 2010 bid, namely, “special maintenance tools (SMTs) and special test equipment (STE)” and computer hardware for the ground-based training system, while the other two had.
The price bids were read out to the representatives of the three vendors in May 2010, who then confirmed it.
However, the report points out, before the lowest bid was determined, a clarification was sought from Pilatus on 10 June 2010 about its offer, following which the firm stated that the SMTs, STE and computer hardware should be considered included in its bid.
The auditor noted in its report that this amounted to changing the bid or accepting a discount from the firm before the determination of lowest bidder, which Central Vigilance Commission guidelines prohibit.
The CAG noted that Pilatus had offered a lower quantity of spares than were required, adding that “this contributed to reducing the price of the firm during price evaluation”.
Transfer of technology
The RFP required vendors to provide complete ‘transfer of technology’ for maintenance to state-owned Hindustan Aeronautics Limited (HAL).
According to the CAG report, the ministry found that only one vendor (Grob aircraft, Germany) from the initial respondents offered complete transfer of technology for maintenance, including for the components supplied by sub-vendors.
The company subsequently didn’t make the shortlist
The CAG report pointed out that while Korea Aerospace Industries, which was shortlisted, quoted $120.6 million as the total cost of transfer of technology for maintenance, the offer made by Pilatus did not include the complete cost, with the firm stating instead that it was “subject to further discussion between the Indian Air Force and HAL”.
The CAG noted that maintenance and supply of spare parts were an important part of acquisitions, which is why the “technical and price evaluation of after-sales support should form an integral part of the acquisition contract”.
“Having awarded the main contract to the vendor, there is no bargaining power left with ministry to extract better quantity, price or timely supply,” the auditor noted.
“In this case, having bagged the main supply contract, it appeared that the vendor was not very keen on parting with the ToT (transfer of technology) for maintenance,” the CAG said.
“By separating the procurement of after-sales support from the main contract, the IAF has created a situation where it will have to send the aircraft components to the vendor for maintenance, thus benefitting the vendor,” it said.