The Ministry of Defence passed a death sentence on the Indian Medium Multi Role Aircraft (MMRCA) contest on January 31, 2012. As explained in the preceding part of this analysis, by the end of April 2011, the Indian Air Force (IAF) had removed four of the six competing aircraft from the competition, clearing only the French Dassault Rafale and the Eurofighter for the shortlist.
The Rafale had managed to survive the contest. Now the French only had Eurofighter to beat. The dice were loaded. With the two aircraft the only ones qualified technically, a decision to select one of the two would now depend on their commercial bids. Rafale would have to come out cheaper than the Eurofighter in order to win the contest.
But what should have been a straight figure-for-figure comparison (both bids were in Euros) turned into a farce.
Disrupting the Contest
First of all, the RFP laid out that the commercial bids were to be submitted in a prescribed, detailed format, so that figures against each head could be compared across competing bids.
The bids would be compared in terms of their total life cycle cost and the cheaper bid would win. The total life cycle cost was supposed to be the sum of the following seven cost components:
M1: Direct Cost of Acquisition
M2: Cost of Total Technical Life
M3: Cost of Time Between Overhaul and MTBF
M4: Cost of Scheduled Intermediate Level Maintenance
M5: Cost of Depot Level Overhaul and Maintenance
M6: Operating Cost
M7: Cost of Transfer of Technology
All the above would be summed up to arrive at the total life cycle cost (M8) and compared to determine the lower L1 bid.
Dassault Aviation did not bother to submit their bid in this required format.
The CAG report says, “M/s DA did not submit its price bid in the format prescribed by the RFP which contained detailed cost breakup of the seven cost elements prescribed in the RFP, which were crucial for price evaluation. The firm had instead disclosed its price in two parts – Price of Direct flyaway aircraft and price of ToT.”
Dassault’s bid should have been thrown out at this point.
“M/s EADS on the other hand had submitted its price bid in conformity to the prescribed RFP format giving the detailed cost breakup of the seven elements. This created difficulty in comparing the prices of the two firms,” adds the report, somewhat ironically.
But it also notes how accommodating the Contract Negotiation Committee (CNC) and the L1 Sub-Committee were to Dassault Aviation.
“In the absence of complete cost breakup of the seven components for the price bid of M/s DA, the price evaluation L1 sub-committee derived the price of these components with whatever information was available in the bid. The independent validation of these costs with reference to the Total Technical Life (TTL), Time Between Overhaul (TBO) and Mean Time Between Failure (MTBF) data given by vendor in their technical proposal was not possible,” says the report.
Fixing the Cost
But it was when it came to the interpretation of the respective costs of the two aircraft, that the real sleight of hand was performed.
As mentioned above, this interpretation became necessary as Dassault had simply not submitted its commercial bid in the required format.
The interpretation cost analysis of the Eurofighter bid was inflated and the interpretation of the Rafale bid was undervalued. Five times.
The CAG report notes that, ‘Audit noted that the L1 sub-committee had taken the cost of Kits and Material for Eurofighter as “RIK” billion € whereas the vendor had quoted “RIK(-)”70 billion €. This error was because the Sub-committee converted the price of different component of kits and material into INR from € and reconverted it to €. This was unwarranted as both the vendors had given the price of ‘Kits and Material’ in Euros. Thus the price of M/s EADS was overstated by (+) “TIK” billion €.’
Secondly, the CAG report says, “Price bid for M1 M/s DA did not quote for the Capital Expenditure for setting up of license production of aircraft. It had stated that the price would be provided later. The L1 sub-committee, while comparing the prices took this price as nil while calculating M1 for Rafale aircraft. But Capital Expenditure for production was included in the price bid of M/s EADS.”
The defence ministry tried to justify this to the CAG, which said in its report, “Ministry in its response stated that the price quoted by M/s DA for M1 included capital expenditure in the component of ‘Non-Recurring costs’.”
The CAG clearly didn’t buy this argument, noting, “However, Audit noted that the Non-Recurring Cost and Capital expenditure for production of an aircraft are distinct.” The report also added that ‘M/s DA in its bid had clearly segregated Non-Recurring Cost and Capital expenditure and stated that the cost of capital expenditure would be provided at the time of signing of Technical Collaboration Agreement. But the L1 Sub-committee had assumed the Non-Recurring Cost as cost of plant and machinery.’
The cost of capital expenditure for a Rafale assembly line was simply not counted.
Thirdly, the Rafale bid included an additional commercial offer for the famous ‘India Specific Enhancements’ that have been pointed out to be against the rules, elsewhere in the CAG report. That notwithstanding, the CAG report also points out that, “While submitting additional commercial offer, M/s DA had quoted only the ‘Non-Recurring Costs (NRC)’ for 14 India Specific Enhancements. It had further stated that the additional commercial offer did not include the costs related to implementation on serial aircraft and Logistic support adaptation which were to be quoted later on. However, Audit noted that L1 subcommittee had incorrectly adopted the additional commercial offer as inclusive of equipment and integration costs of ISEs on all the aircraft for evaluation of bids.”
Again, the Rafale commercial bid was undervalued.
The L1 Sub-Committee inflated the interpretation of the cost of the warranty offered by the Eurofighter.
“The RFP required the vendor to provide warranty on aircraft, engine, accessories, system, weapons and associated equipment. However, during price evaluation the sub-committee noted that M/s DA had also included the cost of warranty on the SKD, CKD and IM Kits to be supplied by the vendor under ToT. But M/s EADS quoted the warranty cost for SKD kits only. The Sub-committee therefore extrapolated the warranty cost of SKD to the CKD and IM kits. However Audit noted that this extrapolation was not correct because the warranty cost of CKD, SKD and IM would be different depending upon their level of indigenization. Thus, instead of comparing the prices after excluding the warranty costs on these items by M/s DA, the subcommittee added “TOSA” million € to the commercial offer of Eurofighter on account of warranty for the ToT kits,” said the CAG report.
This was one more way the cost analysis was fixed in favour of the Rafale bid to determine the L1.
Finally, the L1 Sub-Committee bestowed one last benevolence on Dassault to help them on price. As it turned out, so egregious was this concession to the French arms company, it became one of the two reasons why the order was dead in the water, even as of January 31, 2012, the day the bid was announced L1.
“For the calculation of the cost of production of the aircraft in India (by HAL) under ToT, the RFP required the vendors to quote the man hours required for production in India,” says the CAG report, explaining, “M/s EADS quoted man hour requirement of 25.5 million man hours, while M/s DA quoted 31.2 million man hours.”
So far so good, right? Not so fast.
“But M/s DA in its bid had stated that these man hours were according to the French industry. This was not in accordance with the RFP which required the vendor to quote the man hours as required in India. At the time of Bench Marking in June 2011, HAL had stated that the French man hours had to be converted to Indian man hours by multiplying M/s DAs quoted man hours by factor of 2.7,” said the CAG report.
“But CNC ignored this factor while determining the benchmark price as well as the L-1 vendor. This created difficulties later during negotiations with M/s DA when the CNC realized that after applying the factor of 2.7 to the manpower cost of M/s DA it was no longer the L-1 vendor,” slams the CAG report.
The L1 Sub-Committee simply did not convert the number of French man hours cited by Dassault into the required number of Indian man hours for the production of the aircraft in India.
The CAG report explains, “Audit noted that by including this factor, manpower costs would have been about 2.7 * 31.2 million man hours * “XXY” /man hour for HAL = “XXZ”crore and the bid price of M/s DA would have increased by “ZZZ” billion €.”
The defence ministry offered a surprisingly lame defence for their failure here, which turned out to be a winning stroke of luck for Dassault and condemned the MMRCA acquisition.
“The Ministry replied that CNC had felt that the manhour factor required by HAL was not on the basis of scientific rational and so the same was not agreed to in evaluation of bids. However, Audit noted that the reply of the Ministry is silent on the manner the bid of M/s DA was evaluated since it was submitted with manhours under ‘French industrial conditions’, and HAL wanted that figure to be multiplied by 2.7,” says the CAG report.
The issue of man hours inevitably created a stalemate in negotiations that could never be resolved. But there was one more thing that killed any chance of the 126 Rafale MMRCA order being placed.
According to the CAG report, “The RFP also stated that the vendor shall guaranty the performance of the product to design specification, at the production agency or customer locations.”
Any participant in the competition was bound to comply with the requirements laid down in the RFP.
“During CNC M/s DA took the position that the firm was only responsible for delivery of 18 direct flyway aircraft, CKD, SKD and IM kits and weapons and associated supply and services. HAL as the production agency was responsible for the quality of the 108 aircraft to be manufactured by it under ToT. CNC insisted that M/s DA should take full responsibility for the quality and performance of all 126 aircraft as required under the RFP,” says the CAG report.
Against the series of violations of process and non-compliance by the Rafale bid, there were only two minor instances of non-compliance by the Eurofighter bid. By the standards of accommodation accorded to Dassault’s bid by the IAF and the defence ministry, Eurofighter’s misdemeanors could have been easily dismissed.
But by March 2015, the defence ministry was in an impossible situation. Either it would have to admit all its failures, if not the invariable corruption tabulated above in the CAG report, or withdraw the tender.
There is no question that the series of errors of judgement in comparative cost analysis and the accommodations provided to Dassault by the L1 Sub-Committee can only be explained by corruption.
As it turned out, the tender was withdrawn.
The French never had any intention of allowing the Rafale to be built in India. They participated in the contest in bad faith to do whatever it took to be declared L1 and then undermined the RFP and destroyed the contest by implosion, to make sure no one else could supply and build fighter aircraft for India.
Dassault wasted eleven years. It is probably impossible to calculate the opportunity cost down the toilet. Not to mention, the safety and capability implications for the Indian Air Force (IAF).
But as we’ll see in the next part of this analysis, what followed raises even more troubling questions.