No Bank Guarantees Meant A More Expensive New Rafale Deal

INT’s final report reveals how the Indian negotiating position was weakened and the French position bolstered by a parallel negotiating track.

- N. Ram

In its final report submitted to the Defence Ministry on July 21, 2016, the seven-member Indian Negotiating Team (INT) estimated the cost of loading bank guarantees, which the French commercial suppliers with backing from the French government refused to do, as €574 million. This made the €7.87 billion inter-governmental agreement signed on September 23, 2016 by the National Democratic Alliance government for the aircraft and weapons packages for the 36 fly-away Rafale fighter jets more expensive by €246.11 million than the estimated aligned cost of the Rafale aircraft deal initiated by the United Progressive Alliance government.

Detailed document

The “Report of the Indian Negotiating Team on Procurement of 36 Rafale Aircraft for Indian Air Force” is a detailed and revealing document to which The Hindu has access. The report states in paragraph 69: “The final offer of 7878.98 M€ (excluding additional mandatory weapons supplies of 10.55 M€) is 327.89 M€ lower than the aligned cost of 8205.87 M€ with respect of MMRCA [Medium Multi Role Combat Aircraft] offer without taking into account the impact of BG [Bank Guarantees], which has been brought out at Para-23 above [emphasis added].”

How cost was arrived at

In fact, the INT report elaborates in paragraphs 21, 22, and 23 on how it arrived at €574 million as the cost of loading the bank guarantee. The computations were done on “an annual bank commission rate of 2% including confirmation charges by an Indian bank, as communicated by SBI on 02 March 2016,” and the total commercial impact of bank guarantees was worked out to a substantial 7.28% of the contract value.

Table 1, sourced from the dissent note of the domain experts, shows that the aligned cost is lower than final the final negotiated price with the financial impact of bank guarantees.