CAG says removal of ‘sovereign guarantees’ only helped Dassault

Ajay Banerjee

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Tribune News Service

New Delhi, February 13

The CAG report on the Rafale deal stops short of questioning the government on how sovereign guarantee clause was waived to become a ‘letter of comfort’ from France. The report narrates the facts, but does not give a verdict.

The Dassualt Aviation in its 2007 bid had included 15 per cent bank guarantee against advance payments, 5 per cent each for ‘performance guarantee and warranty’.

A bank guarantee gets directly and automatically invoked in case of breach of contract by the seller. In the 2015 offer, the French company did not furnish any financial and performance bank guarantees.

Since about 60 per cent of advance payment (Rs35,000 crore) were to be made to the French company, the Ministry of Law and Justice advised that a government/sovereign guarantee should be requested in view of the value of the proposed procurement. However, the government of France and company neither agreed to furnish the bank guarantees nor government/sovereign guarantee. Instead, it provided a ‘letter of comfort’ signed by the French Prime Minister in lieu of a bank guarantee.

The company was to provide bank guarantee against the 15 per cent of the advance payment (Rs5,200 crore) made by the ministry to the vendor which would be outstanding for three years till the deliveries of equivalent amount are made by the company.

The bank charges, which the vendor would have to pay to hold this guarantee, work out to be a few million euros. The bank rate for such holding charges is 1.25 per cent per annum. The offer of 2007 included ‘performance guarantee and warranty’, valuing 10 per cent of the total value of the contract, which was to be held till the completion of deliveries five-and-half years. The bank charges for this work out to another few million euros. The cost of the bank charges should “have been passed on to ministry... Audit noted that this was actually a saving for Dassault when compared to its previous offer of 2007”.

An inter-government agreement means that the selling government (in this case France) procures the items from their vendors on behalf of the buying government, using the same procedure, terms and conditions which it uses for its own procurements. As a result, the buying government receives the same benefits and protection as the vendor gives to its own government. The cost of such procurements are considered to be lower because the equipment is already in use by the selling government and much of the cost of R&D and other fixed costs would have been recovered by the vendor.