- Rafale deal settles for Letter of Comfort instead of sovereign guarantee
- Opposition has repeatedly targeted centre for getting Letter of Comfort
- CAG report noted the previous UPA deal included a 15% bank guarantee
The auditor (CAG)'s report on the Rafale fighter jet deal has flagged the drawbacks of settling for a "Letter of Comfort" instead of a sovereign guarantee from the French, a subject on which the opposition has repeatedly targeted the government.
The Comptroller and Auditor General (CAG) report, tabled in Parliament on Wednesday, noted that the previous deal for 126 jets negotiated in 2007 by the Congress-led UPA government included a 15 per cent bank guarantee against advance payments. But the deal sealed by the current government in 2016 says if there is a breach of agreement, India has to first settle the matter through arbitration with the French vendors, in this case Rafale-maker Dassault.
India has to exhaust all legal remedies before the French government steps in and makes the payment on behalf of the private company.
The government, for the first time, signed an Intergovernmental Agreement (IGA) with France for 36 Rafale fighter jets. It has earlier similar agreements with the US, UK and Russia.
"In case of IGA for 36 Rafale, the offer of M/s DA (Dassault Aviation) in 2007 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," the CAG report said.
In the 2015 offer with the present government, the French vendor did not furnish any financial and performance bank guarantees, the report stated.
Since about 60 per cent of advance payments were to be made to the French vendors, the law ministry had advised that a government or sovereign guarantee should be requested from France, given the value of the proposed procurement, the report said.
But neither the French government nor Dassault Aviation agreed to furnish bank guarantees or a government/sovereign guarantee.
"Instead it provided a 'Letter of Comfort' signed by the French Prime Minister in lieu of the Bank Guarantee," the CAG report said.
The issue on sovereign guarantee and "Letter of Comfort" was submitted to the Cabinet Committee of Security in September 2016 for consideration.
The cabinet panel decided to accept other associated guarantees or assurances provided in the agreement, instead of a bank guarantee, subject to payments through an escrow account or "any other safeguards which the ministry was to work out in consultation with the French Government with the assurance by the French Government that they shall provide effective oversight on the utilization of payments released to the French Industrial suppliers", the CAG report said.
But the escrow account was also dropped days before the deal was signed. The French government, the report said, did not agree to an escrow account as it felt "the guarantees already provided by it were far reaching and unprecedented".
"In case of any breach of agreement Indian party (Ministry) would have to first settle it through arbitration directly with the French vendors. If the arbitration award were in favour of Indian party and the French vendor fails to make the payment, the Indian party should exhaust all available legal remedies. Only then the French Government would make these payments on behalf of the vendors," the report said.
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