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Defence finance wing redflags UPA’s trainer aircraft deal

In 2013, Finance under Chidambaram had alerted ministry headed by Antony.

Written by Appu Esthose Suresh | New Delhi |
March 5, 2015 4:07:30 am
What was to be spent on Pilatus trainer over 30 years will get over in just 7. What was to be spent on Pilatus trainer over 30 years will get over in just seven.

* 9 components overlooked before declaring lowest bidder, says ministry department

* In 2013, Finance under Chidambaram had alerted ministry headed by Antony

* What was to be spent on Pilatus trainer over 30 years will get over in just 7

* Antony says let them investigate if they feel there is a problem with deal

India’s 2012 order for 75 Swiss Pilatus basic trainer aircraft (BTA) for the Indian Air Force (IAF) has run into rough weather with the finance wing of the Ministry of Defence pointing out that 88 per cent of the acquisition cost over 30 years will be incurred in just seven years because of “inbuilt flaws” in the Rs 4,000-crore deal signed during the UPA rule.

The Ministry of Defence (Finance) raised the red flag in January this year after the IAF moved a proposal for Follow On Support Contract (FOSC) for five years at an estimated cost of Rs 507 crore for maintenance and related issues of Pilatus aircraft — almost three times the cost for repairs and maintenance presumed at the time of evaluation of the lowest bidder (L1).

The Indian Express has learnt that in August 2013, the Ministry of Finance, then under P Chidambaram, while giving a no-objection certificate, had asked the Ministry of Defence, then under A K Antony, to fix future cost escalation through “clarification of fixity of contractual prices given in the pre-bid conference”.


“RFP for life cycle cost (LCC) used by MoD may be made clearer on a number of aspects such as the cost elements which would be incorporated in the contract, the specific items on which vendor would be bound by any escalation quoted by him, the manner in which evaluation would be done where escalation has been provided and the way various cost elements quoted by them would be binding on the vendor. MoD needs to revisit the RFP format…” the Ministry of Finance stated in its letter dated August 22, 2013.

The letter mentioned that “the instant case has been forwarded without specific views of MoD (Fin)”.

The Ministry of Defence, it is learnt, raised the issue twice through Financial Adviser (Defence Services) in two notes  — in January 2013 and April 2014 — given to Antony asking him to “revisit all these cases urgently to address the issues highlighted by MoF and a view taken on how to progress them further”.
Air Force
On October 24, 2014 — after the change of guard at the Centre — a Ministry of Defence note stated: “It is clear that the basis for MoF in giving ‘No Objection’ for procurement of 75 x BTA was clarification on fixity of contractual prices given in the pre-bid conference… The argument that L1 vendor is L1 on the basis of both TCA (total cost of acquisition) as well as DAC (direct cost of acquisition) is not advisable as it will amount to denial of opportunities to vendor other than the selected one in view of the fact that issue of contractual fixity of price was not stated upfront in the RFP (Request for Proposal).”

So last Saturday, when the Defence Acquisition Council (DAC) cleared a proposal for the purchase of an additional 38 Pilatus, it put in a rider — purchase subject to examination of life cycle cost issues.

Reached for comment, former Defence Minister A K Antony said: “Let them investigate if they feel there is a problem.”

The two orders for the Pilatus PC-7 MkII aircraft are to meet the IAF’s desperate need for 181 BTA to train its pilots. The Hindustan Aeronautics Limited (HAL) will meet the remaining requirement by supplying the indigenous HTT-40.

The Indian Express has learnt that nine components, now part of an IAF proposal to pay Pilatus under the maintenance head, were not calculated during the request for proposal (RFP) stage before declaring it the lowest bidder.

This was an issue the South Koreans had also raised in 2011 after Korea Aerospace Industries (KAI) lost to Pilatus in the race for the contract.

“KAI is also confident that one of the bidders could not fulfill the requirements in RFP and DPP 2008 so that company should be disqualified in this tender process for fare and transparent competition,” South Korea Defence Minister Kim Kwan-jin stated in a letter to counterpart Antony in July 2011.

The BTA contract was the first awarded on the basis of life cycle cost (LCC). Two components determine L1 (lowest bidder) under the new format: Direct Acquisition Cost (DAC) and LCC, the cost of operation spread over 30 years.

On January 9, 2015, the Ministry of Defence (Finance) red-flagged the deal: “The cost of acquisition with FOSC calculated with exchange rate at the time of L1 evaluation works out to Rs 3274.59 cr… Thus 88.89% of TCA (Total Cost of Acquisition) will be incurred at the end of 07 years period (02 years warranty + 05 years of FOSC) as against Rs 3684.52 cr for 30 years arrived at the time of L1 evaluation.”

“There is no independent validation of information provided by the vendor to validate the claims made by them for TCA elements…The actual life cycle cost could be much higher than the one used for L1 evaluation and may invite audit objections subsequently,” the MoD (Finance) stated.

In an email response to queries from The Indian Express, a spokesperson for Pilatus said: “We are not in a position to respond to your questions due to our contractual obligations. May we suggest that you direct your questions to the appropriate GOI/IAF departments and it would then be at their discretion to release any information pertinent to your enquiries.”

Ministry of Defence spokesperson Sitanshu Kar said: “While approving the proposal for acquisition of 38 new BTA from Pilatus, Defence Acquisition Council (DAC) has directed that approval will be subjected to examination of the life cycle cost related issues by Defence ministry’s finance wing and subsequently by Ministry of Finance at appropriate stages.”

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