New scam? Auditor points out fallacies in Navy’s $2.1 billion aircraft deal

The Comptroller and Auditor General (CAG) on Tuesday said Boeing was awarded the contract based on a wrong conclusion that the US plane maker was the lowest bidder (L-1), pointing out fallacies in a $2.1 billion naval aircraft deal inked in 2009.

A report tabled in Parliament on Tuesday revealed that the defence ministry enhanced the financial bid of Boeing's competitor EADS CASA, Spain, by including the cost of 20 years of product support. It said the product support component was ignored while considering Boeing's quote for eight P-8I submarine hunter planes, resulting in L-1 being determined wrongly.

A defence ministry official offered no comment, saying the CAG report was being examined. A Boeing spokesperson also declined comment.

The United Progressive Alliance government ordered the P-8Is in 2009 as a replacement for the navy's Soviet-era Tu-142 fleet to improve the navy's anti-submarine and anti-surface warfare capabilities. The planes were delivered between May 2013 and October 2015.

The NDA government inked a follow-on deal worth $1 billion with Boeing in July 2016 for four more P-8I submarine hunter planes. The P-8I is a military derivative of Boeing's 737-800 commercial aircraft.

The CAG report said Boeing's commercial bid, submitted in November 2007, was $ 2.18 billion (~8,700 crore, at the exchange rate then) compared to EADS CASA, Spain's Euro 1.32 billion (~7,776 crore). The EADS bid included product support for two years. The report said Boeing clarified to the defence ministry that it would be able to provide 20 years of product support under a separate contract.

Apart from two years of product support included in its bid, the Spanish firm submitted a formula for extending support for 18 more years.

"Instead of reducing the product support cost for two years factored in EADS CASA, Spain's commercial offer so as to determine L-1 on the same footing, the contract negotiation committee (CNC) enhanced the cost of EADS CASA, Spain's quote to Euro 1.48 billion ((~8,712 crore) by including product support for another 18 years at Euro 7.1 million per annum," the report said.

The report said this resulted in Boeing being declared L-1 and winning the contract in January 2009 at $2.13 billion (~10,773 crore). In response to an audit query, the navy told CAG last year that as Boeing had not specified any amount in its commercial offer, the CNC considered the 20-year product support as 'nil' and concluded it was included in the overall acquisition price.

The CAG, however, found the navy's reply untenable. It said "lack of proper internal checks on the part of the CNC resulted in Boeing being adjudged L-1 incorrectly." The auditor faulted the plane's capabilities too. "The critical role equipment offered by Boeing was not fully meeting the needs of the Indian Navy. Owing to capability limitations of radars installed onboard, the aircraft is not able to achieve the envisaged coverage area requirements," the report noted.

The report said Boeing was supposed to fulfil offset obligations to the tune of $ 641 million by August 2016 but the firm had not done so.

When contacted, a Congress spokesperson said the party is yet to study the report.