CAG says wrongdoing in Italy chopper deal, piles pressure on govt

By Anurag Kotoky

NEW DELHI (Reuters) - Indian negotiators set a higher base price for the purchase of helicopters from AgustaWestland and frequently changed the bidding rules, the auditor said on Tuesday, making it harder for the government to complete the 560 million euro deal.

The ruling Congress is battling allegations of widespread corruption in government and the latest report into the deal to buy 12 helicopters for top politicians offers further ammunition to its opponents in the run-up to general elections next year.

The Comptroller and Auditor General said the defence ministry did not comply with rules from the very beginning of the tender process to the conclusion of the contract with AgustaWestland, a division of Italy's Finmeccanica defence group.

Italy and India are separately investigating charges that AgustaWestland paid bribes to win the 2010 deal for the AW101 helicopters. India froze payments to the company in February as the scandal unfolded.

It had taken delivery of three helicopters before the deal was stalled.

The auditor said the defence ministry had initially set a condition that the helicopters should be able to fly to an altitude of 6,000 metres, which meant that AgustaWestland could not compete since the AW101 was certified to fly only to 4,572 metres.

Later the minimum altitude requirement was lowered to 4,500 metres, even though the helicopters were expected to be used in the mountainous north and northeast parts of the country where the altitudes are higher, it said.

Field trials of AgustaWestland's bid were conducted on representative helicopters Merlin MK-3A and Civ-01 and on a mock-up of the passenger cabin, and not on the actual helicopter, the CAG said.

In contrast, the actual S-92 helicopters offered by rival bidder Sikorsky Aircraft, a unit of United Technologies Corp , were evaluated, the report said.

Bruno Spagnolini, former CEO of AgustaWestland, and Giuseppe Orsi, former chairman of Finmeccanica, are being tried in Italy on the accusations in the Indian deal. Both deny wrongdoing.

The Italian arrest warrant for Orsi and Spagnolini, seen by Reuters, said the Indian tender was changed to deliberately favour the Italian firm.

"The benchmarked cost adopted by the contract negotiating committee was unreasonably high compared to the offer cost," the auditor said.

"Hence it provided no realistic basis for obtaining an assurance about the reasonableness of the cost of procurement of AW101 helicopters," it added.

There was no immediate comment from the defence ministry to the auditor's report and military analysts in India and abroad said that New Delhi was likely to wait for the results of a federal police investigation before making a decision on the deal.

"CAG's assessments on the chopper deal will most probably be factored into the current investigation, but to conclude that either AugustaWestland will be blacklisted or the VVIP chopper tender will be cancelled seems a little premature at the moment," said Deba Mohanty, chairman of Indicia Research & Advisory, a New Delhi-based think tank.

AgustaWestland has denied any bribery and asked India to pay the sums due under the contract, sources said earlier this year.

A source familiar with the company's position said AgustaWestland told the India's finance ministry in a letter that its initial contract with the Indian government was still valid and India was liable to pay the remaining amount because the allegations had not been proved.

"The most prudent thing for India to do is to complete all relevant investigations - including the CBI inquiry - and to make a decision based on these findings," said Jon Grevatt, Asia Pacific Defence Industry Analyst at IHS Jane's.

(Reporting by Nigam Prusty and Anurag Kotoky; Writing by Sanjeev Miglani; Editing by Clarence Fernandez and Nick Macfie)