Friday, May 24, 2024

Life Cycle Costing Effective Tool To Identify The Best Bid

By Air Marshal SBP Sinha (r.)

DRDO-Chair

The Indian Ministry of Defence (MoD) promulgated the first Defence Procurement Procedure-2002 (DPP-2002) in 2002 with an intent to make the defence capital acquisition process more efficient, systematic and time-bound. Thereafter, revised versions of the DPP were published in 2005, 2006, 2008, 2011, 2013 and 2016 to enhance its scope and bring greater clarity in the process based on the experience gained. In September 2020, DPP-2016 was replaced by Defence Acquisition Procedure-2020 (DAP-2020). The preamble of DAP-2020 states “While maintaining highest standards of transparency, probity and public accountability, a balance between competing requirements such as expeditious procurement, high quality standards and appropriate costs needs to be established.” 

High-value military acquisitions are initiated through a multi-vendor Request for Proposal (RFP) except for the ones initiated based on an inter-governmental agreement. Few vendors respond to the RFP and offer similar performing equipment, which has an immensely distinct design and maintenance philosophies. The equipment with the lowest cost bid from amongst the ones that meet the operational requirements specified in the RFP is invited for contract negotiations.

Acquisition cost is finalised during contract negotiations for all deliverable items asked for in the RFP and on completion of successful contract negotiations, the contract is signed post approval from the Competent Financial Authority. Such acquisitions are purely intended to buy the cheapest equipment that meets the operational requirements without even looking at the likely cost to be incurred on lifetime operation and maintenance of the equipment being acquired vis-à-vis the likely cost of lifetime operation and maintenance of other similar available equipment. 

Accurate budget forecasting for military acquisitions is one of the crucial inputs required for preparing long-term perspective plans for the armed forces. Military acquisitions in India for long have revolved around buying the cheapest equipment that meets the specified operational requirements. In contrast, Life Cycle Costing (LCC) provides an opportunity to make a financial assessment of the cost likely to be incurred in operating and maintaining an equipment over its entire operational lifecycle over and above the acquisition cost. The Department of Defence of the USA first started using the LCC model as early as the early 196Os. Many countries today use the LCC model for high value military acquisitions.

The purpose of a LCC model is to estimate the overall cost that is likely to be incurred on acquisition, operations and maintenance of an equipment over its entire lifecycle. After finalising the acquisition, LCC also helps in accurate forecasting and planning year-on-year budgetary allocations required to operate and maintain the equipment during its entire lifecycle. Further, LCC helps in identifying and eliminating the probability of buying an equipment that has the lowest cost at the tendering stage but later incurs a very disproportionately high cost to operate and maintain during its lifecycle.  

Indian MoD had identified the significance of LCC and accordingly, paragraph 51 of DPP-2005 had stated “Equipment Induction Cells (EICs) will be raised for major projects on a case-to-case basis in SHQ at the discretion of SHQ. The EICs will deal with the induction of major equipment and help in planning the requirement of facilities essential for the serviceability and maintainability aspect of acquisition. The EICs will help the Defence Procurement Board to move towards the Life Cycle Cost Concept”.

The same text was replicated at paragraph 63 of DPP-2006, DPP-2008, DPP-2011 and DPP-2013. However, DPP-2016 eliminated the sentence on LCC and at paragraph 95; it had instead stated “Equipment Induction Cells (EICs) will be raised for major projects on a case-to-case basis in SHQ at the discretion of SHQ.

The EICs will deal with the induction of major equipment and help in planning the requirement of facilities essential for the serviceability and maintainability aspect of that acquisition”. DAP-2020 also does not make a mention of LCC in contrast to the earlier DPPs. Notwithstanding, all DPPs and DAP have an appendix on ‘General Guidelines for Transfer of Technology (ToT)’ and another one on ‘Guidelines and Conditions for Establishing Maintenance Infrastructure with an Indian Firm’ that cursorily mention about LCC, which has never been implemented in any acquisition thus far. 

While granting Acceptance of Necessity (AoN) to initiate the acquisition of 126 Medium Multi-Role Combat Aircraft (MMRCA) in 2007, the Defence Acquisition Council chaired by the Defence Minister, cleared for the first time, an LCC model for inclusion in the RFP. The RFP for the acquisition of MMRCA, initiated as per DPP-2006, had stipulated that the lowest cost bid would be identified as per the stated LCC model. Later the Defence Procurement Board chaired by the Defence Secretary had directed that RFP for all aircraft acquisitions would suitably adapt and include the LCC model approved for the MMRCA acquisition case.

Accordingly, RFP for the acquisition of 75 Basic Trainer Aircraft (BTA), 15 Heavy Lift Helicopters (HLH) and 22 Attack Helicopters (AH), initiated as per DPP-2008, and RFP for 56 Avro Replacement, initiated as per DPP-2011, had all stipulated that the lowest cost bid will be identified as per the stated LCC model. The MMRCA acquisition case fell through in 2015 and its RFP was withdrawn. PC-7 BTA, Chinook HLH and Apache AH were acquired using the LCC model. The contract for C-295 as a replacement for Avro has been signed recently; this acquisition too used the LCC model.

IAF Apache Attack Helicopter in flight; File Photo

The BTA, HLH and AH acquisition cases were only for acquisition of flyaway aircraft and helicopters along with their associated equipment. On the other hand, MMRCA and 56 Avro Replacement cases were for acquisition of flyaway aircraft along with their associated equipment and ToT for licence manufacturing of the aircraft in India. No participating vendor ever objected to the LCC model stipulated in the five RFPs but for some reason, the LCC model did not find favour in India and it was probably for this reason that DPP-2016 and DAP-2020 deleted the mention of moving towards the Life Cycle Cost Concept. (The author was member of Contract Negotiation Committees for MMRCA, BTA, HLH, AH and was involved in formulating and obtaining approval for the Avro replacement case)

DAP-2020 proposes Strategic Partnership model as one of the processes to focus on indigenisation and it further states that in the initial phase, Strategic Partners will be selected for the fighter aircraft, helicopters, submarines and Armoured Fighting Vehicles (AFV)/Main Battle Tanks (MBT) segments. The four segments identified for the Strategic Partnership model, in fact include the highest value military assets that not only significantly affect the operational capabilities but also incur huge expenses towards their acquisitions, operations and maintenance.

With increasing pressure on the defence budget, it would be prudent to assess the long-term financial implications of all such high-value military acquisitions on both capital and revenue budgets. The LCC model provides an effective tool to identify the expenses likely to be incurred during the entire lifecycle of such high-value military assets. LCC undoubtedly identifies the Acquisition Cost, which is the contract cost, and the subsequent costs likely to be incurred during the entire lifecycle of the equipment offered by all competing vendors.

Thus, use of the LCC model will help decision makers get a clear visibility on the operational capabilities and the long-term financial expenditure profile of the asset being acquired. In so doing, the LCC model will enable acquisition of high-value military assets that are operationally effective, most economical to operate and can be maintained efficiently during their entire lifecycle.    

In the Indian context, the LCC model for an aircraft or helicopter being acquired from a foreign vendor would include acquisition cost, cost of lifetime operations and scheduled maintenance, and cost of Transfer of Technology (ToT) whenever asked for. ToT will be the most vital constituent of any acquisition using the strategic partnership model. Cost of lifetime operations and scheduled maintenance is the most significant contributor towards expenses incurred on an aircraft or helicopter during its lifecycle and in many cases could exceed the initial acquisition cost many times over.

Majority of the maintenance cost is incurred on scheduled maintenance, which is very clearly defined and stipulated in the maintenance manuals of every aircraft and helicopter. Unscheduled maintenance can neither be predicted nor cost in anticipation. Examples of unscheduled maintenance include repair after a bird strike, heavy landing, tyre burst, lightning strike, flying through hailstorms etc. Therefore, only the cost related to scheduled maintenance that is defined and stipulated in the maintenance manuals should be considered in the LCC model.

There may be numerous viewpoints on what all elements need to be included in an ideal LCC model and it is difficult to arrive at any perfect LCC model. The emphasis should be to clearly and indisputably capture all distinct costs related to the aircraft being acquired along with estimates of lifetime expenses likely to be incurred on its operations and maintenance. Certain aircraft acquisition may require additional ‘specific to type’ institutional and infrastructural facilities to support its operations and maintenance and the additional expenses likely to be incurred towards such provisioning must also be included in the LCC.

Indian MoD in the past had specified the LCC model to identify lowest cost bids in five RFPs issued to acquire aircraft and helicopters of which four succeeded. Nevertheless, Indian MoD stopped inclusion of LCC model in its RFPs after the failure of 126 MMRCA acquisition cases even though the reason for failure of MMRCA case was linked to the ToT and not to the LCC. The benefits of using the LCC model in acquisition of high-value military assets can be best understood by analysing the types of expenditure incurred in the lifecycle of an aircraft, which will be equally applicable in acquisition of all fighter aircraft, transport aircraft and helicopters. 

We are all very familiar with the Acquisition Cost (C-1); it includes the cost of all deliverable items asked for in the RFP and later included in the contract. Normally, the deliverable items in an aircraft contract would include the number of aircraft, types and number of weapons, ground equipment, tools and test equipment for specified number of operating bases and Depot Level Maintenance, Manufacturer Recommended List of Spares (MRLS) for a five-year period, documentation, training aids, warranty for two years, training by OEM for pilots, engineers and technicians.

Except for the acquisitions of PC-7 BTA, Chinook HLH, Apache AH and C-295 as a replacement for Avro that were based on the LCC model, Indian MoD uses only the acquisition cost to identify the lowest cost bid. It is very simple for vendors to quote the acquisition cost for all deliverable items as per the format provided in the RFP and it is equally simple for the Contract Negotiation Committee to identify the lowest bid. The vendor offering the lowest acquisition cost collectively for all deliverable items asked for in the RFP emerges as the lowest bidder (L1 vendor) with whom the contract is signed after successful contract negotiation. Acquisition cost is a firm and fixed cost and the most conclusive element of LCC.

RFP for aircraft acquisition in many cases seeks ToT for license manufacturing of the aircraft and its aero-engine in India. ToT cost becomes applicable in such cases where the RFP seeks ToT and the ToT cost is included in the overall acquisition cost as ToT is a deliverable item. ToT Cost (C-2) includes cost of fully formed kits, semi knocked down kits and completely knocked down kits, material for indigenous manufacture of aircraft, tools, jigs and fixtures required for manufacturing aircraft and its aero-engine in India, licence fee for ToT, technical documentation, technical assistance, training by OEM for Indian manufacturing, supervisory and quality assurance teams.

The contract captures the scope and contours of the ToT for license manufacturing in detail. In acquisition cases with ToT, the contract includes the cost of both acquisition and ToT and notwithstanding the inter-se variations between the two costs the vendor offering the lowest cost bid collectively for both Acquisition (C-1) and ToT (C-2) costs emerges as the lowest bidder. Implementation of ToT generally requires additional expenses to bridge the technological and infrastructural gap between the capabilities and facilities existing with the Indian production agency vis-à-vis that required to manufacture the aircraft and its aero-engine.

Accordingly, the RFP needs to demand that all vendors must physically evaluate this aspect with the identified/nominated Indian production agency before submitting their technical and commercial bids. This will enable providing ab-initio full clarity on all aspects of ToT during the pre-bid meeting and obviate any ambiguities later during the contract negotiation stage. 

RFP for aircraft acquisition clearly specifies the life required in terms of both number of flying hours and number of calendar years. As an example, the RFP could specify the life of a fighter as not less than 6,000 flying hours/40 calendar years, whichever is earlier. The life specified in the RFP is also called the Total Technical Life (TTL) of the aircraft. At the end of TTL, the aircraft has to either be authorised a life extension after a thorough structural scrutiny or retired from service. The RFP could similarly specify the life required for the aero-engine(s) installed on the aircraft. The TTL specified in the RFP forms the basis for all LCC computations.

Operating Cost (C-3) is compilation of the total expenditure likely to be incurred to fly all aircraft being acquired, both fly-away and licence manufactured, for their TTL in terms of number flying hours specified in the RFP. A specific ‘mission profile’ is included in the RFP and every competing aircraft is made to fly the same mission profile during field evaluation to establish consumption of all consumables like fuel, oils and gases to compute the operating cost. Operating cost actually turns out to be only the fuel cost likely to be incurred in flying all aircraft for the number of flying hours specified in the RFP as the cost of other consumables is not very significant.

However, there could be some hidden costs while operating an aircraft. New technology permits installation of On-Board Oxygen Generation System (OBOGS) on aircraft while some aircraft continue to use either gaseous or liquid oxygen. OBOGS eliminates the need of a complex oxygen replenishment procedure before every mission and helps in quicker preparation of the aircraft for the next mission. Use of either gaseous or liquid oxygen requires a special supply chain to be sustained between the oxygen plant and each operating base coupled with the equipment required for both transporting oxygen and replenishing the aircraft throughout its entire lifecycle.

The recurring expenditure on the entire human, material and infrastructure resources involved to sustain and support the supply chain for gaseous/liquid oxygen along with its purchase cost over the entire lifecycle of a few decades would be a significant amount. It is important to formulate the RFP in a manner to obviate the chances of any hidden operating costs being missed out. Everything else being equal, the aircraft having the most fuel-efficient engine(s) will have the lowest Operating Cost (C-3).

Aircraft maintenance involves routine and regular scrutiny and upkeep of thousands of systems, sub-systems, components, Line Replaceable Units (LRU) and Shop Replaceable Units (SRU). Notwithstanding the extreme complexities involved in aircraft maintenance, all aircraft undergo preventive maintenance as per their design philosophy and the entire process is very well-defined and stipulated by its OEM in the maintenance manuals that are certified by the Aircraft Certification Agency.

Preventive maintenance is generally carried out at three distinct levels viz. Organisational Level Maintenance (OLM), Intermediate Level Maintenance (ILM) and Depot Level Maintenance (DLM). OLM is conducted at the unit/squadron level to replenish, arm and quickly prepare the aircraft after every mission for the next mission. OLM repairs are limited to the removal and replacement of failed or unserviceable LRUs with serviceable LRUs drawn from the store. ILM has scheduled maintenance carried out on each aircraft at specific flying hours/periodicity as stated in the maintenance manuals to validate the serviceability of all systems.

Certain components as specified in the maintenance manuals need to be replaced during ILM. ILM activities also include diagnostic testing and repair of failed and unserviceable items removed during OLM. ILM is carried out in specialised laboratories and workshops having automated aircraft specific test equipment/benches. ILM setup at an operating base will normally support all units/squadrons operating that type of aircraft.

DLM is scheduled maintenance carried out on each aircraft at specific flying hours/periodicity as stated in the maintenance manuals to validate serviceability and functionality of all its structures and systems. Certain structures, systems and components as specified in the maintenance manuals need to be replaced during DLM, which is carried out in highly specialised Repair Depots or at OEM facilities having diagnostic equipment and manufacturing capabilities to overhaul and upgrade equipment installed on the aircraft. 

With advances in technology, cutting-edge diagnostic tools can be imbedded in modern systems installed on an aircraft, which helps many OEMs to revise maintenance philosophy of their aircraft from three-level (O-I-D Levels) to two-level (O & D Levels) with minimal ILM. Further, many OEMs are designing aircraft and aero-engines for ‘On-Condition’ maintenance wherein the aircraft and its aero-engine do not require to go for DLM. Instead, only certain systems and sub-systems of the aircraft and its aero-engine are removed and taken up for DLM. All systems and sub-systems, as and when removed for DLM, are replaced by serviceable ones to ensure serviceability of the aircraft and its aero-engine. On-Condition maintenance significantly improves aircraft availability and mission readiness. 

Scheduled ILM Cost (C-4) is compilation of the total expenses likely to be incurred on scheduled ILM of all aircraft during their entire lifecycle. Scheduled ILM is carried out on each aircraft at the flying hours/periodicity specified in the maintenance manuals. All ILM activities to be carried out on the aircraft and its various systems, sub-systems and components that need to be replaced during the scheduled ILM are also stipulated in the maintenance manuals.

Accordingly, the number of times each aircraft will undergo scheduled ILM during its TTL and the number of systems, sub-systems and components required to be replaced during each ILM can be determined very exactly from its maintenance manuals. Therefore, expenses likely to be incurred towards scheduled ILM can be unambiguously captured for the entire fleet during its total lifecycle.

For example, a fighter designed for TTL of 6,000 flying hours and scheduled for ILM after every 100 flying hours would undergo 59 instances of ILM while another fighter scheduled for ILM after every 250 flying hours would undergo only 23 instances of ILM. The technology and material used by the OEM in the design of the aircraft and its systems determines the flying hours/periodicity at which ILM is to be carried out. Aircraft designed to undergo a lesser number of scheduled ILM would have lower Scheduled ILM Cost (C-4) during its lifecycle and an aircraft designed with a maintenance philosophy of minimal ILM will have a significantly lower Scheduled ILM Cost (C-4). 

Scheduled DLM Cost (C-5) is computation of the total expenditure likely to be incurred on scheduled DLM of all aircraft during their entire lifecycle. Like ILM, Scheduled DLM is carried out on each aircraft at the flying hours/periodicity specified in the maintenance manuals. All DLM activities to be carried out on the aircraft and its various structures, systems, sub-systems and components including the number of structures and components that need to be replaced during the scheduled DLM are also stipulated in the maintenance manuals.

Accordingly, the number of times each aircraft will undergo scheduled DLM during its TTL and the number of structures and components required to be replaced during each DLM can be determined very exactly from its maintenance manuals. Therefore, expenses likely to be incurred towards scheduled DLM can be unambiguously captured for the entire fleet during its total lifecycle.

For example, a fighter designed for TTL of 6,000 flying hours and scheduled for DLM after every 1,000 flying hours would undergo five instances of DLM while another fighter scheduled for DLM after every 1,500 flying hours would undergo only three instances of DLM. The technology and material used by the OEM in the design of the aircraft and its structures determines the flying hours/periodicity at which DLM is carried out. Aircraft designed to undergo lesser numbers of scheduled DLM would have lower Scheduled DLM Cost (C-5) during its lifecycle and an aircraft designed for On-Condition maintenance will have a significantly lower Scheduled DLM Cost (C-5).

IAF fighter photographed while carrying out a training sortie; File Photo

Military aircraft are to be kept in a very high state of readiness at all times, which can only be achieved by establishing and maintaining an efficient and robust supply chain to ensure continuous and timely availability of spare parts. Reliability of any system or component is completely dependent on the technology used and its design philosophy and in turn, the serviceability state and readiness level of any aircraft fleet is very critically dependent on the reliability of all systems, sub-systems and components installed on it. Use of the LCC model helps in obtaining very good visibility on the reliability of all systems and provides the information required to establish an efficient and robust spares supply chain.   

All aircraft are a collection of numerous structures, systems, sub-systems, components, LRU and SRU that have to be independently and individually removed at specified flying hours/periodicity and taken up for overhaul at ILM or DLM facilities as specified in maintenance manuals. Adequate spare stocks have to be maintained to replace these structures, systems, sub-systems, components, LRU and SRU whenever they are removed for overhaul to keep the aircraft serviceable and available for mission. The specified flying hours/periodicity at which overhaul is to be carried out is known as Time between Overhaul (TBO).

The technology and material used by the OEM in the design of the equipment determines its TBO; better the technology and material higher will be its TBO. Stocking spares to replace items to be removed for overhaul comes at a cost, which is known as ‘Cost of TBO Based Spares (C-6)’. Maintenance manuals specify the TBO of all items installed on the aircraft and this information can be used to identify the quantum of TBO based spares required during the entire lifecycle and in turn compute the Cost of TBO Based Spares for the entire fleet during its total lifecycle.

For example, for a fighter designed for TTL of 6,000 flying hours an equipment with TBO of 500 flying hours would undergo 11 overhauls while another equipment with TBO of 750 flying hours would undergo only seven overhauls. An aircraft having components and systems designed for higher TBO will have lesser overhaul occurrences leading to lower Cost of TBO Based Spares (C-6).

An aircraft and all its equipment have a definite technical life specified in terms of flying hours or calendar life at which the equipment is no longer airworthy and must be replaced. Such absolute technical life of an aircraft and its equipment is called Total Technical Life (TTL). The technology and material used by the OEM in the design of the equipment determines its TTL; better the technology and material higher will be the TTL. Maintenance manuals specify the TTL of the aircraft and also all its equipment, which can be used to determine the number of times an equipment needs to be replaced during the lifecycle of the aircraft.

For example, for a fighter designed for TTL of 6,000 flying hours an equipment with TTL of 750 flying hours would undergo eight replacements while another equipment with TTL of 1,500 flying hours would undergo only four replacements. Thus, expenses to be incurred on replacing all TTL based components on the entire fleet during its total lifecycle can be computed. The expenses to be incurred on replacement of equipment on expiry of their TTL is known as ‘Cost of TTL Based Spares (C-7)’. An aircraft having components and systems designed for larger TTL will have lesser replacement occurrences leading to lower Cost of TTL Based Spares (C-7).

Major cost of aircraft maintenance is incurred on replacement of failed items. Every item installed on the aircraft based on its technology and material has a pre-defined Mean Time Between Failure (MTBF), which predicts its useful life. MTBF forms the basis for spare stocking and maintaining a supply chain to sustain spare replenishment to enable unhindered serviceability of any aircraft fleet. MTBF data is used to compute the number of times an item to be replaced during the TTL of each aircraft as per its predicted useful life to prevent failure in air. The cost of such spares compiled for the entire fleet based on MTBF data is known as ‘Cost of MTBF Based Spares (C-8)’. Items with higher MTBF will need to be replaced a lesser number of times.

For example, for a fighter designed for TTL of 6,000 flying hours an item with MTBF of 150 flying hours would undergo 40 replacements while another item with MTBF of 500 flying hours would undergo only 12 replacements. The technology and material used by the OEM in the design of the item determines its MTBF; better the technology and material higher will be the MTBF.

An aircraft having items designed for higher MTBF will require lesser spares during its entire lifecycle leading to lower Cost of MTBF Based Spares (C-8). Maintenance Manuals of an aircraft specify the schedule for ILM and DLM, TBO and TTL whereas the MTBF data is generated and provided by the OEM of the aircraft. There is a possibility of inaccurate MTBF data being provided to bring down the cost, therefore, MTBF data used for cost computation must always be reinforced by a MTBF Linked Warranty by the vendor to bind him to the MTBF data provided.

Human resources, material resources, training and infrastructure are also very important cost components that can hugely affect the cost of operation and maintenance of an aircraft fleet during its entire lifecycle. A specific type of aircraft may have certain enhanced requirements to support its operations and maintenance, which if not considered at the time of acquisition, may result later in incurring of disproportionately huge expenditure in its sustenance, operation and maintenance all through its lifecycle.

These aspects need to be considered critically in the acquisition decision, as these aspects are difficult to capture holistically in an RFP. Examples of some such cost components are as follows. A two-seat fighter vis-à-vis a single-seat fighter would necessitate an increased pilot intake, which in turn would demand increased number of all types of trainer aircraft for each stage of flying training, additional accommodation for increased number of trainee pilots and instructors at all flying training sites and for increased number of pilots in all operating bases.

In addition, it will entail additional recurring cost towards monthly pay and allowances for increased number of pilots. Similarly, some aircraft may require more maintenance personnel vis-à-vis another aircraft, which in turn would necessitate an enhanced number of engineer and technician trainees leading to additional accommodation for trainees and instructors at all training sites and for increased number of engineers and technicians in all operating bases.

In addition, it will require additional recurring cost towards monthly pay and allowances for an increased number of engineers and technicians. Some fighters could be larger in comparison to most fighters operated by India; this in turn will impose the need to construct new larger sized hangars, tarmacs, aircraft servicing facilities, blast protection shelters and hardened aircraft shelters in all operating bases at huge costs.

There are several variables in the life of an aircraft but the variables are least at the time of acquisition. The LCC model (C-1 to C-8 costs), as explained earlier, helps compile and compute all tangible cost components explicitly and gives a very reasonable and clear indicator of the Life Cycle Cost likely to be incurred towards both capital and revenue expenditures in operating a given fleet over its entire lifecycle. All costs from C-1 to C-8 would actually be incurred in different periods in the future but these costs have to be computed at the present value for the purpose of comparison of cost bids in a multi-vendor scenario and also to retain the offered costs as a benchmark price for all future purchase of spares.

The MTBF data gives a very good visibility on the reliability of the aircraft and its systems. The contract for an aircraft acquired using the LCC model would contain the regular details and descriptions of all contracted deliverable items, delivery and payment schedules like any other contract. In addition, the contract entered using the LCC model will also contain annexures stipulating the data related to fuel consumption, ILM, DLM, TBO, TTL and MTBF that were used to compute the LCC.

Further, the contract will also include the price of all items as used while computing the LCC along with indices based escalation formulae to be used for spares procurement in the future. Thus, LCC will help in providing greater visibility on reliability and capital and revenue expenditures to be incurred over the lifecycle of an aircraft fleet. Similar LCC models could be evolved for ships, submarines, AFV and MBT.

If there is a need to compute LCC for an aircraft to be indigenously developed then the LCC model will include an additional cost component to capture the expenditure likely to be incurred on Design and Development (D&D) of the aircraft and depending on the specific case ToT component may or may not be applicable.

Presently, there is a requirement/practice of obtaining two distinct approvals for acquisition of indigenously designed and developed products; initially for the R&D phase and later for the acquisition after completion of successful trials. LCC cannot be computed for a D&D aircraft if the numbers to be produced are not known, therefore, to compute the LCC for an aircraft to be indigenously developed, the number of aircraft to be produced and inducted has to be predicted and stated upfront. 

DAP-2020 proposes a Strategic Partnership model for acquisition of fighter aircraft, helicopters, submarines, AFV and MBT. Considering the very high value of these military assets it would be beneficial to determine the best bid using the LCC model as it provides better visibility into reliability, operations and maintenance costs to be incurred in the entire lifecycle, capital and revenue cash flows required during the entire lifecycle for better budgeting by definitively capturing these aspects at the time of the initial acquisition.

An acquisition using the LCC model captures the cost of every element installed on the aircraft at the present value in the contract, which can be used as a benchmark price for purchase of spares in the future using indices based escalation formulae. This will, thus, prevent the OEM exploiting a captive customer at a later stage. The benefits that accrue by using the LCC model far outweighs the doubts and suspicion created by many naysayers and India needs to reconsider using the LCC model for all high value military acquisitions particularly for the ones being acquired from foreign OEMs.

Air Marshal SBP Sinha PVSM AVSM VM (Retd) is former Deputy Chief of Air Staff and Air Officer Commanding-in-Chief of Central Air Command. He currently holds the DRDO Chair (Prof MGK Menon Chair)


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