Friday, 24 November 2017

Part 2: How much did the Rafale actually cost?


By Ajai Shukla
Business Standard, 24th Nov 17

Has the Indian Air Force (IAF) paid more per Rafale fighter than what Prime Minister (PM) Narendra Modi had undertaken in Paris whilst announcing his agreement with French President Francois Hollande to buy 36 aircraft from French vendor, Dassault?

On April 10, 2015, standing beside Hollande, Modi declared: “Keeping in mind the critical operational necessity of fighter aircraft in India, I have discussed with the [French] President the purchase of 36 Rafale fighters in ‘fly-away condition’ at the earliest through an Inter Governmental Agreement. We have both agreed that these would be supplied on better terms and conditions than were offered to India in a separate procurement process (emphasis added).”

The “separate procurement process” Modi referred to was an on-going tender the IAF issued in 2007 for 126 medium multi-role combat aircraft (MMRCA). In response to that tender, Rafale had submitted a commercial bid in 2008-09, quoting a price for 18 Rafale fighters “in fly-away condition”, and 108 fighters to be built in India.

Now the Congress Party alleges that the Modi government, in buying 36 Rafales for Euro 7.8 billion ($9.2 billion, Rs 58,000 crore), paid more what Dassault had quoted in the MMRCA tender. If that is the case, the PM’s public commitment was violated.

In the absence of government figures, analysts must extrapolate from other available, if less authoritative, sources. Defence Minister Nirmala Sitharaman committed at a press conference on Friday that the Rafale bid figures would be publicly released. Despite subsequent requests from Business Standard, no figures have been forthcoming.

A full breakdown of figures is essential because the total cost of a fighter contract includes -- besides the cost of the aircraft – also costs related to technology transfer, spare parts, weapons and missiles, added on equipment and maintenance costs. A valid comparison, on an apples-to-apples basis, requires “non-aircraft” costs to be isolated from the price being paid for the aircraft.

Cost of the current deal

Fortunately, authentic figures are available for the Euro 7.8 billion contract, signed in 2015, for 36 Rafales. Soon after the contract was signed, a senior political leader in the National Democratic Alliance (NDA) held an off-the-record briefing in New Delhi for several journalists, including this correspondent (see chart below).

Cost breakdown of Modi’s 36-Rafale contract

Expenditure item
Details of expenditure
Cost



Cost of aircraft





Single-seat Rafale fighters
28 @ Euro 91.07 million each
Euro 2.55 billion
Twin-seat Rafale fighters
8 @ Euro 94 million each
Euro 0.75 billion
India-specific enhancements
Helmet sights, radar receiver, radio altimeters, Doppler radar, cold start
Euro 1.7 billion



Total cost of 36 fighters

Euro 5.0 billion



Cost per fighter
Averaging for single/twin seaters
Euro 138.9 million



Cost of weaponry





Including Meteor, SCALP missiles
Total cost of weapons, mainly from French firm, MBDA
Euro 700 million



Maintenance expenses





Spare parts and items
Needed to keep aircraft flying
Euro 1.8 billion
Performance based logistics
Guarantee of 75% availability
Euro 350 million



TOTAL COST
Aircraft cost plus add-ons
Euro 7.85 bn



It was divulged that the contracted price averaged out to Euro 91.7 million (Rs 686 crore) per Rafale aircraft. This included the purchase of 28 single-seat fighters for Euro 91.07 million (Rs 681 crore) each; and eight twin-seat fighters, each priced at Euro 94 million (Rs 703 crore). That puts the cost of each of the 36 “bare bones” fighters at Euro 91.7 million (Rs 686 crore) – totalling up to Euro 3.3 billion.

Besides this, the IAF paid Euro 1.7 billion for “India-specific enhancements”, Euro 700 million for weaponry like Meteor and SCALP missiles, Euro 1.8 billion for spare parts and engines, and Euro 350 million for “performance based logistics”, to ensure that at least 75 per cent of the Rafale fleet remains operationally available. All this added up to another Euro 4.5 billion, taking the cost of the contract up to 7.85 billion.

A key question is: how much of the “additional costs” are actually part of the aircraft? Most aerospace industry executives agree the “India-specific enhancements” are a part of the Rafale operational platform and should be included in its price. These enhancements include a “radar warning receiver” to detect enemy radar and “low band jammers” to foil it; a radio altimeter, Doppler radar, extreme cold weather starting-up devices for airfields like Leh, and “helmet mounted display sights” that let pilots aim their weapons merely by looking at a target.

Adding the Euro 1.7 billion for “India specific enhancements”, the payment made for the aircraft goes up to Euro 5 billion, averaging out to Euro 138.9 million (Rs 1,063 crore) per Rafale fighter.

Cost of 126-aircraft MMRCA deal

While it is inadvisable to directly compare two differently structured contracts – one involving manufacture in France and the other, manufacture in India with transfer of technology – an apples-to-apples comparison can be made with Dassault’s pricing in the MMRCA tender that quotes for 18 fighters in “fly-away condition”.

Other than that, the only authoritative indicator of Rafale’s bid in the 126-fighter MMRCA contest has come from Manohar Parrikar, while he was defence minister. Talking to Doordarshan on April 13, 2015, he quoted a figure: “The Rafale is quite expensive. As you go into the upper end, the cost goes up. When you talk of 126 aircraft, it becomes a purchase of about Rs 90,000 crore.”

While this figure would include elements of technology transfer and manufacturing infrastructure creation, Rs 90,000 crore for 126 Rafales translates into an indicative cost of Rs 714 crore per fighter – significantly lower than what India is paying now.

“The most valid comparison is with 18 fly-away Rafales in the MMRCA tender. The government should make those figures public”, says an aerospace company executive.

French pricing for Rafale


Unit acquisition cost
Loading development cost (Euro 87.5 mn)
French Senate 2014





Cost of Rafale B (twin-seat)
Euro 74.0 million
161.5 million
Cost of Rafale C (single-seat)
Euro 68.8 million
156.3 million
Cost of Rafale M (marine)
Euro 79.0 million
166.5 million



Egypt buy (24 fighters)





24 fighters for Euro 5.2 billion
Cost of “bare bones” fighters hard to assess

Loaded cost is Euro 217 million per Rafale
Qatar buy (24 fighters)





24 fighters for Euro 6.3 billion
Cost of “bare bones” fighters hard to asses

Loaded cost is Euro 262 million per Rafale

The French Senate periodically issues authoritative figures for Rafale pricing. The most recent figures, from 2013-14, put the acquisition cost per Rafale at Euro 74 million (Rs 566 crore) for the Rafale B (twin-seat version); Euro 68.8 million (Rs 527 crore) for the Rafale C (single-seat version); and Euro 79 million (Rs 605 crore) for the Rafale M (aircraft carrier version). These prices are significantly lower than what the IAF is paying for the Rafale.

The reason could be that France expects India to pay a significant share of the Rafale’s development costs. A Business Standard analysis of official French Senate figures indicates that the Euro 45.9 billion cost of the Rafale programme consisted of two components: Euro 25 billion for design, development and testing costs, and Euro 20.85 billion for building 286 Rafales for the French air force and navy.

Without factoring in export orders and assuming the French military will eventually buy 286 fighters (so far, it has only ordered 180), it amounts to a developmental cost of 87.5 million (Rs 670 crore) per Rafale – more than its manufacturing cost.

Loading design and development costs onto the manufacturing cost of the aircraft, the French cost per Rafale rises to an average of about Euro 160 million (Rs 1,225 crore). In paying close to Euro 138.9 million (Rs 1,063 crore) per fighter, the IAF is obtaining only a Euro 21 million (Rs 161 crore) discount on the Rafale’s fully discounted price. The IAF, therefore, is effectively subsidising French aerospace R&D and industry.

Egypt, Qatar deals

Can the price the IAF has paid for the Rafale be compared with the price the other two buyers – Egypt and Qatar – have paid? While such a comparison would face the same pitfall of not knowing what each of those contracts includes, on the face of it, both those buyers are paying prices similar to, or higher than, the IAF.

The Egyptian Air Force has paid Euro 5.2 billion for 24 fighters and is reportedly considering buying 12 more, a “fully loaded cost” of Euro 217 million per Rafale. Similarly, the Qatar Air Force has paid out Euro 6.3 billion for a similar number of aircraft, with a “fully loaded cost” of Euro 262 million per fighter.


(Tomorrow: “How a cheap, single-engine MiG-21 replacement fighter became the exorbitant, nuclear-capable Rafale)

13 comments:

KK said...

Shukla,

You are getting confused in the price factor. Take an example, each C-17 Globemaster aircraft costed US$ 218 million in 2008. India bought ten C-17 for US$ 4.1 billion, so US$ 410 million per aircraft, including costs of infrastructure, PBL everything. So your comparison of 74 million per aircraft of French Air Force is weak.

On India specific modifications, the price is not big. UAE bought F-16 E/F desert falcons with UAE specific modifications. They paid US$ three billion in 2003 to get their modifications.

Rafale is a good and cheap deal. Ideally Egypt and Qatar should be crying hoarse over higher pricing. Your confusion in unwarranted.

Anonymous said...

Excellent articles. Well researched and written. Puts many of us to shame.

Prasun

Krishna said...

How would paying 1.7 billion Euro to integrate HMDS, radar receiver, radio altimeters, Doppler radar, cold start, IFF etc. contribute to developments costs already incurred on the Rafale? It costs time and money to integrate these stuff into Rafale and India is financing their integration.

The development cost that India is paying should be calculated by subtracting the unit cost that India is paying, with the unit cost for the French. The French cost was also given in 2013 Euro, which should be inflation adjusted to 2016 Euro.

This brings the unit cost of Rafale B to 74.52 million (2016) and Rafale C to 69.28 million (2016) Euro. Subtracting it with what India paid i.e. 94 million and 91.07 million, we get a development cost of 19.48 million for Rafale B and 21.79 for Rafale C. Subtracting them with 87.5 million (2013) converted to 88.1 million (2016), we get a discount of 68.6 million for Rafale B and 65.7 million for Rafale C. This is three times the 21 million Euro figure that you arrived at.

Leaving the bean counting aside, the final allegation is that IAF is subsidising the French R&D industry. To answer this, we must first answer if any foreign armament can be bought without contributing to development costs or their profits in any way? These companies are not charities, they will always charge us development costs and make profits from arms deals.

The only way to avoid paying these costs is to make our own fighters. Sadly, the IAF has an institutional aversion to HAL and DRDO, which prevents us from going for incremental improvements to Indian fighters like Tejas Mk. 2 over an imported Single Engine Fighter, one of which was roughly in the same development stage as Tejas Mk. 2 when the Single Engine Fighter program was conceived. Of course HAL, DRDO and MoD are to be blamed for this mess too, they have always over-promised and under-delivered.

Anonymous said...

we have to bear in mind that the cost involved is for full life of the aircraft. Also if we buy another lot then the prices will be lower as the development cost would not apply. But I agree that the GOI must give the price break up. Historically is there any contract where the price break up is available? Whether Scorpene or Su-30mki or any contracts with Russia and Israel, I don't think price info is available. sadly the trend will continue forever.
But I doubt there can be corruption in a G2G contract that too with France.

Anonymous said...

I liked the article , Ajay that was excellent. Infact the present government got a good deal in purchasing of rafales. I did not like the mirage upgrade that was negotiated at 45 million each without AESA radar when you devlop Tejas MK2 with GE 414 EPE engines that would cost about 30 million each and would outperform the Mirages in almost every aspect.

TIMBAKTOO

VIKRAM PRASAD said...

The R&D COSTS WILL BE BUILT IN THE AVERAGE COST OF UNITS SOLD. SO A F16 WHICH HAS SOLD SAY 3000 FIGHTERS WILL HAVE A MUCH LOWER R&D COST PER UNIT

WHILE THE RAFALE HAS AT BEST SOLD 400 UNITS SO R&D COSTS WILL BE MUCH HIGHER

Anonymous said...

@KK, Check what the UAE got with their F-16's though. They got a more powerful engine, a brand-new AESA radar that was paid for by them (and operational around the same time the USAF declared its F-22s operational), a digital, AESA based Elecronic-warfare and electronic attack suite which was created from scratch for them, and integrated onto the aircraft. They also integrated an IR navigation and targeting systems. Most of these things did not even exist prior to them paying for its basic research and development. On the rafale, the AESA is standard, as it exists on the French new builds. There is a new HMD system but it is not being developed, just integrated. No one with any sort of objectivity would equate these two things as the same.

Regards,

Rao

Anonymous said...

How come there is no mention of support by French for 40 long years, that includes a great deal of spares too?

There was also talk of the price including 20 additional engines as "spares".

It is amazing that you quote the prices paid by other countries at the bottom almost as a footnote.

Hope it serves as an antacid for those with bile issues after reading your hatchet job on the Rafale deal.

This was more of Congress-Batting, BJP Flame Baiting than anything else.

Mission accomplished.

Zela Thar said...

Rafale of F3R standard already has IFF, RWR,Radio altimeter..

A K said...

Thanks for a comprehensive and critical analysis, I must point out that you have missed below points, which favours UPA Govt.:

1. It'd be more appropriate to call out the date of RFI too (2004). In fact requirement of 126 MMRCA came in 2001 itself. From 22 May ’04 to 26 May ‘14, UPA has been in power. All the delay since floating of RFP (2007) cannot be attributed to IAF alone. Executive under which IAF functions must take the responsibility for not expediting it.

2. Base price of Qatar deal ($101m/plane) is available since 7 Dec 2017 (within few days of your post).

Qatar, on 4 May 2015, ordered 24 Rafales for €6.3b ($7.02b) with extensive weapons and training package with follow-on order, exercised on 7 Dec 2017, for 12 Rafales (plane only) for €1.1 billion ($1.22 billion). Cost of each loaded plane and base plane comes to $293 m and $102m respectively.
Source: Rafale Wiki
https://en.wikipedia.org/wiki/Dassault_Rafale#Qatar

Egypt, on 16 Feb ‘15, ordered 24 Rafales for €5.2b ($5.9b) with moderate weapons package and support - negotiations for follow-on orders are WIP. Loaded cost per cost is $245.8m.
Source: Rafale Wiki
https://en.wikipedia.org/wiki/Dassault_Rafale#Egypt

3. Base price (Rs. 670Cr at prevailing exchange rate of Nov 2016 i.e. $100m @ Rs.66.7/$) of each plane (without associated equipment, weapons, India specific enhancements, maintenance support and services) has been made available by GoI on 18-Nov 2016 and again on 9th Mar 2018 in the Parliament and this is not called out. UPA Govt. can easily quote the price of the 18 fly-away planes to be imported, but it is clouded in the politics around it.

India, on 23 Sep 2016, ordered 36 Rafale for €7.8 billion ($8.7 billion / Rs. 58,000 Cr) which comes to $241.6m per loaded plane. This price includes armaments (Meteor and Scalp), avionics, India specific enhancements, performance based logistics, support & maintenance for 5 years with 75% guaranteed availability, training and 50% offset with 30% to DRDO with ToT/partnership in strategic areas of engine, radar, EW Suite, active/passive stealth and avionics.

4. Similar (exact may not be possible) UPA fig of Rs. 526 Cr (few quoted Rs. 570 Cr) comes to about Rs. 745 Cr ($111.7m) on account of 16.5% escalation for inflation and another 21.5% for forex rate (Dec '12: 1 USD = 54.9 and Nov '16: 1 USD = 66.7 INR) which is Rs. 75 Cr more than NDA fig of Rs. 670 Cr.

Ideally it should have been compared with the per plane cost of the 18 planes to imported in the fly-away conditions where UPA and sadly even NDA are silent.

5. Now we can safely conclude that both base ($100m) and loaded ($241.6m) rates are lower than that of Qatar (loaded - $293m/plane, base - $101m/plane) and Egypt (loaded - $245.8/plane) even if we discount inflation for 2.5 years or MMRCA 1.0 ($111.7m). On top, Indian price includes India specific enhancements, 50% offset with 30% in strategic areas with DRDO and performance linked support with 75% guaranteed uptime, which are not part of Egypt or Qatar pricing.

6. Other comparisons are possible, if one were to estimate the total cost of MMRCA 1.0 and cost of 126 planes under this deal under follow-on orders. One can compare. As per MMRCA Wiki, estimated value of MMRCA 1.0 would have $28-30B and per plane cost would have been around Rs. 1500/Cr. In my estimates, at least 50% of Rs. 941 Cr ($141m) being the cost of the supplementary systems per plane may not be required in follow-on orders and cost per loaded plane will not exceed say Rs. 1,140 Cr per loaded plane. Even from this perspective, the deal seems better to me.

7. Finally Arup Raha (IAF Chief, 31-Dec 13 to 31-Dec 16,; appointed by UPA), part of the both negotiation teams and subject matter expert, has been on record saying that the current deal is cheaper and for a better plane. I’ve indicated his appointment by UPA to indicate his neutrality (though IAF chiefs are all apolitical and neutral).

beekay said...

Has IAF done trials of Helmet sights, radar receiver, radio altimeters, Doppler radar, cold start?
Was there any procurement procedure/proposal of these add-ons pending when second deal was finalised?
Are you sure they were not included in old deal?

beekay said...

Why details of deal were revealed in off-the-record briefing ,but not in Parliament?

Ajax said...

so if the prices are comparable to what egypt or qatar paid, then where is the problem? Also, ambani has recently stated there is no manufacturing deal as alleged.
It appears the MMRCA that the french negotiated was a very low deal, the french co. did it at the time because they had no orders. So MMRCA would have been a large contract to keep them busy for years. However, the indian selection process and the rafale winning it did attract attention from egypt, qatar, malaysia etc so these countries also opted for the rafale, confident that the indian selection process was exhaustive. The indians on the other hand failed to exercise their option to buy under the conditions of the mmrca. Having failed, the indians cannot now say they are entitled to the sweet/low pricing they had earlier. Its no different than an individual failing to buy a real estate property under an agreement to purchase in a timely way and the price has gone up due to demand, so the seller does not feel obligated. India was also highly unreasonable in expecting rafale to take responsibility for quality of aircraft manufactured by HAL when HAL is not under rafale control. Rafale should have been left free to choose their own partner, or even to set up a 100% owned indian operation. That was the only fair and reasonable thing, if dassault was expected to take responsibility.
The other issue is so called transfer of technology. Lets be clear that nobody in the world is simply going to part with intellectual property or trade secret info and most certainly dassault did not intend to part with design information, It is as ludicrous as expecting microsoft to make the source code of its bestselling software public to the indian govt just because the indian govt may have been interested in buying several units of its software products.
All in all,your article is rather poor for missing these insights.