The acquisitions manager read out in broad terms the financial terms offered by the two sides. As the executives took notes furiously, it dawned that the formulae for pricing the aircraft presented by each was so complicated that it would take weeks to determine the values.
“There is no such thing as a sticker price,” said one officer. “You don’t buy aircraft like oranges, by the kilo.”
He explained why it could take up to six weeks – may be till the end of December -- to determine the lowest bidder. “It’s a price for the whole package,” he said.
For the first 10 to 12 days, Air Headquarters expects there will be much back-and-forth between the IAF and the companies as clarifications are sought. The meeting determined that the financial bids would be tied to the price of the dollar quoted by State Bank of India’s Parliament Street branch on November 4.
The IAF has sought financial quotes in eight categories, called M1 to M8. M1 is the “unit flyaway cost”, the price of each of the first 18 aircraft to be purchased “off the shelf”.
M2 asks for the lifecycle costs – the price of running the equipment over their lifespan of 6,000 hours – of the different components that make up the aircraft (engines, airframe, weapons pods).
M3 is “operational cost”. M4 asks for the lifecycle costs of spares, fuel usage, a “mean time between failures” (MTBF), and lubricants.
M5 and M6 are the estimated costs of overhaul and mid-life upgrade. M7 is the cost of the technology that the maker will transfer to Hindustan Aeronautics that will set up the assembly line were the Typhoon or the Rafale would be made under licence. M8 is the computation of total costs.
The formula for computing the costs has an escalation cost, net present value and discounted cash flow built into it, a financial expert said.
Air force officers, however, worry that formulae have a way of getting disrupted in the acquisition process because they get complicated by the pressures of diplomacy and/or under-the-table processes. On the other hand, they also say that if India were to award such a huge deal to a country or a collection of countries, it would be foolish to not extract diplomatic and political mileage out of the deal. Compounding all of this is the IAF’s dire necessity for the aircraft as it stretches its assets – such as the outdated MiG 21 that make up a bulk of its inventory -- well beyond their prescribed lifespan.
, might come in handy for some other unlucky country with massive bureaucracy in case they have to select fighters in large numbers.