Fasgaya – Rafale Price we paid is more by 41% per jet: is this a fact or fiction?

14 MARCH 2019

Rafale

  

A lot has been talked and written about the price of Rafale.

I wanted to get clarity on the claims and counter claims as an ordinary citizen of the country by going to the root of these claims. I am an engineer and a general management professional. I started thinking from the fundamentals:

Let us assume that the price of a Rafale with no India-specific add-ons- what is called the basic price- is x.

Let us assume price of India -specific add-ons unique to india features is y and let us also assume the one time charges for designing and developing the India-specific features over and above the basic jet is z.

The total cost per jet is: x+y and the one-time development cost is z; the total outflow from India is therefore No. of jets bought multiplied by (x+y) plus one time development cost z. The cost per jet is and will remain only x+y and it won’t be {(x+y + (z divided by the no. of jets bought)}. This is because the development cost being a one-time cost cannot alter the price per jet whether we buy one jet or a thousand jets. Thus for example if we had gone for a thousand jets the cost per jet would still be (x+y) and not one rupee more. However the total outflow from India would have been 1000 multipled by (x+y) plus z Rs.

Let us see how much would have been the outflow from India under UPA which would have, if ever, have bought 126 jets:

126( x + y) +z

The outflow from India under NDA, which bought 36 jets, would have been 36multipled by ((x+y) plus z.

36(x + y) + z

The difference = {126(x +y)+z} –{36(x + y)+ z)} = 90(x+y) and we would have got 90 jets more, had we paid this 90(x+y). It is significant to note that z does not play any role in the per jet price. Now if NDA govt. decides to buy more identical Rafale jets it is getting, it has to pay whatever number it wants multiplied by (x+y) and nil towards z.

By paying this 90(x+y) additional, UPA would have got 90 more jets. If NDA pays 90x(x+y) more NDA would get 90 more jets as well.

Whether you get 126 jets or 36 jets, you have to pay an amount towards design and development of z only and not one rupee more or less. Can we say the NDA govt. -going by the assessment of IAF at present- went in for only 36 jets instead of 126 jets and saved the country 90x(x+y) Rs?

It is unfortunate that the Hindu out of all newspapers committed such a fundamental mistake of distributing a one-time fixed cost z over the number of jets bought and arrived at a figure of 41% excess ‘cost’ per jet. It is a fundamental mistake in costing to distribute a fixed cost over a variable number bought and claiming that each jet costs more or less. More than anything it showed the ignorance of the author of the article N.Ram on costing that resulted in millions of readers of the Hindu losing faith in the fairness of the Hindu that it had established for decades of its existence.

When NDA went in for 36 jets it is not with a view to inflate the cost per jet and pay more to Dassault but, may be, the Airforce’s requirement would have changed from UPA days to NDA days because of strategic factors best known to IAF only. If the purpose served by 126 jets can be served by only 36, why spend an additional 90 multiplied by (x+y)? Also may be the money saved namely 90 multiplied by (x+y) would be spent on a superior technology jet in the future,

You can always get a basic jet for x. Even NDA would get this price for a basic jet. If they want to get jets with India specific additions they have to pay y in addition to x per jet, whether it is NDA or UPA. The one time design and development charges will have to be paid whether you buy just one jet with india specific additions or one thousand! So the charge that NDA allegedly paid more per jet is ridiculous and based on not understanding the one-time fixed nature of design and development costs as different from the variable costs associated with the basic jet and fitting it with the india-specific requirements.

And when CAG says the total outflow is less by 2.3% we should go by it as they are the experts on costing and not Ram of the Hindu. Whether Ram did it out of ignorance of basics of costing as to the difference in nature between fixed one-time cost and variable cost or because of motivation from quarters who are against the ruling govt., or both, what the Hindu published as the headline Modi’s decision to buy 36 Rafales shot the price of each jet up by 41% is ridiculous to say the least and is condemnable because it misleads the public – whom the media are supposed to serve by informing them correctly and not by gaining sensationalism – an act the Hindu never indulged in for a century of its existence but which it frittered away in just one day thru an article by N Ram.


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