IMPORTANCE OF LIFE-CYCLE COST
In view of limited financial resources and consequently low budgetary allocations for defence, it would be necessary to factor in life-cycle cost in the selection of defence equipment
The expression ‘Life-cycle Cost’ related to military hardware, whether a tank, warship or aircraft, pertains to the total cost of initial acquisition of the equipment, expenditure on maintenance for it to remain fit for operational deployment and the cost of operating the equipment over its entire life as defined by the original equipment manufacturer (OEM). This concept would apply also to all other military systems including software-based equipment such as command, control, communications, computers, intelligence, surveillance and reconnaissance (C4ISR) systems. In other words, life-cycle cost refers to the cost of particular military equipment and the supporting elements over their entire life from ‘cradle to grave’.
The methodology of computing the total cost of ownership of defence equipment acquired through either development within the country or through imports, was originally evolved in the early 1960s by the US Department of Defense. It has since then been adopted by various countries, such as the United Kingdom, Australia and more recently by India as well. Also, with the ever tightening control on defence expenditure and shrinking defence budgets of nations across the world, reduction of life-cycle cost has become an inalienable imperative. Ways and means of reducing life-cycle cost has been an area of ever-increasing focus of global aerospace majors to remain competitive and also by the user nations to remain within the bounds of financial affordability.
When a nation procures defence equipment in sizeable numbers, it may be advantageous for the buyer nation to also set up the facilities to assemble or manufacture in-house a major portion of the total number of units contracted for, acquire the latest technologies through transfer of technology, obtain the necessary documentation and have adequate number of personnel trained to respectable proficiency levels. For example, in the tender for the 126 Rafale combat jets for the Indian Air Force (IAF) from Dassault, the OEM was required to supply 18 aircraft directly in flyaway condition. The remaining 108 platforms were to be manufactured in India in collaboration with an Indian partner. Apart from the fact that this arrangement would have contributed to reduction in the unit cost of the equipment, the manufacturing facilities established in the process would have later undertaken manufacture of spares and would have provided maintenance support for the fleet throughout its service with the IAF as well as would have undertaken midlife upgrade thus reducing life-cycle cost significantly. Unfortunately, this particular tender proved abortive.
However, there is similar arrangement with the ongoing contract with Sukhoi of Russia in case of the Su-30MKI fleet of 272 aircraft of which only 40 have been received directly from the OEM in flyaway condition and the remaining are being manufactured under licence by the Indian aerospace major the Hindustan Aeronautics Limited. The offer from Airbus-Tata Advanced Systems Limited consortium to supply 56, C-295 medium-lift military transport aircraft to replace the ageing fleet of Avro aircraft in the IAF is also formulated on similar lines with 16 aircraft supplied directly from the Airbus factory in Seville, Spain, and 40 platforms to be manufactured within the country at a facility yet to be set up.
As is generally the case, the initial cost of acquisition of military assets is high. One of the reasons for this is the relatively lower volumes of production when compared with non-military hardware. The total quantities produced are low primarily because the demand is low and there are a number of impediments, political or otherwise, in promoting global trade of military equipment. Besides, the cost of operating and maintaining military equipment over its complete life-cycle which may extend up to 40 years or even more, is in fact much higher than the initial acquisition cost. This is one of the important factors that should and must be taken into account in the process of selection of the equipment. For example, the cost of operating the fifth-generation combat aircraft like the Lockheed Martin F-22 Raptor works out to $44,000 per hour. As against this, the cost of operating the fourth-generation combat aircraft Gripen from Saab of Sweden is only $3,000 per hour. The question for a nation scouting the global market for combat aircraft then boils down to whether it must go for the F-22 Raptor or make do with the Saab Gripen.
In the procurement of a military aircraft therefore the decision must not be based on the initial procurement cost alone. While the low price quoted for a particular piece of hardware may appear attractive, its life-cycle cost may turn out to be much higher than that of an equivalent platform where the significantly higher unit cost is more than compensated for by the much lower life-cycle cost. European and American military aircraft generally fall in the latter category, i.e high unit cost but much lower life-cycle cost.
The difference in the total operating cost over the complete lifecycle of the two aircraft would be important from the point of view of affordability and limitations of future budgetary support. In view of limited financial resources of the nation and consequently low budgetary allocations for defence, it would be necessary to factor in the life-cycle cost in the selection of defence equipment whether for import or domestic production.
Finalisation of contract for Airbus A330 MRTT selected for the IAF long ago is delayed possibly due to lack of understanding of ‘life-cycle cost’