NOT SO HAL AND HEARTY
Was the public sector giant shortchanged in the Rafale offsets deal?
CCongress president Rahul Gandhi continued his barrage against the Modi government’s purchase of 36 Rafale fighter jets with a strategically-timed public meeting. He addressed over 100 workers of PSU monolith Hindustan Aeronautics Limited (HAL) outside their corporate headquarters in Bengaluru on October 12. Rahul’s public meeting came just a day after Union defence minister Nirmala Sitharaman’s trip to Paris for the annual India-France defence dialogue, where she was photographed at a Dassault facility assembling Rafale jets for India. ‘HAL is India’s strategic asset. The future of India’s aerospace industry has been destroyed by snatching Rafale from HAL and gifting it to Anil Ambani,’ he tweeted. At the meeting, Rahul called HAL a ‘temple of modern India’, a line his greatgrandfather coined for India’s
public sector undertakings. Rahul was batting for the desi PSU giant while the government favoured foreign company Dassault and its Indian partner Reliance Defence, which he alleged was getting all the (offsets) business worth Rs 30,000 crore from the Rs 59,000 crore jet deal. The offsets are in fact being split between the four partners in the contract—Jet designer and integrator Dassault, electronics firm Thales, engine maker Safran and weapons maker MBDA, who will tie up with their Indian partners. HAL has partnered with Safran for the offsets, several of which are still being negotiated. (Dassault CEO Eric Trappier clarified on October 12 that Reliance would get only 10 per cent of the company’s share of offset contracts, estimated to be Rs 6,500 crore.)
HAL is now caught in a bitter political crossfire, with the Congress alleging the NDA had cut it out of the 126 Rafale deal it was negotiating with the off-the-shelf purchase. Sitharaman seems to blame HAL and the UPA when she told wire service PTI that the deal to license-produce Rafales (scrapped in 2015) fell through because “if the aircraft were to be produced in India, a guarantee for the product to be produced was to be given. It is a big-ticket item and the IAF would want the guarantee for the jets. HAL was in no position to give it. The then (UPA) government could have come forward and pumped in resources into HAL, but they did not”.
At his annual Air Force Day press conference, Air Chief Marshal B.S. Dhanoa reeled out the IAF’s list of gripes against HAL, specifically a list of delayed aircraft programmes
(see Customer Unhappy). The timing of all this makes HAL employees believe the government and IAF are out to make them the fall guy. Ominously, they point to how Sitharaman has not visited any of their facilities in the 13 months she has been in office. The buzz at the HAL offices now is an event where the defence minister will hold centre stage—Aero India 2019—the defence aerospace exhibition in February next year. At least 500 employees are involved in organising the event, even though the MoD has a Defence Exhibition Organisation for the purpose. “We are an engineering firm, why are we being the MoD’s event management agency?” asks a senior HAL officer.
A GREY FUTURE AHEAD
Balance sheets suggest that India’s aerospace giant is going great guns. The company recorded its highest ever turnover of Rs 18.284 crore this year, its Rs 2,070 crore profit (after tax) a modest 3.86 percentage
Sitharaman has not visited a single HAL production facility in the 13 months she has been in office
points increase over last year. But these figures hide what one company official says is HAL’s existential crisis—there are no new orders for license-producing fighter aircraft. Its cash cow, the formidable Su-30MKI being license-produced since 2003, will cease production in 2020 when the last batch of 44 jets is delivered to the IAF.
The mismatch between the NDA and UPA years becomes evident when one looks at the orders placed between 2004 and 2018. Between 2004 and 2014, HAL received orders of Rs 1.06 lakh crore for Su30MKIs, engines, Light Combat Aircraft (LCAs), Hawks, Dorniers, Jaguars and Mirage upgrades and advanced light helicopters (ALHs).
Between 2014 and 2018, it received orders of just Rs 26,570 crore. It has yet to receive orders worth Rs 62,900 crore for the 83 LCA Mark-1As, Rs 2,700 crore for the 15 Light Combat Helicopters and a Rs 10,200 crore order for 150 AL31FP engines for the Su-30MKI.
HAL, the largest of India’s nine defence PSUs, was set up to build fighter aircraft in 1964 after the India-China border war of 1962 as the Indian government scrambled to meet the military threat from China. It began to license-produce fighter jets for a rapidly expanding IAF. Ever since, over 70 per cent of HAL’s established capacity is devoted to making fixed wing aircraft, including fighters.
The current run of fighter jets—44 Su-30MKIs and 20 LCAs—will be completed by 2020. After that, HAL is staring at an abyss. It is a dilemma the stock market has sniffed out too. The MoD offloaded a 10 per cent stake of its company, valued at Rs 4,230 crore, on March 19 this year. Its IPO, however, had a tepid response, remaining under-subscribed on the last day till state-owned LIC stepped in with a Rs 3,000 crore buyout of shares.
HAL’s current agony can be traced to two critical decisions taken by the NDA government in 2015 and 2018. When the Modi government assumed office in 2014, it was staring at three gigantic big-ticket IAF requirements—126 Rafales estimated at Rs 1.6 lakh crore (18 off-the-shelf, 108 built in India), five systems of S-400 long-range air defence missiles and continued budgetary support for a 2006 Indo-Russian joint venture estimated at $30 billion that would see India eventually buy around 200 PAK-FA fifth generation fighter aircraft, aka the Su-57, a decade from now. Two of these projects were a windfall for HAL, allowing its production lines to run on business as usual. The 108 Rafales, to be license-built, would bridge the gap between the end of the Su-30 MKI production and the start of the PAK-FA construction.
The Modi government’s decision to scrap the MMRCA or Medium Multi-Role Combat Aircraft contract in 2015 and go in for a limited offthe-shelf buy was the first blow. The 108 Rafales deal vanished. Then, this year, the MoD gently withdrew from the PAK-FA programme, with Sitharaman couching the cancellation in diplomatese. “It was conveyed to Russia that they can go ahead with the programme and India can join later,” she told the media in New Delhi in July. Last year, HAL offered to build 44 additional Su-30MKIs for the IAF at a little over Rs 400
crore per aircraft, the same price they were contracted for in 2014. But with the MoD now having maxed its procurement budgets on S-400s, Rafales, Chinooks and Apaches, there is no money to buy anything else.
This leaves HAL with just a single horse in the race—the indigenous Light Combat Aircraft or LCA ‘Tejas’, an aircraft that has had a long and troubled development cycle and multiple stakeholders, neither of whom sees eye-toeye. The LCA has been designed and developed by the DRDO’s design and testing agency—the Aeronautical Development Agency (ADA)—since 1983. HAL entered the programme only after a production order was placed in 2006.
The first batch of 20 Tejas Mark1s has completed production, but the jets have yet to receive their Final Operational Clearance (FOC) which certifies them fit for combat duty. Only then can formal orders for the next batch of 20 LCAs be placed. The IAF says these aircraft do not meet all their specifications but have agreed to take them as Mark-1 while ADA works on the Mark-2, a redesigned aircraft with a more powerful engine that meets all the requirements. HAL will complete deliveries of the first batch of 20 LCAs next year. But there’s a catch. The Mark-2, of which the IAF could potentially buy 200 planes, is still on the drawing board and will not fly for another five years. Orders for a stop-gap, 83 Tejas Mark-1As worth Rs 50,000 crore, are yet to be placed. But even these will not sustain HAL. “Just that order is unsustainable, we will finish that in five years. We need more orders,” says a HAL official.
Looming in the distance is the spectre of competition in the aerospace sector, an arena that HAL has ruled unchallenged for 50 years. In July, the IAF received six proposals from global manufacturers for 110 fighter aircraft to be made in India over the next decade. The contract could be worth $15-20 billion, easily India’s largest defence contract. The proposals from the same six companies that participated in the MMRCA tender between 2007 and 2012—Boeing, Lockheed Martin, Dassault, RAC MiG, Eurofighter GmBH and Saab—came in response to a request for information (RFI) issued in April this year.
In the MMRCA contract, HAL was assured of being the production agency. Now, for the first time in its existence, it has to compete with the private sector for a fighter contract. In April, HAL signed an MoU with Boeing Defense which is fielding its F/A-18 ‘Super Hornet’ for the MMRCA reboot. (The Super Hornet was a contender in the MMRCA won by Rafale.) A third partner in this MoU is Mahindra Defense Systems which makes small transport planes. The three partners are to announce a joint venture in the next few months. But the competition is likely to be stiff and the order is not guaranteed. “The trouble with HAL is that it is essentially a helicopter maker,” says Rahul Chaudhry, chairman, Defence Innovators and Industry Association (DIIA). “It has helicopter R&D but none for fighter aircraft. It is merely a production agency to make foreign aircraft.”
HAL’s ALH ‘Dhruv’, which it designed and developed, and has sold over 200 units to all the three services and the coast guard, is the only contemporary success story. This also explains HAL’s paltry export figures, of just Rs 484 crore last year mainly to small neighbours like Myanmar and Nepal. For fighter jets, HAL is completely reliant on external sources—the DRDO’s ADA, or foreign vendors like MiG, Sukhoi and BAE Systems. With no fighter jet orders coming in a hurry, the PSU, which employs over 30,000 employees and has 20 manufacturing divisions spread over 10,000 acres of prime land, is staring at a bleak future.
TROUBLED MONOLITH
A torrent of acrimony usually flows when the armed forces, which account for 90 per cent of HAL’s output, are asked about the monopoly of the PSU aircraft maker. Complaints range from its PSU work culture to the lack of competition, zero benchmarking of prices, long lead times, delayed deliveries and poor work quality. “HAL has remained an assembly unit of aircraft because of the ‘protected’ status and ‘assured market’ they enjoy,” says a senior IAF official. “The attitude of ‘you buy what we make’ rather than ‘will make what you need’ has led to its decline.”
This basic outlook, a pampered workforce for whom “misplaced welfare has primacy over professionalism”, critics say, has resulted in poor in-
vestments in R&D. Since there was virtually no competition, they say, there has been no business development, that too at a time when business excellence is an absolute must. The IAF says HAL’s inability to deliver critical trainer aircraft like the HTT 40 and the Intermediate Jet Trainers have led to major problems. Delay in timelines for production of Tejas, Jaguar modification, Mirage upgrade, Su 30MKI combined with unrealistically high cost of equipment and spares are major problem areas.
HAL officials attribute the delays to the development cycles of equipment and the fact that multiple stakeholders are involved, especially when it comes to imported aircraft. There is also the complaint that the services keep changing their requirements. “The IAF now wants us to fit software defined radio communication sets in the LCA Tejas. This requirement wasn’t there when the contract was signed in 2006,” a senior HAL official says. The IAF is yet to decide the configuration for six LCA trainer aircraft it is supposed to build nearly a decade after the order for 40 aircraft was placed—this will mean two squadrons of fighter aircraft with no aircraft to train the pilots on.
There is, however, no disputing the fact that HAL in its present form is not fit for the purpose, a fact that has been hinted at by multiple CAG reports lambasting the PSU for inefficiency and delays. “Essentially, our inefficient government model is bad news,” says Rear Admiral Sudhir Pillai, former Flag Officer, Naval Aviation. “HAL needs to do what the China has provided for its ship-building industry—competition, corporate management and independent oversight by regulators, especially in Hong Kong.”
“It’s a great company with a great heritage, but it has had sloppy political oversight for years... there’s no pressure to innovate or do more than licensed manufacture,” says BJP MP Rajeev Chandrasekhar. “India made a fatal mistake by having only HAL as its source for the air force. Competition is the only answer for innovation and price competitiveness. Even communist Russia, with its multiple aircraft bureaux—Sukhoi, Mikoyan and Kamov—recognised that.”
Neither has the present political leadership taken any steps to fix the mess in HAL. Sitharaman pillories the UPA for the neglect and for not “pumping in resources into HAL”, but neither she nor the defence ministry that controls the PSU is yet to unveil a vision to rectify India’s aerospace monolith. (A questionnaire sent to the MoD remained unanswered.)
Yet, in the short term, there is no alternative to HAL. Critics who compare it with Air India miss the point about HAL being irreplaceable in the near term. A fact that the IAF admits to grudgingly, as it commends HAL for ensuring a 70 per cent availability of combat aircraft during Gaganshakti 2018. The IAF’s largest peacetime exercises in three decades involved over 1,000 aircraft and was meant to simulate a theoretical two-front war against China and Pakistan. The future looks gloomy without deep surgery. “HAL has less than four years of orders,” says Laxman Behera, scholar at the MoD think-tank Institute for Defence Studies and Analyses, or IDSA, which studies defence procurements. “It does not have a fighter aircraft the IAF needs and doesn’t have big value products like transport aircraft.” Both HAL and IAF bitterly point fingers at each over the failure of the Medium Transport Aircraft (MTA), an Indo-Russian joint venture that would have fielded 45 aircraft in both civil and military versions, but which was scrapped in 2016. “The IAF killed both the MTA and the Fifth Gen fighter after spending over $200 million. Where is the accountability for that?” asks a HAL official.
The IAF is hungry for fighter aircraft—it’s already down to 31 fighter squadrons, from its peak of 39 squadrons. Over the next decade, it will retire 14 squadrons of MiG-21s, MiG-27s and MiG-29s, numbering over 200 aircraft (each squadron has 18 jets). The IAF plans to replace all these retiring aircraft to reach its sanctioned strength of 42 fighter squadrons by 2027. With the rising cost of fighter jets and stagnant defence budgets, it is debatable whether these numbers can be made up. In that sense, it shares a dilemma with HAL.