Indian Private Aircraft Makers May Build Planes Worth $2.38 Billion For India, Then the World

By Ajay Shukla
Business Standard

New Delhi, June 12, 2013 -The Ministry of Defence’s global tender for supplying the Indian Air Force (IAF) with 56 medium transport aircraft is deeply flawed, say Indian companies that will compete to build 40 planes in India in partnership with a foreign vendor who will supply the first 16 already built.

Air Chief Marshal NAK Browne, the IAF boss, has touted this as a game-changing contract that would bring India’s private sector into aerospace manufacture. But private company CEOs say the contract is set up to fail, shutting the doors forever in their face and leaving the field clear for public sector monopoly, Hindustan Aeronautics Ltd (HAL).  .
The 56 aircraft to be supplied under this contract will replace the IAF’s aging Hawker Siddeley 748 Avro aircraft. The Ministry’s tender – termed Request for Proposals (RFP) – has gone to eight global vendors, including Boeing, Ilyushin of Russia, Antonov of Ukraine, Franco-German consortium EADS, Embraer of Brazil and Alenia Aeromacchi of Italy. By October 8, each bidder must select an Indian partner, termed the Indian Production Agency (IPA), and submit their detailed proposals.

Defence Minister A K Antony told Parliament last August that the contract, worth an estimated Rs 11,897 crore (about US$2.38 billion) would see the first aircraft delivered 24 months after signing, and all 56 delivered over the next eight years.

But this may never come to pass, say three CEOs from the Indian private sector, pointing to what they term “fatal problems” with the proposal. Their greatest apprehension is the enormous cost of establishing a greenfield aircraft production unit, and an airfield and control tower to test and fly out the aircraft that are built. Acquiring hundreds of acres of land and setting up such a facility will be an expensive and time-consuming task that could incur serious delays.

“It would be hugely uneconomical to establish such a facility just to build 40 aircraft for the IAF. The Ministry presumes that, after delivering the IAF aircraft, the facility can build for the global civilian market, amortizing the cost over many more aircraft. But why would a foreign vendor establish a line in India that would compete with its home facility?” wonders an Indian defence company CEO.

Besides the possible loss of jobs in the home country, foreign vendors would calculate that Indian aerospace manufacturing costs are significantly higher than in developed countries.

Industry bodies have suggested that one of the IAF’s base repair depots (BRDs) be used for setting up the production facility. The BRDs, which carry out major repairs and overhaul of aircraft, have vast tracts of land and functional airfields that could be given on lease to the IPA. If the BRD cannot spare land, the industry bodies have proposed that the IAF acquires adjoining land under the national defence clauses. But the Ministry has not accepted that suggestion.

Besides this, Indian CEOs point to another major problem – the certification needed for aircraft built here for the civil market. Furthermore, each individual component built in India would require certification for civilian aerospace use, a rigorous and time-consuming process that would significantly raise the cost.

“Eventually the foreign vendor will end up supplying all 56 aircraft from abroad. With the Indian partner mired in land acquisition, certification, licenses and procedural formalities, the Ministry will have no choice but to fall back on import. This is set up to become a Ministry case study of how the private sector, given an opportunity, failed to rise to the occasion,” says a private defence company CEO.

Watching from the wings is HAL, which has steadfastly opposed the proposal to build through the private sector. Top HAL officials have lobbied with the Ministry to let HAL manufacture the transport aircraft at its Kanpur facility.

These issues are only emerging now because the Ministry has tightly controlled access to the RFP document. While issuing it on May 8th to eight foreign vendors, the prospective IPAs, have been denied a copy. When Indian industry bodies officially requested for a copy of the RFP, the Ministry turned them down.

Business Standard has a copy of the RFP in its possession. The Ministry has not responded to an emailed request for comments.