HAL has been in the news a lot lately, particularly due to the Rafale controversy on its quality and pricing issues. I do not intend to even touch on this controversy since I doubt anyone, outside of the loop, has any authentic information on how and why of this deal, except for what is said by various debaters on TV and questionable “leaked” information. What triggered this article is that on pricing, the Defence Minister also stated on Times Now on 13 January that a Su-30 built by HAL costs 45% more than the one directly imported from Russia.
It is an incontrovertible fact that despite being in existence for over seven decades, HAL has not moved much beyond being a license manufacturer and overhaul agency.
It is an incontrovertible fact that despite being in existence for over seven decades, HAL has not moved much beyond being a license manufacturer and overhaul agency. Through my personal experience, I am of the opinion that, apart from the usual bureaucratic ills which plague PSUs, most of what ails HAL today is largely due to the culture of cost plus pricing policy of the early 1970s. Basically, what this meant was that HAL would include all the costs incurred towards running its organization, including all the wining and dining, in its labor costs and then price its products based on the materials bought and man-hours used, heaped with 10% profit on top. The man-hours required were also inflated on the pretext of the learning curve. A few examples may help illustrate this.
In December 1993, I took charge of the MiG-21 Bis upgrade program for 125 aircraft with an estimated cost of US$ 850 million. In early 1994, the JS (Air), then Mr Vinod Rai and later the famous CAG, asked me to reconsider the program requirements due to budgetary constraints after the monetary crisis of 1990-91. Finally, we were sanctioned $ 626 million/Rs 2000 Crores at the going conversion rate. This figure necessitated careful scrutiny of every penny spent to ensure that the program didn’t lose its effectiveness due to cuts in critical equipment.
Most of the avionics were due for change in the Bis upgrade. Initially, the UNA-52 inertial system, being manufactured at HAL Korwa for the Jaguar under license, was suggested. This was a mechanical gyro system and cost around Rs 4 Crores, or close to US$ 1.3 million. We went for a technologically far superior Ring Laser Gyro (RLG) system, which was initially quoted close to US$ 500,000. Finally, we managed to get the entire system for under US$ 100,000, that too with an MTBF-linked warranty for 3200 field hours as against the field MTBF of the UNA-52 at 16 to 23 hours. Today, the MTBF-linked warranty is a standard clause in the DPP. I mention this because with such a warranty, it became easier to control the spares and life-cycle costs.
The point I am making is not that HAL has bad people; almost everybody I worked with was friendly, sincere and hard working. It is just that the Cost Plus policy gave them no incentive to cut down on costs…
In April/May 1994, I was also asked by HAL to consider the SCR-300 Flight Data Recorder (FDR), being manufactured in Korwa under license for the Jaguar. This system was more like the Russian SARPP already on the MiG-21 Bis and, in any case, beyond our budget of $ 40,000. The commercial details of the SCR-300 indicated the cost of imported raw materials at about Rs 22 Lakhs with another Rs 10 Lakhs as value addition, labor and profit, a total of Rs 32 Lakhs amounting to $ 100,000. Within a couple of weeks of rejecting it, I received an offer in writing from the OEM offering the entire system at around 18,500 Pounds, or Rs 5.9 Lakhs, un-negotiated, if we bought more than 75 systems. We got a better system within our budget.
Another example from this era that I could give is with HAL Hyderabad from which we were buying six systems for the upgrade including the radio and IFF etc. Initially, Hyderabad submitted a proposal costing Rs 128 Crores. Finally, we were fortunate to shake hands for a contract value of about Rs 58 Crores, including their profits.
As an aside, we completed the entire planned upgrade program in about $ 580 million without cutting any requirement, and signed all the contracts on 01 March 1996 keeping another 25 million for Russian spares to be decided later during the D & D phase in Russia.
The point I am making is not that HAL has bad people; almost everybody I worked with was friendly, sincere and hard working. It is just that the Cost Plus policy gave them no incentive to cut down on costs, improve quality or to compete in the open market. Perhaps, higher cost-inputs resulted in greater quantity of profits, particularly with a captive market and, maybe the leadership frowned on lower profits. Due to lack of such incentives, HAL also appears to have slowly lost the drive to continuously innovate and improve its products indicated by the slow draining of its design capabilities after the HF-24 and HJT-16 programs, unless funded by someone, instead of using some of its profits to design and test new products for the international market as well as likely Indian requirements. This is despite a new Fixed Price policy that came into force in mid-1995.
The ALH Dhruv, though termed a success by many, still hasn’t carved out a noticeable space for itself in the international market for various reasons.
Two examples that come readily to mind are of the basic trainer HTT-40 and the AJT. If the LCA was taken away from HAL and given to ADA, what prevented HAL from developing world-class training aircraft in time in place of a fighter that ADA was attempting? The ALH Dhruv, though termed a success by many, still hasn’t carved out a noticeable space for itself in the international market for various reasons. A comparison with the revival model of Embraer of Brazil would perhaps show that some forward thinking was missing from the DNA of HAL. Hopefully, after the HTT-40 episode with the push coming only after Mr Raju taking over as Chairman in 2013-14, this lacuna has been reversed.
Considering the foregoing, I am of the opinion that the senior leadership of HAL needs to be carefully chosen. I feel it is more important to choose the most qualified person, whether from the Air Force or internally. Most certainly though, a political bureaucratic appointment, as we have seen earlier, has no place in the aviation circuit, be it HAL, Air India, DGCA or AAI if we want these to be world class. I, for one, am also concerned about the costs of Make in India for defence equipment, even from the private sector, on the lines of HAL, unless vetted and negotiated by a professional team to ensure that we do not end up paying far more than competitive international prices, with just the label of Made in India on the product.
As an aside, in my time in the Bis Upgrade, I had coined a dictum in a lighter vein, which went like this. “If HAL can buy something for $ 10, it would rather pay $100 and if DRDO can do a job in one year, it would rather take 10 years”. This may still hold.