THE Narendra Modi government almost hived off BEML, a profit-making defence public sector enterprise (DPSE), using the strategic sale route, with the primary contender being a Reliance entity. However, the move failed. Could it now be devising ways to run Hindustan Aeronautics Limited (HAL), the state-owned aerospace and defence company, into the ground?

To many defence pundits and the government’s political opponents, it appears to be very much so. HAL’s top bosses and trade union leaders have not yet gone so far but they privately question the wisdom and intent of many of the government’s recent decisions concerning a company whose vision is to become “a significant global player in the aerospace industry” and which recorded its highest turnover ever in 2017-18 (Rs.18,283 crore).

The signs are ominous for the Navaratna DPSE. The Modi government is certainly guilty of some curious, if not downright irrational, decisions that were taken for reasons totally unconnected with promoting India’s aerospace major’s health but had more to do with the government’s avowed desire to dilute its stake in DPSEs in order to curb its fiscal deficit.

HAL’s order book is looking bleak, notwithstanding Defence Minister Nirmala Sitharaman’s statement in Parliament that it had been given orders worth Rs.1 lakh crore. The long-running programme to build the twin-seater, multi-role, long-range Sukhoi Su-30 MKI at its Nashik plant is down to the last 23 fighters, while the order for 73 Dhruv advanced light helicopters (ALHs) is coming to an end.

After Congress president Rahul Gandhi accused the government of lying about the truthfulness of HAL’s order book, Nirmala Sitharaman put out a tweet clarifying the numbers. Of the Rs.1 lakh crore worth orders, HAL had signed contracts worth only Rs.26,570.8 crore—primarily for 19 Dornier 228s (worth Rs.3,400 crore), Dhruv, Cheetal and Chetak helicopters (a total of Rs.15,000 crore) and aero engines worth Rs.8,400 crore.

The remaining Rs.73,000 crore, for 200 Kamov 226T helicopters, 83 Tejas light combat aircraft in Mk1A configuration and 15 light combat helicopters (LCHs), would come from orders that were all either in the request for proposal (RFP) stage or in the acceptance of necessity stage. HAL had received requests from the Indian Air Force and the Indian Army for 10 and five LCHs respectively. Projects in the RFP or acceptance of necessity stage could take years to materialise or may never fructify. Further, in the case of the Rs.20,000-crore Kamov 226T deal, HAL will not get the entire order. An independent Indo-Russian joint venture with a paid-up capital of Rs.30 crore has already been set up for the purpose, in which HAL’s stake is 50.5 per cent while 42.5 per cent is owned by Russian Helicopters and 7 per cent by Rosoboronexport. Any orders for the Kamov will go to the new company and HAL will be entitled only to dividends from the business just as Russian Helicopters and Rosoboronexport will be.

The Defence Minister’s flip-flop prompted many, including Rahul Gandhi, to question her claims. Rahul Gandhi said: “The strategy of the government is to weaken HAL, not give it money and destroy India’s strategic capability and give it as a gift to Anil Ambani.” Many in HAL tend to agree. They also allege that every global aerospace major has strategically set up design centres in Bengaluru chiefly to net designers trained by HAL.

Dividend payouts

Between 2003-04 and 2017-18, successive governments led by the Congress and the BJP forced HAL to pay out Rs.8,996 crore in dividends and more than 50 per cent of this amount was paid during the current regime.

In the 10 years between 2003-04 and 2012-13, HAL paid the government Rs.4,366 crore as dividends. In the subsequent five fiscal years from 2013-14 to 2017-18, it paid Rs.4,630 crore.

On top of this, the government, in 2015-16, ordered HAL to participate in an “equity buyback scheme”, a first in the company’s history, forcing it to transfer in two tranches Rs.6,393 crore to the government while buying back its own shares. The buybacks came within three years of each other—Rs.5,265 crore in 2015-16 and Rs.1,128 crore in 2017-18—leading to a huge financial burden on the entity.

Over the past five years, HAL has paid the government Rs.4,631 crore in dividends and taxes—Rs.1,041 crore in 2013-14, Rs.576 crore in 2014-15, Rs.755 crore in 2015-16, Rs.963 crore in 2016-17 and Rs.1,295 crore in 2017-18.

The figure jumps to Rs.11,024 crore if the equity buyback is included. HAL’s share price in recent months declined 30 per cent, down to Rs.814 a share from its one-year-high of Rs.1,184.

A traditionally cash-rich company, HAL had over Rs.20,000 crore in cash reserves in 2011 and Rs.17,671 crore in 2015. That figure dipped to Rs.700 crore in the third quarter of the current financial year and the company has been forced to borrow, for only the second time in its history, the last being in 1990 prior to securing the Su-30 order.

In 2018, HAL borrowed almost Rs.1,000 crore against its assets to buy spares; keep production lines running; pay its vendors; build capacity; fund expenses including civil works, plant and machinery; for deferred revenue expenditure; and even to pay the salaries (Rs.358 crore a month) of 29,000-plus permanent and about 10,000 contract employees.

Speaking to Frontline, a member of the HAL board said it was the government’s prerogative to take decisions on dilution or dividends. But, he added: “Why was HAL asked to pay dividends when there was no money for salaries is a question the government of the day needs to answer. It looks like the government wants to strip HAL to the bone and then….” He also admitted that the company’s “order book position was not comfortable for its long-term sustainability”.

A former finance director of the company said: “Given the huge amounts of money to be made in defence contracts, foreign OEMs (original equipment manufacturers) would prefer HAL to continue being a licence production agency and not design its own aircraft. The classic example is the Su-30 MKI programme. Although a bulk of the 272 Sukhois contracted from Russia were made by us, we have basically only assembled them here with imported knocked-down kits. HAL is still not capable of manufacturing a Sukhoi on its own. But the government, instead of helping, is eating away at HAL.”

Outstanding dues

Receipts during the last fiscal year almost dried up as HAL was not paid for orders received and fully discharged, including deliveries of fixed and rotary wing aircraft and maintenance of the fleet serviceability (maintenance and repair) of the IAF’s inventory. Interestingly, it is HAL’s biggest customer, the IAF, which has delayed payments totalling Rs.15,400 crore.

According to HAL Chairman R.Madhavan, by March this year the figure will likely cross Rs.20,000 crore since HAL is slated to deliver a few Su-30 MKIs, five Tejas light combat aircraft, Mirage 2000s and Jaguar upgrades, and Dhruv and Rudra helicopters to the IAF. At the end of 2017-18, the IAF owed HAL Rs.7,000 crore.

The IAF was the largest beneficiary of the capital (modernisation) component of the 2018-19 defence budget, receiving Rs.33,085 crore as compared to the Army’s Rs.21,211 crore and the Navy’s Rs.19,927 crore. But, according to reliable sources, it has no funds for revenue expenditure and to pay HAL. Most of the allocated funds have already been paid to foreign vendors, most notably the French company Dassault Aviation, which received Rs.20,000 crore for 36 Rafale fighter aircraft ordered in September 2016 but yet to be delivered, and Boeing for contracts signed in 2015 for Apache and Chinook helicopters.

The fact that the IAF has paid foreign OEMs but not the homegrown government entity has shocked many.

It is obvious that for the government the foreign OEMs are priority number one and DPSEs priority number 2. HAL is expected to end the current fiscal with a cash deficit of around Rs.6,000 crore.

According to IAF officers, the procedure involves making a 15 per cent upfront payment once the contract is signed, followed by milestone payments. Why the IAF has missed these milestones is curious, to say the least. This has left the HAL with no money for fleet survivability and this might also jeopardise future programmes.

Programmes under threat

Among the programmes that might hit a roadblock unless money is found is the upgrading of the Tejas production capacity from eight to 16 fighters a year. The original plan was for HAL and the IAF to share the Rs.1,381-crore costs needed to set up the needed jigs and tooling.

HAL’s Rs.500-crore development of the Hindustan Turbo Trainer (HTT-40), a basic trainer, which is nearing completion, could also be delayed further. Other programmes where HAL is committed to putting in money are the development of the light combat helicopter (Rs.376 crore) and the light utility helicopter (LUH) project (Rs.200 crore).

On the Tejas programme, HAL sources said that the delays in production were mainly on account of the design not being frozen. A senior HAL official said: “The Aeronautical Development Agency (ADA) is the design house for the Tejas. It is not an inhouse design. With the ADA continuously asking for concessions, Tejas’ design is constantly undergoing change. More than 300 in the recent past itself. How can you blame HAL for this? The biggest mistake was to ask an outside agency to design the aircraft. HAL’s own ARDC [Aircraft Research and Design Centre] has over 5,000 designers. Why were they not tasked with designing the LCA? HAL’s manpower is being wasted on tasks like organising the defence expo and the aero show.”

But HAL’s inability to call a spade a spade has also cost it, the most glaring example being the much-touted intermediate jet trainer. Even when the top management knew that the aircraft, on account of a faulty design, was beyond redemption, they continued with it, wasting time, money and manpower.

A former director said: “Everybody knew what was wrong. But nobody was prepared to stand up and say let’s scrap it. So, money continued to be wasted. On the multi-role transport aircraft we invested Rs.125 crore in a joint venture with the Russians. While the Russian programme took off, ours failed. HAL burnt its fingers in the floundering $30 billion Indo-Russian fifth generation fighter aircraft programme. For all practical purposes we have got out of the programme but only after paying a heavy price. HAL forked out $295 million for a preliminary design contract in 2010 just before negotiations went into a tailspin.”

There is no doubt that the Modi government’s decision to scrap the 126 medium multi-role combat aircraft (MMRCA) deal (18 to be procured in flyaway condition and 108 to be assembled under licence at HAL) with Dassault Aviation hit HAL hard. Until mid-2014, HAL was confident of being awarded a contract to build 108 Rafale aircraft under licence from Dassault Aviation and negotiations were at an advanced stage, but deadlocked. By 2015 the deal had vanished. During a visit to Paris in April 2015, Modi announced that India, in a direct government-to-government deal, would be buying 36 Rafale fighters, thereby overriding negotiations for the purchase of 126 MMRCA.

The Rs.30,000 crore of offsets that would accrue from the purchase of the 36 Rafale aircraft have been subject to controversy, with the opposition alleging that Modi literally forced the French to hand it over to a company floated by Anil Ambani and Dassault just days before the deal for 36 aircraft was signed.

Criticism on HAL

Former Chief of Air Staff, Air Chief Marshal S. Krishnaswamy, said: “Most years a substantial portion of the IAF’s procurement budget would not be utilised and go back to the government. But when it came to HAL, it was a different story. HAL would draw money from the IAF’s procurement budget as advance payments for aircraft or services but fail to deliver. In some cases, taking even five to six years beyond the scheduled delivery dates. This money would have moved out of our accounts and into HAL’s accounts. HAL would park this money in banks and earn interest out of it. This was unacceptable. For one, we didn’t get the products we had contracted and paid for, and secondly, we couldn’t use this money to procure anything else. The money wasn’t surrendered by HAL to the government, rather HAL earned interest that amounted to a few thousand crores per year. Neither was this interest given to the government. The previous government got wise to this and the Ministry of Defence (MoD) has curtailed it.”

An Air Marshal added: “Take the case of the Su-30 MKIs. The IAF would place an order for 12 aircraft and start paying right from the time HAL bought the semi- or completely knocked-down kits, the metal etc. HAL would deliver 10 aircraft and the remaining money would be parked in a bank.”

Senior IAF officers, both serving and retired, also asked why the IAF had to pay for infrastructure that HAL wanted to create. Krishnaswamy said: “For the ALH project, we even paid for the hangars.”

Many are of the opinion that exports is one of the avenues HAL would have to pursue for it to function profitably.