Development Risks Hinder Private Investment in AMCA Project

India's quest to develop a technologically advanced indigenous fighter jet through the Advanced Medium Combat Aircraft (AMCA) program faces a significant challenge: attracting robust private sector participation.

While the AMCA holds the promise of boosting India's defence capabilities and technological prowess, private companies remain hesitant due to substantial development risks.

Understanding the Risk Factor​

At the heart of private sector reluctance lies a fundamental concern: risk sharing. Companies make investment decisions based on a thorough assessment of potential returns against the risks involved.

In the AMCA's case, the development risk – the possibility of delays, cost overruns, and the aircraft not meeting its ambitious technological goals – looms large. This risk is amplified due to the project's structure, spearheaded by the Aeronautical Development Agency (ADA) and Hindustan Aeronautics Limited (HAL).

This setup means private companies would have limited influence over critical aspects of the development process, making it harder for them to control and mitigate these risks. For profit-driven entities, this uncertainty can significantly undermine the investment's attractiveness.

Unpacking the Development Risk​

The development risk associated with the AMCA project has several dimensions:

• Timeline Slippage: Delays are a common occurrence in complex defence projects. For private companies, delays directly translate into a reduced return on investment (ROI) as costs remain fixed or increase while revenue generation is pushed further into the future.
• Cost Overruns: If a project's budget spirals out of control, it directly impacts the bottom line of private investors. The aerospace sector, particularly the development of cutting-edge military platforms, is notorious for cost overruns.
• Technological Shortcomings: The AMCA is envisioned as a fifth-generation-plus aircraft with advanced features. If it falls short of these performance targets, it could result in lower demand, further diminishing potential returns for private players.

Navigating the Risk Landscape​

Given these risk factors, it's understandable why private companies might be more comfortable entering the AMCA program as suppliers of specific components or subsystems.

This role allows for focused expertise and more predictable revenue streams while minimizing exposure to the larger development uncertainties.

The Ministry of Defence (MoD) aims to implement a Special Purpose Vehicle (SPV) model for AMCA's long-term manufacturing, envisioning greater private sector involvement. However, the success of this model hinges on the government's ability to address risk-related concerns.

Potential Solutions and Future Outlook​

To pave the way for robust private sector partnership in AMCA, India's MoD and project leaders may need to explore:

• Risk Sharing Mechanisms: Develop equitable risk-sharing agreements where the government and private entities shoulder a portion of the development risk, making the project more financially viable for the private sector.
• Clearly Defined Milestones: Establish a detailed roadmap with well-defined, achievable milestones to minimize delays and inspire confidence.
• Transparent Cost Management: Implement rigorous and transparent cost management protocols to prevent overruns and provide accountability.
• Incentivization: Consider offering incentives, such as tax breaks or preferential procurement, to encourage private sector investment.

By addressing these concerns, India has the potential to unlock the expertise and resources of the private sector, potentially accelerating AMCA's development and ensuring the success of this crucial national program.

 

[Akshat]

Then HAL will start producing consumer goods instead of aircrafts. We should realise that aerospace is not that lucrative for private players.

Do you know the profit margins of HAL? Compare that with the likes of Tata steel or other heavy industries. It’s a gold mine.

 

[Akshat]

What you are suggesting is the american model. Bro, in order to do that you need an incredible amount of money.

Did you read the article? Private companies are hesitant to join SPV because of financial risk. What you are suggesting is that they build a prototype to compete with a different prototype, and best one wins. This is hugely risky, as if their prototype gets rejected they will suffer losses, which is exactly what they dont want.

This is most brain dead suggestion for indian context.

Did you read ACM Bhadoria’s comments?

 

[Akshat]

The entire article is about them not wanting financial risk. Private companies want to reduce the risk, they also lack expertise to build a fighter jet. What you are suggesting is that they build a prototype for 5th gen fighter and compete with HAL and friends for defence contract. That is like asking a 10th class student coding enthusiast to compete with a google software developer.

Spending all that time and money developing a prototype 5th gen fighter, when you lack expertise and you are asked to compete for contracts with an established juggernaut...... you dont think it is INSANELY risky?

Anyone can compete with HAL with ease as HaL is guaranteed to fail like with Mk2 or mk1a.

 

[charminar_waale_ismail_bhai]

Right now what is being proposed puts the entire risk on private players while HAL and ADA make the decisions.

And what is wrong in the private player's demand?

 

[Apocalypse gupta]

And what is wrong in the private player's demand?

None. They have a perfectly valid concern. I never said they were unjustified or being paranoid. I said that their concerns will have to be taken care of and a compromise will have to be reached. Like what happened in P75I. The foreign players were complaining about risk and liability clause resting in them entirely while he domestic shipyards will be the ones building the subs. That is why the tender got delayed so much. After the policy was changed, and the concerns of the foreign players were addressed, the tender finally moved forward.

 

[Apocalypse gupta]

Haan bhai, HAL has been making 5th and 6th gen aircraft since ages and have an impeccable record of delivering everything on-time without delays.

HAL Tejas, HAL IJT, HAL MTA are all examples where HAL has delivered projected platforma on time.

Way I see it, depending on HAL alone for the future of aeronautical Industry in India is the biggest risk the nation is taking. Allowing private players to come up with their design and expertise is called risk hedging, not risk taking.

You are cherry picking HAL's failures. You forget the Dhruv, prachand, rudra, dornier, jaguar, Su-30MKI, tejas mk1.

Whether you like HAL or not, you cant deny that HAL has experience and expertiseaa when it comes to building fighters

 

[kumar]

I always thought that private sector was supposed to head AMCA SPV and utilize DPSU infrastructure for the program. Where required, DPSUs were supposed to hand hold private players.

 

[charminar_waale_ismail_bhai]

You are cherry picking HAL's failures. You forget the Dhruv, prachand, rudra, dornier, jaguar, Su-30MKI, tejas mk1.

HAL has been a DPSU since 1964. In its glorious 60 years of existance, you were able to list seven aircrafts of which:-

Helicopters - 03
Foreign designed aircrafts - 03
Indigenous designed - 01 (02 if you add HF-24 Marut)

Will let readers come with their own judgement of HAL's record.

 

[Apocalypse gupta]

HAL has been a DPSU since 1964. In its glorious 60 years of existance, you were able to list seven aircrafts of which:-

Helicopters - 03
Foreign designed aircrafts - 03
Indigenous designed - 01 (02 if you add HF-24 Marut)

Will let readers come with their own judgement of HAL's record.

If you combine the design and R&D budget of every aircraft HAL has ever designed or built or upgraded, it will still be lower than F35 Design cost. Let that sink in.

 

[Dagger]

Then HAL will start producing consumer goods instead of aircrafts. We should realise that aerospace is not that lucrative for private players.

definitely no. TATA released a satellite and they make cars too. Not an issue

 

[charminar_waale_ismail_bhai]

If you combine the design and R&D budget of every aircraft HAL has ever designed or built or upgraded, it will still be lower than F35 Design cost. Let that sink in.

This is personal assumption, right?
Or you know the actual figures?

Let that sink in.

Bhai, figure do aur sink karwa do.

 

[Apocalypse gupta]

This is personal assumption, right?
Or you know the actual figures?

Bhai, figure do aur sink karwa do.

DOD estimates it will cost nearly $1.7 trillion to buy, operate, and sustain the F-35 and systems over its lifetime. This is total cost, including procurement and parts, But you can guess how expensive it is.

 

[Avada kedavra]

How can there be a risk when tax payers money will be funding the program.
Also the govt is ready to buy it at any cost so it's not like a product that might flop in the market.

 

[Sandeep]

It doesn't matter even if the private sector companies only want to manufacture parts and technology that they can do or have expertise because that will still help to grow the military industry and then HAL can just assemble and certify the jets made if they don't want to join the army or the special purpose vehicle.

One key change that we can make is increase the number of AMCA as we need more than just 120 as we need more stealth jets. If we plan to increase the number then they might some tempted to join because this is a guaranteed number of orders given that will definitely be increased later on so this is a great opportunity for the private sector of making most of the opportunity to earn some money again.

 

[Gudakesh]

This will be sweet music to westerners.
They will give some tinpot business to our private players to convince them that they have everything to lose by joining GOI led projects.
HAL and other leftist unions will insist upon the work to be done under them.
All this could have been quietly managed by private players and selling the patent to govt.

 

[Deepak Hegde]

Just shows how DRDO & HAL have been operating in development. compare to other world class established players . development cost of AMCA stealth Fightr plane to other steath Fighter projects. Both DRDO & HAL are saving Funds by developing Tech with minimun Funds compared to other world Experience & Established players.

AMca and other stealth fighters ! lol ! All fantasies and nothing else. Channeling funds down the black hole called HAL. If the funds were channeled to proper private players, the aircrafts had a chance of being developed on time with a fraction of the funds.

 

[charminar_waale_ismail_bhai]

DOD estimates it will cost nearly $1.7 trillion to buy, operate, and sustain the F-35 and systems over its lifetime. This is total cost, including procurement and parts, But you can guess how expensive it is.

The cost of $1.7 trillion is the cost of building, maintining and operating 2470 units of F-35s through its expected life cycle of 66 years.

$ 1.7 trillion is not the design cost of F-35.

 

[Satya Dev]

All Indian private sector companies use 50-70% contract labor, including illegal b'deshis to save labor cost to improve their profits. Such companies prefer to invest in products where there is guaranteed hefty return by screw driver assembling howitzers from South Korea or paint their logo on radars from Israel to qualify under ATMANIRBHAR scheme, than investing in R&D for a product whose success is not guaranteed.

 

[nakul1307]

They don't have good project managers and negotiators it seems...