1.

THE CONTRACT/S

1. 1 Initially a composite contract was forwarded by M/s BAES envisaging

acquisition of 24 aircraft in flyaway condition and manufacture of 42 aircraft
at HAL through Transfer of Technology in line with the TPR Issue 03. It was
decided by CNC to split into relevant contracts for Direct Supply of 24
aircraft to IAF and Licence manufacture of 42 aircraft at HAL. Accordingly
BAES proposed the following Contracts/Agreements. The summary of all
the contracts signed along with references is given below:

IAF

i) Direct Supply Contract

Ref: Air HQ/S 96963/1/1/Proj(AJT)/Direct Supply
Supply 24 fly away aircraft and associated equipment providing
technical & flying training to IAF for the operation and I & II level of
maintenance of Hawk AJT aircraft for the first two years.
ii) Contract for Services to IAF
Ref: Air HQ/S.96963/1/2/Proj(AJT) Services
Provide Technical & Logistics support and Training for IAF personnel
in India to facilitate operation & maintenance of aircraft.
HAL
iii) Licence Agreement
Ref. 43(11)/1/2001-D(HAL)/Licence Agreement
Accord licence for manufacture & assemble Hawk AJT aircraft and
the associated equipment, tooling and Test Equipment.
iv) Purchase Contract
Ref. 43(11)/1/2001/D(HAL)/Purchase Contract.
Supply of aircraft material, part kits, accessories, GHE, tooling etc. for
the manufacture of Hawk aircraft and also provide training to HAL
personnel.
v) Contract for services to HAL in India
Ref.43(11)/1/2001-D(HAL)/Services Contract
To provide technical assistance in India for the manufacture of Hawk
aircraft and modification of the engine test facilities at HAL.
 vi) Licence Agreement from Rolls Royce for Adour MK871 engine.
Licence for production of Adour 871-07 engines and associated
equipment, tooling & test equipment.

The Licence manufacture of Hawk aircraft and Adour 871 engine will be
undertaken at Aircraft and Engine Divisions respectively. Avionics
equipment (7 CFEs) will be manufactured/procured and serviced by
Hyderabad and Korwa Divisions. Repair, overhaul and maintenance of
airframe and rotables of Hawk aircraft will be undertaken by Overhaul
Division, Bangalore. The Licence manufacture of 49 Adour Mk 871 Engine
will be done in Three Phases in Engine Division HAL.
Phase 1 CKD 7 Engines + 1reserve
Phase 2 SKD 7 Engines
Phase 3 RAW MATERIAL 28 Engines + 6 reserves

1.4.6. The licence manufacture at HAL of 42 aircraft will be done in 3 phases.

Considering the need to optimize the time schedules for the operation of the
aircraft, and to maximize the value addition by HAL, only 3 aircraft each are
planned in the first two phases of CKD and SKD build and the balance 36
aircraft will be produced from raw material phase. The communication and
armament avionic equipment of the original Hawk aircraft will be replaced
with one-to-one interchangeable units to be supplied by HAL through
indigenous manufacture/procurement from non US source for integration on
the aircraft as Customer Furnished Equipment. Based on the above
integration programme, the deliveries of Hawk to IAF will start from 41 st
month from the program start date (April 30, 2004) of the contract and by
73rd month, the full 66 aircraft will be inducted to IAF

1.5.8. The work share of the different Divisions involved in the Hawk
manufacturing Programme is summarized in the table below :

DIVISION PRODUCT
Aircraft Division, Bangalore Airframe & Flight Test
Engine Division, Bangalore Adour 871 engine
Avionics Division, Hyderabad Following CFEs:-

 IFF (1410 AS)

 RADALT (RAM 1730AS)
 UHF (COM 1150A)
  V/UHF (IN COM 1210A)
 TACAN (NC 12E)
 VOR/ILS (TLS 2020 B21)

Avionics Division, Korwa IN/GPS (SIGMA 95 NAB)

HAL was involved in the preparation of Technical Project Report of the Hawk
Advanced Jet Trainer which was finalised and issued as TPR Issue 03 during
August 2000, which was vetted by Technical Evaluation Committee (TEC) and
approved by MOD in September 2000. This was the basic document against
which RFPs for acquisition & licence production of AJT aircraft were issued.
The proposal received from BAES were negotiated by the PNC and negotiated
prices were put up to CCS for approval. CCS in the meeting held on Sep 03,
2003 approved the following:

a) Procurement of 24 BAe HAWK Advanced Jet Trainer Aircraft in

flyaway condition with spares, ground support equipment, training
aids and materials for 42 aircraft to be licensed manufactured by HAL
at a cost of 734.21m pounds equivalent to Rs.5653.4 crores at the
exchange rate of 1 Pound = Rs.77.

b) Training of 75 IAF Pilots in UK during a period of three years at a

cost of 60.375m Pounds equivalent to Rs.464.9 crores for interim
Stage-III training.

c) Concluding of an Inter-Governmental Agreement with the

Government of UK to ensure long-term product support.

d) Procurement of 42 aircraft to be licensed manufactured by HAL at an

additional production cost not exceeding Rs.1944 crores and
payment of 7.5 m Pounds approximately to M/s.Rolls Royce as
Licence fee for manufacture of engines.
 e) Creation of the necessary infrastructure at Air Force Station, Bidar
for the operation of HAWK aircraft, at a cost of Rs.140 crores
approximately.”

2.1. Based on the CCS approval, MOU between the Government of India and
Government of U.K was concluded on 19 March 2004 & subsequently on
26th Mar 04 the following Contracts were concluded :

With BAES

For Supplies and Services to IAF

Direct Supply Contract

Contract for Services to IAF

For Licence Manufacture at HAL

Licence Agreement

Purchase Contract

Contract for Services to HAL

With RRTM

Licence Agreement for manufacture of Adour Mk 871-07 Engines

2.2. The contracts envisage delivery of 24 aircraft from M/s. BAES in fly away
condition to IAF and manufacture of 42 aircraft under licence at HAL through
Transfer of Technology. There are 7 types of avionic equipment (referred to
as CFE), which will be supplied by HAL for integration and fitment on 24 fly
away aircraft.. The licence manufacture of 42 aircraft is in 3 phases, 3 each
from CKD & SKD stage and the balance 36 from Raw Material stage. The
Licence Agreement grants HAL rights to manufacture spares to enable HAL to
support the aircraft. The agreement also provides for Global rights for repair,
maintenance and supply of spares to third countries. The Agreement for
Adour 871 engine provides transfer of technology for manufacture, repair,
overhaul and maintenance. The programme envisages manufacture of 49
Engines in three phases - 8 Engines in CKD Phase, 7 in SKD Phase and 34
in Raw Material Phase .
2.3. In the above background, a Project Team was deputed to M/s BAES works to
ascertain the reuirements for the manufacture of the Hawk Mk 132 aircraft at
HAL and to prepare the Detailed Project Report (DPR) to seek the sanction of
the Board for the investments and to launch the project. The ProjectTeam
visited M/s BAES and M/s Rolls Royce from 5 to 17 Jul 04 and collected
significant inputs and based on the same the DPR is being submitted for the
Management Approval

2.4. The DPR covers the technical features of the aircraft, phase-wise production
programme, the investment towards capital & DRE, the details of Licence fee
and Royalty payable to BAES, assessment of man hours required for
production, the work share between the Divisions of HAL, the estimates of
cost of production, Cash flow and Return on investment and will be the basis
for making the commitment of expenditure subsequent to its approval.

2.5. The Hawk Mk 132 is a dual seat (tandem), transonic, multipurpose aircraft
powered by a single Adour Mk 871 turbofan engine. It provides basic and
advanced weapons training in its training role and can be deployed for ground
attack and air defence roles depending on the range of external stores it can
carry. The location of the fin and rudder forward of the tail plane ensures
Hawk’s consistent and positive spin recovery characteristics. The aircraft is
remarkably insensitive to the external load it can carry in its wide ranging
aerobatic manoeuvres and exhibits very good resistance to departure even
from the normal flight envelope. The aircraft has a range of 1395 nautical
miles with external fuel, has a service ceiling of 13533 metres and has short
take-off and landing of less than 800 metres. The aircraft has an inverted flight
capability of 30 seconds. The cockpit provides excellent field of view and is
equipped with IN/GPS, HUD and HOTAS controls. The aircraft has 7 hard
points to carry external stores with the possible 12 types of combination to
carry the stores. The TTL of the aircraft is 6000 hours with a TBO of 2000
hours. With the anticipated 200-250 hours of flying per annum per aircraft, the
aircraft is likely to be in operation with IAF for not less than 25 years

2.6. The Divisions participating in the Hawk 132 Licence manufacturing

programme, are listed below along with their share of responsibilities.

Division Manufacture/Integration Responsibility

Aircraft Division, Bangalore Airframe & final integration

Engine Division,Bangalore Adour 871 Engine

 Avionics Division, Hyderabad
Following CFEs:-
 IFF ( 1410AS )
 RADALT ( RAM 1730AS )
 UHF ( COM 1150A )
 V/UHF ( IN COM 1210A)
 TACAN (NC 12E)
 VOR/ILS (TLS 2020 B21 )

Avionics Division, Korwa IN/GPS ( SIGMA 95NAB)

2.7. The program start date for the project has commenced on 30 th April, 2004.
The deliveries of Direct Supply aircraft will start from the 41st month and
complete by 46th month. The Licence Production deliveries will commence
from 47th month and will complete by 73 rd month and phase wise production
programme is as follows:.

Years AIRCRAFT PHASES

I II III TOTAL
2007-08 1 - 1
2008-09 2 3 9 14
2009-10 - - 24 24
2010-11 - - 3 3
`TOTAL 3 3 36 42

2.8. The cost towards acquisition of 24 fly away aircraft and accompanying
facilities and services to the IAF along with supplies and services to HAL for
Licence manufacture of 42 aircraft cleared by CCS are as under:

Payments to BAES In £ Millions

For Supplies to IAF

Direct Supply Contract 475.668

Contract for services to IAF 6.746

 For Licence Manufacture at HAL

Licence Agreement 29.520

Purchase Contract 271.380

Contract for Services to HAL 11.268

Total BAES 794.582

Payments to RRTM

Licence Agreement for manufacture of 7.500

Adour Mk 871-07 Engines

Royalties for manufacture of Engine Rs. 20.21 Crores

For Supplies and Services from HAL Rs. 1944.25 Crorers

For Supplies and Services from HAL (Including royalty for engine
manufacture) Rs. 1964.46 Crorers
2.9. CAPITAL INVESTMENTS

The details of the Capital facilities required for the project are dealt in
Chapter IV. After the study of the detailed plant layout and other inputs
obtained from the visit of the multi-disciplinary Project team to the works of
BAES and Hamble, and various vendors and facilities of Roll Royce, plant
and machinery requirements has been reviewed and incorporated.

The Capital Investments for the Project has been estimated and phased as
under :

COMMITMENT (RS IN CRORES)

Year 2004-05 2005-06 2006-07 2007 - 08 TOTAL

Civil Works 28.40 12.20 0.20 0.20 41.00
Plant and Machinery 96.30 45.19 104.06 4.12 249.67

TOTAL 124.70 57.39 104.26 4.32 290.67

EXPENDITURE (RS IN CRORES)

Year 2004-05 2005-06 2006-07 2007 - 08 TOTAL

Civil Works 8.52 24.48 7.60 0.40 41.00
Plant and Machinery 18.13 89.54 41.17 100.83 249.67
TOTAL 26.65 114.02 48.77 101.23 290.67
 The Capital Expenditure is based on the assumption that it will be paid upfront
to avoid financing costs.

2.10. DEFERRED REVENUE EXPENDITURE

Costs of various elements have been estimated based on the information made
available to HAL Team by BAE SYSTEMS. Year wise phasing of Commitment
and expenditure is as follows:-

(Rs. In Crores)

DRE 2004-05 2005-06 2006-07 2007 - 2008-09 Profit TOTAL

08
COMMITMENT 59.56 117.09 66.87 13.78 8.54 19.94 285.78
Expenditure 27.51 93.15 97.67 38.80 8.71 19.94 285.78

The estimates of DRE are based on the assumption that duty exemption will
be available and the funds will be provided upfront to avoid financing costs.

2.11. The total project cost in respect of HAL Manufacture including the
participation in Direct Supply aircraft towards CFE supplies is as under :
Sl.No Description In £ Million In Rs. Crs Total (Rs. In
Crs)

1 Payments to BAES

1.1 License Agreement 29.520

1.2 Purchase Contract 271.380

1.3 Contract for Services 11.268

2 Payments to RRTM 7.500

– License Fee for
Adour Engines
Royalty for
manufacture 20.21 20.21

3 Supplies & Services

of HAL

3.1 Capital Investments 290.67 290.67

 3.2 Deferred Revenue 285.78 285.78
Expenditure

3.3 Recurring Costs 767.03 767.03

3.4 Participation in Direct 75.49 75.49

Supply Contract

3.5 Maintenance 129.97 129.97

Supplies & Services

3.6 Warranty 122.69 122.69

3.7 Profit 272.62 272.62

Total 1944.25 20.21 1964.46

(Supplies & Services- HAL)

2.12. UNIT COST OF PRODUCTION

Unit Production Cost has been worked out at the level of year of delivery. The
Unit Production cost is separately worked out with and without Capital, DRE
and Licence fees. Details are as under:

Phase Year Quantity Cost excluding Cost including

Capital and DRE Capital and DRE
I 2007-08 1 8373.46 10867.69
I 2008-09 2 8408.85 10903.07
II 2008-09 3 7287.37 9781.59
III 2008-09 9 6532.67 8926.90
III 2009-10 24 6441.20 8935.42
III 2010-11 3 6492.04 8986.26
The weighted average cost of indigenous manufacture of aircraft works out to
Rs.66.65 crores assuming that the DRE and Capital Expenditure is paid
upfront and not included in the unit cost of Aircraft. If DRE and Capital is
amortized over 42 aircraft, the weighted average cost of the aircraft works out
to be 91.37 crores. The cost of imported aircraft is Rs. 85.59 Crores(Details
placed at annexure XV) (Taking 1 GBP = 77 rupees). It is seen that the
average indigenous cost of production (Excluding Capital and DRE) is less
than the imported cost by approximately 22%.
 Considering the amortization of Capital and DRE, the cost tends to be more
than the Direct Supply aircraft cost due to the limited number of aircraft to be
produced. If we consider a volume of 55 aircraft, the cost of indigenous
manufacture including amortization of Capital and DRE would match with the
Direct Supply Cost and thereafter the cost of indigenous aircraft would be
lower than the Direct Supply Aircraft Cost

2.13. MANPOWER REQUIREMENT

The requirement of manpower considering AJT Manufacturing project and

also other on-going/anticipated projects for each Division has been assessed.
Extent of subcontracting possible, considering the technical complexity of the
products also has been taken into account. The peak requirement in the
Division is tabulated below:

AIRCRAFT DIVISION

DIRECT INDIRECT OFFICERS

314 203 105

ENGINE DIVISION
DIRECT INDIRECT OFFICERS
48 19 16

Requirement of indirect workmen and officers is worked out in proportion to

the strength of direct workmen. It is proposed to induct manpower in phased
manner considering the firm tasks and realization of anticipated tasks from
year to year.

2.14. ASSUMPTIONS:

Following assumptions are made while preparing the Detailed Project

Report estimates.
a. General Assumptions:

i) Following Exchange rates are considered :

1 GBP = Rs 77/-

1 Euro = Rs. 52

1 US $ = Rs. 48
 Exchange rate variation during the period of the project shall be
payable extra with profit.

b. Assumptions regarding Investments/Expenditure for facility set up

i. Custom duty on imported capital items, NSE/ Tooling and other items of
DRE is not considered in the estimate.

ii. Capital & DRE expenditure are assumed to be funded upfront to avoid
the financing costs.

c. Assumptions regarding Material Cost

i. Material costs are taken from the kit costs finalised with the BAES.

ii. In respect of Adour Engines the items which are of non RRTM sources
are estimated based on the past procurement data available for MK 811
Engine.

iii) Freight & insurance in respect of BAES supplies have been considered at
the applicable rates for the respective division.

d. Assumptions regarding Labour Cost

i. Manhours for production of units in various phases have been estimated

based on the workload indicated by BAE SYSTEMS and the learning
curves as applicable for each Division

ii) Manhour rate for the duration of the project has been estimated
considering the following

- 24% increase in wages is considered during 2007.

- Other expenses are estimated based on the admissible percentage

increase as per the present FPQ in operation

e. Payment for Supplies and Services by BAES & RRTM

The amount payable to BAES and Rolls Royce towards the Contracts
concluded by the Govt with M/s BAES and RR All Payments falling due to
M/s BAES & RR under the Purchase Contract, Licence Agreements and
Contract for Services shall be made by HAL on behalf of Govt. of India. The
 modalities for releasing the payments to HAL to meet this obligation had
been proposed by HAL to M.O.D. vide letter no. MD(BC)/AJT/2004 dated
24th March 04 as follows :

i. Funds would be released to HAL by D.O.D as per payment schedule

indicated in the Contracts.
ii. CDA Bangalore will make available the fund in advance to HAL on
request.
iii. HAL will release the payment and produce proof of payment to CDA.
iv. If the fund is not made available in advance, responsibilities remain with
M.O.D for additional liability if any.

The first payment against the Contracts has been made by the
M.O.D. All the four contracts have been entrusted to HAL for
implementation by M.O.D. vide PC-1 to 43 (11)/1/2001-D(HAL) vol IV dated
9th June 2004.

f) Payments for Supplies and Services to HAL is assumed to be as

follows:

Capital Expenditure – Upfront Payment

DRE - Upfront Payment
Recurring Costs:-
25% - Down Payment
35% - On loading of components for 1st batch quantity
20% - On commencement of structural assembly of batch
15% - On commencement of equipping of batch
5% - On delivery of Aircraft
For CFE supplies, services and maintenance support/ spares following
will be the payment schedule: -
25% _ Down Payment
20% - Milestone I of BAES Contract
20% - Milestone II of BAES Contract
15% - Milestone III of BAES Contract
20% - Delivery to BAES
Subject to the above, the funding is expected to match the cash flow
requirements and the financing costs are expected to be nil.