Real Options Approach towards Achieving ‘Atmanirbharta’ over Indian Skies: Evolution of IAF’s Tejas Project

When it comes to developing new defence technologies, it is not particularly difficult to fathom that when a project is successfully completed it will likely result in a whole set of trickle down benefits. There are virtually endless examples of this, starting with the humble microwave oven, which was a result of Raytheon’s efforts to develop a more effective radar to track Axis aircrafts during WW2. It may have taken 20 years to get to market from the first encounter of the heating effect (domestic microwave ovens were first shipped in 1967), but the oven is now a staple of the Western kitchen. Alternatively, take the example of scientists at General Electric, who were tasked with developing a more efficient lighting system for the US Navy and ended up inventing the light-emitting diodes (LEDs) in the late 1960s. Today, the LEDs are playing a big role in conserving energy and improving energy sustainability. Digital cameras, GPS, VR goggles, the headphones, lithium ion batteries, all of them originated as an offshoot of a larger defence project. Even the internet has its origins in the defence realm. Suffice to say that an ambitious defence project has often led to several unforeseen benefits. Benefits, which are best identified as early as possible in a project so that they can be exploited to their maximum potential. This would entail taking a real options approach to projects.

A large-scale defence project, such as HAL’s Tejas fighter aircraft project, has the ingredients for a real options analysis: it involves researching less-known or unknown technologies, the outcomes and success rates are uncertain, it carries large capital investments, and it is interdisciplinary. Given the complexities and planned objectives of such a defence project, traditional financial analyses, such as the DCF method, are not robust enough to explicitly account for the presence of real options embedded in different stages of the developmental value chain.

The Tejas Project: The early days

Throughout the 1970s and ‘80s, the Soviet made MIG-21 was the backbone of the Indian Air Force (IAF). In 1984, in an effort to replace the aging MIGs, the Indian government tasked the Aeronautical Development Agency (ADA) to develop a light combat aircraft (LCA) and allotted a budget of $730 million for the project. With final design taking shape in 1988, the agency unveiled the first LCA prototype in 1995 –a full 12 years after the start of the project. However, the LCA would take another 6 years to take to the skies as the first flight was in 2001 –nearly two decades after the LCA project commenced. Even after repeated delays, the first iteration of the LCA, now christened Tejas, did not receive the initial operational clearance from the IAF until 2013 –again, a full 30 years after the project was initiated.

Defence analysts and experts attribute the delays in development of Tejas to the following:

  • Lack of technological knowhow in the ADA vis-à-vis the IAF’s expectations: many defence analysts have attributed ADA’s inability to achieve major milestones in a timely manner to IAF’s “unrealistic” expectations from the program and a lack of technological knowhow within the ADA. When the project was conceived, the ADA lacked capacity in almost all the critical areas of the fighter jet development including manufacturing composite materials, avionics, aerodynamics, and weapons integration. While the ADA was expected to develop the expertise in designing and executing the LCA project according the final specifications as agreed to by all stakeholders, it is alleged that the IAF repeatedly revised the specifications to make the fighter worthy of 21st century warfare. Experts on the side of the IAF make a strong a case for revising the specifications given the snail’s pace at the ADA.
  • Budgetary constraints: Indian defence projects have had a history of inadequate funding. Experts argue that the original $730 million for the LCA project was about half the amount required for timely progress. The budget was revised upwards to $2.2 billion in 2001 and, later to $3.6 billion in 2009; four years later in 2013, the LCA achieved the first breakthrough in combat worthiness when it received the initial operational clearance from the military. The project total cost, including cost overruns, was estimated to be around $5 billion (as of 2019).
  • Bureaucratic hurdles: To complicate matters further the bureaucratic and procedural delays worsened the situation. Stakeholders failed to acquire land for developing testing facilities and could not obtain regulatory clearances which delayed all progress.
  • Acquisition of sensitive technologies: As the public sector units failed to live up to expectations in terms of developing key technologies domestically, it was decided that the some technologies would be imported for the LCA. High-end sensitive technologies are considered to have dual-use and the Indian authorities failed to obtain clearances and permits to procure the critical components from close defence partners in Russia, France and the US. For instance, it took nearly 10 years for ADA and the defence ministry to procure the first prototype of GE’s F404 engine for a compatibility test in the LCA.

Notwithstanding the developmental delays and challenges, the Hindustan Aeronautics Limited (HAL) and ADA’s LCA project culminated in the combat-worthy Tejas Mk1. In 2021, the IAF placed an order for 83 Tejas Mk1 –a contract valued at $6.6 billion. This contract was structured, in part, to fund the development of the more advanced, more capable Tejas Mk2 (the mark 2 variant). With the Tejas Mk2 project, the agencies adopted a more flexible and leaner approach to development.

Tejas Mk2 and AMCA

First conceived in 2012 as a more capable variant of the LCA, the Tejas Mk2 project underwent major overhaul in 2015. Keeping in line with the Indian Government’s push for self-reliance (atmanirbharta) in the areas of defence technology and manufacturing, the defence ministry and the ADA took a longer-term view and redesigned the Mk2 project serve as a platform for testing and deploying several new indigenously developed air combat technologies. The Mk2 would be the platform to develop, test and deploy:

  1. Astra BVR missiles: first test fired in 2003, the Astra beyond-visual-range air-to-air missile has been one of major the success stories for the DRDO. Originally intended as an indigenously developed alternative to the Russian R77 (which was plagued with reliability and range issues for the IAF), the Astra missile, in its latest iteration, is comparable to USAF’s AIM-120 AMRAAM and Europe’s Meteor range of missiles. The early versions of Astra had a range of 110 km, with most recent iteration having a range of over 160 km.
  2. Uttam AESA radars: having an AESA (Active Electronically Scanned Array) radar is a key requirement for a modern fighter jet. The LRDE lab at DRDO developed Uttam AESA radar for use in indigenously designed fighter aircrafts, and the first production-ready version is currently being tested in the Mk1. LRDE is also working on version 2 of the AESA which comes with enhanced resistance to enemy’s electronic jamming capabilities.
  3. New suite of EWS and jamming systems developed by BEL.
  4. Testbed for AMCA and TEDBF designs: The Mk2 is expected to serve as a test vehicle for indigenously developed composite materials to be used in the upcoming Advanced Medium Combat Aircraft (AMCA) and its naval variant, the Twin-Engine Deck-based Fighter (TEDBF). Both are designed to be 4.5-generation fighter aircrafts (comparable to Rafale). This approach to aircraft design illuminates different investment and timing options for the ministry in the various stages of project development.

Considering the project design and staging aspects, it seems that the MoD and its research agencies have taken a real options approach to developing and deploying new combat technologies. Having learnt from the failures of the LCA project, the Mk2 platform was completely redesigned to be more modular in approach as this offers more flexibility (the flexibility option) and increases the possibilities to reduce sunk costs. The modular philosophy also offers the government an easier way to scale-back, or even completely abandon, the less successful and more risky initiatives without the main project taking a hit. Under this approach, the most promising breakthroughs and technologies with a high success rate such as the Astra BVR missiles, Uttam AESA and EWS systems have been prioritized for scaling up, even as the government works to develop the more high-risk, uncertain technologies namely, the indigenously designed jet engine (the Kaveri project by GTRE).

In a scenario in which a fighter jet development project is underway, and the R&D team can identify new technologies that could enhance the combat capabilities of the aircraft. With the real options approach, the Tejas Mk2 will serve as a near-perfect 4th generation testbed to develop and test 4.5th generation air combat technologies. For example, as India’s AESA capability matures it can develop the next generation Distributed Aperture Systems (DAS) radars. Similarly, as the digital fly-by-wire systems bear fruit, the ADA can develop algorithm controlled (semi-autonomous) digital fly-by-wire systems for use the next generation AMCA.

With real options analysis, decision-makers can evaluate the expected value of incorporating an uncertain technology into the project, even though the cost of doing so may be less clear at time the decision made. In addition to evaluating investment options, real options analysis can also be used to assess the overall economic feasibility of a fighter jet development project. By taking into account uncertainties in market demand, technological advancements, and other variables, decision-makers can better estimate the potential financial return of the project.

Prof. Abhijith S
Assistant Professor – Analytics & Data Science