BY ROHIT SINGH TOMAR
The union budget of 2019-20 was a promising start for the MRO industry. There are expectations that the current financial budget would also include beneficial structures for propagating India’s MRO industry, which is welcome news for the industry.
However, it is pertinent that policies directed towards achieving this goal accept that the MRO industry, unlike the domestic consumption industry, is not location-driven. It is a high-cost industry, requires significant capital investment, technology transfer, and scale of operations. An MRO set up in Singapore is not built to service the aircraft in Singapore but is built on business volumes expected of the Asia Pacific fleet at the core of its business plan. Hence, it would be necessary to take the view that OEM’s investing significant capital in Singapore, most of which are publicly traded organizations across the globe, would not like to cannibalize their investment by setting up another facility close to their existing facilities.
India missed the bus for a long time in this aspect. Over the last decade and more, Singapore, Malaysia, and even Indonesia placed themselves strategically to attract the OEM’s and large MRO Service providers across the globe to invest in their countries.
Now, let’s compare the total operating fleet of Singapore airlines, Malaysian airlines, and Indian airlines. It is no surprise that these countries were able to attract investments when their fleet was almost half of what we have in India today, so this addresses one key question, MRO investments are not driven by domestic consumption capabilities (the only exception being China). These countries identified the critical investment driving factors and incentivized these to bootstrap the MRO sector. The first wave of investments was driven by co-building MRO facilities, using the existing government-owned carriers as the backbone. However, one of the key differences was that these national facilities were allowed to be privatized or semi privatized in Singapore and Malaysia at the opportune moment.
Privatization of a large MRO unit created opportunities for OEM’s and MRO’s to scale operations fairly quickly and improve efficiency and technology transfer to build up capacity and compete in the market. The second round of incentivization was learning from the first wave, which aimed at significant tax credits by allowing more than 30%-50% of the CapEx investment to be eligible for tax rebates. These credits were coupled with tax removal on dividends and capital gains by the foreign OEM and MRO investors. At an operational level, these governments provided additional support to streamline the MRO supply chain based on the level of MRO technology in these MROs, including but not limited to zero royalty, access to airport infrastructure at discounted land rates (as compared to ready reckoner rates), and credits in terms of training workforce and credits on exports by these OEM’s.
These actions enabled the second wave of investments in MRO setup and technology. It is essential to keep in mind here that these investments come from large publicly listed entities and significant hedge funds across the globe. Like any capital intensive business, MRO investment needs to have a clear exit strategy to provide returns to
the investors. In the MRO industry, exit strategies have been the successful public listing of companies. The public listing of companies has delivered significant capital access for the MRO’s to expand their facilities.
However, with this model’s success, it meant more MRO’s in closer regional clusters, which accelerated the consolidation among the OEMs to strengthen their market position, performance and control over the business. Hence, the independent high technology MRO facilities have shrunk in their numbers across the last 5-6 years.
Countries like Singapore and Malaysia were quick to react to this. They created an investment policy, however, this time to create an environment to limit these OEMs from investing in other countries by providing CapEx-reinvestment tax credits. The credits effectively meant that an OEM, already generating revenues from Singapore or Malaysia, could re-invest as CapEx in these countries and enjoy another significant tax credits on the 50%-60% of these CapEx investments. This policy has been the primary inhibitor for OEM’s to invest in a close cluster of countries.
For India to develop its MRO sector, it would require a more holistic policy approach than a piecemeal approach.
India’s defence industry is a unique advantage to India compared to Singapore and Malaysia. It would always attract significant spending from the Indian government.
Several Indian companies are entering the supply chain for Indian defence. The Indian defence also has multiple MRO’s built across the country to maintain the fleet of aircraft. The initial steps have been initiated to bring the defence and civil MRO together by MoCA, which is a welcome first step. While these synergies can bring significant negotiation power cohesively, this alone cannot guarantee the Indian MRO industry’s growth due to the licensing agreements and the ability to undertake high tech maintenance for commercial aviation assets. While OEM’s would be happy to work with the defence sector to build up the capability to service the high tech component and defence aircraft, these would be controlled by approval limitations.
The civil MRO’s would not be able to undertake the same work without needing a separate licensing agreement with the OEM’s. Moreover, many would argue that states have set up SEZ where an MRO can carry out MRO activities with incentives, and we have seen such SEZ in Nagpur. However, except for Indamer MRO’s investment, which is again an airframe MRO, we have not seen any high technology MRO being set up by a private entity. The concept of SEZ’s for MRO’s is favourable for MRO’s, requiring a low level of investment like wheels and brakes shop, but not for MRO’s which need high-end technology setup significant upfront cost.
The GoI to achieve its strategic mission to build up the MRO sector in India would hence require a comprehensive strategy, as recommended below.
STRATEGIC
1. Create a matched defence and civil MRO pair, not at 36000 feet, but at ground level, match up civil MRO’s and Defence MRO units in pairs of 2 or 3 to jointly develop a plan on what they could do together to enhance their capabilities and what are the additional capabilities that would add a value of these pairs.
2. Renegotiate the current provision of the Bilateral Aviation Safety Agreement (BASA) with the USA to acknowledge cross-validation and certification in aerospace manufacturing, modification, and or repairs done on aircraft and aircraft components.
3. Develop a capital investment incentive policy with a joint contribution from center and state for each of the states, including component MRO, Landing gear, Engines, APU. The incentives to be technology and CapEx related. Higher the technology and the higher the CapEx, the better the incentives. (Tax credits based on % of CapEx investment spread over 5-8 years).
4. At the state level – the contribution from the center should be based on state specific parameters such as:
a. Land lease rental discounts at airports (below the minimum threshold discount on ready reckoner land rates).
b. State-level incentives on training costs of workforce.
c. State-level incentives on discount on the cost of electricity and amenities.
5. Access to a major airport in the state.
6. Removal of dividend distribution tax and capital gain tax for foreign OEM’s and MRO’s.
HYGIENE FACTORS
1. Inclusion of Aircraft spares distribution & logistics into the gambit of zero-duty exemptions. These players control the volumes of component business and are critical to supply the feed to component MRO business.
2. Inclusion of aircraft component level piece parts and engine piece parts under the definition of exemption from duty, which currently only states aircraft and aircraft parts and has created significant confusion among the customs and MRO players.
3. To create an RCS drawdown policy for carriers based on business volume, the airlines give to Indian MRO’s.
4. To provide a 5-6 years CapEx re-investment tax incentives to existing MRO players in India. With the focus on Aatma Nirbhar Bharat, India does not need to re-invent the wheel to spruce up the domestic MRO industry, but take cues from what some of the neighbouring countries have achieved, with the most recent news of an MRO successfully investing in Vietnam to set up a component MRO as a Joint Venture.
(The writer is Managing Partner of Caladrius Aero Consulting)
