Fa­cil­i­ta­tion of de­fence off­sets

Per­haps there is need to pro­vide higher mul­ti­plier val­ues to ex­tremely crit­i­cal tech­nolo­gies re­quired by DRDO in or­der to at­tract for­eign ven­dors. It may be help­ful if MoD as­signs mul­ti­plier val­ues on a case to case ba­sis, based on crit­i­cal­ity, im­por­tance

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De­fence Off­sets Man­age­ment Wing (DOMW), Depart­ment of De­fence Pro­duc­tion (DoDP), the Min­istry of De­fence (MoD) has is­sued an of­fice me­moran­dum on Fe­bru­ary 14, no­ti­fy­ing op­er­a­tional­is­ing of a Fa­cil­i­ta­tion Cell-DOMW at Cen­tral Mar­ket­ing, Scope Com­plex, Lodhi Road, New Delhi. The ob­jec­tive is to en­hance trans­parency and fa­cil­i­tate free and easy ac­cess to in­dus­try par­tic­i­pants to ap­proach the DOMW for dis­cus­sion on any mat­ter per­tain­ing to the off­set pol­icy and speedy re­dres­sal of grievances. Es­tab­lish­ment of a Fa­cil­i­ta­tion Cell by DOMW is a wel­come step but it needs to be re­mem­bered that the DOMW was pre­ceded by the De­fence Off­set Fa­cil­i­ta­tion Agency (DOFA) that was es­tab­lished in 2006 but had to be shut down as it could not deliver upon what was ex­pected. The Par­lia­ment was in­formed in Au­gust 2012 that In­dian com­pa­nies had signed 19 off­set con­tracts with for­eign ven­dors un­til mid-2012; IAF pro­cure­ments gen­er­ated 80 per cent of all off­sets and naval pro­cure­ments ac­counted for the other 20 per cent. The Army signed its first off­set con­tract in March 2013 for ther­mal imag­ing in­te­gra­tion for the BMP–II ve­hi­cles. Ac­cord­ing to the new guide­lines, the re­spon­si­bil­ity of de­fence off­sets is di­vided be­tween two or­gan­i­sa­tions: the De­fence Ac­qui­si­tion Coun­cil (DAC) will eval­u­ate the off­set pro­pos­als and fi­nalise the con­tracts whereas the DoDP will be re­spon­si­ble for im­ple­men­ta­tion of off­set con­tracts, in­clud­ing mon­i­tor­ing the progress of the con­tracts. The newly es­tab­lished DOMW has been as­signed the re­spon­si­bil­ity of off­set con­tract man­age­ment.

In­dia has emerged amongst the largest im­porters of de­fence equip­ment. Ac­cord­ing to the Stock­holm In­ter­na­tional Peace Re­search In­sti­tute (SIPRI) fact sheet of 2013, In­dia is among the top 10 coun­tries in terms of mil­i­tary ex­pen­di­ture. Our de­fence sec­tor has in­vest­ments pri­mar­ily from Rus­sia, Is­rael, UK and USA. The 13th Indo-Rus­sian sum­mit (De­cem­ber 2012) led to $5 bil­lon in­vest­ment by Rus­sia. US aero­space ma­jor Boe­ing plans $30 mil­lion in­vest­ment as “off­sets” for the four additional P-8I long-range mar­itime pa­trol air­craft that In­dia in­tends to buy. Re­cent and po­ten­tial de­fence deals in­clude: $10.4 bil­lion 126 Rafale air­craft for medium multi-role com­bat air­craft; $3,000 mil­lion deal for 197 light ob­ser­va­tion/util­ity he­li­copters; $3,500 mil­lion deal for 7 Scor­pene sub­marines; $7,600 mil­lion deal for 12 stealth frigates; and $1,000 mil­lion deal for 16 multi-role he­li­copters. De­fence off­set obli­ga­tions are ap­pli­ca­ble to all cap­i­tal ac­qui­si­tions where the in­dica­tive cost is 300 crore ($50 mil­lion ap­prox­i­mately) or more and the schemes are categorised as: ‘Buy (Global)’ in­volv­ing out­right pur­chase from for­eign/In­dian ven­dors; and ‘Buy and Make with Trans­fer of Tech­nol­ogy (ToT)’ i.e. pur­chase from a for­eign ven­dor fol­lowed by li­censed pro­duc­tion in In­dia. Obli­ga­tion: value of the off­set obli­ga­tions pre­scribed un­der the De­fence Off­set Guide­lines (DOG) is 30 per cent of the es­ti­mated cost of the ac­qui­si­tion in ‘Buy (Global)’ cat­e­gory ac­qui­si­tions and 30 per cent of the for­eign ex­change com­po­nent in ‘Buy and Make with ‘ToT’ cat­e­gory ac­qui­si­tions. Off­set obli­ga­tions may be dis­charged by any one or a com­bi­na­tion of the fol­low­ing meth­ods: Di­rect pur­chase of, or ex­e­cut­ing ex­port or­ders for, el­i­gi­ble prod­ucts man­u­fac­tured by, or ser­vices pro­vided by In­dian Off­set Part­ners and In­dian En­ter­prises, i.e. de­fence pub­lic sec­tor un­der­tak­ings (DPSUs), Ord­nance Fac­tory Boards (OFB), etc; FDI in joint ven­tures with In­dian en­ter­prises (eq­uity in­vest­ment) for the man­u­fac­ture and/or main­te­nance of el­i­gi­ble prod­ucts and pro­vi­sion of el­i­gi­ble ser­vices; in­vest­ment in ‘kind’ in terms of ToT to In­dian en­ter­prises for the man­u­fac­ture and/or main­te­nance of el­i­gi­ble prod­ucts and pro­vi­sion of el­i­gi­ble ser­vices: through joint ven­tures or through the non-eq­uity route for co­pro­duc­tion; ToT should be pro­vided with­out li­cence fee or re­stric­tion on do­mes­tic pro­duc­tion, sale or ex­port; In­vest­ment in ‘kind’ in In­dian en­ter­prises by pro­vid­ing equip­ment through the non-eq­uity route for the man­u­fac­ture and/or main­te­nance of el­i­gi­ble prod­ucts and pro­vi­sion of el­i­gi­ble ser­vices (ex­clud­ing ToT, civil in­fra­struc­ture and sec­ond-hand equip­ment); Pro­vi­sion of equip­ment or ToT to govern­ment in­sti­tu­tions and es­tab­lish­ments en­gaged in the man­u­fac­ture and/ or main­te­nance of el­i­gi­ble prod­ucts and pro­vi­sion of el­i­gi­ble ser­vices, in­clud­ing DRDO; Tech­nol­ogy Ac­qui­si­tion by the DRDO in ar­eas of high tech­nol­ogy.

For any coun­try to be strong, a vi­tal el­e­ment is a strong de­fence-in­dus­trial base. Our De­fence Re­search and De­vel­op­ment Or­gan­i­sa­tion (DRDO), OFBs and DPSUs have been try­ing to ful­fill their man­date to mas­ter the sci­ence of de­sign­ing, de­vel­op­ing and man­u­fac­tur­ing cut­ting edge mil­i­tary tech­nolo­gies ever since. How­ever, what has been achieved is “pock­ets of ex­cel­lence”, as ac­knowl­edged by high placed DRDO of­fi­cials them­selves. In­dia has adopted nu­mer­ous method­olo­gies like li­censed pro­duc­tion, ToT, JVs and indige­nous re­search and de­vel­op­ment to ac­quire and ab­sorb crit­i­cal de­fence tech­nolo­gies. How­ever, 67 years af­ter inde-

pen­dence we con­tinue to im­port over 77 per cent of our de­fence needs which is a shame. To say that we are lag­ging be­hind the en­vis­aged goals of re­al­is­ing a sus­tain­able indige­nous de­fence man­u­fac­tur­ing in­dus­try would be a gross un­der­state­ment. Off­set prac­tices in the global de­fence in­dus­try have been in­stru­men­tal in in­flu­enc­ing the de­fence re­lated de­ci­sion-mak­ing of sev­eral coun­tries with vary­ing re­sults and de­grees of suc­cess. De­fence off­sets en­com­pass a va­ri­ety of com­pen­sa­tion ar­range­ments man­dated by for­eign gov­ern­ments as a con­di­tion on the pur­chase of de­fence equip­ment, weapons and ser­vices. Of­ten, the aim of the process is to even-up a coun­try’s bal­ance of trade. Off­sets gen­er­ally in­clude tech­nol­ogy trans­fer, for­eign in­vest­ments, joint ven­tures, co-de­vel­op­ment, and co-pro­duc­tion and the like with the aim of en­hanc­ing indige­nous in­dus­trial growth. Coun­tries use off­sets to ob­tain crit­i­cal mil­i­tary tech­nol­ogy, to ease the bur­den of large de­fence pur­chases on their econ­omy, to in­crease or pre­serve do­mes­tic em­ploy­ment and to pro­mote tar­geted in­dus­trial sec­tors. The key ob­jec­tive of the de­fence off­set guide­lines was to lever­age cap­i­tal ac­qui­si­tions to de­velop the de­fence in­dus­try, im­prove de­fence re­search and en­cour­age de­vel­op­ment of syn­er­gis­tic sec­tors like civil aero­space and in­ter­nal se­cu­rity. These guide­lines were last re­vised in Au­gust 2012 and the lat­est De­fence Pro­cure­ment Pro­ce­dure 2013 came into ef­fect on June 1, 2013. The first off­set con­tract was signed for the pur­chase of medium power radars in 2007.

The ap­pli­ca­tion of off­sets against ac­qui­si­tions in de­fence is a pro­gres­sive step to­wards mak­ing In­dia self-re­liant. Over the last two decades, off­sets have be­come a com­mon fea­ture of ma­jor de­fence ac­qui­si­tions all over the world, un­leashed by the forces of lib­er­al­i­sa­tion and glob­al­i­sa­tion. More than 100 coun­tries have in­cor­po­rated an of­fi­cial off­set pol­icy as a part of their for­eign mil­i­tary pro­cure­ment deals. Coun­tries use var­i­ous in­cen­tives like mul­ti­pli­ers; off­set bank­ing, cred­its for R&D and ToT to at­tract for­eign ven­dors. There is no par­tic­u­lar tem­plate which suits the re­quire­ments of ev­ery coun­try. A coun­try needs to de­fine the off­set con­cepts and pro­ce­dures in ac­cor­dance with its spe­cific aims and re­quire­ments. The present off­set pol­icy, in­cor­po­rat­ing many changes, came into ef­fect from Au­gust 1, 2012. Af­ter much spec­u­la­tion, the re­vised pol­icy brought some clar­ity to the de­fence off­set pro­ce­dures while try­ing to strike a bal­ance be­tween the de­mands of the for­eign orig­i­nal equip­ment man­u­fac­tur­ers (OEMs) and the in­ter­ests of the do­mes­tic de­fence in­dus­try. The off­set pol­icy which be­gan its jour­ney in 2005 ap­pears to have reached a sus­tain­able de­gree of ef­fec­tive op­er­a­tional­i­sa­tion. In In­dia, all con­tracts above 300 crore re­quire 30 per cent of off­set. In­dian firms and JVs are ex­empted from off­set obli­ga­tions pro­vided the indige­nous con­tent is over 50 per cent. In­dia also ac­cepts sub­con­tract­ing in out­sourced ser­vices, such as en­gi­neer­ing and de­fence soft­ware. The new off­set guide­lines pro­mote in­vest­ment in mi­cro, small and medium en­ter­prises (MSMEs) by ap­ply­ing a mul­ti­plier fac­tor of 3.0 to the off­set cal­cu­la­tions. It also fa­cil­i­tates tech­nol­ogy ac­qui­si­tion from a se­lect list, by the DRDO. The off­set dis­charge bank­ing pe­riod is ex­tended to seven years. Pe­riod of ex­e­cu­tion of off­set con­tracts is now al­lowed up to two years be­yond the pe­riod of main pro­cure­ment con­tract.

Ac­cord­ing to re­ports, the to­tal amount of off­set con­tracts signed by In­dia so far is around $5 bil­lion. With the em­pha­sis on mod­erni­sa­tion of the de­fence forces, the scope and value of off­set con­tracts are ex­pected to rise ex­po­nen­tially. Dif­fer­ent stake­hold­ers have dif­fer­ing opin­ions on the level of suc­cess of off­sets to deliver on the key re­sult ar­eas of de­fence pro­cure­ment.

The re­port of the Comp­trol­ler and Au­di­tor Gen­eral of In­dia (CAG) of Novem­ber 2012 is the lat­est re­view on the sub­ject, throw­ing light on the per­for­mance of off­set projects but de­tails of the sta­tus of off­set con­tracts and the names of In­dian off­set part­ners are not avail­able in the pub­lic do­main. The CAG re­port that was tabled in Par­lia­ment in Novem­ber 2012 in­di­cated cer­tain short­com­ings in the off­set con­tracts signed till mid-2012. The re­port high­lighted that most of the off­set con­tracts had not ad­hered com­pletely to the DPP guide­lines. The re­port also ques­tioned the waivers given by the MoD to cer­tain for­eign ven­dors in ful­fill­ing the off­set obli­ga­tions.

It would be pru­dent for DOMW to draw lessons from the DOFA fi­asco and not re­peat them. Some of the ma­jor is­sues that merit con­sid­er­a­tion are: de­spite sign­ing about 20 off­set deals, the sta­tus of most of the con­tracts is still not known. It is dif­fi­cult to un­der­stand the ra­tio­nale be­hind con­ceal­ing the de­tails and progress of off­set con­tracts. This by it­self mil­i­tates against the re­peated claims of trans­parency by MoD; what con­sti­tutes a le­git­i­mate off­set are ques­tions still search­ing for an­swers. The phys­i­cal val­u­a­tion of off­sets is com­plex. Value of parts lo­cally sourced could be straight­for­ward, but cost of ToT and help­ing set up in­dus­trial base could be vague. Co­pro­duc­tion and sub­con­tracts are the best forms of di­rect off­sets; off­set/in­dus­trial part­ner­ship man­age­ment has be­come a spe­cialised field and part­ner­ship man­age­ment or­gan­i­sa­tions, like Off­set In­dia So­lu­tions (OIS) have come up. Whether DOMW can per­form such func­tion on its own or not only time will tell; there have been pro­vi­sions for ToT in ear­lier de­fence pro­cure­ment pro­grammes but the ex­pe­ri­ences of indige­nous in­dus­try in ab­sorb­ing and util­is­ing the tech­nol­ogy re­ceived from for­eign OEMs have fallen short of ex­pec­ta­tions in the past, two ex­am­ples be­ing the Bo­fors guns and the BEML-Ta­tra deal. Lack of tech­nol­ogy ab­sorp­tion ca­pa­bil­ity has been the main rea­son for non-un­der-util­i­sa­tion of ToT from for­eign sources. Though the ToT pro­vi­sion seems promis­ing, there is no guar­an­tee that In­dia will be able to make full use of it, con­sid­er­ing its in­abil­ity to do so in the past; de­fence con­trac­tors are not only wor­ried about in­tel­lec­tual property rights or the tech­nol­ogy mov­ing to un­in­tended sources, but also about some of the re­cip­i­ents de­vel­op­ing tech­nolo­gies and later be­com­ing com­peti­tors at their ex­pense; def­i­ni­tion of mul­ti­plier val­ues may not help In­dia in gain­ing crit­i­cal de­fence tech­nolo­gies. The for­eign com­pa­nies which in­vest con­sid­er­ably in R&D may not be com­fort­able in shar­ing those high-end crit­i­cal tech­nolo­gies with In­dia at a mul­ti­plier value of as low as 2. There are no spe­cific in­cen­tives to share high-end tech­nolo­gies and for­eign OEMs can get the ben­e­fit of mul­ti­pli­ers by shar­ing com­par­a­tively non-crit­i­cal tech­nolo­gies for the same mul­ti­plier value. Per­haps there is need to pro­vide higher mul­ti­plier val­ues to ex­tremely crit­i­cal tech­nolo­gies re­quired by DRDO in or­der to at­tract for­eign ven­dors. It may be help­ful if MoD as­signs mul­ti­plier val­ues on a case-to-case ba­sis, based on crit­i­cal­ity, im­por­tance, re­quire­ment and ur­gency; DOMW should en­sure there is no am­bi­gu­ity in the process in­clud­ing through a fully au­to­mated sys­tem that will mon­i­tor, ac­count for, and au­dit off­sets in real time, which should be prefer­ably web-based; and, DOMW must pro­vide ac­cu­rate and de­tailed in­for­ma­tion about the sta­tus of off­set con­tracts and the tech­nol­ogy/ca­pa­bil­ity re­ceived from each con­tract to help stake­hold­ers un­der­take cost-ben­e­fit anal­y­sis, fa­cil­i­tat­ing mid­course cor­rec­tions.

LT GEN­ERAL (RETD) P.C. KA­TOCH

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