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
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