Offset Contracts on the Rise As Defence Ministry Initiates an Offsets Monitoring Wing

With the advent of the Defence offset policy in 2005, India’s offset contracts have risen sharply enabling the growth of the Indian Defence industry. Minister of State for Defence, MM Pallam Raju has announced in the Parliament that local firms in the country had signed 19 offset contracts with international firms since the inception of the offset policy. In addition, a Defence offsets monitoring wing to monitor and audit the implementation of offsets by foreign arms vendors.

Minister of State (Defence) MM Palam Raju has indicated that Indian Air Force (IAF) procurements have generated the largest chunk of offsets amounting to 80 percent. The remaining 20 per cent of offsets have come from naval procurements while the army procurements have not led to any offsets. According to media reports, the total amount of these offsets are to the tune of roughly $ 5 billion (Rs.25,000 crores).

The offsets policy was made imperative in the Defence Procurement Policy of 2005 (DPP-2005) and has been updated over the years. The mother of all offsets contract has been the outcome of the acquisition of the C-17 Globemaster III transport aircraft from the US for the IAF which is an over $ 1.1 billion contract. Following this is the roughly $ 1 billion offsets contract with the upgrade of Mirage 2000 fighter aircraft which involves aerospace majors Thales and MBDA.

At present, the Defence offset policy makes it mandatory for international arms vendors who win contracts worth Rs 300 crore or more to plough back at least 30 per cent of the contract value into Indian indigenous industries. Since 2011, offsets can be discharged in the fields of civil aviation and internal security. In 2011 and 2012, offset contracts worth $ 2.2 billion were signed.

Meanwhile, the Defence Ministry has initiated the creation of a crucial department which will overlook and audit the roughly $ 1.7 billion worth of offsets per annum that international players will plough back to India. In august, Defence Ministry announced new offset guidelines as well. Basically, a new department called Defence Offset Monitoring Wing (DOMW) has been initiated and the ministry has been sanctioned an additional secretary just to head the DOMW. One of the crucial functions of the DOMW will be to hire a private agency for physically auditing the implementation of offsets by foreign arms vendors.

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Brig Vivek Mehta Posted on: August 25, 2012

EMPOWERING THE DOMA/DOMW

Setting up of a Monitoring Wing as an adjunct to the DOFA or Independent to it is a good initiative by the MoD. However, to date most agencies set up to assist/facilitate Defence Acquisition, have been ineffective and found wanting in the execution of the envisaged task. To limit this to the Offsets Procedure, the following lacunae exist:-
1. The DOFA stopped registering Indian Industry for manufacturing of Arms and Ammunition over a year ago, saying that they did not have the staff and wherewithal for it. As a result, a number of Indian Defence Industries who are already suppliers of Equipment to the Armed Forces and have the intent to widen their scope, are not in the list displayed on the relevant MoD, DOFA Web Page.
2. The DOFA as well as the DOMA/DOMW must accept Letters of Intent/Industrial Licences or some sort of Registration of Indian Defence Industry, and maintain a record of Defence Products, allowed under Defence Offsets for the following reasons:-
(a) The Foreign Vendor would be facilitated and would have a number of options to choose his Offset Partner. Even if he has chosen one, he still has an option for more partners in case he is unable to fulfil his obligations from only one partner.
(b) There are a number of unfulfilled Offset Obligations, prompting the Foreign Vendor to ask for additional time or extension to fulfil the obligations. With the DOMA/DOMW promulgating a list of Offset Obligations once the Contract is signed and de-classified, as well as list of Outstanding Obligations, the Indian Industry will be facilitated in offering products to the Foreign Vendor thus helping him in timely execution of his Offset Obligation.
3. The DOFA is under the DDP, who has a stake only till the Offset Partner is selected. Thereafter, the Acquisition Wing of the MoD takes on the Process of Technical Eligibility, Trials, Evaluation, Contract Negotiation and Monitoring of Execution of Contact. The DOMA/DOMW must therefore be under the Acquisition Wing to coordinate, facilitate and implement execution of Offset Obligations, as it has a direct stake in this process and is in a position to coordinate the implementation of various actions post contract.
Unless there is facilitation of both the Foreign Vendor and Indian Industry by Transparency in promulgation of eligible Offset Partners as well as outstanding/ongoing Offset Obligations, any new initiative is bound to fail or stagnate due to lack of vision and empowerment.
Brig Vivek Mehta, Veteran.