Wednesday, 4 April 2012

Defence ministry specifies aim of offset policy

By Ajai Shukla
Business Standard, 4th April 12

After months of delay, the defence ministry (MoD) has cleared long-awaited revisions to the defence offsets policy. These include permitting the transfer of technology (ToT) as offsets; incentivising vendors to transfer specified technologies to the Defence R&D Organisation (DRDO) by allowing offset credits worth 300% of the value of technology that they provide; extending by two years the period within which vendors must discharge offset obligations; and extending the validity of banked offset credits to seven years (it was earlier two years).

The revised Defence Offset Guidelines (DOG) were approved by the MoD’s apex Defence Acquisitions Council (DAC) at a meeting in New Delhi on Monday. Offsets were first made mandatory in the Defence Procurement Policy of 2006 (DPP-2006) and then revised periodically. The policy requires foreign vendors who win defence contracts worth Rs 300 crore or more to plough back at least 30% of the contract value into India in the form of defence orders, technology or infrastructure.

Crucially, the revised DOG provides clarity to the offset policy by explicitly stating its objectives. Its threefold purpose is “to leverage capital acquisitions to develop Indian defence industry by (i) fostering development of internationally competitive enterprises, (ii) augmenting capacity for Research, Design and Development related to defence products and services and (iii) encourage development of synergistic sectors like civil aerospace and internal security.”

Recognising ToT as eligible for discharge of offset obligations, the revised policy mandates that the ToT must be complete, including documentation, training and consultancy, but not civil infrastructure and equipment. The DOG specifies that “ToT should be provided without licence fee that there should be no restriction on domestic production, sale or export.”

This ensures that Indian industry would be free to market any equipment that is built using the technology transferred as offsets.

The revised policy permits a multiplier of up to 3 on technologies that are transferred to the DRDO, making offsets a viable route for obtaining key technologies that the DRDO has its eye on. In practical terms, if a vendor provides the DRDO with technology for a missile seeker head, which is agreed to be worth $200 million, the vendor would be deemed to have discharged $600 million worth of offsets.

The new policy clarifies that, in a complex contract where multiple sub-vendors incur offset liabilities, the sub-vendors can individually discharge their own liabilities, but the main vendor shall be responsible for ensuring that offsets are discharged in full. For example, in Dassault’s Rafale fighter, a significant share of the offsets (especially that relating to avionics) would be the responsibility of Thales, Dassault’s key sub-contractor for the Rafale’s avionics. While Thales is permitted to discharge its offset liabilities, by partnering Indian offset partners (IOP), the overall responsibility would remain that of Dassault, which is the prime contractor.

The new policy also clarifies that the offset agreements between the vendors and the IOP would be subject to the laws of India.

A key concession to foreign vendors is the extension of two years for discharging offset obligations. The earlier policy mandated that offset liabilities must be discharged alongside the main contract. Now, an extension of two years beyond the execution of the main contract has been allowed.

The revised offset regulations provide another welcome break for foreign vendors by making banked offset credits valid for seven years, as opposed to a two-year validity period that the superseded policy allowed. Now offset-linked credits that materialise in, say, 2012-13, can be used against offsets that arise between now and 2019-20.

Finally, the revised offset guidelines incentivise foreign vendors to select micro, small and medium enterprises (MSMEs) as their offset partners by introducing a multiplier of 1.5 for all offsets discharged through MSMEs. The latter shall be identified through the monetary guidelines specified by the Department of Micro, Small and Medium Enterprises of the government of India.

What the revised offset policy does not provide, though it was expected to, is clarity on which MoD arm --- the Department of Defence Production (DDP), or the Acquisitions Wing --- will monitor offsets.

“The absence of clarity on who which department will monitor offsets is a major weakness in India’s defence offset policy. The MoD needs to specify this and to equip the concerned department with technically competent manpower at the earliest,” says Laxman Behera of the Institute for Defence Studies and Analyses.

2 comments:

Prasad said...

Technology import should never be a long term solution.
A country never as friends, only convenient partners.
Encouraging foreign players, who benefit by selling the same system to two warring states will prove counterproductive in the long run.
Easy roads never lead to great heights.

Anonymous said...

Dear Ajai Sahab, Has the revised offset policy (2012) being promulgated formally by MoD? If yes, can you share its link please.