Foreign suggestions on offsets: the MoD’s response - Broadsword by Ajai Shukla - Strategy. Economics. Defence.

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Monday 9 April 2007

Foreign suggestions on offsets: the MoD’s response

(Part 2 of a three-part series on offsets)

by Ajai Shukla
Business Standard, 9th Apr 07

Until the Defence Offset Policy was framed in 2005, India --- the developing world’s biggest arms buyer --- had never demanded offsets, even as smaller buyers like Malaysia, Korea and South Africa drew billions of dollars worth of foreign investment as conditions for the weaponry they bought. But now, India is not just richer, it’s also savvier. New Delhi’s $100 billion budget for weaponry means that foreign suppliers must tie up with Indian companies offset agreements worth $21 billion (Rs 90,300 crores) by 2012.

Foreign vendors, unsurprisingly, are unhappy with the idea that 30% of every arms deal worth over Rs 300 crores must generate business in India’s economy. Offsets, the US government officially declares, are undesirable, since they increase the cost of a deal. But with little choice but to accept offsets, foreign suppliers, particularly from the USA, have been trying to shape India’s offset policy to their advantage.

The US-India Business Council (USIBC), representing 250 of the biggest US companies investing in India, presented India’s Defence Secretary Shekhar Dutt with a document listing “International Best Practices” in defence offsets, suggesting India study this before finalising its offset policy. On Tuesday, Dr Kiran Chadha of the Defence Offset Facilitation Agency (DOFA), the MoD’s nodal agency for planning and implementing offsets, officially responded, informing an audience of European and Indian defence manufacturers that MoD experts were competent to formulate policy, having “deliberated on the global practices on offsets, and studied the offsets programmes of companies across the world to arrive at the policy as it exists today.”

The DOFA chief announced a slew of new decisions on offsets, responding point-by-point to suggestions made over the last year by foreign vendors.

• The MoD has accepted the suggestion that India should permit “offset banking”. This allows vendors to set up projects in partnership with an Indian company and then credit the value of business generated as offsets for a future defence contract. The USIBC has argued that this provides offset partnerships with a long-term, rather than a single-contract perspective. Take for example, a joint venture, set up as an offset obligation in a F-16 contract, to manufacture F-16 fighter radios. If offset banking was allowed, the JV could continue producing radio sets as part of the F-16 global supply chain, even after the Indian contract was concluded.
• The MoD rejected the suggestion to allow “indirect offsets”, such as joint ventures in key economic sectors like energy, infrastructure, water and high-technology. The USIBC, amongst others, argued that JVs in non-defence sectors like thermal power should be given offset credits for unrelated defence contracts, e.g. for supplying night vision equipment.
• The MoD also rejected the suggestion to allot “credit multipliers” to offset proposals. Foreign vendors suggest that India could draw offsets into sectors that are higher national priorities by allotting projects in those areas higher credit multiplier ratings. E.g. by allocating a credit multiplier of 4 to a key software development project, a $50 million investment in that project would bring a vendor offset credits of $200 million. The USIBC points out that some countries use multipliers of up to 30 to encourage high technology offset investment.
• The MoD announced that it would amend its Defence Offset Policy to dispense with offsets in procurements that are processed under its fast track procedure. The logic is that tying up offsets cannot delay urgently needed items, and the waiver from offsets will provide a motivation for quick delivery. The DOFA chief says, “After the order is issued the product will have to be supplied in 12 months flat. Of course there will be a penalty clause for no compliance”.

The DOFA’s nimbleness is not confined just to flexible and transparent decision-making. The DOFA chief assured private industry that the Defence Offset Policy would evolve continually and quickly. Instead of going to the Cabinet for a brand new policy each time changes were required, Kiran Chadha explained, “We just have to take approval from the Defence Procurement Board and from there, with their recommendations and their views, it’ll go to the Raksha Mantri… and the amendments will be effective.”

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