Defence offsets making little headway - Broadsword by Ajai Shukla - Strategy. Economics. Defence.

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Friday 5 October 2007

Defence offsets making little headway

by Ajai Shukla
Business Standard, 5th Oct 07

Unexpected speed bumps threaten to disrupt India’s defence offsets programme, through which the Ministry of Defence (MoD) hopes to generate Rs 60,000-84,000 crores worth of business in India’s defence industry via foreign investment. This newspaper has already reported how two top managers of the offsets programme have been changed at a crucial time. Now Business Standard has learned that India’s first ever offsets deal, which involves Israeli defence major ELTA in partnership with Indian private companies L&T and Astra Microwave, is in trouble.

Top MoD officials, speaking on condition of anonymity, have told Business Standard that the Central Vigilance Commission (CVC) is scrutinising the deal for ELTA to supply radars to the air force. After a series of raids early this year on businessmen associated with Israeli defence companies, the MoD has played it safe by referring the ELTA deal to the CVC. For over six months now, the CVC has held on to the file. As a result, a year after the Defence Offsets Policy was spelled out, not a single offsets agreement has been finalised.

Foreign aerospace majors, which must submit by 9th June their offsets proposals for the Rs 42,000 crores contract for supplying Medium Multi-role Combat Aircraft (MMRCA), are carefully watching the ELTA deal, as an indicator of how India’s offsets programme will play out. There is little to reassure them; with the parent deal under scrutiny, the offsets agreements with Astra Microwave and L&T are also in limbo.

This is also the case with two other contracts that are considered test cases for the offsets programme. The Rs 2,200 crore deal for 197 multipurpose helicopters, finalised after years of testing and negotiation with EADS subsidiary, Eurocopter, is being reviewed after objections from rival company, Bell Helicopters. Meanwhile Eurocopter and its offsets partner, Hindustan Aeronautics Limited (HAL), can only wait. And in the proposed Rs 4,000 crore purchase of six C-130J Hercules aircraft, the MoD has still to clarify whether offsets will apply at all for this government-to-government agreement.

Adding to the apprehension amongst vendors is South Block’s delay in clarifying major policy issues relating to offsets. The MoD has verbally assured foreign military vendors that it will permit “offsets banking”. This would allow vendors to go ahead with setting up partnerships with Indian companies, with the assurance that the business generated would be credited as offsets for future defence contracts. But the MoD has held back on a formal announcement.

The MoD has also verbally indicated that it will allow foreign vendors to count technology transfers to Indian manufacturers as offsets. But this too has not been formally announced.

Dr Kiran Chadha, who headed the Defence Offsets Facilitation Agency (DOFA) until 1st October 07, explains that finalising the policy has taken time because there was no expertise on offsets within the MoD. Since these issues were being confronted for the first time, the MoD took time making sure there were no loopholes in its policy. She confirms that DOFA has now finalised its recommendations.

There is, however, another delay because Defence Minister AK Antony does not wish to announce frequent and piecemeal changes to the Defence Offsets Policy, which was spelt out just a year ago. According to Dr Kiran Chadha, “the Defence Minister will himself announce all the policy changes, in one go. This will most probably happen before the end of the financial year, that is 31st March 2008.”

The offsets policy mandates that every foreign defence contract worth Rs 300 crores or more obliges the foreign vendor to plough back at least 30% of the contract value as offsets, which are co-production or purchase agreements with Indian defence producers.

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