Aggressive MoD gets clear on offsets

(Part 1 of a three-article series)

by Ajai Shukla
Business Standard, 7th Apr 07

For the first time, India’s Ministry of Defence (MoD) has publicly put a figure on its forthcoming defence purchases. On Tuesday, Dr Kiran Chadha, head of the MoD’s Defence Offsets Facilitation Agency (DOFA) told a gathering of Indian and European defence industry that India will buy $100 billion worth of military equipment over the next five years. At current exchange rates, that amounts to Rs 4,30,000 crores over the 11th defence plan period from 2007-2012.

The audience, executives from European Aeronautic Defence and Space Company (EADS), had gathered to discuss potential offset partnerships with Indian entrepreneurs invited by the Confederation of Indian Industry (CII). Their mental cash-registers could easily process the MoD figures: every foreign defence contract worth Rs 300 crores or more requires the foreign vendor to plough back 30% of the contract value as offsets, which are co-production or purchase agreements with Indian defence producers. If a conservative 70% of India’s $100 billion is spent on foreign equipment, Indian businessmen would benefit from offset opportunities worth $21 billion (Rs 90,300 crores).

As startling as the amounts involved were the MoD’s far-reaching changes and clarifications to the Defence Offsets Policy that was first formulated last September as a part of India’s Defence Procurement Plan – 2006 (DPP–2006). On Tuesday, divulging for the first time that India’s Ministry of Commerce was formulating a National Offset Policy, Kiran Chadha explained that the Defence Offset Policy would continue to operate independently, since “we cannot equate rice and wheat with arms and ammunition.” It remains unclear whether the Ministry of Civil Aviation (MoCA), which has its own offset policy for aircraft and equipment purchased from overseas, will operate under the new National Offset Policy.

It was also announced that the MoD had accepted a major demand from India’s growing private defence sector. In bidding for offset partnerships with foreign arms vendors, India’s private defence manufacturers will henceforth be treated on par with the eight Defence Public Sector Undertakings (DPSUs) like Bharat Electronics Limited (BEL) and Hindustan Aeronautics Limited (HAL), which have traditionally obtained preferential treatment. Now foreign vendors can choose Indian private companies as partners for implementing offset obligations.

Kiran Chadha stated that, “For the majority of projects that are ready for procurement and the 30% offset obligation, it will be the foreign companies that will choose their Indian partner, and they can choose more than one Indian private partner.”

This is already happening. India has just finalised it first offset agreement, worth $15 million (Rs 60 crores), with Israeli company ELTA, in a deal to supply India Medium Power Radars. ELTA’s offset partners will be private companies, L&T and Astra Microwave from Hyderabad. The offset proposals for the purchase of the navy’s newest fleet tanker involve 8-10 Indian companies. And in a major statements that DPSUs would now compete on level terms with the private sector, the MoD has ordered the redrafting of two tender proposals, which had mandated BEL and HAL as offset partners. In those proposals for buying helicopters, the vendors can choose any Indian companies as offset partners.

The MoD is also guarding against any tendency amongst foreign vendors to avoid offset obligations; it has mandated that every offset agreement will have to be coterminous with the main contract and directly related to it. For example, in a transfer of technology (ToT) deal for manufacturing helicopters in India, the offset deal must involve parts or technology related to that very helicopter and must be completed by the time the last payment is made to the foreign vendor. In this, the MoD has drawn on earlier experiences, where foreign vendors tended to avoid offset obligations. Says Kiran Chadha, “Some of the offsets programmes which were finalised by HAL almost 15 years ago have still not been implemented… We do not want to run after every vendor after the contract is over.”

Representing an increasingly confident private sector, active Defence Cells within industry bodies like the CII are pushing the MoD for a greater role in defence. The MoD, realizing that its eight DPSUs and 40 Ordnance Factories cannot deliver alone, is clearing the decks for the private sector to build up defence capabilities through offset opportunities.