High technology to come in as offsets

by Ajai Shukla
Business Standard, 5th June 07

The Ministry of Defence (MoD) has added another important change to the series of internal decisions on the Defence Offset Policy: foreign vendors can offer Transfer of Technology (ToT) as a way to fulfil its offsets liabilities in a deal. The MoD believes that this is a win-win situation for both vendors and for India. The MoD would gain from access to sensitive technologies that it has long been denied, while the foreign vendor would be spared the difficulties of actually implementing an offset liability: finding an Indian partner, obtaining the manufacturing licenses, and going through the uncertainties of an opaque MoD tendering procedure.

This proposal, beneficial though it appears for the Indian defence industry, has apparently been greeted with even greater enthusiasm by global defence majors.

The proposal greatly simplifies the execution of a vendor’s offset liability. MoD sources explain its working with an example that they stress is hypothetical. India could soon contract for the purchase of 197 utility helicopters from EADS subsidiary, Eurocopter. The deal would involve the purchase of 67 helicopters off-the-shelf, and the ToT and licensed production of another 130 helicopters in HAL Bangalore. If the total contract is worth $1 billion, Eurocopter would have to invest $300 million (30% of the contract value) into offsets, or defence production in India. Instead, if the value of the ToT is negotiated at $350 million, Eurocopter can simply offer it as an offset, fulfilling its $300 million liability, and banking the extra $50 million as offsets towards a future deal.

The stage for this MoD decision was set by a fortuitous set of circumstances. Firstly, the Defence R&D Organisation (DRDO), under public interrogation for its failure to deliver quickly on indigenisation, has dropped its reflexive opposition to procuring foreign technology. Confronted by its failings, the DRDO has agreed to import key technologies to develop downstream military equipment. For example, to fulfil the huge army order for Night Vision Devices, the DRDO accepts the need to import the key technology, Image Intensifier Tubes, which it has failed to develop itself.

The second big change, explain MoD sources, is the changed global mindset about providing cutting-edge technology to India. After decades of international sanctions since the 1974 nuclear experiment, Israel’s readiness over the last decade to provide India with defence technology has meant that other countries either get onto the bandwagon or get left behind. India already accounts for 30% of Israel’s arms exports and the figure is rising.

The third circumstance, the MoD points out, is the increased confidence amongst uniformed servicemen and defence scientists in evaluating and pricing technology on offer. With foreign courses and exchange programmes liberalised over the last decade, many more soldiers and scientists have developed international exposure and technological expertise. Having evaluated foreign technology as part of several ToT deals signed by India recently, there is a bank of experience as well.

Leveraging offsets allows the MoD to bargain for technology from a position of strength. After decades of being palmed off with near-obsolescent technology, MoD sources point out that vendors will now have to compete to provide India with technology. The companies tendering for any contract will have to specify, in their offset proposals, the technology they will provide as well as the cost they assign to it. Thereafter, Indian military and DRDO experts will make the decision.

While the MoD has made the decision to include ToT as a part of the offset options open to a vendor, it has not yet been promulgated. Global vendors are also waiting for an official announcement on the MoD’s earlier decisions to permit “offset banking” and waiving offsets in “fast track” procurements.