Offset debate within MoD

The first of the IAF's six C-130J Super Hercules will soon be delivered by Lockheed Martin. The offsets around this and other deals have raised deep concerns within the MoD

By Ajai Shukla

Business Standard, 11th Dec 10

On Wednesday, 15th Dec, the MoD’s apex decision-making body, the Defence Acquisition Council (DAC), will hold a crucial meeting to decide on far-reaching changes in the Defence Offset Policy. Significant sections of the MoD fear that the proposed changes would unduly benefit foreign arms vendors, while derailing the offset policy’s aim of strengthening domestic defence industry.

Business Standard has learned from senior MoD sources that the DAC will consider, and possibly approve, the following amendments to the offsets policy, which have long been sought by the global arms industry:

(a) Liberalising the offset policy to permit indirect offsets in civil aviation and homeland security. Currently, vendors must discharge their offset obligations entirely within the defence industry.

(b) Expanding the definition of services that qualify as offsets. Currently, the services that qualify for defence offsets are “maintenance, overhaul, upgradation, life extension, engineering, design, testing of defence products, defence related software or quality assurance services.” Now, many more services are being considered, including training.

(c) Allowing transfer of technology to be eligible for offset credit. So far, the MoD has insisted that it will pay upfront for technology, as a part of the main contract. Now, by providing technology as an offset, a vendor could discharge his offset liability.

(d) Permitting foreign vendors to invest “in kind” in Indian defence industry. Presently, the policy permits “direct foreign investment”. Permitting investment in kind would allow vendors to claim as offsets the supply of goods and services, e.g. training simulators.

Yesterday, Business Standard had reported that Lockheed Martin’s US $275 million offset offer --- arising from its $962 million sale to India of six C-130J Super Hercules transport aircraft --- had been accepted by the MoD despite not meeting the provisions of the current offset policy. If the DAC okays these proposed amendments, however, offset proposals like Lockheed Martin’s would become permissible.

The MoD’s current offset policy mandates that foreign vendors that are awarded defence contracts above Rs 300 crores must plough back at least 30% of the value of the contract into Indian defence production or R&D. But global vendors, particularly US arms corporations, insist that the Indian defence industry does not have the capacity to absorb the Rs 40,000 to 50,000 crores worth of offsets that could arise over the next five years.

Global industry has kept the pressure on the MoD ever since offsets were announced in the Defence Procurement Procedure of 2006 (DPP-2006). The influential US-India CEO’s Forum is pushing for permitting defence offsets in civil aviation and homeland security. And on 25th August, six defence and aerospace bodies that represent almost every major US, British, German, French and Canadian arms corporation sent the MoD a joint memorandum urging “liberalisation” of the offset policy.

Indian industry, meanwhile fiercely resists dilution of the offsets policy, especially companies that have invested in defence capabilities and now see offsets as a lever for growth. On 29th November, at a meeting in the MoD, industry bodies CII and FICCI opposed the proposed changes, arguing strongly that Indian defence companies are capable of absorbing offsets. On the other hand, ASSOCHAM, dominated by companies that see defence as an opportunity for mass manufacture rather than high-tech capability creation, has argued for liberalising the policy.

“Liberalising offsets would completely defeat the purpose of an offset policy”, says a major private defence company CEO, speaking anonymously. “Expanding offsets to civil aviation, for example, would mean that a vendor could fulfil his obligations by producing luggage conveyer belts.”

Meanwhile, a divided MoD has internally debated whether to allow transfer of technology as offsets. The Defence R&D Organisation (DRDO), which has drawn up a list of 18 key technologies that must be acquired from abroad, argues that offsets provide a viable route for obtaining these. But MoD bureaucrats have resisted this plea, arguing that it would be difficult to fix an acceptable price for a particular technology.

“It would be very easy for a foreign vendor to give us artificially tailored financial arguments about what it cost to develop a technology”, says a senior MoD official. “We could end up with a valuation much higher than what that technology actually cost.”