MoD’s offset farce: notes for the CAG

Antony releasing the Defence Production Policy last month, which talks about building up Indian defence industry. The DPP-2011, released the same day, undermines that aim by diluting offsets.

by Ajai Shukla

Business Standard, 8th Feb 11

Defence Minister AK Antony’s apparent probity is set to naught by his dismal lack of judgement. In a heated internal debate on offsets that has polarised his ministry, Antony has backed a group of bureaucrats that argue exactly what foreign arms vendors have lobbied for since offsets were instituted in 2005. They agree that India’s nascent defence industry is incapable of executing the offset projects that would arise from our weapons purchases. Consequently, the 30% plough back that foreign vendors were required to make into the Indian defence industry, on all contracts above Rs 300 crore, has now been permitted in civil aviation, internal security and aviation.

The foreign investment that offsets were to direct into the indigenous development and fabrication of high-tech radars, night-vision devices and missile seekers now seems headed for airliner seat upholstery and carpets; rubber panels for baggage claim conveyer belts; cabin crew training; and passenger management systems. All these are permissible under the MoD’s “liberalised” offset policy, promulgated last month. This is over and above an offset policy already in place for civil aviation. Worryingly, civil aviation offsets have never been audited and there are serious apprehensions about who has benefited from them.

Murdering the offset policy has not satisfied global arms vendors; they want it killed with retrospective effect. Currently, offsets relating to tenders that predate the neutered offset policy of 2011 must still be discharged within the defence industry. These include the multi-billion offset liabilities connected with the medium multi-role combat aircraft (MMRCA); the C-130J Super Hercules transport aircraft; and the P8I Poseidon multi-mission maritime aircraft (MMA). Now this coterie of MoD officials is pushing for the new policy to be applied with retrospective effect.

Also on their tables is another proposal that will delight foreign vendors: permitting transfer of technology (ToT) as an offset. This would be a true freebie, since India’s leverage as a massive arms buyer can ensure that ToT forms part of any deal. Besides, as the MoD knows well, an arbitrary price can be placed on most technologies.

The blinding illogic of these MoD decisions will surely be investigated someday, with questions raised over motivations, just as the 2G telecom scam is being probed today. The files will reveal that the MoD was so divided on this issue that Antony referred the further emasculation of the offsets policy to a committee --- that useful ministerial device for passing the buck.

So let us document how the MoD votes on the dilution of offsets. Supporting foreign vendors, and pooh-poohing CII’s and Ficci’s documented insistence that Indian Defence Inc. can absorb offsets in full, are the officials who spend the defence capital budget on overseas procurements: the defence secretary, and his acquisitions chief. Backing them firmly is the Indian Air Force --- the biggest buyer of foreign weaponry. This group regards offsets as an inconvenient obstacle to overseas procurement, a perspective shared and warmly encouraged by global arms vendors.

Opposing this coterie, and urging that offsets be implemented within the defence industry, is a group with professional stakes in building up the Indian defence industry. This includes the department of defence production, backed by the indigenisation-conscious Indian Navy that has traditionally built its ships in India. The army watches and waits, realising the benefits of indigenous industry but not yet clearly committed like the navy.

Highlighting the impatience of the IAF and the acquisitions wing with offsets, is the indefensible clearance, in violation of multiple MoD rules, of Lockheed Martin’s $275 million offset proposal relating to its billion dollar sale of C-130J Super Hercules aircraft. In what most investigators would consider a conspiracy, the IAF left out a C-130J training simulator from their list of requirements; well knowing that this would be required for mission training. Smartly exploiting that gap, Lockheed Martin offered, as an offset, a simulator at an exorbitantly inflated price. The acquisitions wing illegally granted them offset credit for doing so.

French company, Thales, is getting away with an equally farcical offset proposal relating to its supply of radars to the IAF. While sourcing the radar equipment from France, Thales is discharging its offset obligations by buying accommodation tents (including toilets; kitchens; air-conditioners; and microwaves) from a Gurgaon-based company; and by purchasing motorcycles and vehicles for the radar crews. This is a travesty of what offsets were intended to be: a stimulant for domestic defence industry.

This is happening because Antony --- normally an astute guardian of his reputation, but severely endangering it here --- has failed to create within his ministry an organisation to evaluate and manage offsets. In the resulting vacuum, the acquisitions wing and the department of defence production have each tried to palm off to the other the responsibility for handling offsets. To bypass this passing-the-parcel within the ministry, Antony has been persuaded to pass on the parcel to civil aviation.

This is clearly at odds with the government’s own regulations. The MoD’s “Rules of Business” (Serial 12) holds the ministry responsible for: “Development of the aeronautics industry and coordination among users other than those concerned with the Ministry of Civil Aviation and the Department of Space”. How is the MoD going to administer offsets that arise from defence, but flow into civil aviation, without inter-ministerial coordination?

The logic at the heart of defence offsets is the use of buyers’ leverage to arm-twist vendors into building up what they rightly see as potential competition. But despite their protests, commercial logic would bring the vendors in line. This newspaper has reported in detail how global arms vendors have, over years, systematically protested India’s offset policy even while tying up local partnerships for implementing it. The MoD’s offset dilution of 2011 is an appalling example of snatching defeat from the jaws of victory, a tradition once the preserve of our cricket squad.

Was this mere incompetence or a rigged game? Some day, not far away, an investigation will decide.