Defence offsets: Ministry dilemma holds up policy

Who should handle offsets? The Acquisitions Wing, or the Department of Defence Production? That dispute is holding held up the new offset policy

(Pictured here: the DRDO's Kaveri jet engine)

By Ajai Shukla
Business Standard, 25th Feb 12

A slew of amendments to the Defence Offset Policy are held up by disagreement within the defence ministry on a single crucial issue: which MoD department should handle offsets. A meeting of the apex Defence Acquisition Council (DAC) in New Delhi on Wednesday agreed on letting vendors offer high technology as an offset; on using “multipliers” for directing offsets into priority areas; and on allowing vendors to “bank” offsets for longer periods. But without consensus on which department should be the “single window” for offsets, the new offsets policy is on temporary hold.

“Over the last six months, proposed amendments to the offsets policy have been discussed threadbare in the Offset Committee, headed by Vivek Rae, the Director General of Acquisitions. All that remains to be decided is who should handle offsets. The Offsets Committee will discuss this further and the matter should be cleared in the next DAC meeting next month,” says a senior MoD official anonymously.

The disagreement centres on whether the Acquisitions Wing should handle offsets, or the Department of Defence Production (DDP). The DG Acquisitions spends the military’s capital budget, purchasing defence equipment worth tens of thousands of crore annually. Any overseas purchase worth over Rs 300 crore makes the vendor liable for offsets worth 30% of the contract amount.

The DDP, too, is directly connected with offsets. The government’s Allocation of Business Rules makes the department responsible for developing indigenous defence products and for the domestic defence industry. This is also the stated aim of offsets.

Currently, the Acquisitions Wing and the DDP’s Defence Offsets Facilitation Agency (DOFA) both play roles in implementing offsets. The new policy aims at combining these roles into a single office. This has been a long-standing demand from global arms vendors.

According to the Defence Procurement Procedure of 2011 (DPP-2011), the Acquisitions Wing receives and examines the technical and commercial offset offers from vendors; finalises and signs the offset contract; and monitors the implementation of offsets through an Offset Monitoring Cell. DOFA’s, role is more nebulous: it assists the Acquisition Wing in the technical evaluation of offset proposals; assists foreign vendors in interacting with Indian industry; certifies which Indian R&D agencies can receive offset investments; and advises and assists in implementing the offset policy.

The MoD’s decision, therefore, is where to set up the “single window”. One section of the ministry favours the Acquisitions Wing; another argues for the DDP.

“There is a clear conflict of interest in allowing the Acquisitions Wing a predominant role in offsets. Its primary role is to buy defence equipment expeditiously; and it regards offsets as an additional hurdle in an already cumbersome procurement process. The Acquisitions Wing has neither the competence, nor mind space to handle offsets,” says Major General (Retired) Mrinal Suman, an expert on Indian defence procurement.

Both sides, however, agree that a “single-window’ agency would require the contracting authority to also monitor the discharge of the contract. Indian defence manufacturers and experts like General Suman favour a strengthened DOFA that handles all the offset-related aspects of procurement: receiving and evaluating vendors’ offset proposals; facilitating offset partnerships; signing the offset contracts; and, crucially, monitoring how vendors discharge their offset liabilities.

Offsets, which were first introduced in the Defence Procurement Policies of 2005 and 2006 (DPP-2005 and 2006), required foreign vendors who were awarded defence contracts worth Rs 300 crore or more to plough back at least 30% of the contract value into Indian defence production or R&D. Amendments in DPP-2008 permitted offsets in non-licensed defence fields. And DPP-2011 also permitted vendors to discharge offsets in the non-defence fields of civil aviation and homeland security.