Ministry may dilute defence offset policy today

By Ajai Shukla

Business Standard, 23rd Feb 12

The Defence Ministry will today finalise long-awaited amendments to the defence offset policy. The key steps that the apex Defence Acquisition Council (DAC) is likely to okay: permitting vendors to offer technology as offsets; allowing offsets to be discharged in commercial shipbuilding; and allowing “offset multipliers” in order to canalize offsets into desired fields. Crucially, the DAC is likely to mandate that the Defence Offset Facilitation Agency (DOFA) would be responsible for administering offsets, a decision that would permit the expansion and empowerment of this currently moribund department.

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. But global vendors, particularly US companies, have lobbied hard to dilute this policy, insisting 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. The policy that is likely to be finalised today will fulfil many of the vendors’ demands.

High-level MoD sources say that the DAC could okay the following measures:

• Permitting technology transfer as an offset. This will only apply to high technology that a vendor provides with full Intellectual Property Rights (IPR), and without restrictions. The DRDO will evaluate technology that is offered as an offset, assessing whether it fits into an overall indigenization plan. For example, if a vendor offers technology for a missile seeker head, the DRDO will assess how badly that is needed; the feasibility of developing the technology within India quickly; and the cost at which it is offered.

• A system of “multipliers” will be introduced, which would give vendors enhanced credits for investing in priority fields. For example, if the MoD urgently requires metallurgical technology for building jet engines, a multiplier of, say, 3 could be placed on that technology. That would give a vendor who provides technology worth Rs 200 crore an offset credit of Rs 600 crore.

• Likely to be approved: a multiplier of 1.5 for purchase/manufacture directly related to the contract that generates the offset obligation. Also likely is a multiplier of 1.5 for investment in small and medium enterprises (SMEs). The highest multiplier of 3 is likely for the provision of high technology.

• DOFA, the lightweight section under the Department of Defence Production (DDP), could be beefed up with additional manpower and resources into a “single window agency” that can provide vendors with all reviews and approvals. Alternatively, DOFA could take the form of an entirely new agency, called “Directorate of Defence Offset Management” or “Defence Offset Management Wing.”

• Vendors could be permitted to discharge offsets through commercial shipbuilding. This non-defence field will be in addition to civil aviation and homeland security, which were permitted as offsets in DPP-2011

• The requirement of offsets may be substantially increased above 30%, since vendors would benefit from measures like multipliers (a multiplier of 3 effectively brings down a 30% liability to just 10%). It will also be compulsory for vendors to discharge at least 40% of their offset requirement through defence production (i.e. direct offsets) and no more than 60% through the non-defence categories of civil aviation, homeland security and shipbuilding.

• The eligibility period for “offset banking”, which allows vendors to accumulate offset credits towards a future contract, could be increased to 7-10 years.

DPP-2006 permitted only direct offsets, i.e. offsets in products that required a defence licence. This was diluted in DPP-2008, which allowed offsets in non-licensed defence fields. Vendors began discharging offsets through low-tech, quasi-military products like field shelters and air-conditioning. DPP-2011 diluted the requirements further, permitting vendors to discharge offsets in the non-defence fields of civil aviation and homeland security. The latest policy will represent the third wave of offset dilution.