Defence ministry setting up new offset agency, starts hiring private consultants

The roll-out of the naval version of the Tejas light fighter in 2010. With the naval fighter facing developmental roadblocks, and technology cooperation with the ADA now eligible for offset credits, foreign vendors may show greater interest in working with ADA 

By Ajai Shukla

New Delhi

The defence ministry (MoD) has begun setting up a new, crucially important department that will monitor and audit some Rs 8,300 crore worth of offsets per year that must be discharged by foreign vendors who sell arms to India. On Aug 1^st, the MoD had announced new offset guidelines that mandated such a body.

Senior MoD officials, speaking anonymously, have briefed Business Standard on the Defence Offset Monitoring Wing (DOMW), the clunky nomenclature given to the new department. The MoD has been sanctioned an additional secretary just to head the DOMW. One of the DOMW chief’s first actions will be to hire a private agency for physically auditing the implementation of offsets by foreign arms vendors.

“Tenders will be going out soon to a range of consultants. We need an agency that can physically verify the correctness of the compliance reports that the vendors will be submitting to us every six months. The MoD does not have the resources to do these checks,” explains a senior MoD official.

The defence offset policy mandates that foreign arms vendors who win Indian defence contracts worth Rs 300 crore or more, must invest 30% of the contract value into building India’s defence industry. A vendor can discharge offsets by sourcing defence products from India, investing in Indian defence R&D and manufacturing, or providing defence technology. Since 2011, offsets can be discharged in the fields of civil aviation and internal security.

The new offset guidelines split responsibility for defence offsets between the MoD’s two main departments. The Acquisition Wing, under the Department of Defence (DoD), will evaluate offset proposals submitted by prospective vendors. It will also conclude offset contracts with vendors, alongside the main contract that creates those offset obligations. But post-contract monitoring and auditing of offsets will be the job of the Department of Defence Production (DDP), through its newest agency, the DOMW.

The DOMW is being set up from scratch. The DDP has so far been authorized a Defence Offsets Facilitation Agency (DOFA), an understaffed agency under a joint secretary, whose duties have been confined to putting foreign arms vendors in touch with prospective Indian offset partners. The DOMW, in contrast, will be higher-powered and more expansively manned. An additional secretary (one rank senior to joint secretary) will head it, with a joint secretary and six full-time director-level officers under him.

“We are becoming functional right away. Six temporary directors are arriving next week from defence PSUs and the Ordnance Factory Board, until permanent officers can be posted. Eventually, civilian and military officers from all three services will man these six director-level posts,” says a top MoD officer.

Tenders are also being sent out to IT companies, for developing the fully automated systems that the DOMW will use for monitoring offsets. The selected company will be developing the databases and prescribed formats for vendors to submit returns on line.

“Realisation has dawned on everybody (in the MoD) that offsets will be huge. We will function through a fully automated system, which will let us monitor, account for and audit offsets on line,” says an official.

The DDP has also begun scouting around for a suitable location for the DOMW offices. South Block is considered unsuitable, as the entry of foreign vendors would be severely restricted.

India will spend an estimated Rs 2,75,000 crore on overseas weaponry this decade. Offset requirements of 30% (the recent medium fighter contract actually stipulates a 50% offset obligation) means that some Rs 83,000 crore worth of offsets could be generated during the coming ten years. The DOMW, therefore, will be required to monitor the implementation an average of about Rs 8,300 crore in offsets each year.

(The article originally published in Business Standard on 10th Feb 12 stated that the DOMW head would be an "assistant secretary". In fact, as corrected later, he will have the rank of "additional secretary")