Relook at the Policy
Its time for a paradigm change of approach in defence
offsets
By Maj. Gen. Mrinal Suman (retd)
Although India entered the complex world of defence offsets only
seven years ago, it has travelled a long distance and offsets have
become an essential part of all high value defence deals. Although
ministry of defence (MoD) prefers to keep all offset activities
concealed from public scrutiny, it is estimated that India has
signed offset contracts worth Rs 22,000 crore. However, it is still
a mystery if any offset contract has been successfully implemented
with anticipated benefits.
Indias defence offset policy has matured through a process of
evolution. Initially announced in 2005, the policy was more of a
counter-trade arrangement, designed primarily to promote exports
from the public sector. The policy was revised in 2006 to include
any private defence industry manufacturing these products or
components under an industrial licence granted for such
manufacture. It also allowed Foreign Direct Investment (FDI) in
Indian defence industry and defence R&D. Subsequently, the
mandatory requirement of an industrial licence for private
companies was removed in 2008.
The last revision of the policy was carried out in January 2011
as a part of the Defence Procurement Procedure (DPP). The latest
policy directive, called Defence Offset Guidelines (DOG), has been
made effective from 1 August 2012. The directive contains two major
changes objectives of the defence offset policy have since been
spelt out and Transfer of Technology (ToT) has been accepted as an
eligible avenue for discharging offset obligations.
Salient Aspects of the PolicyAs per the Indian policy, all
import deals with an indicative value of more than Rs 300 crore
carry an offset obligation equal to 30 per cent of the contract
value. Offset percentage can be changed or waived by the Defence
Acquisition Council (DAC). Offset obligations can be discharged
within a timeframe that can extend beyond the period of the main
contract, but within two years of the main deal being
implemented.
Foreign vendors can choose their Indian partners and discharge
their offset obligations through any one or a combination of the
seven specified methods. They include direct purchase of, or
executing export orders for, eligible products manufactured by, or
services provided by Indian enterprises; FDI in joint ventures with
Indian enterprises (equity investment) for the manufacture and/or
maintenance of eligible products and the provision of eligible
services; investment in kind in terms of ToT to Indian enterprises
for the manufacture and/or maintenance of eligible products and
provision of eligible services; investment in kind in Indian
enterprises in terms of provision of equipment through the
non-equity route for the manufacture and/or maintenance of eligible
products and provision of eligible services; provision of equipment
and/or ToT to government entities engaged in the manufacture and/or
maintenance of eligible products and provision of eligible
services, including the Defence Research and Development
Organisation (DRDO); and technology acquisition by DRDO in areas of
high technology.
Products eligible for discharge of offsets relate to defence,
internal security and civil aerospace. Services mean maintenance,
overhaul, upgradation, life extension, engineering, design, testing
of eligible products and related software or quality assurance
services with reference to the indicated eligible products and
training. Training may include training services and training
equipment but excludes civil infrastructure.
An Appraisal of the Current DispensationAlthough the offset
regime continues to be highly obscure, two audit reports submitted
by the Comptroller and Auditor General of India (CAG) provide a
rare glimpse of its imperfections and absurdities. The first report
covers a review of 16 offset contracts worth Rs 18,444.56 crore
(Report No 17 of 2012-13). According to the contracts, India should
have received offset inflows of Rs 5543.33 crore at the time of
compilation of the said report. Actual gains have neither been
collated nor revealed. The second report relates to the acquisition
of helicopters for VVIPs (Report No 10 of 2013).
Both the reports are alarming in nature, to say the least. They
reveal that Indias offset regime is in a total mess. Policy
provisions are being flouted with impunity. Unauthorised programmes
have been accepted against offset obligations. In some cases,
foreign vendors have been allowed to claim credit against
outlandish activities like expenditure incurred on the conduct of
seminars in India. Offset credits have been granted against the
supply of simulators, despite specific instructions to the
contrary.
Bizarrely, ineligible Indian companies with more than 26 per
cent foreign holding have been accepted as Indian Offset Partners,
thereby making a mockery of the concept of offsets since most
benefits flowed back to the foreign holders. As MoD has no
mechanism in place to monitor offset programmes, it is being forced
to accept the progress reports submitted by the vendors. In short,
the foreign vendors are calling the shots and MoD is helplessly
acquiescing.
The success of any offset programme primarily depends on its
proper selection, detailed planning, close supervision and regular
monitoring. India has failed in all respects. CAG reports reveal
that there has been no value addition in India due to the flawed
policy and faulty implementation. As offsets do not come for free
and carry cost penalty, India has suffered considerable financial
outflow without commensurate benefits.
Need to Exercise CautionAs is apparent from the CAG reports, the
current offset policy suffers from major infirmities. Guidelines
for the ToT are far too complex and lack clarity, thereby lending
themselves to multiple interpretations. Procedure for the selection
of high technology for receipt by DRDO is too convoluted to
succeed. The concept of multipliers has been rendered ineffective
and purposeless by making it usage-based rather than linking it
with the level of technology on offer. Finally, instead of having a
single authority with decision-making powers to oversee all facets
of offset activities, India has chosen to have two agencies the
Acquisition Wing and the newly created Defence Offset Management
Wing. It is a sure recipe for bureaucratic turf battle.
It is time India carries out a paradigm shift in its fundamental
approach towards offsets. To start with, offsets should not be
mandatory for all major deals. It should be based on case-by-case
decisions of DAC. Need and desirability of seeking offsets should
be debated at length while categorising a procurement proposal.
Offsets should be demanded only when the envisaged benefits justify
the likely cost-penalty.
Offset programmes must always be in consonance with national
priorities and should fill an important technological/economic
void. As relevance of offset programmes is of critical importance,
the choice cannot be left to the discretion of vendors who will
invariably opt for the cheapest and the easiest routes. Therefore,
DAC must decide detailed contours and scope of offsets that the
vendors should offer. Request for Proposal (RFP) must contain these
details upfront.
As recommended by Transparency International, vendors should be
asked to submit two commercial quotes in two separate sealed
envelopes duly marked one with the stipulated offset package and
the other without any offset obligations. Such an approach will
force vendors to reveal the true offset cost being charged by them,
thereby facilitating value-for-money evaluation.
Commercial evaluation of the technically acceptable vendors
should be done by opening commercial quotes without offset
packages. It implies that offset packages should not influence
determination of the lowest bidder. Once the lowest bidder is
identified, his offset quote should be opened for a reality check
to ascertain whether seeking specified offsets makes economic sense
or not. In case it is felt that the indicated cost-penalty does not
justify the advantages likely to accrue from the offsets, the
requirement of offsets should be dropped.
The Way ForwardThe current euphoria about the benefits accruing
from offsets is highly misplaced. India will do well to pay heed to
the caution sounded by Transparency International that offsets are
very prone to corruption. Indian defence procurement regime is
already mired in controversies, contract for the purchase of
helicopters for VVIPs being the latest imbroglio. CAG has faulted
the contract for non-compliance with the provisions of DPP. Worse,
work completed prior to the award of the helicopter contract was
allowed against offset obligations.
Offsets are certainly a highly potent tool in the hands of
assiduous experts but become an imprudent activity when handled in
an amateurish manner. Inappropriately selected, poorly implemented
and casually monitored programmes invariably prove to be wasteful.
More worrisomely, they hold the ominous potential of getting
embroiled in allegations of corrupt practices, thereby derailing
planned modernisation of the armed forces. It is a harsh reality
that many nations have learnt at a great cost. Therefore, India
must revisit the complete policy, lest it proves detrimental to
national security imperative.
http://www.forceindia.net/DefExpo2014_RelookatthePolicy.aspx 14
Sep. 14
IDSA COMMENTDefence Offset Guidelines: Time to Correct the
Imbalance
Laxman K BeheraJuly 24, 2013On 23 May 2013, the Ministry of
Defence (MoD) issued an Office Memorandum (OM), keeping in abeyance
of services related provisions from offset guidelines, the latest
revised version of which was issued less than a year ago in August
2012. The abeyance of all services, effective from the date of
issue of the OM, is applicable to all tenders or Request for
Proposals (RFPs) issued after the notification of the OM, and also
those tenders issued earlier but the commercial and technical bids
are yet to be submitted. The MoDs action has created a debate among
various stakeholders, particularly the Indian IT and software-
related companies which see a loss of business to the tune of $10
billion as consequence of the OM. More importantly, the OM has
opened up a new challenge for the MoD in articulating a revised
offset policy that would take into account the current gaps in the
offset guidelines while satisfying the services sector a key
stakeholder in Indian defence industry and a vital partner from the
offsets point of view.The OM comes in the wake of controversies
surrounding the purchase of 12 VVIP Agusta Westland helicopters, in
which allegations were made that bribes were paid through bogus
software companies which merely worked as front organisations on
behalf of middlemen and foreign companies. While the OM is an
attempt to prevent such malpractices, it has in the process banned
the entire services sector from doing offset business. This is
evident from its annexure, which has gone into every possible
minute details in identifying and suspending all such paragraphs in
the Defence Offset Guidelines of 2012 (DOG 2012), where the term
services surfaces. Consequently, the term Services which broadly
cover a range of activities including software development;
software and computer based training modules; maintenance, repair
and overhaul (MRO); engineering, designing and testing; quality
assurance; and training has now become history till the time new
orders are issued. Interestingly, in addition to suspending the
complete list of services which appear as the fourth category in
the List of the Products and Services Eligible for Discharge of
Offset Obligations, the annexure has also suspended
services-related activities in other paragraphs, including the ones
which had been included for the first time in the DOG 2012. Two
such paragraphs relate to vessels of war, special naval systems,
equipment and accessories and Micro, Small and Medium Enterprises.
Any services related to the above two now stand suspended.Since the
OM talks of its validity till such time that further instructions
are issued, one would assume that no sooner than later a revised
guideline would be issued by the MoD. It is also assumed that the
new guidelines would take into account the current gap in the
offset policy which is biased in favour of the services sector. In
comparison to the defence manufacturing sector which is subject to
compulsory industrial licensing and where strict value addition
principle is applicable (the latter being made more stringent in
Defence Procurement Procedure 2013), the services sector is
exempted from such conditions. The services sector also gets
further incentivised by the defence FDI policy which (after the 16
July 2013 meeting chaired by the Prime Minister) allows more than
26 per cent foreign equity in defence manufacturing sector on a
case by case basis to be decided by the Cabinet Committee on
Security (CCS), Indias highest decision making body on security
matters. The CCS decision is to be influenced by the FDI proposals
credibility in bringing in yet to be defined modern and state of
the art technology to India. In comparison, the services sector can
attract upto 100 per cent FDI without any governmental watch or
regulation.The above imbalance has led to a flurry of offset
inflows into the services sector which has in fact become the most
preferred area for the foreign companies to choose Indian Offset
Partners (IOPs) from, for the discharge of their offset
obligations. This has, however, not necessarily led to capability
enhancement of the Indian services sector, particularly the
companies in the IT and IT enabled Services (IT-ITeS) industry
which have already reached a certain level of maturity and
international reckoning. Moreover as the VVIP helicopter
procurement case shows, the sector is at times vulnerable to
malpractice since the government has no wherewithal to see how much
real work is being done in India and by the Indian companies.The
crucial challenge for the MoD is now to limit the flow of offsets
into the services sector and ensure that value addition takes place
in India. On the aspects of limiting offset flows into the services
sector it would be ideal for the MoD to stipulate a maximum
percentage of offsets that can go into the services sector. This
would not only limit the scope for malpractice, but would provide a
fillip to the manufacturing sector which constitutes the core of
defence industrial base.On the aspect of value addition by the
services sector, the MoD has a real challenge on hand as the
services by nature are intangible. The silver lining is that the
National Association of Software and Services Companies (NASSCOM),
an industry association, has come forward in devising a method by
which the intangibles can be measured. The MoD now needs to work
with the NASSCOM and other industry players to establish a
mechanism and issue the revised guidelines that would thwart bogus
companies from doing business in defence.Last but not the least the
MoD also needs to seriously think about the background checking of
Indian Offset Partner (IOP). Presently the foreign companies have
the complete discretion in choosing the IOPs, with virtually no
background checking by the MoD. It is quite surprising that the
Defence Offset Management Wing (DOMW) which has otherwise a wider
mandate relating offset guidelines and all matters relating to
post-offset contract management does not have the authority to
ensure genuiness of the IOPs. A little background checking by way
of examining the IOPs annual reports, balance sheet and all such
necessary documents would however trigger a fear among the foreign
companies who would be more cautious in partnering with bogus
companies.http://www.idsa.in/idsacomments/DefenceOffsetGuidelines_lkbehera_240713.html
14 Sep. 14
India has emerged as a large net importer of arms over the past
decade. The year 2001 saw an opening up the defence sector to
private players and allowing up to 26 per cent foreign direct
investment.
India has emerged as a large net importer of arms over the past
decade. The year 2001 saw an opening up the defence sector to
private players and allowing up to 26 per cent foreign direct
investment. In 2006, the first formal Defence Procurement Policy
(DPP) was put in place. The key objective of the defence offset
guidelines was to leverage capital acquisitions to develop the
defence industry, improve defence research and encourage
development of synergistic sectors like civil aerospace and
internal security. The guidelines were last revised in August 2012
and the latest DPP-2013 came into effect on June 1.
Some form of barter system has existed for centuries, but the US
was the first to coin the term offsets as an inducement to sell
arms to underdeveloped friendly countries, and in return, either
purchased goods or made local investments. The ground position
today is that the major arms sellers of the world such as US, UK,
France and Germany label such regulations as protectionist, and are
not in favour of defence offsets. On the other hand, most countries
have high defence offsets regulations. China has no formal offsets
policy. Australia does not accept indirect (civilian) offsets,
unless they bring benefits to the countrys defence industry.
In India, all contracts above $65 million require 30 per cent of
offset. Indian firms and joint ventures are exempted from offset
obligations provided the indigenous content is over 50 per cent.
India also accepts subcontracting in outsourced services, such as
engineering and defence software. Clearly, Indian offsets
requirements are not unreasonably stringent.
Nearly 122 open defence offset contracts signed around the world
between 1997 and 2010 have only partially been executed due to
various issues. It is clear that offset management is very complex,
as has to be managed to the satisfaction of two parties. The US,
being one of the largest exporters of high technology weapons, has
been vocally moderating offset policies around the world.
Offsets are a powerful marketing tool to motivate a purchase.
Major defence contractors are conscious of the psychological power
of offsets in democracies. What constitutes a legitimate offset,
are questions still searching for answers. The physical valuation
of offsets is complex. Value of parts locally sourced could be
straight-forward, but cost of transfer of technology (ToT) and
helping set up industrial base could be vague. Co-production and
subcontracts are the best forms of direct offsets.
Offset/industrial partnership management organisations have
emerged. Offset India Solutions (OIS), an Indian company, extends a
partnering approach to provide customised expertise to
international companies for fulfilling their offset obligations
throughout its lifecycle. Offsets management itself has, thus,
become an industry.
The new offset guidelines promote investment in micro, small and
medium enterprises (MSMEs) by applying a multiplier factor of 3.0
to the offset calculations. It also facilitates technology
acquisition from a select list, by the defence research and
development organisation (DRDO). The offset discharge banking
period is extended to seven years. Period of execution of offset
contracts is now allowed up to two years beyond the period of main
procurement contract.
Indian defence manufacturing industries capability to absorb
offsets is still evolving. To achieve high indigenous content in
high technology products is not easy. At present, the exclusion of
services for purposes of value addition in India is a dampener. All
this results in complex extended negotiations. One would recall the
long time that Indian agencies and French aerospace company
Dassault had to iron out offset issues during the MMRCA
negotiations. One recent successful offsets management case is that
of Pilatus Aircraft, Switzerland, setting up an electrical harness
manufacturing capability, along with Bharat Electronics (BEL) in
Bangalore. The electrical harnesses manufactured by BEL would be
for the Pilatus global supply chain. The contract which includes an
integrated ground based training system, and a comprehensive
logistics support package, covers the 30 per cent offset
obligation. Pilatus Aircraft entered into a contract with the
Indian government last year for the supply of 75 PC-7 Mk II
turboprop basic trainer aircraft for the IAF.
The companies that want to build long-term defence relations
with an emerging power like India would find good offsets
solutions. A Financial Times study projects 15,000 defence
contracts in the decade ending 2022, with offset obligations of
$100 billion. Top five US defence contractors Boeing, General
Dynamics, Lockheed Martin, Northrop-Grumman, and Raytheon would be
saddled with $ 42 billion of the obligations. Even as Indo-US
defence trade reach new highs, offsets and defence FDI policies
continue to act as roadblocks. Notwithstanding, US president Barack
Obama reaffirmed during his recent meeting with prime minister
Manmohan Singh that the US would grant India the same privileges
reserved for its closest allies in respect of transfer of defence
technology, co-production and co-development.
US sales of military equipment to India have grown from zero in
2008 to around $9 billion in 2013. Projects worth tens of billions
are in the pipeline. Indias expectation combined with a 26 per cent
cap on FDI in the defence sector limits the interest of American
firms to fulfill Indian requests for high-technology defence items.
Defence contractors are not only worried about intellectual
property rights or the technology moving to unintended sources, but
also about some of the recipients developing technologies and later
becoming competitors at their expense. India has a significant
manufacturing industrial base. It has, under licence, produced
thousands of aircraft over five decades. It has a very successful
space programme. Therefore, it should not be difficult to find
local offset partners. Pilatus has recently set a good example for
others to follow.
http://www.defencenews.in/defence-news-internal.aspx?id=jeKqtUMFhVs=
14 Sep. 14
Defence offsets in India: the way forwardByAnil Chopra Dec 01
2013Tags:Op-ed
BloombergBIG BUY A file photo of the Russian-made fighter jet
Sukhoi 30 during an Aero India airshow in BangaloreIndia has
emerged as a large net importer of arms over the past decade. The
year 2001 saw an opening up the defence sector to private players
and allowing up to 26 per cent foreign direct investment. In 2006,
the first formal Defence Procurement Policy (DPP) was put in place.
The key objective of the defence offset guidelines was to leverage
capital acquisitions to develop the defence industry, improve
defence research and encourage development of synergistic sectors
like civil aerospace and internal security. The guidelines were
last revised in August 2012 and the latest DPP-2013 came into
effect on June 1.
Some form of barter system has existed for centuries, but the US
was the first to coin the term offsets as an inducement to sell
arms to underdeveloped friendly countries, and in return, either
purchased goods or made local investments. The ground position
today is that the major arms sellers of the world such as US, UK,
France and Germany label such regulations as protectionist, and are
not in favour of defence offsets. On the other hand, most countries
have high defence offsets regulations. China has no formal offsets
policy. Australia does not accept indirect (civilian) offsets,
unless they bring benefits to the countrys defence industry.
In India, all contracts above $65 million require 30 per cent of
offset. Indian firms and joint ventures are exempted from offset
obligations provided the indigenous content is over 50 per cent.
India also accepts subcontracting in outsourced services, such as
engineering and defence software. Clearly, Indian offsets
requirements are not unreasonably stringent.
Nearly 122 open defence offset contracts signed around the world
between 1997 and 2010 have only partially been executed due to
various issues. It is clear that offset management is very complex,
as has to be managed to the satisfaction of two parties. The US,
being one of the largest exporters of high technology weapons, has
been vocally moderating offset policies around the world.
Offsets are a powerful marketing tool to motivate a purchase.
Major defence contractors are conscious of the psychological power
of offsets in democracies. What constitutes a legitimate offset,
are questions still searching for answers. The physical valuation
of offsets is complex. Value of parts locally sourced could be
straight-forward, but cost of transfer of technology (ToT) and
helping set up industrial base could be vague. Co-production and
subcontracts are the best forms of direct offsets.
Offset/industrial partnership management organisations have
emerged. Offset India Solutions (OIS), an Indian company, extends a
partnering approach to provide customised expertise to
international companies for fulfilling their offset obligations
throughout its lifecycle. Offsets management itself has, thus,
become an industry.
The new offset guidelines promote investment in micro, small and
medium enterprises (MSMEs) by applying a multiplier factor of 3.0
to the offset calculations. It also facilitates technology
acquisition from a select list, by the defence research and
development organisation (DRDO). The offset discharge banking
period is extended to seven years. Period of execution of offset
contracts is now allowed up to two years beyond the period of main
procurement contract.
Indian defence manufacturing industries capability to absorb
offsets is still evolving. To achieve high indigenous content in
high technology products is not easy. At present, the exclusion of
services for purposes of value addition in India is a dampener. All
this results in complex extended negotiations. One would recall the
long time that Indian agencies and French aerospace company
Dassault had to iron out offset issues during the MMRCA
negotiations. One recent successful offsets management case is that
of Pilatus Aircraft, Switzerland, setting up an electrical harness
manufacturing capability, along with Bharat Electronics (BEL) in
Bangalore. The electrical harnesses manufactured by BEL would be
for the Pilatus global supply chain. The contract which includes an
integrated ground based training system, and a comprehensive
logistics support package, covers the 30 per cent offset
obligation. Pilatus Aircraft entered into a contract with the
Indian government last year for the supply of 75 PC-7 Mk II
turboprop basic trainer aircraft for the IAF.
The companies that want to build long-term defence relations
with an emerging power like India would find good offsets
solutions.
A Financial Times study projects 15,000 defence contracts in the
decade ending 2022, with offset obligations of $100 billion. Top
five US defence contractors Boeing, General Dynamics, Lockheed
Martin, Northrop-Grumman, and Raytheon would be saddled with $ 42
billion of the obligations. Even as Indo-US defence trade reach new
highs, offsets and defence FDI policies continue to act as
roadblocks. Notwithstanding, US president Barack Obama reaffirmed
during his recent meeting with prime minister Manmohan Singh that
the US would grant India the same privileges reserved for its
closest allies in respect of transfer of defence technology,
co-production and co-development.
US sales of military equipment to India have grown from zero in
2008 to around $9 billion in 2013. Projects worth tens of billions
are in the pipeline. Indias expectation combined with a 26 per cent
cap on FDI in the defence sector limits the interest of American
firms to fulfill Indian requests for high-technology defence items.
Defence contractors are not only worried about intellectual
property rights or the technology moving to unintended sources, but
also about some of the recipients developing technologies and later
becoming competitors at their expense. India has a significant
manufacturing industrial base. It has, under licence, produced
thousands of aircraft over five decades. It has a very successful
space programme. Therefore, it should not be difficult to find
local offset partners. Pilatus has recently set a good example for
others to follow.
(Air Marshal (Retd) Anil Chopra is former head of IAFs HR and
training)http://www.mydigitalfc.com/op-ed/defence-offsets-india-way-forward-264
14 Sep. 14
The Government of India has been reiterating its commitment to
achieve the much-publicised target of procuring 70 per cent of its
defence requirements from indigenous sources by 2010. Despite its
best efforts over the last two decades, India is nowhere near that
figure as yet. The Government is well aware of the emergence of
private sector as a vibrant and dynamic force, especially in
information technology, service sector and manufacturing fields. It
has come to realise that self reliance would remain a pipe dream if
it continued to bank on public sector alone.One of the objectives
mentioned in the new defence procurement procedure is to achieve
self-reliance in defence equipment. But the whole procedure is
silent about the role of the private sector and no worthwhile
initiatives have been proposed to integrate its potential in Indias
quest for self reliance.In all deals where transfer of technology
is negotiated, the nominated recipient is always a DPSU, even if a
private sector company is better placed in terms of infrastructure
and know-how to absorb the technology.
In addition to economic factors, defence industry is generally
considered to be an instrument of national sovereignty and pride.
Defence industry comprises of all industrial undertakings engaged
in the production of hardware and services for use by the defence
forces. The origin of the Indian defence industry can be traced to
the establishment of Gun and Shell Factory at Cossipore in 1801. At
the time of the Independence, India had 16 Ordnance Factories,
established by the British to produce low tech items. Bharat
Electronics Ltd was the first Defence Public Sector Undertaking
(DPSU) established in 1954 to manufacture electronic equipment for
the forces. Today, India has 39 Ordnance Factories and eight
DPSU.The Industrial Policy Resolution of 1956 divided industry into
three parts:- Schedule A: Basic industries which are the preserve
of the state, including defence and heavy engineering. Schedule B:
Industries in which private industry was allowed to operate.
Schedule C: All other industries.Manufacture of components,
assemblies and sub-assemblies was thrown open to the private sector
in 1991. With a view to promote defence-industry partnership, the
Ministry of Defence (MoD) constituted six Joint Task Forces in
collaboration with Confederation of Indian Industry in 1998.
Consequent to their recommendations, the Government opened defence
production to the private sector in January 2002. It allowed 100
percent private equity with 26 percent Foreign Direct Investment
(FDI). It was a major policy change. Subsequently, the Department
of Industrial Policy and Promotion issued detailed guidelines for
the issuance of licence for the production of arms and
ammunition.The Kelkar Committee, constituted in 2004, made many
radical recommendations. The Government has accepted a majority of
them but their implementation has lacked earnestness and focus. The
Department of Industrial Policy & Promotion (DIPP), in
consultation with Ministry of Defence, has so far issued 37 letters
of intent for the manufacture of various types of defence hardware
which include armoured and combat vehicles, radars, electronic
warfare equipment, warships, submarines, avionics, military
aircraft, safety and ballistic products, armaments and
ammunition.Despite the above measures, there has been no
discernible change in the ground situation. Only a handful of
Indias top companies are involved in small value defence contracts.
The private sector has to remain content with the supply of some
low-tech items to the public sector. Its supplies to DPSU and
Ordnance Factories grossed over Rs. 1200 crores and Rs. 1900 crores
respectively last year. Whereas these figures signify the
contribution made by the private sector, they also highlight the
fact that the private sector continues to be merely an outsourcing
base for the public sector.Reasons for Continued Non-Participation
of the Private SectorA number of defence-industry seminars,
conferences and exhibitions have been held in the recent years.
Given decades of insulation and prejudices, this was no small
achievement. But old mindsets, complexity of procurement procedures
and clout wielded by the public sector have been acting as major
deterrents to any meaningful participation of the private sector.
New aspirants, in particular, find the whole regime to be highly
forbidding.Policy IssuesDecisions are taken by the Defence
Acquisition Council to categorise a proposal as Buy or Buy and Make
or Make based on the advice given by Defence Research and
Development Organisation and the public sector. No inputs are
sought from the private sector. Its competence and potential are
given no consideration.In all deals where transfer of technology is
negotiated, the nominated recipient is always a DPSU, even if a
private sector company is better placed in terms of infrastructure
and know-how to absorb the technology. A DPSU may have to establish
complete facilities ab initio, whereas a private sector company may
need only incremental technology.Procedural IssuesThe Indian public
sector has got used to a position of pre-eminence. Its hold over
defence orders is total. It thrives because of its monopolistic
clout and not because of any displayed excellence.
Requirements of the armed forces are not made known to the
private sector sufficiently in advance, with the result that it
does not get adequate time, either to scout for foreign tie-ups or
to establish the necessary facilities. The time given for the
submission of technical and commercial proposals is grossly
inadequate for a new entrant in the field.Parameters for the
equipment to be procured are formulated with foreign equipment in
mind, after reading manufacturers brochures. Private sector is not
consulted in this process, whereas minor acceptable changes in
parameters may make the Indian equipment eligible for
consideration.As Requests for Proposals (RFP) are issued to foreign
original equipment manufacturers as well, they prefer direct
bidding. They decline joint ventures with Indian companies as it
helps them to guard their technology and perpetuate their monopoly
with consequent financial gains.All trials are carried out on No
Cost No Commitment basis. Whereas foreign vendors can incur the
expenditure involved, many upcoming indigenous companies do not
possess the necessary financial strength. This acts as a major
disincentive.Functional IssuesDue to the very nature of its usage,
defence equipment has to meet highly exacting standards. There can
be no failure in the face of the enemy. Regrettably, many Indian
vendors have not fully grasped the import of this requirement and
find the quality control regime to be extremely irksome.Every
producer seeks economies of scale and assured continuous orders.
Unfortunately, Indian procurement regime precludes both. RFPs are
issued for one-time piecemeal quantities without indicating the
envisaged total requirement over a period of time. Additionally, no
long term commitment is made regarding regular flow of orders. This
deters Indian companies from committing resources for establishing
production facilities as the venture can prove both expensive and
risky.Lack of Mutual ConfidenceThe Indian public sector has got
used to a position of pre-eminence. Its hold over defence orders is
total. It thrives because of its monopolistic clout and not because
of any displayed excellence. It is fully aware of its weaknesses
and knows that it cannot survive an open competition with the
private sector. This sense of insecurity makes it wary of any move
to facilitate the entry of the private sector and it tries all
stratagems to block it.On the other hand, many functionaries feel
that the private sector is out to make a quick buck and lacks
required perseverance. They tend to view the private sector as
traders rather than committed manufacturers who can endure the
travails of long drawn procurement procedure. According to them,
anyone desirous of entering defence industry has to be fully aware
of the fact that defence orders take inordinately long to
materialise and vacillation invariably proves unproductive.The
Communication GapThere is a total absence of an effective
institutionalised interface between the MoD, the services and the
private sector for regular interaction at the policy making level.
There are a number of groups or partnership forums in place, but
their utility is limited to exchange of views only.(a). Procurement
Agencies are Unaware of Industrys PotentialEven today all major
defence deals are signed with foreign producers. The public sector
continues to get bulk orders under transfer of imported technology.
The private sector continues to be a peripheral participant.
The procurement agencies are extremely keen to encourage
indigenous production and limit imports to the minimum inescapable
requirements. They, however, are unaware of the capabilities and
potential of different private sector companies, as the competence
of Indian companies has not been authentically catalogued as yet.
They do not know whom to invite for submission of proposals. It is
much easier to acquire details of numerous foreign producers.There
is no data bank of Indian industries available with the MoD.
Requests for Proposals (RFPs) are issued only to a few highly
visible companies, while many others lose by default. Although, the
Acquisition Wing has been tasked to create the necessary data bank,
the process has hardly taken off as yet.(b). Industry Lacks
Knowledge of Defence Requirements and ProceduresOn the other hand,
many private sector companies have the capability to manufacture
the whole range of defence requirements but do not know whom to
approach to ascertain details. They are ignorant of the procurement
agencies, their policies and procedures. This ignorance makes them
wary of dealing with the defence.To compound the problem, there are
over 150 different defence procurement agencies with different
procedures. There is no system of centralised notification of
requirements and vendor registration. Due to this lacuna, a new
entrant finds the whole environment highly dissuasive.The Way
ForwardThe present process of interaction between the Government,
public sector and private enterprises should be continued, albeit
with renewed vigour and purpose. All joint committees should be
represented at the level of decision makers, so that follow up
action can be taken in a time bound manner.Structural ReformsA
representative of the designated industry association should be a
permanent invitee to the Defence Acquisition Council, depending on
the security sensitivity of agenda points. His inputs as regards
the technical prowess of the private sector will prove invaluable
while deciding whether to import technology or not. Similarly,
selected agenda points of Defence Procurement Board, Defence
Production Board and Defence Development Board should be circulated
to the industry association for advice. These steps will go a long
way in integrating the private sector.Early Interaction with
Industry on Acquisition ProposalsThe Acquisition Wing should
indicate broad parameters of equipment under procurement to the
industry association six months prior to the issuance of RFP. The
association could circulate this information amongst the concerned
companies for their advance knowledge. This will give adequate time
to the interested companies to carry out technology scan and scout
for foreign collaborations, if required.Equipment Directorates of
the Services Headquarters should seek advice of the industry before
finalising parameters. The industry, with its massive pool of
knowledge, will be able to help the authorities in getting a better
understanding of the latest technological advancements worldwide
and in India with their degree of stabilisation. Comments received
from the association should compulsorily be put up to the approving
committee. In some non-critical cases, indigenous capability may
even influence the formulation of parameters.To help the Indian
companies in taking decisions regarding investment of resources,
RFP should invariably indicate the total requirement envisaged over
the years. This could be without any firm commitment as
such.Support to Indigenous IndustryThere is an urgent need to have
a mechanism in place to facilitate the participation of Indian
private sector in defence industry.
Most nations support indigenous producers by giving them
purchase and price preference. Foreign producers should be given
incentives for collaborations with Indian companies. It could even
be made mandatory, as has been done by Great Britain under its
Industrial Participation policy.Policy on grant of waivers for
deviations from parameters must make a distinction between an
Indian and a foreign producer. Easier grant of waivers, albeit
within acceptable limits, to Indian companies will encourage them
to commit resources more willingly. Even commercial terms should be
made more favourable to the local vendors as the lower life-cycle
cost of indigenous equipment must also be factored in.Presently,
the payment terms are unfavourable to the Indian producers. Foreign
vendors are released full payment of their dues on submission of
proof of dispatch (against performance and warranty bonds each
equivalent to 5 percent of contract value). However, Indian
companies get payment only after the issuance of inspection note by
the designated inspectors. This may take a few months, thereby
increasing the cost of the capital involved. This incongruity needs
to be addressed.Facilitation ServiceThere is an urgent need to have
a mechanism in place to facilitate the participation of Indian
private sector in defence industry. Such a mechanism can serve twin
objectives. First, it could assist in the assessment of a companys
current technical/manufacturing prowess and its potential for the
development of defence products. A directory of credible defence
manufacturers should be compiled with details of all assessed
companies. This directory should be made available to all the
defence procurement agencies to assist them to identify companies
for issuance of tenders. The directory could also help foreign
producers to locate potential Indian partners for
collaboration.Secondly, advisory service could be extended to
companies as regards the availability of opportunities for the
supply of their current products to the defence. The service could
also suggest defence products which a company can manufacture with
marginal addition to its facilities. Related areas for
development/diversification could also be indicated. Thus, this
service can acquaint a company with the prevailing business
opportunities and guide it as well.Public-Private Sector
PartnershipThe public sector possesses excellent infrastructure,
manufacturing facilities and a highly experienced task force. It
will be a waste of national resources if these assets are
duplicated by the private sector.The Government has to realise that
both public and private sectors are national assets and harnessing
of their potential is essential if India wants to achieve self
reliance in defence production.
The private sector, on the other hand, can bring in latest
technology, managerial practices, marketing skills and financial
management. Therefore, a well-blended fusion of both will result in
synergising of their strengths through economies of scale and prove
mutually beneficial.A strong and fruitful relationship can be built
with mutual accommodation. The public sector should not regard
private players as a persistent irritant and adopt a
confrontationist attitude towards them. Similarly, the private
sector must not seek to replace the public sector. Such an approach
may be perceived by the public sector as a threat to their primacy
and existence. It may make them close their ranks and resist all
interaction with the private sector. That shall be
counter-productive.The Government has to realise that both public
and private sectors are national assets and harnessing of their
potential is essential if India wants to achieve self reliance in
defence production. It should not play favourites and treat both as
equal partners in progress.ConclusionThe then Defence Minister of
India, Mr Pranab Mukherjee, in his address at New Delhi in June
2005 had stated: The Government is committed to the development of
a vibrant and proactive defence industry in India. It should be
ensured that the available capability, infrastructure and resources
including intellectual capital are harnessed to the fullest extent
as our national assets and optimally utilised in achieving this
objective. He further advocated a strong and healthy partnership
between the public and private sector for enhancing the defence
capability and in sustaining a powerful domestic industrial base
for the future.During the last three years, a serious and concerted
effort has been made by the Government to reform and streamline the
entire acquisition process. The Government has come to appreciate
the potential of the private sector and wants it to complement the
efforts of the public sector. A number of praiseworthy initiatives
have been taken and policies reviewed. Yet, the results on ground
have very little to show. There has been no appreciable inflow of
anticipated foreign funds.Even today all major defence deals are
signed with foreign producers. The public sector continues to get
bulk orders under transfer of imported technology. The private
sector continues to be a peripheral participant with the production
of some low-tech items and indigenisation of some components.The
present process of interaction and integration should be continued,
albeit with renewed vigour and purpose. All joint committees should
be represented at the level of decision makers so that the follow
up action can be implemented in a time bound manner. There is no
point in having committees and joint task forces if their reports
are going to gather dust with no follow up action.Technological
prowess of the private sector should be given due recognition and
considered a national asset. The objective of achieving
self-reliance will remain elusive unless the private sector is duly
integrated and its potential fully harnessed to build a viable
indigenous defence industrial base. The Government has to create an
environment wherein the private sector feels assured of just
business opportunities, level playing ground and fair play.And
finally, India plans to spend USD 100 billion on capital
expenditure during the 7th Plan Period (2007-12). Imports account
for close to 70 percent of capital expenditure and offsets are
required equal to 30 percent of import contracts. Thus, India
expects offset trade worth USD 21 billion during the next five
years. Currently, Indian defence exports amount to paltry USD 50
million annually, i.e. USD 250 million in five years. From USD 250
million to USD 21 billion, it will be a quantum jump of enormous
proportions. The public sector cannot handle it by itself. The
private sector has to be closely integrated and its potential fully
harnessed for beneficial absorption of the projected offset
business.http://www.indiandefencereview.com/spotlights/private-sector-in-defence-production/0/Impact
of Offset Policy on India's Military Industrial Capability -
IByS.N. MishraIssueVol. 26.3July - Sept 2011 | Date : 24 Oct ,
2011The Indian Ministry of Defence introduced offset provisions in
its Defence Procurement Procedure 2005 (DPP-2005)1 for capital
acquisition schemes exceeding an estimated cost of Rs. 300 crores
i.e. around $ 66 million with the fond hope to build indigenous
capability in design, development and production of critical
military hardware, systems, & components by promoting Joint
Venture (JV) arrangements, Foreign Direct Investment (FDI) inflow,
skill up gradation, setting up Manufacture Repair & Overhaul
(MRO) facility, boosting export etc.Click for IDR subscriptionAs
part of the liberalisation process and to foster long term
business/production tie up with global companies the offset policy
in DPP 2006,2 2008,3 20094 included provision for credit banking5,
delineation of defence products6 and dispensed with the licensing
requirement in Ministry of Defence (MOD).There is an urgent need to
look at our offset policy options; particularly in regard to
inclusion of technology transfer in priority areas, FDI policy in
Defence and a more effective offset implementation arrangement.
DPP-20117 made a substantial leap from the earlier stipulation
of direct offsets by including dual use Civil Aerospace products
and Homeland Security items8 thereby ushering indirect offsets in a
limited way. It also makes a definitive policy statement for
progressive indigenization in critical areas and ensuring level
playing field for the private sector including private shipbuilding
companies.9DPP-2011 was soon followed up with a Defence Production
Policy10 document which outlines the road map for
indigenization.This paper examines impact of offset policy during
(2005-2010) on indigenous capability build up in MIC (Military
Industrial Complex) and bolstering self reliance. It brings out how
offset realisation of around $2B during (2005-2010) was mainly for
sub contractorisation of low end products and services, MRO
facilities, Training & soft skills and has not brought in the
expected inflow of FDI and JV arrangements, exports & long term
business partnership in design, development and production of high
end products.There is thus an urgent need to look at our offset
policy options; particularly in regard to inclusion of technology
transfer in priority areas, FDI policy in Defence and a more
effective offset implementation arrangement.2. Indias Military
Industrial ComplexIndias military industrial complex consists of 9
DPSUs, 40 OFs, 50 DRDO labs, 140 private defence companies, 5000
SMEs (Small and Medium Enterprises) involved in production of
around 450 items.12Product range: DPSUs & OFsThe nine DPSUs
(Defence Public Sector Enterprises) are engaged in manufacture of
wide range of products like helicopter, fighters, warships,
submarines, patrol vessels, heavy vehicles and earthmovers,
missiles and a variety of electronic devices, alloys and special
purpose steel.The forty ordnance factories are engaged in
production of small arms and ammunition of all the weapon systems,
clothing, armoured and transport Vehicles.14 A very high degree of
self reliance has been achieved in these areas except in the area
of artillery guns of 155 mm calibre where army is still groping to
fill up the void in towed and wheeled category-thanks to Bofors
imbroglio.Value AdditionThe DPSUs and OFs, largely through licence
agreements since 1960s have built substantial production capability
for tanks, ICVs, Vehicles, missiles, frigates, submarines,
aircrafts and electronic devices.The overall value addition of
DPSUs hover around 37%. Midhani is a healthy exception (57%) where
substantial self reliance in several critical material like
titanium alloys, managing steel, special steel alloys, nickel base
and cobalt base, super alloys and Niobium-Hafnium required by
strategic sectors and programmes has been achieved.15In case of OFs
the value addition is substantial (85%), possibly because of the
lesser technology depth of land systems compared to fighters and
frigates.Even amongst the naval platforms, value addition in
submarines is substantially less (23%) compared to patrolling
vessels (37%), because of technology depth.The value addition of
each deliverable would, depend on the depth of technology provided
and stage of technology absorption.An overview of performance of
the DPSUs and OFs is placed below:
The value of sales of DPSUs & OFs (Ordnance Factories) was
of the order of $7.7Billion during (2009-10) with Profit after Tax
to Sales a healthy 13% for the DPSUs.DRDO: Major ProgrammesThe 50
Defence R&D lab(s) are engaged in progressive enhancement of
self reliance of defence systems.16Some of the major milestones
towards making the country self- reliant in the areas of military
technology are: Prithvi (Surface to Surface missile) in the ranges
of 150 km & 250 km Agni-I (Surface to surface missile) with a
range of 700km Akash (Surface to Air) missile with 25km range
Brahmos (Supersonic cruise missile) a JV product of India &
Russia Light Combat Aircraft (LCA) Tejas Battle field surveillance
radar- Short Range, Phased Array Radars Electronic warfare
programme for Army (Samyukta) & Navy (Sangraha) Multi barrel
rocket system(Pinaka) in 37.5 km range Hull mounted sonars HUMSA
(NG) Torpedo Advanced Light (TAL) MK-1The value of
systems/products/technologies developed by DRDO and inducted into
the services is in the range of $11B.17Private Sector
Participation:Consequent on opening up of the defence industry
sector in May 2001, allowing Indian private sector participation
with FDI cap of 26%, a number of JVs have mushroomed between Indian
and foreign companies.Editors Pick
US Aerospace Industry and India Indias Role in the New World
Order India as a defence manufacturing hub
Major private sector industries and SMEs are actively engaged in
software development, engineering services, manufacturing & sub
assemblies, accounting for 17% of outsourcing18 to DPSUs, OFs.They
are also associated with national & strategic programmes like
LCA, MBT (Main Battle Tank), Pinaka, Arihant, Dhanush &
Brahmos.Many of them have excellent facilities like Tatas, L&T,
Pipava but significant limitation in terms of design capability and
systems integration.The Buy & Make (Indian) option in 2009
would provide private sector a window to TOT19 which was the
exclusive preserve of DPSUs/OFs earlier.They are now into cost
effective production of fast patrol vessels and IPVs &
outcompeting defence shipyards thanks to the level playing field
provided in Ship Building Procedure.20 Even DPSUs like HAL are
giving way to the Tatas in manufacture of Aerostructures &
Cabins where foreign OEMs like Lockheed Martin & Sikorsky have
shown distinct predelection for partnership with Tatas3. Self
RelianceA review committee headed by Dr.Kalam, the then SA to RM,
with participation of all the Services and the DPSUs, in Oct 1993
took note of uncertainties in supply of defence systems by
countries of former Soviet Union, mounting pressure of embargo on
critical technologies from developed nations and set a goal of
enhancing the indigenous content in the defence inventory from
30%(1995) to a possible 70% by 200521 in a 10 years
time.Self-Reliance Index was defined as the ratio of Indigenous
Systems Procurement Cost to Total System Procurement Cost of the
year.22Despite the impressive indigenous capability, Self Reliance
Quotient has not moved beyond 30% since 1993.In the aerospace
sector, predominant reliance on licensed manufacturing without
taking adequate steps to bolster nascent design and development
capability is a major cause,23 of our lack of indigenous capability
in the fighters segment.The most serious problem in aircraft
design, development and production is the vertical disjunction
between design, development and production agencies.24The Soviet
Union brought the production agencies directly under the design
bureau with remarkable results. Tony Saich also observes that the
major orgnisational problem with S&T System has been lack of
linkage across vertical structure; particularly between research
& production sectiors.25The Defence Expenditure Review
Committee (2009) accordingly makes a strong case for drawing a self
reliance road map for attaining the goal of 70% indigenisation in a
15 20 year time frame.264. Gaps in Critical Areas of
TechnologySelf-Reliance is linked to indigenous capability to
design, develop & produce critical subsystems like Propulsion,
weapon, sensors of major platforms. The areas identified by Dr.
Kalam 18 yrs back remain largely unchanged Even aerograde material
used for fuselage by fighters27 and high quality steel required by
frigates, submarines and aircraft carrier,28 our dependence on
imports is around 90%. It is sometimes alluded to lack of economies
of scale29 which is indefensible as India must have indigenous
capability to produce such critical material to meet recurring
requirement for aircraft and naval platforms.
5. Budget Trends: Capital AcquisitionThere has been a
significant spurt in acquisition by IAF and Navy in recent years,
major acquisition contracts signed being viz. MIG 29 (upgrade)
(Rs.3856 Cr.), Medium Lift Helicopters (Rs.5600 Cr), C-130 J
aircraft (Rs. 366 Crores) and LRMRASW (Long Range Maritime
Reconnaissance and Surveillance) Aircraft) for the Navy (Rs.10684
Crores).The trend of capital acquisition expenditure is placed
below:
5. Offset Contracts (2005-2010)The broad details of the 12
acquisition programmes & offset contracts concluded with
foreign companies is placed below:-
Continued: Impact of Offset Policy on Indias Military Industrial
Capability I
TABLE-1 WORKING RESULTS VALUE OF PRODUCTION AND SALES OF DEFENCE
PSUs (Rs in crore)Name of the
PSUs2011-122012-132013-14(Provisional)
Value of ProductionValue of SalesValue of ProductionValue of
SalesValue of ProductionValue of Sales
HAL12693.1914204.2114201.8214324.0015296.0015180.00
BEL5793.585703.636290.006012.006140.006180.00
BEML4077.193648.373359.703289.773201.323254.81
MDL2523.692262.872290.642404.692709.00112.00
GRSE1293.80546.331529.37464.341550.831550.83
GSL676.40269.70506.62844.13512.241095.89
BDL992.94959.121177.001074.711793.431829.86
MIDHANI496.00509.01537.37558.59555.04563.63
HSL564.04564.04483.84483.84403.22403.22
TOTAL41501.5541058.0042360.3641440.0743395.0841404.24
TABLE-2 Profit After Tax(Rs. in crore)Name of the
PSUs2011-122012-132013-2014 (Provisional)
HAL2539.432997.002735.00
BEL829.90890.00853.00
BEML57.2579.870.00
MDL494.31412.72332.50
GRSE108.03131.54119.12
GSL82.8015.57-35.63
BDL234.96288.40308.18
MIDHANI68.4582.5272.58
HSL(-) 85.98(-)55.17(-)85.00
TOTAL4329.154842.454299.75