Military & Aerospace

Making Offsets Work for India
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Issue Vol. 28.1 Jan-Mar 2013 | Date : 07 Feb , 2013

Rafale

Foreign companies invest a great deal in capital and management attention to form Joint Ventures and other business relationships with India partners so that they can be part of the aerospace and defence manufacturing industry sought through the offset programmes. The MOD should enable the DOMW to review business plans and other venture particulars, including ownership and planned product lines or services, in order to “pre-qualify” firms as an “India Offset Partner” (IOP). Receipt of such prequalification would assist new ventures to promote the future availability of their goods and services to OEMs who need to identify IOPs to include in their formal offset proposals. Once a venture receives recognition of the validity of its offset proposition (IOP status, eligible supplies and services), it would benefit the MOD to announce this publicly.

The Government of India (GOI) is to be commended for the progress that it has made in improving its defence acquisition process and for the revision announced in August 2012 to its Offset Guidelines. These actions should facilitate robust international competition for India’s military and internal security needs as also encourage creation of industrial partnerships to satisfy offset requirements. The GOI has earned credit for positive steps in each of the following areas:

The experience of many foreign companies in attempting to establish joint ventures with India partners too often is one of slow frustration…

  • The Offset Guidelines now express their purposes and provide the clarity which industrial suppliers need for their planning and business decisions.
  • Creation of the Defence Offset Management Wing (DOMW) responds to calls for increased resources for the bureaucracy charged with offset contract administration
  • A liberalized period of performance for offset contracts and for banking of credits facilitates long-term joint venture initiatives.
  • Multipliers incentivize use of India’s small, medium and micro-businesses and may encourage transfer of critical technologies.

The August 2012 changes to the Offset Guidelines, along with continuous improvement to the Defence Procurement Procedure (DPP), show that the GOI has been working steadily to align its acquisition regime and offset program to international “best practices.”

Yet offsets remain a challenging mechanism to achieve national industrial and security objectives. By their nature, offsets depend upon the actions of foreign vendors to return value to India through industrial investment, purchases of supplies and services from domestic Indian companies and through the Transfer of Technology.

So far, India has signed offset contracts worth more than $4 billion (Rs 22,000 crore). As much as another $10 billion (Rs 55,000 crore), perhaps more, is in the offing if India makes further contemplated purchases of offshore systems and completes the announced purchase of 126 Rafale fighter aircraft from Dassault. Yet the record of actual industrial ventures and new employment resulting from offset contracts so far is disappointing. In the present economic climate, the GOI is under pressure to reduce defence expenditures. An appropriate corollary is that India should act to increase the realization of real business and security benefits from offset contracts.

Offsets remain a challenging mechanism to achieve national industrial and security objectives…

This article seeks to identify ways to improve the administration of India’s offset program to make it more “business-like” and successful. The ideas presented are intended to benefit India by promoting foreign investment and participation, as well as foreign companies by providing them clarity and reasonable assurance of business success. All of the ideas here presented are believed to be achievable through improvements in the administration and implementation of existing offset policies. These are practical suggestions that will benefit all stakeholders in the acquisition and offset process, and which will conform to India’s high standards or transparency and accountability. None should require a change to India’s national policies.

Enhanced Inter-agency Coordination

The experience of many foreign companies in attempting to establish Joint Ventures with India partners too often is one of slow frustration. The GOI would serve its own interests by improving coordination of approvals and reviews necessary to form new aerospace and defence ventures and to confirm qualification as “India Offset Partners.” Better coordination among involved Ministries and Departments can expedite formation of joint ventures and investments in India, by a process that is more transparent and predictable, and works more quickly, without sacrificing compliance with law and policy.

Clarification of Roles and Responsibilities within the MoD

The revised Offset Guidelines make the Acquisition Wing of the Ministry of Defence (MoD) responsible for the “front end” of the offset contracting process, i.e., technical and commercial review of the offset proposals and conclusion of offset contracts. The DOMW, under the Ministry of Defence Production, is responsible for “guidelines” and “all matters related to post-contract management.” Private sector stakeholders need to understand better how roles and responsibilities are allocated between Acquisition and DOMW, and issues (if any) that are exclusively assigned.

It seems that India has a preference for “rule-based” governance mechanisms…

Pre-qualification (and Publication) of India Offset Partners

Foreign companies invest a great deal in capital and management attention to form Joint Ventures and other business relationships with India partners so that they can be part of the aerospace and defence manufacturing industry sought through the offset programmes. The MoD should enable the DOMW to review business plans and other venture particulars, including ownership and planned product lines or services in order to “pre-qualify” firms as an India Offset Partner (IOP).

Receipt of such pre-qualification would assist new ventures to promote the future availability of their goods and services to Original Equipment Manufacturers (OEMs) who need to identify IOPs to include in their formal offset proposals. Once a venture receives recognition of the validity of its offset proposition (IOP status, eligible supplies and services), it would benefit the MoD to announce this publicly. This would be similar to the practice at the Foreign Investment Promotion Board (FIPB), which publicly announces its decisions on Foreign Direct Investment (FDI) proposals.

A Consultative Mechanism

For historical and cultural reasons, it seems that India has a preference for “rule-based” governance mechanisms. Yet some, if not many, aspects of the Indian bureaucratic process remain opaque to those who seek to do business in India.

The MoD should clarify what role the DOMW can play in advising prospective offset participants – Indian and foreign. It should be known how to contact the DOMW, when contacts are appropriate, what subjects may be covered and what to expect from the result. This is especially important because companies contemplating forward-looking new ventures or prospective contractual arrangements may not invest or buy without some guidance and advance interaction with the DOMW.

Unequal knowledge and selective availability of information is contrary to transparency and may deter private sector participation…

Ombudsman

It can be difficult in India to know how to navigate among the agencies, departments, bureaus and the likes that have a say in the authorization of business, qualification for defence offset trade and valuation of offset proposals. The MoD should appoint an “Ombudsman” office staffed with knowledgeable persons who could inform Indian and foreign companies about the approvals required, relevant processes, rules and restrictions. The Ombudsman would have to help expedite and coordinate the achievement of necessary actions.

Continuity of Professional Staff

The subject areas of defence procurement and offset administration are knowledge-intensive. It takes time to develop expertise and to accumulate experience to apply that expertise prudently. Having consistency and realizing the benefit of acquired and retained knowledge is helpful to all concerned. The MoD should consider assigning “Case Officers” to individual offset projects, such as may be initiated by a private sector concern by inquiry to or request for meeting with the DOMW.

The GOI may also wish to examine its administrative service rules to determine whether it is possible to extend the tenures of key personnel assigned to defence procurement and offset responsibilities. Appropriate measures should also be adopted for effective knowledge transfer to successors.

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The views expressed are of the author and do not necessarily represent the opinions or policies of the Indian Defence Review.

About the Author

Robert S Metzger

Robert S Metzger is a lawyer in private practice with the law firm of Rogers Joseph O’Donnell, PC and is a former Research Fellow at the Centre for Science & International Affairs, John F Kennedy School of Government, Harvard University. He is a member of the International Institute of Strategic Studies.

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