Indian Defence Review

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 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.

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.

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.

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.

Provisional Advice

The Indian bureaucracy will not wish to make decisions on mere possibilities or hypotheticals. However, businesses approaching the Indian market need feedback as they develop plans and initiatives. The interests of the offset programmes would be advanced if the DOMW is able to give provisional advice based on information provided and subject to later verification. For example, at the time of negotiation of a commercial offset proposal, that initial assumptions remain unchanged.

The DOMW should adopt a practice that invites submission of questions on issues of the application or administration of offset rules. Where the bureaucracy has no objection to a proposition presented, the DOMW might transmit a “No Action” letter. Such “No Action” letters would not constitute formal approval. They would be conditioned upon stated facts and assumptions. Formal and final approval would be earned only when specifics of an offset proposal are reviewed in a contract negotiation. Nonetheless, this form of provisional feedback would provide valued assurance to offset proponents.

Cycle Time Objectives

As experience is gained with categories of decision, the DOMW should state goals for “cycle times” to assure that decisions are made or actions are taken within a reasonable and predictable period after inquiry is made. A variation is to agree that failure to act within normative times may be treated as absence of objection to the proposition presented.

Decision Consistency

The administration of offset rules in the past was perceived as producing inconsistent results. Serious problems were encountered when private sector participants were given approval to a proposition only to later experience a change in position or repudiation of an earlier understanding. For the offset program to be administered in a more business-like fashion, private parties need to have higher assurance that actions taken by the DOMW may be relied upon, unless there are changed facts or circumstances.

Transparency Measures

Unequal knowledge and selective availability of information is contrary to transparency and may deter private sector participation. The DOMW should be encouraged to make publicly available its decisions of general or recurring interest as to how it will administer the offset programmes and apply its rules. The DOMW might distill key rulings or important principles into a format that can be posted as “Decision Circulars” and made available to the public via the Internet. These would not reveal the names of private sector concerns or proprietary or competition-sensitive commercial information.

Valuation Guidance

The revised Offset Guidelines contain many mechanical or technical elements that concern valuation and measurement of value added. There will be recurring questions on how to value investments in kind and Transfer of Technology. Periodic guidance and release of decision extracts in such areas would promote greater understanding of the Offset Guidelines and facilitate business planning.

Offset Partner Substitution and Addition

While more than $4 billion (Rs 22,000 crore) in offset contracts have been signed, not every vendor identified in those offset contracts will prove capable of delivery. No one gains from a failed offset obligation. Hence, the MoD should be encouraged to define and document the process it will employ to make decisions for substitution and addition of qualified IOPs to offset plans incorporated into contracts already let. Those decision-making powers are already vested in the Secretary of the Ministry of Defence and reportedly, he has delegated the role to the Defence Acquisition Council. It would benefit the MoD to state policies and practices to consider and timely act upon substitution and addition of IOPs. This may require a delegation of preparatory responsibilities to subordinate bodies.

Renegotiation of Existing Offset Agreements to Current Standards

Offset contracts today are governed by the version of the DPP that was in force at the time of Request for Proposal (RFP) issuance. With the continual revision of the DPP, it has become difficult for all parties to keep track of the correct version. Also, progressive revisions to the DPP and Offset Guidelines have expanded the sphere of service and supplies eligible for offset credit as well as the means by which offset obligations can be discharged. Where OEMs have encountered bona fide problems in satisfying an existing offset contract governed by an earlier DPP, the MoD may wish to allow companies to propose terms for renegotiation, to apply the current DPP or guidelines. On a case-by-case basis where, in the interest of the GOI, offset contracts could be revised.

The subjects cited above focus on India but there are many actions for the US Government to take that will assist development of the US-India defence industrial relationship. Critical issues are present in subject areas that include export administration, national disclosure policy, better support and faster action upon Foreign Military Sales (FMS) cases. A “trust deficit” remains in that many in India continue to question whether the US is a trusted source for key defence equipment and doubts persist about US willingness to share valuable technology with India. Problems also remain in the reconciliation of India’s DPP with the FMS procedure of the US government. For the US to actualize the opportunity that its companies can help India develop an indigenous defense manufacturing industry and become more self-reliant for its own security, there are a number of measures that must be taken by the former to remove barriers to industrial cooperation, ease technology release constraints, expedite export approvals and foster greater defence cooperation.

A promising start may be present in the new “Defense Trade Initiative” sponsored by US Deputy Secretary of Defense, Ash Carter. This promises unprecedented project opportunities for collaboration in development, manufacture and sustainment of mutually beneficial defence and internal security systems. Success, however, can be achieved only if the US Government steps up and delivers real improvements in how it treats defense cooperation and sharing of technology with India. Meanwhile, India has a right to look beyond the rosy rhetoric to the results that the US delivers.