The practice of countries demanding discharge of offset obligations as a prerequisite to foreign firms’ participation in major defense contracts is not new. While there is substantial divergence of views on the impact of offsets in achieving their stated goals, the fact remains that offset demands are increasing in all regions around the world.1 Over the years, as India’s private industry has developed its technical capacity and expertise, it has also scaled up its demands for reforming the defense procurement system, including an enhanced role for its indigenous industry, most notably through compulsory offset requirements to be met by foreign vendors.
This article focuses on certain aspects of defence offset contracts in India, and provides certain specific recommendations to further reform the legal and regulatory environment for better and more efficient offset contract administration.
Evolution of Indian Defence Offsets
Offsets were first implemented in India under the revised “Defense Procurement Procedure-2005” (DPP-05),2 effective July 1, 2005. The Services Capital Acquisition Plan (SCAP) Categorization Committee3 was authorized to recommend offsets up to 30 percent of the indicative cost in the RFPs where such cost was Rs. 300 crore (INR) or more, although changes could be suggested in the offset amount if necessary.4 Any cost incurred by the vendor in the infusion or providing of any technical or financial assistance was not permitted to form part of the offset offer.5
Notable changes in DPP-06 from previous versions related to the inclusion of private Indian defense industries as a vehicle for the discharge of offset obligations, and also the restatement of an inclusive range of services as options for discharge of offset obligations.
This minimalist regulatory framework was considerably modified in the revised “Defense Procurement Procedure-2006” (DPP-06), effective September 1, 2006,6 when the use of offsets was made applicable in the case of procurements categorized as “Buy (Global)”7 or “Buy and Make with Transfer of Technology (TOT).”8 The range of options for discharge of offset obligations was however considerably expanded.9 Notable changes in DPP-06 from previous versions related to the inclusion of private Indian defense industries as a vehicle for the discharge of offset obligations,10 and also the restatement of an inclusive range of services as options for discharge of offset obligations.11
The most significant development from a contract administration viewpoint was establishing the Defense Offsets Facilitation Agency (DOFA) as a specialized agency under the MoD (Ministry of Defence, Government of India) that was to function as a single window entity in assisting MoD in dealing with offset contracts.12 DOFA was to assist potential vendors in interfacing with the Indian defense industry for identifying potential offset products/projects, as well as provide requisite data and information for this purpose.13
DPP-06 was superseded by a new set of regulations—the “Defense Procurement Procedure-2008” (DPP-08)—effective September 1, 2008.14 Important changes made in the new regulations related to the waiver of offset liabilities on any procurement under “fast-track procedures;”15 broadening the list of private industries by removing the need for an industrial license for participating in offset programs16 and permitting credit banking in offset procedures.17
Also read: Defence Procurement Policy: A Positive Change – CII
The latest amendments to DPP-08 in the form of DPP-08 (Amendment 2009)18 made effective from November 1, 2009 permit the change of offset partners fixed initially under exceptional circumstances, where such change may be desirable to enable the vendor to fulfill its offset obligations.19 These amendments also specify that where offsets were not envisaged under the initial main contract, such provisions will also not be applicable when the government exercises its powers under the “options clause” of the main contract.20
Offset Contract Administration
Both DPP-06 and DPP-08 envisage an important role for DOFA in assisting the MOD in the formation and monitoring of offset contracts. DPP-06 assigned DOFA, inter alia, with the task of providing advisory clarifications on the policy and procedures (in consultation with the Acquisition Wing wherever necessary).21 DOFA was also to assist potential vendors in interfacing with the Indian industry in identifying potential offset products/projects.22 One of DOFA’s mandate was, and remains so even today, to assist the technical committee in evaluating offset proposals,23 and to advise the high-powered “Contract Negotiation Committee” whenever required.24
DOFA now has no specified role in assisting the concerned acquisition manager in monitoring the implementation,26 such responsibilities have now been taken over by the “Offset Monitoring Cell” in the MOD and by the MODs representative”¦
DOFA was also to assist the appropriate acquisition manager in monitoring the implementation of the offset contract.25 Interestingly, however, DOFA was not associated under DPP-06 with any re-phasing of offset obligations within or outside the time period of the main contract under “normal” or “force majeure” conditions.
Under the new DPP-08 as amended, DOFA now has no specified role in assisting the concerned acquisition manager in monitoring the implementation,26 such responsibilities have now been taken over by the “Offset Monitoring Cell” in the MOD and by the MOD’s representative,27 respectively. However, DOFA now assists the acquisition wing in the re-phasing of the offset obligations within and outside the period of the main contract under normal conditions,28 and in the re-phasing of offset obligations under exceptional or “force majeure” conditions.29
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