While the disassociation of DOFA with providing advisory clarifications on the policy and procedures could be justified on grounds of avoiding possible conflicts of interest since DOFA has membership from private industry associations;30 DOFA’s lack of association with the monitoring of offset contracts is worthy of serious re-consideration, in order that both the monitoring and re-phasing aspects of offset contract administration are vested in the same authority, resulting in more efficient administration of defence offset contracts.
Banking of Offset Credits
DPP-06 provided that only contracts for the export of defense products or services or investment made after the signing of the main contract would be reckoned for discharging offset obligations.31 This was perceived by the Indian industry to be unduly restrictive, and there had been an important demand for bringing in provisions to allow for the banking of offset credits to allow for greater flexibility in planning for the discharge of offset obligations by vendors.32 The origin of these demands lay in the fact that it is possible for a vendor to end up discharging offset obligations in excess of the legally required minimum. Further, having once established business relationships in the procuring country, a vendor may even voluntarily wish to continue exports or investments beyond the particular procurement contract to capitalize on economies of scale or to make use of attractive market opportunities33; and vendors may even wish to generate potential offset credits through programs undertaken prior to the award of the main contract to get an “early-mover” advantage.34
“¦having once established business relationships in the procuring country, a vendor may even voluntarily wish to continue exports or investments beyond the particular procurement contract”¦
DPP-08 now allows foreign vendors to create offset programs in anticipation of future obligations.35 Offset credits so acquired can be banked and discharged against future contracts, but they are not transferable except between the main contractor and its subcontractors within the same acquisition program.36 A vendor will therefore be able to discharge the banked offset credits for the RFPs, which are issued within the two financial years of the date of approval of the banked offset credits.37 However, this regulatory guidance is limited, since banking of offset credits immediately requires specific provisions to address a variety of contractual issues, including, inter-alia, the “competent authority” for certification; “valuation” and “timing” of certification; the handling of disputes regarding certified amount or date; tradability,38 and verifiability of a certified offset credit.39
DPP-08 presently grants recognition to offsets at the time of approval. Such recognition at the time of approval, as opposed to recognition at the time of offset activity, may create an incentive to a vendor to file a claim as late as possible; and it is entirely possible that the activity being certified may have little or no relevance from an offset standpoint, and may, in fact, merely constitute an ongoing business transaction. Considering that the essential purpose of offset agreements is to specifically motivate eligible offset activities,40 such an exercise may lose its purpose and may prove to be unfruitful and even counterproductive under certain conditions.41 This becomes especially relevant, considering that offset obligations in India are essentially indirect, allowing for a very wide scope of activities that may not always accrue intended benefits.42 For instance, India already has a robust and thriving software industry, and the inclusion of defense-related software in permitted offset activities may be lucrative to vendors while not being a very attractive proposition from a national interest viewpoint.43
These offset banking regulations are silent on the transferability of offset credits banked in anticipation of future contracts, as no subcontractors would exist at this point of time to which the credits could be transferred in case the vendor fails to get an award. At some point, therefore, the regulations may also need to open up the limitations to perhaps allow for the full tradability of offset credits generated either in anticipation of future contracts or generated through excess performance. If banking is allowed, trade in offsets could be the next step, as both are intrinsically and mutually contingent.44
Also read: Defence Industry Abroad
Since the regulations place a restriction on the parties eligible to receive banked offset credits (namely, subcontractors under the same acquisition program), mechanisms would need to be instituted to prevent unauthorized transfers from getting certified by mistake or otherwise. In fact, the introduction of a system of banking requires the setting up of a registry of banked offset credits that can verify—for the benefit of subcontractors—the value, time, and qualifications or easements, if any, of an offset held by a prime contractor that the prime may be offering to subcontractors in exchange of a consideration.
Such a registry would also help acquisition managers or other official agencies involved in the monitoring of the discharge of offset obligations to ensure that an otherwise “ineligible” offset credit does not get accounted for against a contractor’s performance or other contractual obligations. Some other issues that may require further regulatory guidance in the context of the banking of offset credits relate to issues such as the assignment by bidders of these credits to more than one RFP at a time; subsequent reassignment of assigned credits from one RFP to another at the option of the bidder; withdrawal of assigned credits by bidders from one RFP and re-banking them for reassignment at a later stage; and the legal status of credits once assigned by a bidder to an RFP that is subsequently cancelled (or in cases where the bidder is not the eventual contract awardee).
Conclusion
The use of offset agreements requires implementing a number of consequential, well-designed, and sharply-focused techniques for contract administration. The existing offset contract clauses may therefore be in need of some degree of refinement and detailing, more particularly with regard to provisions relating to the banking of offset credits by laying out the complete mechanisms for certification of offset credits in terms of value and time stamping, establishing a registry that allows private vendors and public officials to quickly verify claimed offset credits, and addressing issues regarding transfer of credits between connected or unconnected vendors.
In addition, the statutory role of DOFA in the contract administration process needs to be more clearly specified, especially vis-à-vis the Offset Monitoring Cell, since DOFA’s current role limited only to the contract formation process and re-phasing of the offset contract does not appear to be consistent with its broader mandate of being an important vehicle for the administration of offset contracts. The suggested changes may lead to increased bidder confidence by reducing their transaction costs with offset contracts; and the government could also benefit from such an exercise, as these changes should ultimately result in timely discharge of offset obligations by defense contractors.
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