J. Brauer and J.P. Dunne in their article “Arms Trade Offsets and Development.” Africanus [South Africa] Vol. 35, No. 1 (June 2005), pp. 14-24,opine: “Arms importing countries’ offset objectives do of course evolve over time and they change their strategies. Some developing economies have targeted certain arms niches because of their desire to be learning master for themselves and they structure arms import acquisition and offset demands toward the fulfillment of that goal (e.g., Singapore, Taiwan).
Other countries (e.g., Brazil, India, Indonesia) appear to be driven by regional power ambitions that would dictate the development of an indigenous ability to produce a comprehensive range of weapon systems in-country and so they pursued or pursue an arms sourcing and offset strategy with broad technology transfer requirements. Yet other states (e.g., South Korea) seek an ability to produce a wide spectrum of systems not because of regional power ambitions but because of a generalized desire and increasing ability to participate broadly in all industrial markets.
With India planning to spend another $30 billion that is almost Rs. 120,000 crore on arms imports by 2012, countries as well as global armament companies continue to jostle with each other to grab big pieces of the lucrative action.
Still other states appear to view arms offsets as an opportunity to revive a collapsed or failed indigenous arms industry (e.g., Poland) and the countries (like South Africa,) appear to view arms offsets as a way to simply get the arms and keep the money at home as well”.
The Defence Procurement Procedure of the Indian Ministry of Defense includes Offsets as a part of the acquisition process. The stated intent of introducing offsets, which is known for its complex procedure is nothing but bringing in the latest technologies to the country, creating opportunities for export of Indian manufactured defense products and reducing dependency of Indian armed forces on imported weapons and equipment.
Offsets, as a part of the acquisition process, practiced by a very large number of countries, is not a new phenomenon. Nations have long used this as a tool to acquire technologies, seek investments in core industries or for creation of new industrial infrastructure, create export markets for their products and in some cases generally improve their quality of life in the fields of education, health and water supply etc.
The preliminary offset conditions have been kept simple with the intent of adding more conditions later when the users gained experience in handling various issues. The basic condition is that “the offset clause would be applicable for all procurement proposals where indicative cost is above Rs. 300 Crores and the schemes are categorized as ‘Buy (Global)’ involving outright purchase from foreign/Indian vendors (30% of the indicative cost as offset) and ‘Buy and Make with Transfer of Technology’ i.e. Purchase from foreign vendors followed by Licensed Production”(30% of the foreign exchange content as the offset).This is followed by a procedure, which allows the vendors extra time for submission of the offset proposal, after the submission of the Technical and Commercial bids in response to an RFP. This procedure, while retaining the option of only ‘Direct offsets’, does not limit offsets to any specific technologies or products.
That such a simple and straight forward offset condition started a major debate in the arms manufacturers’ circles possibly came as a surprise to the planners in the Indian MOD as well as the Service Headquarters. Such has been the intensity of this debate that the offset policy is already under a major revision even before its’ successful initial implementation, which was to form the basis for its improvement. An analysis of the debate on the offset policy has highlighted some very interesting aspects, which merit a mention.
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These are :-
- The Indian offset policy is possibly the simplest in formulation and easiest to implement vis-a-vis the policies of many nations seeking offsets for their defense procurements.
- The policy in general is acceptable to a large number of vendors who have sold their products to Indian armed forces in the past and are indeed willing to do business with this simple addition of the offset clause.
- This rather gratuitous discourse on our offset policy, being spearheaded by some arms manufacturers, is the direct result of our policy of listening to all opinions, even when these are clearly subjective, and our sensitivity to criticism, which is sometimes patently unfair. Other nations, some the most prosperous, have formulated and implemented their offset policies after an internal debate on what is best for ‘their’ nation. We also seem to be moving in that direction at our own pace.
Major Issues
As per the Times of India 04 Feb 08:“With India planning to spend another $30 billion that is almost Rs. 120,000 crore on arms imports by 2012, countries as well as global armament companies continue to jostle with each other to grab big pieces of the lucrative action.”Some of the major issues, (being raised in certain quarters), responsible for the delay in the implementation of the offset policies are :-
Perceived inability of the Indian defense industry to absorb the advantages of offset obligations,and meet the requirement of introducing indirect offsets, transfer of technology and offset banking.
It is a universally accepted fact that India has a vast pool of skilled manpower in all disciplines of sophisticated designing, testing, developing and manufacturing.
Indian Defense Industry and Offsets. The Indian defense industry consists of the DPSUs, manufacturing facilities of the OFB, nominated manufacturing facilities of large industrial houses and defense SMEs. These are selectively supported by the research and testing facilities of the DRDO. The loudest argument in some quarters that the Indian defense industry will not be able to deliver the offset obligations is not supported by the facts.
Regarding the DPSUs, Bharat Electronics Limited (BEL), with its corporate office in Bangluru and manufacturing facilities spread all over the country, will make a good case study for an objective assessment. A visit to one of these state-of-the-art facilities can be a heady experience for any Indian. This public sector undertaking, in the field of electronics, meets a very large part of the electronic and opto-electronic equipment needs of the three services and paramilitary forces besides providing some niche products in the civil markets such as electronic voting machines. A mere look at the mind boggling product range of this company along with its’ willingness and ability to absorb technologies and a well established research centre for in-house R &D should be capable to clear all the doubts till date regarding the ability of this DPSU to meet any products obligation. It might come as a surprise to some that BEL is being quietly wooed by scores of OEMs from all over the globe for joint ventures for the expressed purpose of meeting offset obligations. We have other DPSUs in the same class.
Another major contributor in the Indian armament industry is the Ordnance Factory Board with its’ 40 state-of-the-art Ordnance Factories. Their product range includes tanks, guns, small arms, vehicles and ammunition. There are factories to produce even clothing and parachutes. These world-class manufacturing facilities are quite capable to absorbing the technologies and manufacture of quality products. The presence of a captive market and bureaucratic controls has a hugely impacted on the quality of OFB products and its ability to innovate. To retain its’ pre-eminent position as a national resource with huge potential, OFB has the ability to deliver quality products in a market driven offset regime.
A success story of the Indian defense industry is the very large number of small and medium enterprises in Pune, Hyderabad and Bangluru and other Indian cities, having DRDO labs or other defense industries. These units, which started out as a supportive system for DRDO projects or suppliers of simple components, some with only hand tools and minimal infrastructure, are today having global majors on their customer list. They manufacture and supply quality products to OEMs across the globe and are eagerly waiting the implementation of the offset policy to expand the scope of their business.
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Two more aspects about the Indian defense industry, which merit special mention are:-
- Availability of Skilled Manpower. It is a universally accepted fact that India has a vast pool of skilled manpower in all disciplines of sophisticated designing, testing, developing and manufacturing. We also have a very large pool of defense scientists who can help in absorbing the advanced technologies in any field.
- Testing Facilities. Besides the testing facilities available with various manufacturing units we have world-class testing facilities available with the DRDO laboratories along with the trained staff to test any indigenously manufactured products to world class testing standards. Besides, we also have the DGQA, a body of trained personnel with equipment, systems and procedures, to test and evaluate any military equipment. A very encouraging development in this field is the infusion of private capital in establishing a private, globally accredited, testing facilities in the country.
In view of the foregoing it needs to be stated emphatically the Indian defense industry has the capability to absorb any quantum of offsets.
Introduction of Indirect Offsets. Indirect offsets in the simplest form are a system of counter-trade wherein the seller is obliged to buy and import something from the buyers’ country. Thus,putting it in simple terms -a seller of weapons, in an indirect offset regime, can buy and import fruit juices equal to the desired value of the offset to discharge his obligation. The Indian offset policy has the express stated purpose of obtaining critical technologies, exporting Indian manufactured defence products and invite investments in the defence industrial infrastructure/ R & D. Such an offset policy, for the present, rightly has no place for indirect offsets.
The existing practice of acquiring technologies as part of the “˜buy and make projects has best resulted in some of the build-to-print projects in which the know-how and know-why was never shared with the production agencies. This kind of technology transfer does not result in any substantial advantage
Offset Banking. Banking of offsets is a system of creating credits wherein a seller can seek credit for additional offsets on a given deal to meet the offset obligation in any other deal. It is hoped that the inherent contradiction in stated inability of the Indian defense industry to absorb even the minimum offsets vis-à-vis the possibility of creating enough additional offsets for future use will not be lost to the readers! Some of the issues that merit attention are:-
- Financial mechanisms Need for examining the possibility of service- wise banking of offsets for a focused advantage of technology insertion and other benefits and requirement for a fairly large and a well equipped establishment merely to keep count of offset credits and their utilization.
- Transfer of Technology. As stated earlier, one of the basic reasons for introduction of offsets in the acquisition process is obtaining cutting edge technologies for the armament industry. The existing practice of acquiring technologies as part of the ‘buy and make’ projects has best resulted in some of the build-to-print projects in which the know-how and know-why was never shared with the production agencies. This kind of technology transfer does not result in any substantial advantage to the beneficiary establishment. For our industry to really benefit from a certain technology, and using that knowledge as a base for further research and development, there is a need for transfer of the entire intellectual property of a given project so that our scientists and engineers can develop, modify and improve the product as well as use the technology in other projects. There should be no hesitation in admitting that obtaining cutting edge technologies is actually the cornerstone of our offset policy. We should do every possible thing to include this in the policy. However, there are some concerns, which are preventing the demand of the technology majors from being included in the policy. Two of the issues, which are possibly preventing the introduction of transfer of technology as a pay-off for offset are :-
- Government Controls. It is a well known fact that even when the global technology majors give assurances about sharing the technology, in their product selection, the actual transfer of technology is a rather complex phenomenon. Cutting edge technologies are treated as a national intellectual property and their transfer is subjected to the government controls. Similarly dual use technologies are subjected to stringent government controls. Even when an agreement is finally reached, about transferring the technology, it is unlikely that the latest technology would be on offer as offset or it may come with a number of preconditions preventing its’ exploitation.
- Cost of Technology. Cost of technology, as part of the offset commercial offer, is possibly the most contentious issue, which needs quick resolution. While the owners of the technology always feel that the cost quoted by them reflects the true value of their product and the buyer is bound to contest the same. Absence of universally acceptable norms and methodology for costing the technologies and a well established notion amongst the buyers that the cost of technologies is higher than the actual cost is bound to delay this highly desirable facet of the offset policy.
- There is a need for the policy makers to urgently take all steps to establish an acceptable methodology so that technology can be accepted as an offset.
Conclusion
Thus from an Indian perspective we can summarize: the Indian defense industry has the ability to absorb any quantum of offsets; we must not include indirect offsets in our offset policy; we should examine the possibility of service-wise banking of offsets; and we should urgently evolve procedures to accept offers of complete technology as offset.
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