Need for Transparency in Offsets

Need for Transparency in Offsets

Major General Mrinal Suman, AVSM, VSM, PhD

Although offsets in Indian defence deals were introduced in the Defence Procurement Procedure (DPP) of 2005, secrecy continues to shroud the complete gamut of offset related activities. Reportedly, India has signed offset contracts worth over Rs 14,000 crores to date. That is the only figure available in public domain. Nothing is known about the progress made by different offset programmes so far. No one knows if any offset contract has been successfully implemented and closed. Transparency is conspicuous by its total absence.

One of the biggest weaknesses of offsets is their vulnerability to corrupt practices. According to Transparency International, access to offsets arrangements distributed by officials can become more lucrative than competitive activities, creating an incentive for networks of corruption to proliferate around them. Thus, introduction of offsets has increased the risks of corrupt practices in defence business considerably.

Indian defence procurement regime remains mired in controversies and is struggling to acquire credibility. It will be a terrible setback in case mismanaged offset programmes add to the existing woe and despair. As secrecy breeds corruption, the best safeguard against wrongdoings is to make public details of all offset related developments, contracts signed and their progress on ground. As will be seen, transparency is the most effective preventive precaution against dishonest practices.

Misplaced Concerns for Security

As offset contracts are related to main defence contracts, they are, most unjustifiably, accorded the same security classification as the main contracts.

Foreign vendors are allowed to fulfill their offsets obligations through any of the following routes:-

a) Direct purchase of or executing export orders for eligible products and services provided by Indian defence industries.

b) Foreign Direct Investment (FDI) in Indian industries for industrial infrastructure for services, co-development, joint ventures and co-production of eligible products and components.

c) FDI in Indian organisations engaged in research in R&D as certified by Defence Offset Facilitation Agency (DOFA).

Products eligible for discharge of offsets relate to defence, internal security and civil aerospace. ‘Services’ mean maintenance, overhaul, upgradation, life extension, engineering, design, testing of eligible products and related software or quality assurance services with reference to the indicated eligible products and training. Training includes training services and training equipment but excludes civil infrastructure.

Due to dissuasive policy of capping FDI in defence sector at 26 percent, foreign vendors are reluctant to invest in Indian ventures as they enjoy no controlling power. Thus, direct purchase of eligible products and services is the sole viable option available to foreign vendors for the fulfillment of their offset obligations.

A list of eligible products and services has been given in DPP. Even a cursory glance will show that no item is of any security concern. In any case, India produces no high-tech equipment of exclusive know-how. Foreign vendors are procuring low-end sub-assemblies and components from India to fulfill their obligations. In certain cases, some mundane items are being manufactured in India as per the designs supplied by foreign companies – HAL is supplying doors and windows of aircraft to foreign majors. Even services being exported are of rudimentary maintenance tasks. Therefore, by no stretch of imagination can offset activities be construed to be of security concerns.

Secrecy Spawns Corruption

As stated earlier, the biggest weakness that offsets suffer from is that their opacity provides an ideal playground for corruption. Therefore, dishonest officials considered it prudent to keep offset contracts outside public oversight. Three factors help them in their devious endeavour. One, as the focus always remains on main contracts, offset contracts attract peripheral public interest. Two, due to their long-term spread, both public and media lose interest in them. Three, appraisal, evaluation and efficacy-ascertainment of offset programmes is a highly complex task; and there are no standard tools available for the purpose.

Therefore, very little information about offsets is made public. Resultant lack of media attention allows unscrupulous players to tweak the system ingeniously to derive undue advantages. Although there are numerous possibilities for illegal gratifications in the complete gamut of offset activities, there are three common practices that are often resorted to.

One, exports in lieu of offset obligations are over-invoiced by dishonest Indian partners to inflate value of offset credits. Two, routine commercial/trading activities are claimed as offset programmes to earn credits, thereby denying genuine benefits to the country. Finally, obliging officials allow re-phasing of the offset schedules of erring vendors even beyond the period of the main contract for illegal gratifications on quid pro quo basis. Penalties are unfairly waived by declaring the requests for rescheduling to be justified.

Transparency Promotes Compliance

Public awareness of offset contracts and their progress act as the greatest deterrent for insincere foreign vendors. Most foreign vendors are big defence conglomerate and are very sensitive to adverse media publicity. They are extremely wary of loss of reputation and credibility. Any news about their failure to adhere to offset schedules can dent their world-wide standing and expose them as insincere and inefficient vendors who default on their contractual commitments.

In case they indulge in fraudulent activities, public pressure can force the officials to take punitive action against them – from financial penalties to blacklisting. Any company found guilty in India of corrupt practices renders itself liable for legal action in their own countries as well where anti-corruption laws are far stricter. Foreign vendors dread such a development and would do their best to fulfill their offset obligations as contracted. Thus, transparency and associated public scrutiny will force them to deliver and deter them from transgressions.

Conclusion

India is expecting an inflow of offsets worth USD 36 billion in the next few years. It is an enormous amount by all standards and cannot be consigned to peripheral importance. It deserves close public oversight and regular media scrutiny.

MoD should issue a Quarterly Offset Bulletin (QOB), both in print and electronic forms. In addition to containing information about latest changes in offset policies and amplification of imprecise provisions, QOB should make the following information public:-

• Details of offset contracts signed during the period of coverage with details of their total offset value; breakdown of constituent offset programmes with their respective objectives and value; details of Indian partners; and agreed implementation schedule with major milestones.
• Implementation progress of all offset programmes with details of slippages and reasons thereof; action taken to put the programmes on track; penalties imposed and recovered from defaulting vendors; and permission granted to foreign vendors to change Indian partners for non-performance.
• Particulars of offset contracts duly completed with details of their scheduled progress; performance audit by an independent agency to validate claims; and degree to which programmes were successful in achieving planned objectives.
• Feedback received and lessons learnt for further streamlining of the process.
  

Secrecy is the antithesis of transparency and encourages proliferation of corrupt practices. Under the garb of security concerns, very little information is made public, thereby keeping the whole process under wraps. Thus, a culture of non-accountability thrives under the garb of security considerations. As stated above, offsets warrant no secrecy whatsoever. Details of every single aspect of offset contracts and their implementation should be disseminated to the public. Transparency is the best antidote for the virus of corruption and misconduct.