New Offset Guidelines Continue to Favour the Public Secto

New Offset Guidelines Continue to Favour the Public Sector

 Major General Mrinal Suman

Germany considers strategic partnership between Bundeswehr and the industry to be indispensable for maintaining modern and efficient armed forces. The underlying philosophy of the German defence acquisition regime, as aptly summarised by the German Defence Minister in March 2010, is based on three questions – ‘What is being required?’, ‘Which are the alternatives?’, ‘Which of the alternatives is economically priced while still providing the required performance?’ It implies that all sources are treated at par and the most cost-effective one is selected.

On the other hand, India has failed to appreciate the need to generate competition by exploiting the potential of the private sector. Penchant for preferential treatment of the public sector has been the bane of the Indian defence procurement regime. Despite repeated assertions to the contrary, Indian bureaucracy continues to treat the private sector unfairly. The policy promulgated in the new Defence Offset Guidelines (DOG) is no exception. Instead of having a single policy for the transfer of technology (ToT) to all Indian entities, MoD has created exclusive provisions for the public sector and the Defence Research and Development Organisation (DRDO).

Paragraph 3.1 of the new guidelines spells out various routes that can be taken by foreign vendors to fulfill their offset obligations. Para 3.1(a) deals with export of eligible goods and services from the Indian enterprises. Policy on foreign investment in India industry has been described in Para 3.1(b) to Para 3.1(d). Para 3.1(e) is exclusively for the government entities. Finally, procedure for the acquisition of high technologies by DRDO has been explained in Para 3.1(f). 

As the subsequent discussion will show, Government’s much touted policy of providing equal opportunities to the private sector is a sham. The public sector continues to retain its privileged place and get special dispensation. 

Investment in Kind in Terms of ToT 

ToT under Para 3.1(c) can be received by private sector companies ‘for  the  manufacture  and/or  maintenance  of eligible  products  and  provision  of  eligible  services’. This  could  be through  joint  ventures  or  through  the  non-equity  route  for  coproduction,  co-development  and  production  or  licensed  production of eligible products and eligible services. It is a very restrictive provision. It implies that the technology must relate to eligible products and services. 

On the other hand, Para 3.1(e) makes government entities and DRDO eligible to receive ToT in case they are engaged in the manufacture and/or maintenance of eligible products and provision of eligible services. In this case, there is no stipulation that the technology has to be for the manufacture of eligible products and provision of eligible services. In other words, any government entity engaged in the production of eligible products and provision of eligible services can receive technology which may be totally unrelated to such products and services.

ToT and Equipment for Augmentation of Capacity

Government institutions/establishments and DRDO that are engaged in the manufacture and/or maintenance of eligible products and provision of eligible services are allowed to receive equipment and/or ToT from foreign vendors for augmenting  capacity  for  research,  design  and development; training; and education. This facility has not been extended to the private sector. It implies that private companies cannot augment their R&D prowess with foreign help under the offset regime.

Buyback Stipulations

As per Para 3.1(c), the offset credit for ToT shall be 10 percent of the value  of  buyback  during  the  period  of  the  offset  contract,  to  the extent of value addition in India. It means that a vendor gets no offset credit unless he buys back products/services. Moreover, credit is limited to 10 percent of the buy-back value, to the extent of value addition in India. Value addition is to be determined by subtracting value of imported components and any fees/royalty paid. However, ToT for government entities under Para 3.1 (e) has no such restrictions. It implies that they can claim offset credits simply by providing contracted technology. Additionally, the methodology of calculating offset credits for transferring technology to government enterprises remains unexplained.

Exhaustiveness of ToT 

Under Para 3.1(c), DOG stipulates that ToT to Indian enterprises must cover all documentation, training and consultancy required. Moreover, ToT has to be provided without licence fee and there can be no restriction on domestic production, sale or export. However, there is no stipulation in the case of receipt of technology by government entities under Para 3.1(e). A foreign vendor can transfer technology to a government entity without providing all required documentation, training and consultancy. Foreign vendor can also charge licence fee and impose restrictions on the usage of technology so transferred.

Interestingly, under Para 3.1(f), the policy allows ToT in high technology areas to DRDO without any mandatory stipulation on its usage. On the contrary, foreign vendors earn multipliers as per the utilisation of the technology – 2.0 for use by the armed forces, 2.5 for use by the whole Indian market and 3.0 for unfettered exploitation (including exports). 

Investment in terms of Equipment 

Under Para 3.1 (d), foreign vendors can fulfill their offset obligations through investment in ‘kind’ in Indian enterprises in terms of provision of equipment through the non-equity route. The said equipment has to be for the manufacture and/or maintenance of eligible products and provision of eligible services. However, under Para 3.1(e), government entities can receive equipment if they are engaged in the manufacture and/or maintenance of eligible products and provision of eligible services. It implies that in the case of government entities, it is not necessary that equipment be for the manufacture and/or maintenance of eligible products and provision of eligible services. Thus, the equipment could be for totally unrelated purposes.  

Incongruously, whereas second-hand equipment cannot be transferred to the Indian enterprises under the above provisions, no such restrictions have been imposed on the government entities.

Finally

All acquisition procedures are guided by three imperatives – equipment should meet performance criteria as specified by the armed forces, it should be delivered within the required timelines and it should cost the country the least. In addition, all nations strive to develop and sustain their indigenous defence industry by generating competition. For that, all sources are tapped, all avenues explored and equal opportunity provided to all the competitors. It is only then that a country can benefit. 

Unfortunately, India is yet to appreciate the fact that both the public and the private sectors are national assets and need support. A prejudices MoD continues to perpetuate the monopoly of an inefficient, insecure and inapt public sector. All efforts are made to thwart attempts of the private sector to get an equal opportunity. The new offset guidelines have belied Government’s claims of providing level playing ground to both the sectors and dented its credibility.  

The objective of achieving self-reliance will remain elusive unless the private sector is duly integrated and its potential fully harnessed to build a viable indigenous defence industrial base. For that, technological prowess of the private sector should be given due recognition. MoD must revisit the offset policy and remove all discriminatory provisions and irksome disparities.