India's Revised Defence Offset Policy

Discussion in 'Indian Air Force' started by Daredevil, Aug 29, 2012.

  1. Daredevil

    Daredevil On Vacation! Administrator

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    India’s offset shuffle

    The world’s biggest military importer wants more than hardware from foreign suppliers.

    It is difficult to overstate the importance of India to the world’s big defence players. As western powers sharply reduce defence expenditure, India beckons as the world’s biggest importer. Its airforce operates largely obsolete types, while across the Himalayas regional rival China is determinedly upgrading its airpower and aerospace industry.

    Aside from the competitive cut and thrust of international arms sales campaigns, one key challenge facing defence aerospace players in India is offsets – the requirement,typically set by developing nations, that a certain percentage of the value of an import deal be locally sourced, to soften the balance of payments impact and/or develop local technical capability. In India, these deals amount to big money; the country’s 2012-2013 defence budget of $34.8 billion includes $8.7 billion for the air force, and foreign contractors must generally invest 30% of a deal’s value back into India through offsets. In the recent case of the medium multi-role combat aircraft competition provisionally awarded to Dassault of France, the offset value is 50% of what could end up being a $10-20 billion deal for Rafale fighters. Other recent deals with large offsets include $1.2 billion for six Lockheed Martin C-130Js, $2.1billion for eight Boeing P-8I maritime patrol aircraft and $1.78 billion in 2011 for 10 C-17s.

    NEW SET OF RULES

    But now India has changed the rules, with a 38-page document released this month. Foreign suppliers are still sifting through the details, but have been generally positive. Ron Matthews, an offsets expert at Singapore’s S Rajaratnam School of International Studies, says the latest policy is part of an Indian move to broaden an overly rigid offsets policy set in 2005 to go beyond defence and include high-technology sectors including homeland security and commercial aerospace. One industry source says a revision that allows parties to change an offset project following its approval is a major improvement. This is especially relevant for offset deals involving high-technology systems. The revisions affect a number of other key areas. One major change is the use of “multipliers” designed to encourage the transfer of high technology. The new policy also lends a hand to India’s small and medium enterprises. Direct export, foreign direct investment, and technology transfers to such firms through a non equity route will receive a higher weighting compared with a contractor’s offset obligations.
    “Generally, the new policy is along the lines of what we expected, allowing for a greater flexibility both in terms of what areas come into play, as well as the time scales allowed,” says a New Delhi- based defence industry source who welcomes the introduction of value multipliers, of 1.5x if the offset partner is a small or medium sized company and 3x for high technology components: “It is wise to encourage high-technology transfer, as opposed to shifting expired technologies. “The use of multipliers gives the government a powerful tool to direct investments into areas they deem as most prioritised at any given time.”

    Another industry source, however, feels offsets have a “huge impact” on the profitability of defence deals in India. He also notes that western defence contractors have spent decades and countless billions developing intellectual property, and need to be rewarded for sharing this know-how. “We are not going to throw away our IP for the sole purpose of meeting offset guidelines,” he says. One way to balance the impact of offsets on profits would be to require offset partners to pay franchise fees or royalties on technology transfer arrangements.

    BIG BUCKS TALK LOUDEST

    Ultimately, though, India’s appeal as the biggest export prize should trump such concerns. As Matthews sums up the situation: “Given all the industrial weaknesses that India’s defence sector labours under, including excessive bureaucracy and a constrained private sector, it nevertheless enjoys that greatest advantage of all in ensuring offsets will work: the scale of procurement. This is so huge it will force foreign vendors to concede to attractive offset arrangements. “The lure of the deal outweighs the pain of losing unimaginable revenue and profit.”


    Source: Flightglobal Magazine 28Aug
     
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  3. Daredevil

    Daredevil On Vacation! Administrator

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    Re: India's Offset Policy Change

    New offset rules allow technology transfer, relax time limits

    Ajai Shukla / New Delhi Aug 03, 2012, 00:53 IST

    The defence ministry (MoD) has today announced a slew of keenly anticipated modifications to its defence offset policy, which come into effect from August 1. Transfer of technology (ToT) has been made eligible for offsets, multipliers specified, sub-vendors have been allowed to discharge offsets, and the MoD has acceded to vendor requests to relax time frames for the discharge of offsets. For the first time, the aim of the offset policy has been spelt out clearly, making it easier for vendors to structure their offsets to satisfy Indian aims.

    According to the new policy, the threefold aim of defence offsets are (a) to foster the development of internationally competitive enterprises; (b) to augment Indian capacity for research and development (R&D) and the design of defence products and services; and (c) to encourage the development of “synergistic sectors like civil aerospace and internal security.”

    Transfer of technology (ToT)

    Fulfilling a key demand from foreign OEMs and from India’s Defence R&D Organisation (DRDO), the new policy permits technology to be counted as an offset. To qualify as an offset, ToT should not carry any licence fee, nor should there be any restriction on the production, sale or export of any goods or services that are arise out of that technology. In transferring technology, the vendor must transfer full documentation, training and consultancy (but not necessarily civil infrastructure and equipment).

    Technology that the DRDO badly wants, and has specified for transfer, will carry a multiplier of 3 for being evaluated as an offset. That means that technology valued at Rs 100 crore would be granted offset credit worth Rs 300 crore.

    Multiplier for MSMEs

    In a boost to Indian micro, small and medium enterprises (MSMEs), foreign investment, technology transfer, or investment in “kind” through non-equity route in MSMEs will be granted a multiplier of 1.50 for calculating offsets. The monetary limits specified by the Government of India shall be used in classifying MSMEs.

    R&D collaboration

    Continuing the emphasis on R&D, collaboration with “government recognized R&D facilities” are now eligible for offset credits. The MoD believes that this will facilitate R&D collaboration, and the purchase and export of R&D services “from both public sector and private sector enterprises.”

    Tier-l sub-vendors permitted

    The new policy permits the main vendor who signs a procurement contract to nominate his sub-vendors to discharge part of the overall offset obligations on the main vendor’s behalf. However, overall responsibility for discharge of offset obligations shall rest solely on the main vendor.

    This has been a long-standing demand from large OEMs. For example, a fighter aircraft sold by, say, Dassault, might have components supplied by sub-vendors, say, Thales and Honeywell. The new clause allows Thales and Honeywell to discharge offsets for their share of the fighter aircraft.

    Relaxation of time frame for offsets

    So far, vendors have had to discharge their offset obligations within the time period of the main procurement contract from which those offsets arose. The new guidelines allow a further period of two years, beyond the period of the main procurement contract, for discharging offsets.

    Time frames have also been relaxed for offset banking. So far, offsets credits were bankable for a period of two years. The new guidelines increase that period to seven years. Vendors have pleaded that this would permit continuity in production in any manufacturing activity that they undertake in India.

    Maximum penalty

    Easing the potential liability for vendors, the new policy specifies an overall cap of 20 per cent of the vendor’s offset obligations while discharging offset obligations. However, there is no penalty cap for failing to implement offset obligations during the extended period of two years beyond the main procurement contract.

    Changing offset partners

    The new policy allows the MoD to permit vendors to change their Indian Offset Partner (IOP) in certain cases, providing the value of offset obligations remains unchanged. This meets a long-standing vendor demand for greater flexibility.

    Offsets were first made mandatory in the Defence Procurement Policy of 2005 (DPP-2005) and then revised periodically, most recently in DPP-2011. The offset policy requires foreign vendors who win defence contracts worth Rs 300 crore or more to plough back at least 30 per cent of the contract value into India in the form of defence orders, technology or infrastructure.
     
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  4. Daredevil

    Daredevil On Vacation! Administrator

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    Re: India's Offset Policy Change

    New guidelines make technology transfer eligible offset in defence acquisitions

    The government today announce revised guidelines under the defence offset policy, which clearly spells out the objective of defence offsets and makes transfers of technology or acquisition of technology by Indian companies eligible for offsets.

    The Defence Acquisition Council (DAC) under the defence ministry had, at its meeting held on 23 July 2012, approved the revised guidelines for defence offsets.

    The key objective of the defence offset policy is to leverage capital acquisitions to develop Indian defence industry by fostering development of internationally competitive enterprises, augment capacity for research, design and development related to defence products and services and encourage development of synergistic sectors like civil aerospace and internal security, an official release said today.

    The revised policy tries to clearly define the concepts of co-production and co-development. Distinction has also been made between equity and non-equity route. Investment in 'kind' by OEMs through the non-equity route, ie, co-production, co-development, etc will be recognised for offset credits, subject to certain conditions.

    Transfer of technology

    The revised policy recognises transfer of technology as eligible for discharge of offset obligations. Investment in 'kind' in terms of transfer of technology must cover all documentation, training and consultancy required for full transfer of technology (civil infrastructure and equipment are excluded). The technology transfer should be provided without licence fee and there should be no restriction on domestic production, sale or export. The offset credit for transfer of technology will be 10 per cent of the value of buyback by the OEM during the period of the offset contract, to the extent of value addition in India.

    The revised policy allows provision of equipment and / or transfer of technology to government institutions and establishments engaged in the manufacture and / or maintenance of eligible products and provision of eligible services. This will facilitate capacity building for research, design and development, training and education in DRDO laboratories, Army Base workshops, Air Force Base repair depots, and Naval aircraft yards, etc.
     
  5. Daredevil

    Daredevil On Vacation! Administrator

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    Re: India's Offset Policy Change

    This is the official release from MoD


    Revised Defence Offset Guidelines


    The revised Defence Offset Guidelines(DOG) were approved by Defence Acquisition Council(DAC) at its meeting held on 23rd July, 2012 and shall be applicable w.e.f. 1st August, 2012. The following are the salient features of the new DOG:-

    Objectives

    The objective of Defence Offsets has been spelt out clearly in the revised policy. The key objective of the Defence Offset Policy is to leverage capital acquisitions to develop Indian defence industry by (i) Fostering development of internationally competitive enterprises, (ii) Augmenting capacity for Research, Design and Development related to defence products and services and (iii) Encouraging development of synergistic sectors like civil aerospace and internal security.

    Co-production / Co-development

    Distinction has been made between equity and non-equity route. Investment in 'kind' by OEMs through the non-equity route (i.e.) co- production, co- development, etc. will be recognized for offset credits, subject to certain conditions.

    Transfer of Technology

    The revised policy recognizes TOT as eligible for discharge of offset obligations. Investment in 'kind' in terms of TOT must cover all documentation, training and consultancy required for full TOT (civil infrastructure and equipment are excluded). The TOT should be provided without licence fee and there should be no restriction on domestic production, sale or export. The offset credit for TOT shall be 10% of the value of buyback by the OEM during the period of the offset contract, to the extent of value addition in India.

    Government Institutions

    The revised policy allows provision of equipment and/or TOT to Government institutions and establishments engaged in the manufacture and/ or maintenance of eligible products and provision of eligible services. This will facilitate capacity building for Research, Design & Development, Training and Education in DRDO laboratories, Army Base workshops, Air Force Base repair depots, and Naval aircraft yards, etc.

    Technology Acquisition

    Technology Acquisition by DRDO for a list of specified technologies will be treated as an eligible Offset with a multiplier up to 3.



    Tier-l sub-vendors

    It has been decided to allow Tier-l sub-vendors under the main procurement contract to discharge part of the offset obligations on behalf of the main vendor. However, overall responsibility for discharge of offset obligations shall rest solely on the main vendor.

    Legal jurisdiction

    Under the revised guidelines, the agreement between the OEM/vendor /Tier-l sub-vendor and the Indian Offset Partner(IOP) shall be subject to the laws of India.

    Extended period

    In the earlier policy, offset obligations had to be discharged during the period co-terminus with the main procurement contract. The revised guidelines allow offset obligations to be discharged within a timeframe that can extend beyond the period of the main procurement contract by a maximum period of two years.

    Offset banking

    Under the existing guidelines, banked offset credits were valid for a period of two years. The period of validity has been increased to seven years under the revised guidelines.

    Multiplier for MSMEs

    In the discharge of offset obligations relating to direct export, FDI, TOT or investment in 'kind' in Indian enterprises through non-equity "route, a multiplier of 1.50 will be permitted where Micro, Small and Medium Enterprises are lOPs. The monetary limits specified by the Department of Micro, Small and Medium Enterprises, Government of India shall be applicable for identification of MSMEs.

    R&D collaboration

    R&D services (from Government recognized R&D facilities) have been included in the list of eligible services for Offset Credits. This will facilitate R&D collaboration as well as direct purchase and export of R&D services related to eligible defence products from both public sector and private sector enterprises.

    Flexibility

    In exceptional cases, the competent authority may permit change in offset partners or offset components provided the value of offset obligations remains unchanged. This will provide greater flexibility in implementation.

    Penalty

    The overall cap on penalty will be 20% of the total· offset obligations during the period of the main procurement contract. There will be no cap on penalty for failure to implement offset obligations during the period beyond the main procurement contract, which can extend to a maximum period of two years.
     
  6. Daredevil

    Daredevil On Vacation! Administrator

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    A Critique of India’s Defence Offset Guidelines 2012

    13:20 GMT, September 4, 2012

    The Indian Ministry of Defence (MoD) recently announced its revised Defence Offset Guidelines (DOG), which have come into effect from August 1, 2012. The guidelines have, for the first time, articulated the key objectives of the policy document besides adding some new features and modifying/clarifying some of the earlier provisions. Among others, the DOG has, for the first time, included multipliers up to three to incentivise investment in Micro, Small and Medium Enterprises (MSMEs), and facilitate technology acquisition (from a select list) by the Defence Research and Development Organisation (DRDO). Further incentivisation has also been provided by allowing transfer of technology and equipment as valid mode of offset discharge, extending the banking period to seven years, and expanding the avenues and list eligible product/ services for discharge of offset obligation. A degree of flexibility has also been provided to foreign vendors by extending the period of execution of offset contracts by two years beyond the period of main procurement contract. The monitoring and supervision of offset programmes has been strengthened by establishing a Defence Offset Monitoring Wing (DOMW)—which will replace the existing Defence Offset Facilitation Agency (DOFA) with more powers—and mandating the new organisation to report to the Defence Minister-headed Defence Acquisition Council (DAC) each year about the progress of such programmes.

    Despite the above features, the new offset guidelines still suffer from certain key weaknesses including ambiguity in explanation, greater leeway to foreign vendors, little incentive to defence manufacturing, and lack of in-house capacity for monitoring/auditing offset programmes. These weaknesses, if not addressed at the earliest, will come in the way of key objectives of the new guidelines. This Policy Brief recommends the following measures to address the key shortcomings of the new DOG.

    • The indigenisation requirement for Indian companies to come under the offset purview should be kept at 30 per cent (as against 50 per cent as stipulated in the revised DOG) so as to allow more Indian companies to compete for the MoD’s global contracts. The timeframe to achieve the indigenisation level should also be extended beyond the time of submission of technical bids in order to allow domestic industry to progressively use more and more indigenous components in their final product.
    • A uniform value addition principle should be applied for both manufacturing and services sectors, so as to provide equal opportunity to companies in these sectors and avoid potential manipulation by foreign vendors.
    • It is high time that the industrial licensing (IL) and foreign direct investment (FDI) regulations were liberalised, so as to allow defence manufacturing to take advantage of the revised offset guidelines.
    • The MoD should clarify at what stage the foreign vendors can claim offset credits vis-à-vis transfer of technology and equipment.
    • The MoD should unequivocally name all the new entrants which have been made eligible to become Indian Offset Partners (IOP).
    • The newly created DOMW should develop its own in-house capacity to discharge the range of responsibilities bestowed upon it by the new DOG.

    Download the full report at http://goo.gl/kl1qq [PDF 1MB, 11 pages].)


    ----
    By Dr Laxman Kumar Behera, Research Fellow
    Institute for Defence Studies and Analyses (IDSA)
     
  7. LurkerBaba

    LurkerBaba Staff Administrator

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