Relook at the Policy

Its time for a paradigm change of approach in defence offsets

By Maj. Gen. Mrinal Suman (retd)

Although India entered the complex world of defence offsets only seven years ago, it has travelled a long distance and offsets have become an essential part of all high value defence deals. Although ministry of defence (MoD) prefers to keep all offset activities concealed from public scrutiny, it is estimated that India has signed offset contracts worth Rs 22,000 crore. However, it is still a mystery if any offset contract has been successfully implemented with anticipated benefits.

Indias defence offset policy has matured through a process of evolution. Initially announced in 2005, the policy was more of a counter-trade arrangement, designed primarily to promote exports from the public sector. The policy was revised in 2006 to include any private defence industry manufacturing these products or components under an industrial licence granted for such manufacture. It also allowed Foreign Direct Investment (FDI) in Indian defence industry and defence R&D. Subsequently, the mandatory requirement of an industrial licence for private companies was removed in 2008.

The last revision of the policy was carried out in January 2011 as a part of the Defence Procurement Procedure (DPP). The latest policy directive, called Defence Offset Guidelines (DOG), has been made effective from 1 August 2012. The directive contains two major changes objectives of the defence offset policy have since been spelt out and Transfer of Technology (ToT) has been accepted as an eligible avenue for discharging offset obligations.

Salient Aspects of the PolicyAs per the Indian policy, all import deals with an indicative value of more than Rs 300 crore carry an offset obligation equal to 30 per cent of the contract value. Offset percentage can be changed or waived by the Defence Acquisition Council (DAC). Offset obligations can be discharged within a timeframe that can extend beyond the period of the main contract, but within two years of the main deal being implemented.

Foreign vendors can choose their Indian partners and discharge their offset obligations through any one or a combination of the seven specified methods. They include direct purchase of, or executing export orders for, eligible products manufactured by, or services provided by Indian enterprises; FDI in joint ventures with Indian enterprises (equity investment) for the manufacture and/or maintenance of eligible products and the provision of eligible services; investment in kind in terms of ToT to Indian enterprises for the manufacture and/or maintenance of eligible products and provision of eligible services; investment in kind in Indian enterprises in terms of provision of equipment through the non-equity route for the manufacture and/or maintenance of eligible products and provision of eligible services; provision of equipment and/or ToT to government entities engaged in the manufacture and/or maintenance of eligible products and provision of eligible services, including the Defence Research and Development Organisation (DRDO); and technology acquisition by DRDO in areas of high technology.

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 may include training services and training equipment but excludes civil infrastructure.

An Appraisal of the Current DispensationAlthough the offset regime continues to be highly obscure, two audit reports submitted by the Comptroller and Auditor General of India (CAG) provide a rare glimpse of its imperfections and absurdities. The first report covers a review of 16 offset contracts worth Rs 18,444.56 crore (Report No 17 of 2012-13). According to the contracts, India should have received offset inflows of Rs 5543.33 crore at the time of compilation of the said report. Actual gains have neither been collated nor revealed. The second report relates to the acquisition of helicopters for VVIPs (Report No 10 of 2013).

Both the reports are alarming in nature, to say the least. They reveal that Indias offset regime is in a total mess. Policy provisions are being flouted with impunity. Unauthorised programmes have been accepted against offset obligations. In some cases, foreign vendors have been allowed to claim credit against outlandish activities like expenditure incurred on the conduct of seminars in India. Offset credits have been granted against the supply of simulators, despite specific instructions to the contrary.

Bizarrely, ineligible Indian companies with more than 26 per cent foreign holding have been accepted as Indian Offset Partners, thereby making a mockery of the concept of offsets since most benefits flowed back to the foreign holders. As MoD has no mechanism in place to monitor offset programmes, it is being forced to accept the progress reports submitted by the vendors. In short, the foreign vendors are calling the shots and MoD is helplessly acquiescing.

The success of any offset programme primarily depends on its proper selection, detailed planning, close supervision and regular monitoring. India has failed in all respects. CAG reports reveal that there has been no value addition in India due to the flawed policy and faulty implementation. As offsets do not come for free and carry cost penalty, India has suffered considerable financial outflow without commensurate benefits.

Need to Exercise CautionAs is apparent from the CAG reports, the current offset policy suffers from major infirmities. Guidelines for the ToT are far too complex and lack clarity, thereby lending themselves to multiple interpretations. Procedure for the selection of high technology for receipt by DRDO is too convoluted to succeed. The concept of multipliers has been rendered ineffective and purposeless by making it usage-based rather than linking it with the level of technology on offer. Finally, instead of having a single authority with decision-making powers to oversee all facets of offset activities, India has chosen to have two agencies the Acquisition Wing and the newly created Defence Offset Management Wing. It is a sure recipe for bureaucratic turf battle.

It is time India carries out a paradigm shift in its fundamental approach towards offsets. To start with, offsets should not be mandatory for all major deals. It should be based on case-by-case decisions of DAC. Need and desirability of seeking offsets should be debated at length while categorising a procurement proposal. Offsets should be demanded only when the envisaged benefits justify the likely cost-penalty.

Offset programmes must always be in consonance with national priorities and should fill an important technological/economic void. As relevance of offset programmes is of critical importance, the choice cannot be left to the discretion of vendors who will invariably opt for the cheapest and the easiest routes. Therefore, DAC must decide detailed contours and scope of offsets that the vendors should offer. Request for Proposal (RFP) must contain these details upfront.

As recommended by Transparency International, vendors should be asked to submit two commercial quotes in two separate sealed envelopes duly marked one with the stipulated offset package and the other without any offset obligations. Such an approach will force vendors to reveal the true offset cost being charged by them, thereby facilitating value-for-money evaluation.

Commercial evaluation of the technically acceptable vendors should be done by opening commercial quotes without offset packages. It implies that offset packages should not influence determination of the lowest bidder. Once the lowest bidder is identified, his offset quote should be opened for a reality check to ascertain whether seeking specified offsets makes economic sense or not. In case it is felt that the indicated cost-penalty does not justify the advantages likely to accrue from the offsets, the requirement of offsets should be dropped.

The Way ForwardThe current euphoria about the benefits accruing from offsets is highly misplaced. India will do well to pay heed to the caution sounded by Transparency International that offsets are very prone to corruption. Indian defence procurement regime is already mired in controversies, contract for the purchase of helicopters for VVIPs being the latest imbroglio. CAG has faulted the contract for non-compliance with the provisions of DPP. Worse, work completed prior to the award of the helicopter contract was allowed against offset obligations.

Offsets are certainly a highly potent tool in the hands of assiduous experts but become an imprudent activity when handled in an amateurish manner. Inappropriately selected, poorly implemented and casually monitored programmes invariably prove to be wasteful. More worrisomely, they hold the ominous potential of getting embroiled in allegations of corrupt practices, thereby derailing planned modernisation of the armed forces. It is a harsh reality that many nations have learnt at a great cost. Therefore, India must revisit the complete policy, lest it proves detrimental to national security imperative.

http://www.forceindia.net/DefExpo2014_RelookatthePolicy.aspx 14 Sep. 14

IDSA COMMENTDefence Offset Guidelines: Time to Correct the Imbalance

Laxman K BeheraJuly 24, 2013On 23 May 2013, the Ministry of Defence (MoD) issued an Office Memorandum (OM), keeping in abeyance of services related provisions from offset guidelines, the latest revised version of which was issued less than a year ago in August 2012. The abeyance of all services, effective from the date of issue of the OM, is applicable to all tenders or Request for Proposals (RFPs) issued after the notification of the OM, and also those tenders issued earlier but the commercial and technical bids are yet to be submitted. The MoDs action has created a debate among various stakeholders, particularly the Indian IT and software- related companies which see a loss of business to the tune of $10 billion as consequence of the OM. More importantly, the OM has opened up a new challenge for the MoD in articulating a revised offset policy that would take into account the current gaps in the offset guidelines while satisfying the services sector a key stakeholder in Indian defence industry and a vital partner from the offsets point of view.The OM comes in the wake of controversies surrounding the purchase of 12 VVIP Agusta Westland helicopters, in which allegations were made that bribes were paid through bogus software companies which merely worked as front organisations on behalf of middlemen and foreign companies. While the OM is an attempt to prevent such malpractices, it has in the process banned the entire services sector from doing offset business. This is evident from its annexure, which has gone into every possible minute details in identifying and suspending all such paragraphs in the Defence Offset Guidelines of 2012 (DOG 2012), where the term services surfaces. Consequently, the term Services which broadly cover a range of activities including software development; software and computer based training modules; maintenance, repair and overhaul (MRO); engineering, designing and testing; quality assurance; and training has now become history till the time new orders are issued. Interestingly, in addition to suspending the complete list of services which appear as the fourth category in the List of the Products and Services Eligible for Discharge of Offset Obligations, the annexure has also suspended services-related activities in other paragraphs, including the ones which had been included for the first time in the DOG 2012. Two such paragraphs relate to vessels of war, special naval systems, equipment and accessories and Micro, Small and Medium Enterprises. Any services related to the above two now stand suspended.Since the OM talks of its validity till such time that further instructions are issued, one would assume that no sooner than later a revised guideline would be issued by the MoD. It is also assumed that the new guidelines would take into account the current gap in the offset policy which is biased in favour of the services sector. In comparison to the defence manufacturing sector which is subject to compulsory industrial licensing and where strict value addition principle is applicable (the latter being made more stringent in Defence Procurement Procedure 2013), the services sector is exempted from such conditions. The services sector also gets further incentivised by the defence FDI policy which (after the 16 July 2013 meeting chaired by the Prime Minister) allows more than 26 per cent foreign equity in defence manufacturing sector on a case by case basis to be decided by the Cabinet Committee on Security (CCS), Indias highest decision making body on security matters. The CCS decision is to be influenced by the FDI proposals credibility in bringing in yet to be defined modern and state of the art technology to India. In comparison, the services sector can attract upto 100 per cent FDI without any governmental watch or regulation.The above imbalance has led to a flurry of offset inflows into the services sector which has in fact become the most preferred area for the foreign companies to choose Indian Offset Partners (IOPs) from, for the discharge of their offset obligations. This has, however, not necessarily led to capability enhancement of the Indian services sector, particularly the companies in the IT and IT enabled Services (IT-ITeS) industry which have already reached a certain level of maturity and international reckoning. Moreover as the VVIP helicopter procurement case shows, the sector is at times vulnerable to malpractice since the government has no wherewithal to see how much real work is being done in India and by the Indian companies.The crucial challenge for the MoD is now to limit the flow of offsets into the services sector and ensure that value addition takes place in India. On the aspects of limiting offset flows into the services sector it would be ideal for the MoD to stipulate a maximum percentage of offsets that can go into the services sector. This would not only limit the scope for malpractice, but would provide a fillip to the manufacturing sector which constitutes the core of defence industrial base.On the aspect of value addition by the services sector, the MoD has a real challenge on hand as the services by nature are intangible. The silver lining is that the National Association of Software and Services Companies (NASSCOM), an industry association, has come forward in devising a method by which the intangibles can be measured. The MoD now needs to work with the NASSCOM and other industry players to establish a mechanism and issue the revised guidelines that would thwart bogus companies from doing business in defence.Last but not the least the MoD also needs to seriously think about the background checking of Indian Offset Partner (IOP). Presently the foreign companies have the complete discretion in choosing the IOPs, with virtually no background checking by the MoD. It is quite surprising that the Defence Offset Management Wing (DOMW) which has otherwise a wider mandate relating offset guidelines and all matters relating to post-offset contract management does not have the authority to ensure genuiness of the IOPs. A little background checking by way of examining the IOPs annual reports, balance sheet and all such necessary documents would however trigger a fear among the foreign companies who would be more cautious in partnering with bogus companies.http://www.idsa.in/idsacomments/DefenceOffsetGuidelines_lkbehera_240713.html 14 Sep. 14

India has emerged as a large net importer of arms over the past decade. The year 2001 saw an opening up the defence sector to private players and allowing up to 26 per cent foreign direct investment.

India has emerged as a large net importer of arms over the past decade. The year 2001 saw an opening up the defence sector to private players and allowing up to 26 per cent foreign direct investment. In 2006, the first formal Defence Procurement Policy (DPP) was put in place. The key objective of the defence offset guidelines was to leverage capital acquisitions to develop the defence industry, improve defence research and encourage development of synergistic sectors like civil aerospace and internal security. The guidelines were last revised in August 2012 and the latest DPP-2013 came into effect on June 1.

Some form of barter system has existed for centuries, but the US was the first to coin the term offsets as an inducement to sell arms to underdeveloped friendly countries, and in return, either purchased goods or made local investments. The ground position today is that the major arms sellers of the world such as US, UK, France and Germany label such regulations as protectionist, and are not in favour of defence offsets. On the other hand, most countries have high defence offsets regulations. China has no formal offsets policy. Australia does not accept indirect (civilian) offsets, unless they bring benefits to the countrys defence industry.

In India, all contracts above $65 million require 30 per cent of offset. Indian firms and joint ventures are exempted from offset obligations provided the indigenous content is over 50 per cent. India also accepts subcontracting in outsourced services, such as engineering and defence software. Clearly, Indian offsets requirements are not unreasonably stringent.

Nearly 122 open defence offset contracts signed around the world between 1997 and 2010 have only partially been executed due to various issues. It is clear that offset management is very complex, as has to be managed to the satisfaction of two parties. The US, being one of the largest exporters of high technology weapons, has been vocally moderating offset policies around the world.

Offsets are a powerful marketing tool to motivate a purchase. Major defence contractors are conscious of the psychological power of offsets in democracies. What constitutes a legitimate offset, are questions still searching for answers. The physical valuation of offsets is complex. Value of parts locally sourced could be straight-forward, but cost of transfer of technology (ToT) and helping set up industrial base could be vague. Co-production and subcontracts are the best forms of direct offsets.

Offset/industrial partnership management organisations have emerged. Offset India Solutions (OIS), an Indian company, extends a partnering approach to provide customised expertise to international companies for fulfilling their offset obligations throughout its lifecycle. Offsets management itself has, thus, become an industry.

The new offset guidelines promote investment in micro, small and medium enterprises (MSMEs) by applying a multiplier factor of 3.0 to the offset calculations. It also facilitates technology acquisition from a select list, by the defence research and development organisation (DRDO). The offset discharge banking period is extended to seven years. Period of execution of offset contracts is now allowed up to two years beyond the period of main procurement contract.

Indian defence manufacturing industries capability to absorb offsets is still evolving. To achieve high indigenous content in high technology products is not easy. At present, the exclusion of services for purposes of value addition in India is a dampener. All this results in complex extended negotiations. One would recall the long time that Indian agencies and French aerospace company Dassault had to iron out offset issues during the MMRCA negotiations. One recent successful offsets management case is that of Pilatus Aircraft, Switzerland, setting up an electrical harness manufacturing capability, along with Bharat Electronics (BEL) in Bangalore. The electrical harnesses manufactured by BEL would be for the Pilatus global supply chain. The contract which includes an integrated ground based training system, and a comprehensive logistics support package, covers the 30 per cent offset obligation. Pilatus Aircraft entered into a contract with the Indian government last year for the supply of 75 PC-7 Mk II turboprop basic trainer aircraft for the IAF.

The companies that want to build long-term defence relations with an emerging power like India would find good offsets solutions. A Financial Times study projects 15,000 defence contracts in the decade ending 2022, with offset obligations of $100 billion. Top five US defence contractors Boeing, General Dynamics, Lockheed Martin, Northrop-Grumman, and Raytheon would be saddled with $ 42 billion of the obligations. Even as Indo-US defence trade reach new highs, offsets and defence FDI policies continue to act as roadblocks. Notwithstanding, US president Barack Obama reaffirmed during his recent meeting with prime minister Manmohan Singh that the US would grant India the same privileges reserved for its closest allies in respect of transfer of defence technology, co-production and co-development.

US sales of military equipment to India have grown from zero in 2008 to around $9 billion in 2013. Projects worth tens of billions are in the pipeline. Indias expectation combined with a 26 per cent cap on FDI in the defence sector limits the interest of American firms to fulfill Indian requests for high-technology defence items. Defence contractors are not only worried about intellectual property rights or the technology moving to unintended sources, but also about some of the recipients developing technologies and later becoming competitors at their expense. India has a significant manufacturing industrial base. It has, under licence, produced thousands of aircraft over five decades. It has a very successful space programme. Therefore, it should not be difficult to find local offset partners. Pilatus has recently set a good example for others to follow.

http://www.defencenews.in/defence-news-internal.aspx?id=jeKqtUMFhVs= 14 Sep. 14

Defence offsets in India: the way forwardByAnil Chopra Dec 01 2013Tags:Op-ed

BloombergBIG BUY A file photo of the Russian-made fighter jet Sukhoi 30 during an Aero India airshow in BangaloreIndia has emerged as a large net importer of arms over the past decade. The year 2001 saw an opening up the defence sector to private players and allowing up to 26 per cent foreign direct investment. In 2006, the first formal Defence Procurement Policy (DPP) was put in place. The key objective of the defence offset guidelines was to leverage capital acquisitions to develop the defence industry, improve defence research and encourage development of synergistic sectors like civil aerospace and internal security. The guidelines were last revised in August 2012 and the latest DPP-2013 came into effect on June 1.

Some form of barter system has existed for centuries, but the US was the first to coin the term offsets as an inducement to sell arms to underdeveloped friendly countries, and in return, either purchased goods or made local investments. The ground position today is that the major arms sellers of the world such as US, UK, France and Germany label such regulations as protectionist, and are not in favour of defence offsets. On the other hand, most countries have high defence offsets regulations. China has no formal offsets policy. Australia does not accept indirect (civilian) offsets, unless they bring benefits to the countrys defence industry.

In India, all contracts above $65 million require 30 per cent of offset. Indian firms and joint ventures are exempted from offset obligations provided the indigenous content is over 50 per cent. India also accepts subcontracting in outsourced services, such as engineering and defence software. Clearly, Indian offsets requirements are not unreasonably stringent.

Nearly 122 open defence offset contracts signed around the world between 1997 and 2010 have only partially been executed due to various issues. It is clear that offset management is very complex, as has to be managed to the satisfaction of two parties. The US, being one of the largest exporters of high technology weapons, has been vocally moderating offset policies around the world.

Offsets are a powerful marketing tool to motivate a purchase. Major defence contractors are conscious of the psychological power of offsets in democracies. What constitutes a legitimate offset, are questions still searching for answers. The physical valuation of offsets is complex. Value of parts locally sourced could be straight-forward, but cost of transfer of technology (ToT) and helping set up industrial base could be vague. Co-production and subcontracts are the best forms of direct offsets.

Offset/industrial partnership management organisations have emerged. Offset India Solutions (OIS), an Indian company, extends a partnering approach to provide customised expertise to international companies for fulfilling their offset obligations throughout its lifecycle. Offsets management itself has, thus, become an industry.

The new offset guidelines promote investment in micro, small and medium enterprises (MSMEs) by applying a multiplier factor of 3.0 to the offset calculations. It also facilitates technology acquisition from a select list, by the defence research and development organisation (DRDO). The offset discharge banking period is extended to seven years. Period of execution of offset contracts is now allowed up to two years beyond the period of main procurement contract.

Indian defence manufacturing industries capability to absorb offsets is still evolving. To achieve high indigenous content in high technology products is not easy. At present, the exclusion of services for purposes of value addition in India is a dampener. All this results in complex extended negotiations. One would recall the long time that Indian agencies and French aerospace company Dassault had to iron out offset issues during the MMRCA negotiations. One recent successful offsets management case is that of Pilatus Aircraft, Switzerland, setting up an electrical harness manufacturing capability, along with Bharat Electronics (BEL) in Bangalore. The electrical harnesses manufactured by BEL would be for the Pilatus global supply chain. The contract which includes an integrated ground based training system, and a comprehensive logistics support package, covers the 30 per cent offset obligation. Pilatus Aircraft entered into a contract with the Indian government last year for the supply of 75 PC-7 Mk II turboprop basic trainer aircraft for the IAF.

The companies that want to build long-term defence relations with an emerging power like India would find good offsets solutions.

A Financial Times study projects 15,000 defence contracts in the decade ending 2022, with offset obligations of $100 billion. Top five US defence contractors Boeing, General Dynamics, Lockheed Martin, Northrop-Grumman, and Raytheon would be saddled with $ 42 billion of the obligations. Even as Indo-US defence trade reach new highs, offsets and defence FDI policies continue to act as roadblocks. Notwithstanding, US president Barack Obama reaffirmed during his recent meeting with prime minister Manmohan Singh that the US would grant India the same privileges reserved for its closest allies in respect of transfer of defence technology, co-production and co-development.

US sales of military equipment to India have grown from zero in 2008 to around $9 billion in 2013. Projects worth tens of billions are in the pipeline. Indias expectation combined with a 26 per cent cap on FDI in the defence sector limits the interest of American firms to fulfill Indian requests for high-technology defence items. Defence contractors are not only worried about intellectual property rights or the technology moving to unintended sources, but also about some of the recipients developing technologies and later becoming competitors at their expense. India has a significant manufacturing industrial base. It has, under licence, produced thousands of aircraft over five decades. It has a very successful space programme. Therefore, it should not be difficult to find local offset partners. Pilatus has recently set a good example for others to follow.

(Air Marshal (Retd) Anil Chopra is former head of IAFs HR and training)http://www.mydigitalfc.com/op-ed/defence-offsets-india-way-forward-264 14 Sep. 14

The Government of India has been reiterating its commitment to achieve the much-publicised target of procuring 70 per cent of its defence requirements from indigenous sources by 2010. Despite its best efforts over the last two decades, India is nowhere near that figure as yet. The Government is well aware of the emergence of private sector as a vibrant and dynamic force, especially in information technology, service sector and manufacturing fields. It has come to realise that self reliance would remain a pipe dream if it continued to bank on public sector alone.One of the objectives mentioned in the new defence procurement procedure is to achieve self-reliance in defence equipment. But the whole procedure is silent about the role of the private sector and no worthwhile initiatives have been proposed to integrate its potential in Indias quest for self reliance.In all deals where transfer of technology is negotiated, the nominated recipient is always a DPSU, even if a private sector company is better placed in terms of infrastructure and know-how to absorb the technology.

In addition to economic factors, defence industry is generally considered to be an instrument of national sovereignty and pride. Defence industry comprises of all industrial undertakings engaged in the production of hardware and services for use by the defence forces. The origin of the Indian defence industry can be traced to the establishment of Gun and Shell Factory at Cossipore in 1801. At the time of the Independence, India had 16 Ordnance Factories, established by the British to produce low tech items. Bharat Electronics Ltd was the first Defence Public Sector Undertaking (DPSU) established in 1954 to manufacture electronic equipment for the forces. Today, India has 39 Ordnance Factories and eight DPSU.The Industrial Policy Resolution of 1956 divided industry into three parts:- Schedule A: Basic industries which are the preserve of the state, including defence and heavy engineering. Schedule B: Industries in which private industry was allowed to operate. Schedule C: All other industries.Manufacture of components, assemblies and sub-assemblies was thrown open to the private sector in 1991. With a view to promote defence-industry partnership, the Ministry of Defence (MoD) constituted six Joint Task Forces in collaboration with Confederation of Indian Industry in 1998. Consequent to their recommendations, the Government opened defence production to the private sector in January 2002. It allowed 100 percent private equity with 26 percent Foreign Direct Investment (FDI). It was a major policy change. Subsequently, the Department of Industrial Policy and Promotion issued detailed guidelines for the issuance of licence for the production of arms and ammunition.The Kelkar Committee, constituted in 2004, made many radical recommendations. The Government has accepted a majority of them but their implementation has lacked earnestness and focus. The Department of Industrial Policy & Promotion (DIPP), in consultation with Ministry of Defence, has so far issued 37 letters of intent for the manufacture of various types of defence hardware which include armoured and combat vehicles, radars, electronic warfare equipment, warships, submarines, avionics, military aircraft, safety and ballistic products, armaments and ammunition.Despite the above measures, there has been no discernible change in the ground situation. Only a handful of Indias top companies are involved in small value defence contracts. The private sector has to remain content with the supply of some low-tech items to the public sector. Its supplies to DPSU and Ordnance Factories grossed over Rs. 1200 crores and Rs. 1900 crores respectively last year. Whereas these figures signify the contribution made by the private sector, they also highlight the fact that the private sector continues to be merely an outsourcing base for the public sector.Reasons for Continued Non-Participation of the Private SectorA number of defence-industry seminars, conferences and exhibitions have been held in the recent years. Given decades of insulation and prejudices, this was no small achievement. But old mindsets, complexity of procurement procedures and clout wielded by the public sector have been acting as major deterrents to any meaningful participation of the private sector. New aspirants, in particular, find the whole regime to be highly forbidding.Policy IssuesDecisions are taken by the Defence Acquisition Council to categorise a proposal as Buy or Buy and Make or Make based on the advice given by Defence Research and Development Organisation and the public sector. No inputs are sought from the private sector. Its competence and potential are given no consideration.In all deals where transfer of technology is negotiated, the nominated recipient is always a DPSU, even if a private sector company is better placed in terms of infrastructure and know-how to absorb the technology. A DPSU may have to establish complete facilities ab initio, whereas a private sector company may need only incremental technology.Procedural IssuesThe Indian public sector has got used to a position of pre-eminence. Its hold over defence orders is total. It thrives because of its monopolistic clout and not because of any displayed excellence.

Requirements of the armed forces are not made known to the private sector sufficiently in advance, with the result that it does not get adequate time, either to scout for foreign tie-ups or to establish the necessary facilities. The time given for the submission of technical and commercial proposals is grossly inadequate for a new entrant in the field.Parameters for the equipment to be procured are formulated with foreign equipment in mind, after reading manufacturers brochures. Private sector is not consulted in this process, whereas minor acceptable changes in parameters may make the Indian equipment eligible for consideration.As Requests for Proposals (RFP) are issued to foreign original equipment manufacturers as well, they prefer direct bidding. They decline joint ventures with Indian companies as it helps them to guard their technology and perpetuate their monopoly with consequent financial gains.All trials are carried out on No Cost No Commitment basis. Whereas foreign vendors can incur the expenditure involved, many upcoming indigenous companies do not possess the necessary financial strength. This acts as a major disincentive.Functional IssuesDue to the very nature of its usage, defence equipment has to meet highly exacting standards. There can be no failure in the face of the enemy. Regrettably, many Indian vendors have not fully grasped the import of this requirement and find the quality control regime to be extremely irksome.Every producer seeks economies of scale and assured continuous orders. Unfortunately, Indian procurement regime precludes both. RFPs are issued for one-time piecemeal quantities without indicating the envisaged total requirement over a period of time. Additionally, no long term commitment is made regarding regular flow of orders. This deters Indian companies from committing resources for establishing production facilities as the venture can prove both expensive and risky.Lack of Mutual ConfidenceThe Indian public sector has got used to a position of pre-eminence. Its hold over defence orders is total. It thrives because of its monopolistic clout and not because of any displayed excellence. It is fully aware of its weaknesses and knows that it cannot survive an open competition with the private sector. This sense of insecurity makes it wary of any move to facilitate the entry of the private sector and it tries all stratagems to block it.On the other hand, many functionaries feel that the private sector is out to make a quick buck and lacks required perseverance. They tend to view the private sector as traders rather than committed manufacturers who can endure the travails of long drawn procurement procedure. According to them, anyone desirous of entering defence industry has to be fully aware of the fact that defence orders take inordinately long to materialise and vacillation invariably proves unproductive.The Communication GapThere is a total absence of an effective institutionalised interface between the MoD, the services and the private sector for regular interaction at the policy making level. There are a number of groups or partnership forums in place, but their utility is limited to exchange of views only.(a). Procurement Agencies are Unaware of Industrys PotentialEven today all major defence deals are signed with foreign producers. The public sector continues to get bulk orders under transfer of imported technology. The private sector continues to be a peripheral participant.

The procurement agencies are extremely keen to encourage indigenous production and limit imports to the minimum inescapable requirements. They, however, are unaware of the capabilities and potential of different private sector companies, as the competence of Indian companies has not been authentically catalogued as yet. They do not know whom to invite for submission of proposals. It is much easier to acquire details of numerous foreign producers.There is no data bank of Indian industries available with the MoD. Requests for Proposals (RFPs) are issued only to a few highly visible companies, while many others lose by default. Although, the Acquisition Wing has been tasked to create the necessary data bank, the process has hardly taken off as yet.(b). Industry Lacks Knowledge of Defence Requirements and ProceduresOn the other hand, many private sector companies have the capability to manufacture the whole range of defence requirements but do not know whom to approach to ascertain details. They are ignorant of the procurement agencies, their policies and procedures. This ignorance makes them wary of dealing with the defence.To compound the problem, there are over 150 different defence procurement agencies with different procedures. There is no system of centralised notification of requirements and vendor registration. Due to this lacuna, a new entrant finds the whole environment highly dissuasive.The Way ForwardThe present process of interaction between the Government, public sector and private enterprises should be continued, albeit with renewed vigour and purpose. All joint committees should be represented at the level of decision makers, so that follow up action can be taken in a time bound manner.Structural ReformsA representative of the designated industry association should be a permanent invitee to the Defence Acquisition Council, depending on the security sensitivity of agenda points. His inputs as regards the technical prowess of the private sector will prove invaluable while deciding whether to import technology or not. Similarly, selected agenda points of Defence Procurement Board, Defence Production Board and Defence Development Board should be circulated to the industry association for advice. These steps will go a long way in integrating the private sector.Early Interaction with Industry on Acquisition ProposalsThe Acquisition Wing should indicate broad parameters of equipment under procurement to the industry association six months prior to the issuance of RFP. The association could circulate this information amongst the concerned companies for their advance knowledge. This will give adequate time to the interested companies to carry out technology scan and scout for foreign collaborations, if required.Equipment Directorates of the Services Headquarters should seek advice of the industry before finalising parameters. The industry, with its massive pool of knowledge, will be able to help the authorities in getting a better understanding of the latest technological advancements worldwide and in India with their degree of stabilisation. Comments received from the association should compulsorily be put up to the approving committee. In some non-critical cases, indigenous capability may even influence the formulation of parameters.To help the Indian companies in taking decisions regarding investment of resources, RFP should invariably indicate the total requirement envisaged over the years. This could be without any firm commitment as such.Support to Indigenous IndustryThere is an urgent need to have a mechanism in place to facilitate the participation of Indian private sector in defence industry.

Most nations support indigenous producers by giving them purchase and price preference. Foreign producers should be given incentives for collaborations with Indian companies. It could even be made mandatory, as has been done by Great Britain under its Industrial Participation policy.Policy on grant of waivers for deviations from parameters must make a distinction between an Indian and a foreign producer. Easier grant of waivers, albeit within acceptable limits, to Indian companies will encourage them to commit resources more willingly. Even commercial terms should be made more favourable to the local vendors as the lower life-cycle cost of indigenous equipment must also be factored in.Presently, the payment terms are unfavourable to the Indian producers. Foreign vendors are released full payment of their dues on submission of proof of dispatch (against performance and warranty bonds each equivalent to 5 percent of contract value). However, Indian companies get payment only after the issuance of inspection note by the designated inspectors. This may take a few months, thereby increasing the cost of the capital involved. This incongruity needs to be addressed.Facilitation ServiceThere is an urgent need to have a mechanism in place to facilitate the participation of Indian private sector in defence industry. Such a mechanism can serve twin objectives. First, it could assist in the assessment of a companys current technical/manufacturing prowess and its potential for the development of defence products. A directory of credible defence manufacturers should be compiled with details of all assessed companies. This directory should be made available to all the defence procurement agencies to assist them to identify companies for issuance of tenders. The directory could also help foreign producers to locate potential Indian partners for collaboration.Secondly, advisory service could be extended to companies as regards the availability of opportunities for the supply of their current products to the defence. The service could also suggest defence products which a company can manufacture with marginal addition to its facilities. Related areas for development/diversification could also be indicated. Thus, this service can acquaint a company with the prevailing business opportunities and guide it as well.Public-Private Sector PartnershipThe public sector possesses excellent infrastructure, manufacturing facilities and a highly experienced task force. It will be a waste of national resources if these assets are duplicated by the private sector.The Government has to realise that both public and private sectors are national assets and harnessing of their potential is essential if India wants to achieve self reliance in defence production.

The private sector, on the other hand, can bring in latest technology, managerial practices, marketing skills and financial management. Therefore, a well-blended fusion of both will result in synergising of their strengths through economies of scale and prove mutually beneficial.A strong and fruitful relationship can be built with mutual accommodation. The public sector should not regard private players as a persistent irritant and adopt a confrontationist attitude towards them. Similarly, the private sector must not seek to replace the public sector. Such an approach may be perceived by the public sector as a threat to their primacy and existence. It may make them close their ranks and resist all interaction with the private sector. That shall be counter-productive.The Government has to realise that both public and private sectors are national assets and harnessing of their potential is essential if India wants to achieve self reliance in defence production. It should not play favourites and treat both as equal partners in progress.ConclusionThe then Defence Minister of India, Mr Pranab Mukherjee, in his address at New Delhi in June 2005 had stated: The Government is committed to the development of a vibrant and proactive defence industry in India. It should be ensured that the available capability, infrastructure and resources including intellectual capital are harnessed to the fullest extent as our national assets and optimally utilised in achieving this objective. He further advocated a strong and healthy partnership between the public and private sector for enhancing the defence capability and in sustaining a powerful domestic industrial base for the future.During the last three years, a serious and concerted effort has been made by the Government to reform and streamline the entire acquisition process. The Government has come to appreciate the potential of the private sector and wants it to complement the efforts of the public sector. A number of praiseworthy initiatives have been taken and policies reviewed. Yet, the results on ground have very little to show. There has been no appreciable inflow of anticipated foreign funds.Even today all major defence deals are signed with foreign producers. The public sector continues to get bulk orders under transfer of imported technology. The private sector continues to be a peripheral participant with the production of some low-tech items and indigenisation of some components.The present process of interaction and integration should be continued, albeit with renewed vigour and purpose. All joint committees should be represented at the level of decision makers so that the follow up action can be implemented in a time bound manner. There is no point in having committees and joint task forces if their reports are going to gather dust with no follow up action.Technological prowess of the private sector should be given due recognition and considered a national asset. 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. The Government has to create an environment wherein the private sector feels assured of just business opportunities, level playing ground and fair play.And finally, India plans to spend USD 100 billion on capital expenditure during the 7th Plan Period (2007-12). Imports account for close to 70 percent of capital expenditure and offsets are required equal to 30 percent of import contracts. Thus, India expects offset trade worth USD 21 billion during the next five years. Currently, Indian defence exports amount to paltry USD 50 million annually, i.e. USD 250 million in five years. From USD 250 million to USD 21 billion, it will be a quantum jump of enormous proportions. The public sector cannot handle it by itself. The private sector has to be closely integrated and its potential fully harnessed for beneficial absorption of the projected offset business.http://www.indiandefencereview.com/spotlights/private-sector-in-defence-production/0/Impact of Offset Policy on India's Military Industrial Capability - IByS.N. MishraIssueVol. 26.3July - Sept 2011 | Date : 24 Oct , 2011The Indian Ministry of Defence introduced offset provisions in its Defence Procurement Procedure 2005 (DPP-2005)1 for capital acquisition schemes exceeding an estimated cost of Rs. 300 crores i.e. around $ 66 million with the fond hope to build indigenous capability in design, development and production of critical military hardware, systems, & components by promoting Joint Venture (JV) arrangements, Foreign Direct Investment (FDI) inflow, skill up gradation, setting up Manufacture Repair & Overhaul (MRO) facility, boosting export etc.Click for IDR subscriptionAs part of the liberalisation process and to foster long term business/production tie up with global companies the offset policy in DPP 2006,2 2008,3 20094 included provision for credit banking5, delineation of defence products6 and dispensed with the licensing requirement in Ministry of Defence (MOD).There is an urgent need to look at our offset policy options; particularly in regard to inclusion of technology transfer in priority areas, FDI policy in Defence and a more effective offset implementation arrangement.

DPP-20117 made a substantial leap from the earlier stipulation of direct offsets by including dual use Civil Aerospace products and Homeland Security items8 thereby ushering indirect offsets in a limited way. It also makes a definitive policy statement for progressive indigenization in critical areas and ensuring level playing field for the private sector including private shipbuilding companies.9DPP-2011 was soon followed up with a Defence Production Policy10 document which outlines the road map for indigenization.This paper examines impact of offset policy during (2005-2010) on indigenous capability build up in MIC (Military Industrial Complex) and bolstering self reliance. It brings out how offset realisation of around $2B during (2005-2010) was mainly for sub contractorisation of low end products and services, MRO facilities, Training & soft skills and has not brought in the expected inflow of FDI and JV arrangements, exports & long term business partnership in design, development and production of high end products.There is thus an urgent need to look at our offset policy options; particularly in regard to inclusion of technology transfer in priority areas, FDI policy in Defence and a more effective offset implementation arrangement.2. Indias Military Industrial ComplexIndias military industrial complex consists of 9 DPSUs, 40 OFs, 50 DRDO labs, 140 private defence companies, 5000 SMEs (Small and Medium Enterprises) involved in production of around 450 items.12Product range: DPSUs & OFsThe nine DPSUs (Defence Public Sector Enterprises) are engaged in manufacture of wide range of products like helicopter, fighters, warships, submarines, patrol vessels, heavy vehicles and earthmovers, missiles and a variety of electronic devices, alloys and special purpose steel.The forty ordnance factories are engaged in production of small arms and ammunition of all the weapon systems, clothing, armoured and transport Vehicles.14 A very high degree of self reliance has been achieved in these areas except in the area of artillery guns of 155 mm calibre where army is still groping to fill up the void in towed and wheeled category-thanks to Bofors imbroglio.Value AdditionThe DPSUs and OFs, largely through licence agreements since 1960s have built substantial production capability for tanks, ICVs, Vehicles, missiles, frigates, submarines, aircrafts and electronic devices.The overall value addition of DPSUs hover around 37%. Midhani is a healthy exception (57%) where substantial self reliance in several critical material like titanium alloys, managing steel, special steel alloys, nickel base and cobalt base, super alloys and Niobium-Hafnium required by strategic sectors and programmes has been achieved.15In case of OFs the value addition is substantial (85%), possibly because of the lesser technology depth of land systems compared to fighters and frigates.Even amongst the naval platforms, value addition in submarines is substantially less (23%) compared to patrolling vessels (37%), because of technology depth.The value addition of each deliverable would, depend on the depth of technology provided and stage of technology absorption.An overview of performance of the DPSUs and OFs is placed below:

The value of sales of DPSUs & OFs (Ordnance Factories) was of the order of $7.7Billion during (2009-10) with Profit after Tax to Sales a healthy 13% for the DPSUs.DRDO: Major ProgrammesThe 50 Defence R&D lab(s) are engaged in progressive enhancement of self reliance of defence systems.16Some of the major milestones towards making the country self- reliant in the areas of military technology are: Prithvi (Surface to Surface missile) in the ranges of 150 km & 250 km Agni-I (Surface to surface missile) with a range of 700km Akash (Surface to Air) missile with 25km range Brahmos (Supersonic cruise missile) a JV product of India & Russia Light Combat Aircraft (LCA) Tejas Battle field surveillance radar- Short Range, Phased Array Radars Electronic warfare programme for Army (Samyukta) & Navy (Sangraha) Multi barrel rocket system(Pinaka) in 37.5 km range Hull mounted sonars HUMSA (NG) Torpedo Advanced Light (TAL) MK-1The value of systems/products/technologies developed by DRDO and inducted into the services is in the range of $11B.17Private Sector Participation:Consequent on opening up of the defence industry sector in May 2001, allowing Indian private sector participation with FDI cap of 26%, a number of JVs have mushroomed between Indian and foreign companies.Editors Pick

US Aerospace Industry and India Indias Role in the New World Order India as a defence manufacturing hub

Major private sector industries and SMEs are actively engaged in software development, engineering services, manufacturing & sub assemblies, accounting for 17% of outsourcing18 to DPSUs, OFs.They are also associated with national & strategic programmes like LCA, MBT (Main Battle Tank), Pinaka, Arihant, Dhanush & Brahmos.Many of them have excellent facilities like Tatas, L&T, Pipava but significant limitation in terms of design capability and systems integration.The Buy & Make (Indian) option in 2009 would provide private sector a window to TOT19 which was the exclusive preserve of DPSUs/OFs earlier.They are now into cost effective production of fast patrol vessels and IPVs & outcompeting defence shipyards thanks to the level playing field provided in Ship Building Procedure.20 Even DPSUs like HAL are giving way to the Tatas in manufacture of Aerostructures & Cabins where foreign OEMs like Lockheed Martin & Sikorsky have shown distinct predelection for partnership with Tatas3. Self RelianceA review committee headed by Dr.Kalam, the then SA to RM, with participation of all the Services and the DPSUs, in Oct 1993 took note of uncertainties in supply of defence systems by countries of former Soviet Union, mounting pressure of embargo on critical technologies from developed nations and set a goal of enhancing the indigenous content in the defence inventory from 30%(1995) to a possible 70% by 200521 in a 10 years time.Self-Reliance Index was defined as the ratio of Indigenous Systems Procurement Cost to Total System Procurement Cost of the year.22Despite the impressive indigenous capability, Self Reliance Quotient has not moved beyond 30% since 1993.In the aerospace sector, predominant reliance on licensed manufacturing without taking adequate steps to bolster nascent design and development capability is a major cause,23 of our lack of indigenous capability in the fighters segment.The most serious problem in aircraft design, development and production is the vertical disjunction between design, development and production agencies.24The Soviet Union brought the production agencies directly under the design bureau with remarkable results. Tony Saich also observes that the major orgnisational problem with S&T System has been lack of linkage across vertical structure; particularly between research & production sectiors.25The Defence Expenditure Review Committee (2009) accordingly makes a strong case for drawing a self reliance road map for attaining the goal of 70% indigenisation in a 15 20 year time frame.264. Gaps in Critical Areas of TechnologySelf-Reliance is linked to indigenous capability to design, develop & produce critical subsystems like Propulsion, weapon, sensors of major platforms. The areas identified by Dr. Kalam 18 yrs back remain largely unchanged Even aerograde material used for fuselage by fighters27 and high quality steel required by frigates, submarines and aircraft carrier,28 our dependence on imports is around 90%. It is sometimes alluded to lack of economies of scale29 which is indefensible as India must have indigenous capability to produce such critical material to meet recurring requirement for aircraft and naval platforms.

5. Budget Trends: Capital AcquisitionThere has been a significant spurt in acquisition by IAF and Navy in recent years, major acquisition contracts signed being viz. MIG 29 (upgrade) (Rs.3856 Cr.), Medium Lift Helicopters (Rs.5600 Cr), C-130 J aircraft (Rs. 366 Crores) and LRMRASW (Long Range Maritime Reconnaissance and Surveillance) Aircraft) for the Navy (Rs.10684 Crores).The trend of capital acquisition expenditure is placed below:

5. Offset Contracts (2005-2010)The broad details of the 12 acquisition programmes & offset contracts concluded with foreign companies is placed below:-

Continued: Impact of Offset Policy on Indias Military Industrial Capability I

TABLE-1 WORKING RESULTS VALUE OF PRODUCTION AND SALES OF DEFENCE PSUs (Rs in crore)Name of the PSUs2011-122012-132013-14(Provisional)

Value of ProductionValue of SalesValue of ProductionValue of SalesValue of ProductionValue of Sales

HAL12693.1914204.2114201.8214324.0015296.0015180.00

BEL5793.585703.636290.006012.006140.006180.00

BEML4077.193648.373359.703289.773201.323254.81

MDL2523.692262.872290.642404.692709.00112.00

GRSE1293.80546.331529.37464.341550.831550.83

GSL676.40269.70506.62844.13512.241095.89

BDL992.94959.121177.001074.711793.431829.86

MIDHANI496.00509.01537.37558.59555.04563.63

HSL564.04564.04483.84483.84403.22403.22

TOTAL41501.5541058.0042360.3641440.0743395.0841404.24

TABLE-2 Profit After Tax(Rs. in crore)Name of the PSUs2011-122012-132013-2014 (Provisional)

HAL2539.432997.002735.00

BEL829.90890.00853.00

BEML57.2579.870.00

MDL494.31412.72332.50

GRSE108.03131.54119.12

GSL82.8015.57-35.63

BDL234.96288.40308.18

MIDHANI68.4582.5272.58

HSL(-) 85.98(-)55.17(-)85.00

TOTAL4329.154842.454299.75