MoD does away with defence offset in govt-to-govt deals, allows hiring platform on lease

India on Monday released a new set of defence procurement rules that on the one hand seeks to promote self-reliance, but on the other restricts the use of a key financial tool that was meant to encourage indigenous manufacturing in the sector.

The Defence Ministry released the Defence Acquisition Procedure, 2020 which rules out offset obligations for vendors in case of government-to-government deals, inter-government agreement and single-vendor situation. It will be there only for bids won through a multi-vendor tendering process.

The offset clause, under which a foreign company was to reinvest a part of their contract money in India, was introduced in the defence procurement in 2006 following the advice of an expert panel with the aim of enabling greater participation of private sector in defence production and to bring in technology and investments from abroad.

Fourteen years later, an audit by the Comptroller and Auditor General (CAG) pointed out that only a fraction of the money had come back and there was no flow of high-technology to the Defence Research and Development Organisation (DRDO). The impact on defence FDI was minimal and there was a solitary case of technology transfer to the defence PSUs.

Between 2007 and 2018 (March), as many as 46 offset contracts worth Rs 66,427 crore were signed with an understanding that offsets worth Rs 19,223 crore would be discharged. But vendors claimed to have realised only Rs 11,396 crore out of which the government so far accepted claims of only Rs 5,457 crore because of deficiencies in paper works submitted by vendors, the CAG said in its report, asking the ministry to review the policy.

Ministry officials said doing away with the offset could actually result in savings, as foreign companies tend to increase contract price by 8-10% to cater for the offsets clause.

The announcement comes close on the heels of the CAG pointing out how two French armament majors have failed so far to meet their offset obligations as part of the Rs 59,000-crore deal between India and France to purchase 36 Rafale combat jets for the IAF.

Among other changes, the new military acquisition procedure will allow the army, IAF and the navy to hire platforms on lease and operate them. The money saved will be spent on the upkeep and maintenance of such assets.

Also, emphasis has been given on framing more realistic SQRs (staff qualitative requirements) for quicker acquisition. “The process of formulation of SQRs has been further refined with greater emphasis on identifying verifiable parameters based on the analysis of ‘comparative’ equipment available in the world and domestic markets,” the ministry said in a statement.