Defence offsets offer Rs 90,300 cr opportunity

DEFENCE OFFSET POLICY - I

(This is the first of a three- part series on the amended defence offset policy)

For the first time, India's Ministry of Defence has publicly put a figure on its forthcoming defence purchases. On Tuesday, Kiran Chadha, head of the defence ministry's Defence Offset Facilitation Agency, told a gathering of Indian and European defence industry that India would buy $100 billion worth of military equipment over the next five years. At current exchange rates, this amounts to Rs 4,30,000 crore for the Eleventh Defence Plan period (2007-2012).

The audience, executives from European Aeronautic Defence and Space Company (EADS), had gathered to discuss potential offset partnerships with Indian entrepreneurs invited by the Confederation of Indian Industry (CII).

Their mental cash-registers could easily process the defence ministry figures: Every foreign defence contract worth Rs 300 crore or more requires the foreign vendor to plough back 30 per cent of the contract value as offsets, which are co-production or purchase agreements with Indian defence producers.

If a conservative 70 per cent of India's $100 billion is spent on foreign equipment, Indian businessmen will benefit from offset opportunities worth $21 billion (Rs 90,300 crore).

As startling as the amounts involved were the defence ministry's far-reaching changes and clarifications to the Defence Offset Policy first formulated last September as a part of India's Defence Procurement Plan-2006 (DPP""2006).

Divulging for the first time that the Ministry of Commerce was formulating a National Offset Policy, Chadha explained that the Defence Offset Policy would continue to operate independently, since "we cannot equate rice and wheat with arms and ammunition".

It remains unclear whether the Ministry of Civil Aviation, which has its own offset policy for aircraft and equipment purchased overseas, will operate under the new National Offset Policy.

It was also announced that the defence ministry had accepted a major demand from India's growing private defence sector. In bidding for offset partnerships with foreign arms vendors, India's private defence manufacturers will henceforth be treated on a par with the eight defence public sector undertakings like Bharat Electronics Ltd (BEL) and Hindustan Aeronautics Ltd (HAL), which have traditionally obtained preferential treatment. Now, foreign vendors can choose Indian private companies as partners for implementing offset obligations.

"For the majority of projects that are ready for procurement and the 30 per cent offset obligation, it will be the foreign companies that will choose their Indian partner, and they can choose more than one Indian private partner," said Chadha.

This is already happening. India has just finalised its first offset agreement, worth $15 million (Rs 60 crore), with Israeli company ELTA, in a deal to supply India medium power radars. ELTA's offset partners will be private companies L&T and Astra Microwave from Hyderabad.

The offset proposals for the purchase of the Navy's newest fleet tanker involve 8-10 Indian companies. And backing the statement that DPSUs will now compete on level terms with the private sector, the defence ministry has ordered the redrafting of two tender proposals for buying helicopters that had mandated BEL and HAL as offset partners. For these proposals, vendors can now choose any Indian company as offset partners.

The defence ministry is also guarding against any tendency among foreign vendors to avoid offset obligations "" it has mandated that every offset agreement will have to be coterminous with the main contract and directly related to it.

For example, in a transfer of technology deal for manufacturing helicopters in India, the offset deal must involve parts or technology related to that very helicopter and must be completed by the time the last payment is made to the foreign vendor.

In this, the defence ministry has drawn on earlier experiences where foreign vendors tended to avoid offset obligations. "Some of the offset programmes that were finalised by HAL almost 15 years ago have still not been implemented... We do not want to run after every vendor after the contract is over," said Chadha.

Representing an increasingly confident private sector, active defence cells within industry bodies like the CII are pushing the defence ministry for a greater role. The ministry, realising that its eight DPSUs and 40 ordnance factories cannot deliver alone, is clearing the decks for the private sector to build up defence capabilities through offset opportunities.

Next: Foreign suggestions on offsets: The MoD's response