Thursday, July 25, 2024

Offset Obligations: IA&D’s Experience With The Defaulters

By Vaibhav Agrawal

Recent reports indicate that penalties amounting to $43 million have been imposed against foreign vendors in 16 arms contracts for the delay in fulfilling their offsets commitments.

In the previous year, another report noted that over a dozen Russian, French, US and Israeli firms were put on a watch list by the Indian Ministry of Defence and warned them for failure to fulfill their offsets obligations. Some of these companies, since then, have paid the penalties to get out of the watch-list. 

Among the firms stands the missile-maker MBDA, in the 7.8 billion Euros contract inked with France in September 2016. MBDA is the weapons package supplier for the Rafale jets manufactured by Dassault Aviation

At least 30% of the total contract value in a deal had to be ploughed back into India as re-investments under the defence offsets policy first promulgated in 2005, while offsets in some contracts have been set at 50%, like the Rs 59,000 crore one for 36 French Rafale fighters inked in 2016.

What Are Defence Offsets?

In simplest terms, the offset is an obligation by an international player to boost India’s domestic defence industry if India is buying defence equipment from it. Since defence contracts are costly, the government wants part of that money either to benefit the Indian industry or allow the country to gain in terms of technology.

According to CAG, an offset provision in a contract makes it obligatory for the supplier to either “reverse purchase, execute export orders or invest in local industry or in research and development” in the buyer’s domestic industry.

Overall, around 60 offset contracts have been signed by the Ministry of Defence, with over $13 billion to be discharged from 2008 to 2027. However, till April 2021, only $3.7 billion was discharged by the vendors, of which $2.16 billion has been accepted in audit, and the balance claims are under “clarification or examination.”

Do Offset Penalties Really Work?

The MBDA incident makes it evident that the Offset policy does not seem to work well. 

The Ministry of Defence deals with foreign vendors who are reputed global defence companies. The aforementioned facts indicate that these companies have not been serious about having the necessary concern towards the timelines of the offset contracts, and even the prospect of being penalised has not turned successful for ensuring adherence to the timelines. MoD is also peeved with the vendors on account of their not opting for foreign direct investment (FDI) or transfer of technology (ToT), to discharge the offset obligation.

IA&D’s Experience With Offset Companies

IA&D October 2021 Edition

With regards to Boeing’s Commitment to fulfil offsets of C-17 obligation, IA&D, in its October 2021 edition reported that “Boeing’s commitment to deliver on its offset is intact and that is aligned with India’s Defence Procurement Procedure (DPP) and meeting the Indian Government’s stated goals, including strengthening India’s aerospace capabilities.”

In response to IA&D’s queries regarding the status of offset in the deal of C-17 Globemaster, the US’s aerospace manufacturing giant said that “As specifics of offset are confidential documents and they can’t reveal those right now but clearly indicated towards their commitment to fulfil the offset commitments with India’s DPP.” The manufacturing giant further stated that, “Boeing is also working towards strengthening India’s aerospace capabilities by providing training and other assistance sought by India’s entities.”

November 2021 Edition

In the month’s editions, IA&D featured an article – Both Indian Artillery & Industries Get Shot In Arm With M777 Howitzer Deal!, in which we reported about the M777 Ultra-Light Howitzer procurement deal being touted to bolster the Indian Army’s artillery capabilities. The defence deal between the US and India had provided industry opportunities to local defence firms, owing to the offsets discharged under the contract BAE Systems Inc. was abiding by. 

Kalyani Group, Punj Lloyd, L&T, and Mahindra Group were a few among those prominent industry names with whom BAE Systems held talks to discharge their offset commitments. IA&D had sent “Request For Comments” and awaits a response from BAE about the fulfilment of its offset obligations. 

December 2021

In 2015, the President of Boeing India, Pratyush Kumar, announced the induction of the newest Chinook variant in the upcoming years would be “a milestone in Boeing’s expanding commitment to India,” He further claimed that “Large sections of the Chinook fuselage are already manufactured in India.”

According to a 2019 report by Ankit Panda for “The Diplomat, the deal was projected to have been $3 billion. Negotiations between the two parties over offset obligations, which require the seller to invest a portion of the contract price in India, were the perceived cause behind the delay.”

IA&D reached out to Boeing Aerospace for clarity on the deal’s offset clause discharge. The company responded to this by saying: “While we cannot comment on the specifics of offset contracts with the Indian Ministry of Defence (MoD), Boeing is committed to delivering on its offset commitments that are in line with India’s Defence Procurement Procedure and meeting the Indian government’s stated goals, including strengthening India’s Aerospace capabilities.”

February 2022

MoD’s 22,000 crore C-295 deal was signed with Airbus Defence and Space S.A., Spain, and was the first Make-In-India defence contract manufactured under Transfer of Technology (TOT) within the country by a private sector firm. The induction would also make the IAF the world’s 35th operator of the C-295. This procurement contract was aimed to replace the IAF’s vintage fleet of 56 Avro’s, which have remained in the IAF’s inventory since the 1960s.

IA&D asked Airbus Defense and Space about the ‘offset status’ on the C-295 deal. The publication also inquired about the tentative time frame for the offset implementation and whether or not the offset execution could be incorporated through other military or civilian contracts.

Neha Vij, representing Airbus Defense and Space, responded to IA&D’s requests for comments by saying: “It’s too premature to speak on this topic.” However, they added that the question could be “revisited” around Defence Expo 2022. 

March 2022

On 20 January, SAAB announced that it had signed a contract to provide the Indian Army and the Indian Air Force (IAF) with the AT4, while the contract was awarded after a competitive procurement process.

IA&D made multiple requests for comment via email, text, WhatsApp and call between 4 February and 3 March; however, it received no response from Robert Hewson, Head of Communications, Saab Asia Pacific, about inquiry into the deal’s offset status. 

A draft on the Saab ATA deal by IA&D was also shared with Hewson via WhatsApp, seeking the firm’s observations and comments; however, the publication did not receive a response until this issue went to print. Any comments received from Saab will be incorporated as a rejoinder in the publication’s online edition.

Despite instances of offset violations in the past coupled with the Government of India’s crackdown on defaulters, many defence and aerospace companies remain opaque about the offset status of India’s ongoing defence deals.


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