Wednesday, May 29, 2024

A Clarion Call For Reforms In India’s Defence Offset Policy

By Vaibhav Agrawal

In yet another significant development surrounding India’s defence offset policy, it has been reported that vendors have defaulted/non-performed offset obligations on at least 21 offset contracts in the past five years that have amounted to around $2.24 billion till 31 December 2021. In 16 cases, the penalties amounting to $43.14 million have been imposed against defaulters/non-performing vendors.

Media reports indicate that penalties have been imposed on major defence companies, which include defence & aerospace giants like Thales (France) during a Mirage upgrade project and rocket-related efforts with Hindustan Aeronautics Limited (HAL), European consortium MBDA during the Rafael acquisition and for the Mirage-2000H, Safran (France) during a Mirage aircraft upgrade project and the acquisition of Rafale aircraft, Rosoboronexport (Russia) for contracts related to MiG-29 fighter jet upgrades, Mi-17 helicopters and Kamov Ka-28 helicopter upgrades and Dassault Aviation (France) during a Mirage upgrade project. Even Israel Aerospace Industries (IAI) have faced penalties for contracts involving Harop and Heron drones.

Violator’s Offset Hustle

Penalties were imposed by the government from 2013 to 2021 on several original equipment manufacturers for defaulting on their offset obligations, potentially deterring foreign defence companies from seeking business in the country. 

According to open sources, officials say that the Original Equipment Manufacturers (OEM) are permitted to present their respective offset plans a year before discharge; however, earlier, the OEMs were asked to submit a complete offset plan when the primary and offset contracts were signed.

On the other hand, some of the OEMs who were penalised for defaulting on offset terms stated that the government was to be blamed for delays in offset implementation, citing inflexible and excessive regulations along with a lack of expertise and accountability within the DOMW.

Do Penalties In Offsets Really Work?

Speaking about the penalties imposed on vendors, Major General Brajesh Kumar (r.) told IA&D, “Rewards & penalties are an integral part of any contract agreement. It’s applicable to Offsets as well. How else do you enforce a contract? There will be disputes, and we need to have an effective dispute resolution mechanism. Penalties would work, albeit incentives could be used in addition.”

However, Maj Gen Rajan Kochhar (r.) had a contrarian view; according to him, “It is evident that in spite of a penalty clause in the offset contract for as many as 57 contracts, the Govt has not been able to enforce it, clearly showing that the penalties do not work and therefore there is a need to take stringent actions to de-bar such firms who do not fulfil the offset obligations.”

Lieutenant Colonel JS Sodhi (r.), a Defence and Strategic Affairs analyst, suggests some ways which could reduce these vast offset contract defaults: 

Firstly, review each offset contract and resolve the issue amicably, which should include an extension of time to fulfil the offset clause. Secondly, establish a tribunal to resolve the disputes with a mandate to complete each case in a maximum of 6 months from the date of the case being brought to the notice of the Tribunal in writing. Lastly, the final appellate for appeals against the decision of such a Tribunal should be the Delhi High Court with a clear directive to dispose of the appeal within three months.

Does The Offset Policy Need A Revamp?

Maj Gen Rajan Kochhar (r.) addressed a key issue In the offset policy; he mentioned that there is there is no specific guideline stating the percentage on the extent of work that can be outsourced/assigned by an Indian Offset Partner (IOP) to another subcontractor (whether in the same group or not) under the Defence Offset Guidelines contained in the DAP. Therefore, an IOP can further assign significant or majority of the work to another subcontractor within or outside India. This defeats the very purpose of getting into contact with a reputed OEM. Also, it would subsequently become challenging to impose penalties on a sub-contractor as the liability to execute the contract remains with the OEM.

Maj Gen Brajesh Kumar (r.) further presented his views on revamping the Offset Policy adopted by India; he says that for a considerable armament importing country, India has made a modest beginning while making the defence sector attractive by revamping the procurement policy to make the climate of investment more conducive and friendly is essential. The FDI, opening defence corridors, import embargo, licensing and incentivising offsets all have a role to play, and DAP would require a periodic review.

What’s The Current Offset Status?

Several defaulters did not respond to IA&D’s request for comments on their respective Offset Deals over the past few months. Responses, if received, will be added as a rejoinder in the respective e-magazine issues. 

The recent past has witnessed several media reports on global arms companies failing to meet their offset obligations, for which defaulters have been penalised.

Lt Col JS Sodhi (r.) concluded his view by saying that “keeping in view the precarious global geopolitical scenario and the fact that the security of the nation vastly depends on the defence equipment, certain offset violations may be waived off and the balance dealt.”

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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