Defence ministry flouts offset policy, foreign arms vendors benefit

With the Ministry of Defence (MoD) poised to revise the defence offsets policy, India’s defence industry fears a comprehensive dilution of the original intent of offsets, which was to impel foreign arms vendors towards sourcing defence goods and services from India. The global arms industry, backed in many cases by their respective governments, has lobbied since 2006 for relaxing offset conditions.

But offset rules, it would now appear, have existed mainly on paper. MoD whistleblowers have given Business Standard multiple examples of how the ministry systematically flouts its own offset policy, irregularly clearing offset contracts that violate guidelines. In each case, a foreign arms vendor has benefited, while Indian industry has lost out.

The more flagrant violations relate to:

• Offsets worth Rs 1,100 crore arising from the Rs 3,700 crore purchase from Italy’s Finmeccanica group, of twelve AW-101 helicopters for Indian VVIPs like the PM and the president. (The Italian police are separately investigating bribery allegations in this deal. Finmeccanica denies irregular conduct, while admitting that sacked former chairman, Lorenzo Borgogni, illegally transferred “millions of euros” in consultancy fees). In New Delhi, the Prime Minister’s Office zoomed this procurement through the MoD, despite protests from sections of the IAF and the MoD that these were civilian helicopters that the IAF happens to operate. But even while treating this as a military purchase, the offsets flagrantly violate the Defence Procurement Policy guidelines, granting Finmeccanica offset credits for expenses relating to travel, accommodation and allowances for project committee meetings and steering committee meetings. The rules do not allow for this, since such offsets do nothing for indigenous defence production capability. Neither Finmeccanica, nor the MoD, have responded to an emailed request for comments. 
   
• Offsets worth Rs 1,485 crore arising from the Rs 4,950 crore purchase of eighty Mi-17V5 medium lift helicopters from Russia’s Rosoboronexport Ltd, Moscow’s arms export arm. In violation of the DPP, the IAF (rather than an Indian company) has been designated as the Indian Offset Partner (IOP), through which Rosoboronexport will discharge offset obligations. Instead, offset proposals involve training the IAF’s base repair depots in issues like spares management. The MoD legitimised this belatedly in 2009, rewriting the regulations to permit IAF depots to be IOPs “on a case to case basis in consultation with DDP (Department of Defence Production).”

  “What benefit has this brought to India’s manufacturing capability?” asks the CEO of a defence manufacturing company. Neither the Russian Embassy in New Delhi, nor the MoD, has responded to an emailed request for comments.

Offsets worth Rs 1,233 crore relating to the Rs 3,856 crore contract with Rosoboronexport to upgrade the IAF’s fleet of 62 MiG-29 fighters. Described by MoD officials as “a double whammy,” the contract stipulates that all but the first six MiG-29s would be upgraded in India by Hindustan Aeronautics Ltd; and Rosoboronexport priced the deal accordingly, including technology transfer costs and license fees. Inexplicably, the vendor was also granted offset credits for the work that would be done in HAL, benefiting twice over. Furthermore, offset credits were given for IAF pilot training, which the rules only permitted from January 1, 2011. MoD sources confirm that no waiver was granted for allowing training as offsets.

Neither the Russian embassy, nor MoD responded to an emailed request for comments. 

Offsets worth Rs 240 crore for a Rs 800 crore contract with Italian shipbuilder, Fincantieri, for a fleet tanker that will replenish Indian Navy warships on long patrols. The MoD’s tender specified certain “buyer nominated equipment,” or BNE, which Fincantieri would be required to source from Indian defence manufacturers. This included engines from Wartsila India; a combat system from Bharat Electronics Ltd; an AK-630 gun from the Ordnance Factory Board; and several other components. Fincantieri quoted accordingly, factoring in the cost of building components in India. But then, again providing a double benefit, Fincantieri was also granted offset credits for the BNE that was sourced from India.

The benefit to Fincantieri, by the ministry’s own measure, would be more than Rs 100 crore. The MoD’s director general of acquisitions, Vivek Rae, publicly estimated at a seminar in New Delhi last July that global vendors add 13 per cent to the contract price where offsets are imposed. Fincantieri apparently obtained that benefit despite having factored in the cost of BNE into its quote. Neither Fincantieri, nor the MoD, has responded to an emailed request for comments.

Business Standard has earlier reported on serial irregularities in offset contracts. US company Lockheed Martin’s $275 million offset contract, which related to India’s purchase of six C-130J Super Hercules aircraft flouted the offset regulations blatantly, offering little, if anything, to Indian industry. (“Lockheed offsets mock MoD norms”, December 9, 2010). Similarly, French company, Thales, was allowed to get away with providing 100 cc motorcycles, domestic air-conditioners, bicycles, cars, shelters, etc in its fulfilment of Rs 171 crore worth of offsets related to the Rs 570 crore sale of low level transportable radars to the MoD.

The defence offset policy compels global vendors who win defence contracts worth Rs 300 crore or more to invest at least 30 per cent of the contract value into India’s defence industry. From 2011 onwards vendors can discharge offset liabilities in civil aerospace and internal security as well.

“The MoD allows vendors to wriggle out of useful offsets. The primary job of the acquisitions wing is timely procurement, not developing India’s defence industry. It views offsets as an inconvenient hurdle to procurement, a box that must be ticked. The result is that vendors get away with sub-standard proposals that do nothing to build indigenous capability,” points out Maj Gen (Retd) Mrinal Suman, an expert on offsets who has worked in the acquisitions wing.