The story so far: On September 28, the new Defence Acquisition Procedure (DAP 2020) was released. Among other things, the Defence Ministry has removed the offset clause requirement in inter-governmental agreements (IGA) and has introduced a new category for leasing of military equipment .
What purpose does an offset clause serve?
A defence offset policy was promulgated under the Defence Procurement Procedure (DPP-2005) , with the objective that it would bring high-end technology to the country and help build the domestic defence industry. Under the offset clause, a foreign company that wins a defence deal is supposed to invest a part of the contract value in the country, thus developing skills and bringing in technology, while also generating employment.
Under the DPP 2006 , the offset value was fixed at 30% of defence deals above ₹300 crore, which was revised to ₹2,000 crore in DPP 2016 for full-import deals. The first offset contract was signed in 2007.
Auditing the offset deals till March 2018 , the Comptroller and Auditor General (CAG) said 46 offset contracts were signed for ₹66,427 crore, and till December 2018, ₹19,223 crore worth of offsets should have been discharged. “However, the vendors have claimed discharge of only ₹11,396 crore, [i.e.,] 59%, of the offsets,” stated a report tabled in Parliament on September 23. Furthermore, the Ministry has accepted only ₹5,457 crore or 48% of these offset claims, while the rest were pending or rejected due to various deficiencies. The remaining offset commitments of about ₹55,000 crore would be due for completion by 2024, but the rate of the offset discharge has been about ₹1,300 crore per year. “Given this situation, fulfilling the commitment of ₹55,000 crore by the vendors in the next six years remains a major challenge,” the report said.
What did the CAG say on the Rafale deal offsets?
The IGA of the ₹60,000-crore deal for 36 Rafale fighter jets stated that the French side would facilitate implementation of ‘Make in India’ through offsets for 50% value of supply protocols, minus the value of performance-based logistics and simulator and training aids annual maintenance. The CAG said the French aircraft manufacturer, Dassault Aviation, and missile maker MBDA have till date “not confirmed” the transfer of technology to the Defence Research and Development Organisation (DRDO) under the offset clause.
According to the report, in September 2015, French companies Dassault Aviation and MBDA initially proposed to discharge 30% of their offset obligation in the Rafale deal by offering high technology to the DRDO, and as per the contract, acquisition of technology by the DRDO is envisaged subject to discussions between the vendor and the DRDO. In April 2016, the DRDO identified six new technologies to be obtained from the firms under the offset obligations, but the vendors “did not agree on transfer of five technologies as most of them were not within the vendor’s core competence”.
The sixth proposal of the DRDO was to obtain technical assistance for indigenous development of an engine, Kaveri , for the Light Combat Aircraft (LCA). Stating that in October 2019, the Ministry of Defence (MoD) had informed them that the vendor had not yet been able to confirm their capability for doing the requisite upgradation, the CAG said, “thus, it is not clear if this technology transfer will take place, and there is need for MoD/DRDO to identify and acquire the right technologies in order to comply with the directions of Defence Acquisition Council (DAC) given in September 2016.”
The MoD informed the CAG that the offset obligations under the Rafale deal were to start from September 23, 2019, and the first annual commitment would have to be completed by September 23, 2020. The CAG noted that the maximum discharge of offsets — 57% by MBDA and 58% by Dassault Aviation — had been slated during the last year, which is year seven from the date of contract.
Giving the Rafale deal as a reference, the report said, “In many cases, it was found that the foreign vendors made various offset commitments to qualify for the main supply contract, but later were not earnest about fulfilling these commitments.”
What is the status now?
In the new DAP 2020, which came into effect on October 1, the government has removed the requirement for offset clause in IGAs or in Rafale-like deals. “We removed some of the offset requirements as they are not working. From now on, there will be no offset clause in government-to-government, single vendor and IGAs,” said Director General (Acquisition), Apurva Chandra.