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IDSA COMMENT

A Level-Playing Field that Isn’t: How India’s Defence Offset Procedures Could Discriminate against Indian Bidders

January 15, 2013

Indian industry stakeholders have long advocated the need for a level-playing field with foreign bidders in defence procurements. Important industry concerns in this regard include: customs duty differentials vis-à-vis excise and other taxes levied by States/Central Government that impact relative price competitiveness of Indian bidders; the relatively higher costs of technology acquisition by Indian bidders given the wide persistence of grants and cost-sharing R&D contracts among established players in other countries in the defence manufacturing sector; and many other tariff- and non-tariff-based commercial issues such as discriminatory export control regimes.

Overall, various important provisions of India’s Defence Procurement Procedure (DPP-2008 and its later updates) appear to be unconcerned with domestic manufacturing possibilities: a position that is vastly different from those adopted among developed countries. For instance, the Unites States’ Federal Acquisition Regulation requires government contracts to be mandatorily set aside for domestic industry participation if such set-aside decisions enhance the domestic industrial base. In contrast, India’s DPP does not contain any such mandate, and treats categorisation of procurement cases into Buy(Global) or Buy(Indian)cases as a mere procedural formality, with no sensitivity analysis requirements as to how different SQR and categorisation combinations could differentially impact participation of Indian manufacturers for the platform under acquisition while still yielding acceptable results.

One such obvious inequity that has existed since DPP-2008 was issued relates to indigenisation requirements imposed on Indian vendors, including their joint ventures, for being eligible for participation under “Buy(Global)” procurement cases, as compared to the relatively easier requirements levied on foreign bidders. For capital acquisition cases where the indicative value of procurement exceeds Rs. 300 crore, an offset obligation is imposed on foreign bidders under the DPP requiring them to make investments and/or product purchases where the value-addition requirement/ totals a minimum of 30 per cent of the value of the main procurement contract.1 It is unclear as to how this value-addition requirement can operate in the context of FDI by a foreign vendor into the equity of an Indian company, and it therefore appears that the maximum effective rate of value-addition requirement on foreign vendors is 30 per cent of the value of the main procurement contract.

In addition, this offset obligation on foreign vendors is indirect, i.e., the value-addition need not necessarily be related to parts, components and sub-assemblies of the weapon platform under acquisition, but can be discharged in completely unrelated areas such as electronics and ground support equipment for some other category(ies) of defence/civil aerospace/internal security equipment or related services. This discharge of a vendor’s offset obligations can be staggered over the entire duration of the main procurement contract, since the offset contract is coterminous with the main contract,2 and the year-wise staggering is left to the complete discretion of the foreign vendor without any mandatory requirements of proportional discharge over the duration of the offset contract in sync with deliveries under the main contract.

In contrast, the defence offset provisions impose rather onerous indigenisation requirements on Indian bidders participating under Buy(Global) procurements, who are required to ensure 50 per cent indigenisation in respect of the weapon system/platform under acquisition:3 essentially a 50 per cent direct offset obligation, compared to the 30 per cent indirect offset obligations imposed on foreign vendors. The period within which this 50 per cent indigenisation level must be achieved by Indian vendors is not specified under DPP-2008, but analysts and practitioners believe that this indigenisation is required to be achieved at the time of Field Evaluation Trials (FETs)—virtually an impossible task given that productionisation would not have started at the time of FETs and takes place only much later.

Effectively, it appears that the Indian vendor is expected to achieve these high levels of indigenisation when a procurement contract has not even been signed with the Acquisition Wing, i.e., when there is absolutely no surety of orders being placed on the Indian vendor in the first instance. In contrast, as stated earlier, a foreign bidder’s offset obligations kick-in only upon award of the main procurement contract, that too, in a manner that is left at the absolute discretion of the foreign vendor on how the obligations are to be stagger red over the entire duration of the offset contract.

A quick comparison of the indigenisation/value-addition requirements imposed on Indian and foreign bidders therefore reveals vastly differing requirements, both in terms of the period of discharge of offset obligations/time-period allowed for achievement of indigenisation levels, as well as the percentage of indigenisation/value-addition in India and the nature of the obligation, as shown below:

Category

Foreign Bidders

Indian Bidders

Level of Indigenisation

30% value-addition in India under DPP-2008, practically nil for services-based offset contracts under DPP-2011 as revised4

50% indigenisation

Nature of Obligation

Indirect Offset

Directly related to acquisition platform

Period of Discharge/ Achievement

By the conclusion of the main procurement contract (typically about 8-10 years of issue of RFP) under DP-2008; during main procurement contract + 2 years under DPP-2011 as revised. Year-wise discharge at the absolute discretion of the foreign vendor as formalised at the time of the signing of the offset contract.

By the FET stage (within about 20 months of issue of the RFP)

In addition, greater clarity is perhaps warranted on “Buy(Global)” cases with indicative value less than Rs. 300 crore as to whether Indian bidders in such cases still need to fulfil a 50 per cent indigenous content requirement. This is particularly important, since in such low-value global contracts, foreign bidders are exempted from any indirect offset requirements, which may significantly aggravate the barriers to entry faced by Indian bidders vis-à-vis foreign entities.

In all fairness, this discriminatory treatment of Indian bidders does not appear to be by design, but rather by oversight. DPP-2008 was written at a time when offsets were not well-understood by policy-makers in India, the country being a relative newcomer to the world of counter-trade and offsets, as compared to many countries such as Israel, South Korea and many EU countries which have continuously improved and perfected their offset regulations over the years as a result of valuable lessons learnt in implementation. Canada, for instance, resoled the problem by ensuring equal imposition of its Industrial and Regional Benefits Programme on domestic as well as foreign vendors, further removing many loopholes in offsets implementation.

Given such inequitable treatment of Indian bidders, it is indeed time that India’s offset regulations and defence procurement procedures are weeded for provisions formalising differential treatment against Indian bidders. Simultaneously, many other substantive inadequacies would also need to be addressed upfront, if the fundamental objective of defence offsets is to be achieved in terms of fostering the Indian defence industry, and in particular, embedding the private sector in India at its rightful place into global supply chains for defence and strategic manufacturing.

This paper is an updated version of a brief note that was written while the author was a student of an LLM programme with specialisation in Government Procurement Law at the George Washington University Law School, Washington DC. The original brief was circulated during IROC-2009 for obtaining stakeholder inputs for his research paper on the evolution of defence offset procedures in India, which was being written as a part of the mandatory course requirements of this LLM programme. The author has been a member of IDSA since 2011. Views expressed herein are personal and academic, and do not reflect the official position or policy of the Government of India or any of its departments or agencies.

  • 1. DPP-2008, 1, Appendix D, available at http://mod.nic.in/dpm/DPP2008.pdf. Also see, DPP-2011, 1, Appendix D, available at http://mod.nic.in/dpm/DPP2011.pdf; and Revised Offset Guidelines (2012), 2, Appendix D, DPP-2011, available at http://mod.nic.in/dpm/revised-guidelines.pdf.
  • 2. Offset contract period under the Revised Offset Guidelines (2012) is 2 years plus the duration of the main procurement contract; ROG (2012), 5.2, supra n. 1.
  • 3. DPP-2008, 6.5, supra n. 1; DPP-2011, 6.5, supra n. 2; ROG (2012), 5.10, supra n. 1.
  • 4. The Revised Offset Guidelines (2012) do not appear to insist on value-addition in India as a prerequisite to grant of offset credit in respect of eligible services; ROG (2012), ¶5.9, supra n. 2.See also, Behera, L. (2012), A Critique of India’s Defence Offset Guidelines 2012, IDSA [September 3, 2012]; available athttp://www.idsa.in/policybrief/ACritiqueofIndiasDefenceOffsetGuidelines2012.