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Defence Offset Guidelines – A Long Overdue Tweak

Mr Amit Cowshish is a former Financial Advisor (Acquisition), Ministry of Defence and former Distinguished Fellow, Manohar Parrikar Institute for Defence Studies and Analyses, New Delhi. Click here for Detailed Profile
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  • August 27, 2015

    After being implored for about a year, if not more, the Ministry of Defence (MoD) obliged foreign vendors – many of them struggling to meet their offset commitments – by making two changes in the avant-garde offset guidelines introduced three years back in August 2012 and later made a part of the Defence Procurement Procedure (DPP) 2013.

    Vendors will henceforth not be required to furnish details pertaining to the work share of each Indian Offset Partner (IOP) along with supporting documents within the time stipulated in the Request for Proposal (RFP) for submission of the offset proposal. These details and documents can now be furnished either at the time of claiming the offset credits or a year before discharging the offset obligation through a particular IOP. Of course, this is at the vendor’s risk. For, if the proposal is found to be unacceptable by the Defence Offsets Management Wing (DOMW) at this belated stage, penalty, and even enhancement of the offset obligation where the annual commitments change as a result of the unacceptability, will follow.

    Another procedural change has been made in regard to approval for altering the offset component of the contract. Earlier, the DOMW could recommend such a change in exceptional cases on being convinced that it was necessary to enable the vendor to fulfil the offset obligation, for approval by the Defence Minister through the Defence Procurement Board (DPB). This is now no more restricted to exceptional cases and the authority to approve such changes has been delegated to the Secretary (Defence Production).

    These changes are applicable retrospectively to all offset contracts and ongoing procurement cases, irrespective of the DPP under which the contract was signed or the procurement case initiated.

    Without in any way intending to disparage the step taken by the MoD, one cannot help wonder why it took so long in coming. The relaxation now given was being asked for by foreign companies for a long time. The signal emanating from the ministry for the past several months was that it was a matter of time before the demand was conceded. Considering that practically all the ongoing offset contracts are running behind schedule, it was in everybody’s interest to take steps, such as the one taken now, to facilitate expeditious execution of contracts.

    The time taken for making this small amendment in the procedure is, therefore, baffling. There are larger and more important issues relating to procurement policy and procedures awaiting resolution. The experts’ committee set up by the ministry has given its recommendations. These recommendations need to be examined and the revised policies and procedures that everyone has been waiting for must be promulgated urgently to signify the resolve to fix the problems besetting the modernisation of the armed forces.

    While the urgency in deciding on the recommendations of the experts’ committee cannot be belaboured, it is equally important that the procedures based on accepted recommendations are easily implementable. This is possible only if there is no needless intervention by the ministry and the text of the relevant provisions is not polysemic, which is hardly what one could say about the 5th August amendment to the existing offset guidelines.

    While the amendment now allows the details of the offset proposal to be furnished a year ahead of discharging the obligation through a particular IOP or while claiming the offset credit, the provision in the existing guidelines regarding submission of the offset proposal (both technical and commercial) within the time stipulated in the Request for Proposal (RFP) has not been done away with, leaving room for speculation as to what kind of proposal would be required to be submitted in response to the RFP.

    The 5th August amendment also exemplifies how difficult it is to let go of unnecessary controls. While the delegation of authority to the Secretary (Defence Production) to approve any change in the offset component seems progressive, the stipulation that this will be subject him/her being convinced that such change is necessary to enable the vendor to fulfil the offset obligations could negate its effect.

    Who could be the best judge of whether the change in the offset content is required or not than the vendor who is contractually bound to discharge the offset obligation? Since the existing policy leaves it to the vendors to decide the manner in which they want to discharge the offset obligation, it does not really matter how they discharge the obligations as long as it is within the laid down parameters, which could be laid down with greater clarity and precision to safeguard the interests which are intended to be protected by retaining the control with the Secretary (Defence Production).

    It is necessary to think through the consequential implications of any amendment that is made to an existing provision or when a new provision is being drafted as lack of clarity, or wording that lends itself to different interpretations, is the bane of smooth implementation of government policies.

    Views expressed are of the author and do not necessarily reflect the views of the IDSA or of the Government of India