Changes made to the Defence Procurement Policy in April 2016 allowed suppliers of the Rafale fighter jets not to declare any offset partner when India and France signed a deal in September that year to buy 36 aircraft.
The Comptroller and Auditor General of India, in its Report No. 20 of 2019 which was tabled in Parliament last week, said changes in the offset policy introduced by the government in 2015 were “duly incorporated” with effect from April 1, 2016.
This policy change meant that in the case of the Rafale deal, the foreign vendor did not have to declare an offset partner around the time of the signing of the contract in September 2016.
On the Rafale deal, the CAG said the offset obligations were to kick in from September 2019. The first annual commitment, it said, should have been completed this month and the Ministry of Defence (MoD) must obtain details.
The Defence Procurement Policy of 2013 stated that a Technical Offset Evaluation Committee (TOEC) will scrutinise the technical offset proposals “to ensure conformity with the offset guidelines” and the foreign vendor “may be advised to undertake changes to bring his offset proposals in conformity with the offset guidelines”. The policy stated that the “TOEC will be expected to submit its report within 4-8 weeks of its constitution”.
Under commercial evaluations, the DPP of 2013 stated: “The Commercial Offset Offer will contain the detailed offer specifying the value of the offset components, with a breakdown of the details, phasing, Indian Offset Partners and banked offset credits proposed to be utilized. The commercial offset offer will be opened along with the main commercial offer after the TOEC report has been accepted by the Director General (Acquisition). The commercial offset offer will have no bearing on determination of the L-1 vendor.”
The policy amended in 2015, which came into effect on April 1, 2016, did not change the commercial evaluation part of it. But it amended Para 8.2 under Defence Offset Guidelines and added, “if vendor is unable to provide these details at the time of TOEC (Technical Offset Evaluation Committee), the same may be provided to the DOFW (Defence Offset Management Wing) either at the time of seeking offset credits or one year prior to discharge of offset obligations,” the CAG noted.
The amended DPP, the CAG said, was applicable with immediate effect to all offset contracts and ongoing procurement cases, irrespective of the applicable DPP, and was “duly incorporated in DPP 2016”.
On the Rafale deal, the CAG noted that the Indian government had signed an Inter-Governmental Agreement (IGA) on September 23, 2016 with the French government to buy 36 Rafale Medium Multi Role Combat Aircraft (MMRCA), and the offset obligations were signed by suppliers Dassault Aviation and MBDA.
Article 12 of the IGA, the CAG said in its report on offset policies, “stated that the French side would facilitate implementation of Make in India initiative through offsets for 50 per cent value of Supply Protocols minus value of Performance Based Logistics and Simulators & Training Aids Annual Maintenance”.
The initial negotiation brief for the Indian Negotiation Team (INT) on May 12, 2015 and broad Indian expectations stated that the “terms of offsets is to be also directed towards setting up of Depot Level maintenance facilities in India and manufacturing of spares to supply our requirements and to integrate into global supply chain” of Original Equipment Manufacturers.
The CAG noted “consequential changes in line with the amendments, were not made in related clauses and model formats”. This, it said, “is explained through an examination of amendment made to DPP in August 2015 and further illustrated in case of offset contract with M/s Dassault Aviation and M/s MBDA in procurement of 36 MMRCA”.
The MoD, the CAG said, informed it in May 2019 that the offset obligations were to start from September 2019. “Since the discharge period has started, MoD needs to get the details of the specific products/ services being offered for discharge of offset, to monitor and ensure that the objectives of the offset are achieved,” the auditor said.
Although the DPP was amended for the offset policy, the CAG said the model format to submit technical and commercial offset offers, including name, profile of IOP and eligible offset products and services, was not amended in August 2015, and neither was the model offset contract amended, which required offset contracts to be provided to the DOMW “within 90 days from contract date”.
“Audit noted that this ambiguity created uncertainty in the minds of vendors on the exact details to be furnished to the Ministry,” it stated
On being asked, the MoD responded to the CAG in May and October 2019 that the Frequently Asked Questions (FAQ) had been brought out which “illustrate the details to be provided by vendors” and hence, “no requirement was felt to amend the formats”.
Unimpressed with the MoD response, the CAG said this is “not convincing as FAQ is a document that is subsidiary to the Offset Guidelines and hence FAQ cannot override it”.