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Govt’s new defence acquisition policy drops offsets in 3 types of contracts

Director General (Acquisitions) Apurva Chandra said changes to the defence procurement policy will not be retrospective and ongoing deals will not be impacted

The decision, part of the government’s new policy for defence acquisitions, was approved by the Defence Acquisition Council Monday.

The government has decided not to have an offset clause in procurement of defence equipment if the deal is done through inter-government agreement (IGA), government-to-government or an ab initio single vendor. The offset clause requires a foreign vendor to invest a part of the contract value in India.

The decision, part of the government’s new policy for defence acquisitions, was approved by the Defence Acquisition Council Monday.

Unveiling the new policy, Defence Minister Rajnath Singh, in a Twitter post, said it has been “aligned” with Prime Minister Narendra Modi’s “vision of Atmanirbhar Bharat and empowering the Indian domestic industry through Make in India initiative with the ultimate aim of turning India into a global manufacturing hub”.

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He said with the “new Foreign Direct Investment policy announced, the DAP 2020 has adequately included provisions to encourage FDI to establish manufacturing hubs both for import substitution and exports while protecting the interests of Indian domestic industry”.

Director General (Acquisitions) Apurva Chandra said the offset clause policy had not brought any critical technology to India yet, and had only resulted in foreign vendors loading extra costs in contracts in single-vendor or government-to-government deals.

Chandra said changes to the defence procurement policy will not be retrospective and ongoing deals will not be impacted.

Offsets, however, will continue to be part of multi-vendor competitive procurement contracts, officials said. Since the clause will not be there in the three categories – IGA, government-to-government or ab initio single vendor — offsets are expected to “reduce substantially”.

The deal to buy 36 Rafale fighter jets was signed as an IGA with the French government, which included a 50 per cent offset clause.

In a report tabled in Parliament last week, the Comptroller and Auditor General (CAG) was critical of the offset policy, noting “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”.

The auditor noted that obtaining technology transfer has been a particular failure, as “90 per cent of the investment by the vendors was in the form of direct purchase of goods and services from the Indian industry”. Besides, it said, “of the total value of offsets only 3.5 per cent was contracted to be discharged through FDI”.

An Indian Air Force officer wearing a protective face mask at the Ambala Air Force Station before the induction ceremony of the five Rafale jets on September 10, 2020. (Express Photo by Tashi Tobgyal)

The CAG did not find “a single case where the foreign vendor had transferred high technology to the Indian industry”.

Mentioning the CAG report, Chandra said that “no offsets have led to any Technology of Transfer” as part of the offset deals yet.

According to official sources, anecdotal evidence suggested that foreign vendors added around 10 per cent to balance the offset costs. Thus, doing away with mandatory offsets is likely to bring down costs in such contracts.

The new policy for procurement of defence equipment, titled Defence Acquisition Procedure 2020, which has been in the works since August 2019, will come into effect from October 1.

Under the new policy “offset guidelines have been revised, wherein preference will be given to manufacture of complete defence products over components and various multipliers have been added to give incentivisation in discharge of Offsets,” the government said.

The multiplier value for offset transaction to earn offset credits will be focused towards technology transfer, with Transfer of Technology for critical technology with a 4X multiplier, compared to 3X for ToT to DRDO, ordnance factories or Defence PSUs and just 0.5X for components.

The DAP has reserved procurement under several important categories for companies that are owned 50 per cent or more by Indians. The categories including Buy (Indian — Indigenously Designed, Developed and Manufactured), Make I — with 70 per cent initial government funding, Make II — industry funded, Production Agency in Design and Development, and Strategic Partner model will be exclusively reserved for Indian vendors with ownership and control by resident Indian citizens with up to 49 per cent maximum FDI.

The government has also decided to increase the indigenous content (IC) requirement for all projects from 40 per cent to 50 per cent earlier, depending on the category, to 50 per cent to 60 per cent now. Only under procurement through Buy (Global), foreign vendors can have 30 per cent IC from Indian companies.

The new DAP has several new chapters compared to the Defence Procurement Policy of 2016. It has a dedicated chapter to buy weapons and platforms designed by DRDO, ordnance factories and Defence PSUs.

A new chapter for leasing has also been introduced. Chandra said that while India has leased military equipment in the past, it has generally been through the government-to-government route, but “now they will be more open”.

Leasing or “asset acquisition for a limited period” finds a dedicated chapter in the procurement policy for the first time, allowing the government to hire equipment from either domestic or foreign vendors.

There is a chapter that also looks at procuring software. The chapter on Information Communication Technology will look at “peculiar issues related to procurement of ICT intensive equipment especially of Interoperability & Built-in Upgradability, enhanced security requirements and change management,” the government said in a statement.

A new Make III category has also been introduced, which will be indigenously manufactured defence equipment and platforms or spares and assemblies intended to enable import substitution.

The DAP 2020 will also cater to price variation in long-term projects — into the Request for Proposals for projects worth more than Rs 300 crore with a duration of over 3 years.

Services Qualitative Requirement, which defines the capabilities sought for any equipment, weapon or platform, will now include a comparative analysis for products available within the country and internationally, and making them “more realistic”, Chandra said.

The government has also tried to “rationalise” the trial and testing procedures. With the new measures, the government hopes to bring down the defence procurement timelines.

The Long Term Integrated Perspective Plan has now been re-designated as Integrated Capability Development Plan (ICDP), and will cover a period of ten years, instead of 15 years earlier.

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