Defence offsets cross Rs 8000 crores

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Defence offsets cross Rs 8000 crores
by Ajai Shukla
Business Standard, 21st Nov 09

Since 2005, when the Ministry of Defence mandated that every foreign defence purchase above Rs 300 crores would impose on the vendor an offset liability of 30% of the contract value, global arms majors have scurried to tie up partnerships with Indian defence manufacturers.

Today, for the first time, the MoD revealed exactly how much business the defence offsets policy has generated. Satyajeet Rajan, the chief of the Defence Offsets Facilitation Agency (DOFA) revealed that, since 2007, foreign vendors have signed up for offsets worth about Rs 8000 crores.

In 2007, a mere Rs 243 crores worth of offsets were firmed up. The figure rose tenfold to Rs 2598 crores in 2008. And in 2009, DOFA has already okayed Rs 4870 crores worth of offsets and counting.

These values are of planned production; actual production has still to begin in all but a handful of offset partnerships that were tied up over the last three years.

Interestingly, 94% of all planned offsets are in the aerospace sector; the remaining 6% covers the manufacture of naval systems. Apparently the MoD’s Rs 42,000 crore tender for the purchase of 126 medium fighters has been a major driver in encouraging offsets partnerships. Most of the six vendors competing in that contract have been identifying potential partners within India’s private sector, as well as with public sector aerospace giant, HAL.

Foreign vendors are currently permitted to discharge their offset obligations in three possible ways. Defence products, purchased from India’s defence manufacturers for export are eligible for offsets credits. So too are investments in India’s defence industry. Finally, investments made in Indian R&D facilities will be counted as offsets.

So far, the investment into Indian R&D has been negligible. And in choosing Indian partners, foreign arms vendors have preferred private companies to the public sector. So far, 40% of all offsets have gone to MoD-owned entities: factories of the Ordnance Factory Board and the eight defence PSUs. 33% of the offsets have gone to large private companies and a healthy 27% have gone to small and medium sized manufacturers.

The potential value of offsets business is enormous. India currently buys foreign weaponry worth about Rs 50,000 crores annually, a figure that is rising. Taking the minimum offsets liability of 30%, about Rs 15,000 crores worth of offsets must be discharged annually. In fact, the figure is higher; the medium fighter tender specifies an offsets liability of 50%.

The global arms industry complains bitterly about offsets; the United States government officially frowns at offset demands, but allows its companies to meet the conditions of buyers. But India’s MoD insists that global defence contractors actually derive commercial benefits from partnering Indian companies in defence manufacture. The DOFA chief points out, “Offsets requirements force foreign vendors into looking for Indian companies to partner. But this is for the present; 10-15 years down the line, we will not need offsets at all to galvanise Indian defence manufacture.”

Offsets were first demanded by European countries in the late 1950s, when the US was arming NATO against the Soviet Union. But the practice gathered momentum only in the last two decades. In 1990 only 20 countries demanded offsets as a part of arms purchases. Today offsets are demanded by over 130 countries.

In India, defence offsets were first approved by the Defence Minister in 2004 and included in Defence Procurement Policy of 2005 (DPP-2005). This was amended in DPP-2008, which permitted “offset banking” and the waiving of offsets in “fast track” purchase. This year, DPP-2009 permitted a long-standing request by foreign vendors, allowing them to change offset partners.

Today, indicating that more changes could be legislated in DPP-2010, DOFA Chairman Satyajeet Rajan asked the private sector to suggest useful changes to the offsets policy.


Distribution of offsets

40% : Ordnance factories and DPSUs

33% : Large private industry

27% : Other private industry


Offsets business year-wise

2007 : Rs 243 crores

2008 : Rs 2598 crores

2009 : Rs 4870 crores

 

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HAL targets turnover of $6 billion in the coming decade: Ashok Nayak

New Delhi: Indian state-owned aerospace giant, the Hindustan Aeronautics Ltd (HAL) is targeting a place amongst the top twenty global defence companies, according to chairman, Ashok Nayak. He said the defence public sector unit is looking at achieving a turnover of $6 billion over the coming 10 years.

With a turnover of $2 billion, the company is currently ranked 34th.

Speaking at the 4th international conference on 'Energising Indian Aerospace Industry: Partnerships, Opportunities & Challenges,' Nayak said the growth in India's aviation sector would act as an opportunity for HAL to meet its growth objectives.

The conference was organised jointly by the CII and the Centre for Air Power Studies.

Also, speaking at the same function, air marshal PK Barbora PVSM VM ADC, vice chief of air staff, said India needed to take bold steps in FDI policy for the defence sector. In this regard he mentioned that offset obligations should be instrumental in inviting technology to the country.

According to the air marshal, the country needed a defence policy which would leverage global interdependence in the most optimal way. He also mentioned that the private sector must be allowed a freer hand to access overseas market and be burdened with fewer regulations.

 

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Offsets gather momentum: time to go from banking to trading

by Ajai Shukla
Business Standard, 25th Nov 09

With India’s defence offset policy finally taking off, Prime Minister Manmohan Singh’s call for increased Indo-US collaboration in defence production portends well for offset-based foreign investment. A foreign boost to India’s moribund defence industry has been a government priority since 2005, when the Defence Offset Policy first mandated a 30% plough back into Indian defence industry of every foreign defence sale worth more than Rs 300 crores.

That the policy is beginning to yield results is evident from figures released last week by the MoD. Since 2007, when offsets took effect, foreign vendors have tied up production agreements worth Rs 8000 crores, almost entirely with domestic aerospace manufacturers. But, given that India’s foreign defence purchases currently generate an offset liability of about Rs 15,000 crores annually, this is only a beginning.

The success of India’s defence offset policy should not be measured in agreements signed, or goods manufactured. An offset policy is successful only in so far as it generates long-term industrial partnerships, which function even after the vendor has discharged his offset liabilities. For this the partnership must benefit both vendor and buyer. The challenge for India is to develop the domestic defence industry, both public and private sector, to create an eco-system of potential partners for foreign vendors. This is not difficult; India’s auto component manufacturers have already demonstrated domestic capabilities in high-tech manufacture and cutting-edge R&D. These are precisely the qualities that global arms corporations seek in offset partners in India.

Where mutual benefits are not available, arms vendors simply treat offsets as an imposition, a cost of doing business. They fulfil their offset obligations superficially and add the costs to their bill. That this is happening in India’s civil aviation sector (where, as in defence, vendors are liable for offsets) was evident from what former Civil Aviation Secretary, Ajay Prasad, told a gathering in Delhi last week. Revealing that Kingfisher Airlines had paid US $50 million less than Indian Airlines for similar Airbus aircraft, Mr Prasad explained that was because offsets were mandatory in the purchases by the government carrier. Evidently, the costs of those offsets were added on to Indian Airlines’ bill.

Such subterfuge can be minimised through responsive policymaking, creating benefits for India’s defence economy without unduly taxing vendors. The MoD’s first offset policy, promulgated in the Defence Procurement Policy of 2005 (DPP-2005), has gradually evolved, mainly at the instance of Indian and foreign defence suppliers. The most far-reaching change is the introduction of “offset banking” last year, allowing vendors to accumulate offset credits towards a future liability. But South Block has been less than responsive in the justifiable demand for “offset trading”, which would allow accumulated credits to be sold by vendors who may not have a use for them at that time.

As foreign vendors struggle to find offset partners for their mounting offset liabilities, there is a rising clamour --- particularly from US companies --- for allowing “indirect offsets”, or the discharge of offset obligations through investment in non-defence fields like infrastructure, health, housing, etc. The MoD, focused on building up domestic defence industry, considers “indirect offsets” a potential turf infringement. But unless a well-conceived policy and regulatory framework is created for handling billions of dollars of offsets liabilities each year, New Delhi may have to allow some of that money to spill over into non-defence fields.