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EXECUTION OF DEFENCE OFFSET GUIDELINES SOME EXPERIENCES BY THE USER

VK Saxena

RFP is issued under the DPP in vogue that time; however by the time the case matures up to TOEC levels which may take about 3-4 years, a new revised DPP is published. But the irony is earlier DPP remains applicable and the vendors are not able to take the advantages of the new policy. This anomaly needs to be corrected…..

Ever since the Defence Offset Guidelines have come into effect from 01 Aug 2012 and got included at Appendix D to Para 22 of Chapter 1 of the DPP 2013, we as the users, have been involved in processing various provisions of the said guidelines, chairing TOECs and trying to get into grips with the fine print and, if I may, learning small things through hands-on experience. This little piece shares those little experiences with the reader, by way of some takeaways. It also mentions in context, the two amendments issued by the MoD recently on Offset Guidelines.

The first thing where we hit a sort of road block was related to the applicability of the offset guidelines. Take a specific case which we handled. Here the RFP got issued in a time frame when DPP 2008 was in vogue, while the case got matured upto TEC/TOEC stage much after the promulgation of DPP 2013. Which offset guidelines should be applicable on a point of argument at the TOEC and even before at the TM (LS) stage where an observation was raised, was the big and prolonged discussion point in successive meetings of the TOEC and the forums before that? See this line of arguments:-

  • (a) The logic is very clear, since RFP marks the start point, when the first Written Undertaking as per Annexure 1 to Appendix D, and latter, the Technical and Commercial Offset Proposal on the date specified in the RFP is to be submitted by the main/prime vendor, the offset proposal in vogue at the time of RFP has to be valid right through the TOEC/CNC.
  • (b) But, it is also very clear, that the offset guidelines in DPP 2008 underwent a comprehensive re-look and re-visit by a separate Study Group (of which the author was a member) before these got approved and got included in the DPP 2013. Many provisions which were intensively debated and thought through got incorporated over time; inclusion of civil aerospace and internal security as valid offset fields, provision of 'in kind' discharge through ToT, Tier 1 venders etc, to name a few.
  • (c) The benefit to leverage amendment/ revision to offset guidelines and the procurement through the revised offset guidelines must be enjoyed, both by the user, as well as, the vendor.
  • (d) The touch-stone should therefore be that the applicability of the offset guidelines must relate in time to the convening of the TOEC. In that, irrespective of the time when the RFP was issued, the offset Guidelines as applicable at the time of TOEC must remain applicable.
  • (e) For example if a Tier 1 vendor was not allowed in DPP 2008 offset provisions and the same is allowed in DPP 2013, a call could be taken by the TOEC/Collegiate /DOMW/TM/DG Acqn, if applicability can be allowed or otherwise.

While in the context of the two recent amendments issued by the MoD, it has been categorically stated that the said amendments shall not only apply to the procurement and offset contracts governed by the DPP 2013, but also, will apply to all procurement and offset contracts executed under the earlier DPPs, this only covers two specific points covered in the amendments, viz, change in offset partner or offset component and the two options for submission of the Offset proposal. A general all encompassing applicability is required in the line of what has been stated at Para 3 (d) above.

Another point relates to the Indian defence Industry. Without doubt, the landscape of the Indian industry is changing fast in which, the industry is gaining in strength, stature, capabilities, net worth, throughputs, tie ups and networked domains on a year on-year basis. Also, consider the fact, that in all probability, the practical time between the RFP and TOEC/CNC is anything between two-three years on a modest count. In this scenario, following thoughts are offered :-

  • (a) After the Written Undertaking, the actual Technical and Commercial Offset proposal submitted, say not later than three months from the date of submission of the main Technical and Commercial Proposal it is actually sitting till the TOEC, while the Indian industry constituents which were included therein are in a constant flux and are dynamically changing with time. This is not the case with the main proposal, wherein, while the Technical constituent is being processed through Trials and TEC, the commercial portion MUST WAIT unrevised, till the conduct of CNC (for obvious reasons).
  • (b) There is need to take the Written Undertaking upfront as per Annexure I to Appendix D, the Technical and Commercial Offset proposal is asked for,'later in the day'.
  • (c) The above will ensure, that the vendor watches the changes in landscape of the Indian industry and chooses his IOP/Tier I with due care in amore realistic scenario.

While the above 'later in the day' requirement stands addressed in the second amendment, there is a small issue still left. In that, while as per this amendment, additional two options of submitting the offset proposal have been provided (at the time of seeking offset credits or one year prior to the discharge of offset obligations), the OEM  is still required to finalise the IOP and submit its name to the TOEC at the RFP/bid stage itself? Why this restriction? I think the call of the day, as beautifully enumerated by Cmde. Sammadar and Mr. Cowshish in their article titled 'Recalibrating Defence Offsets' carried in  the Sep-Oct issue of this magazine is to rid the guidelines of 'needless restrictions' and 'linguistic polysemy'.

Experience has it, that ToT as an avenue for discharge of offset obligation as per Para 3.1 (i) of the Defence Offset Guidelines is a complex field. Some thoughts:-

  • (a) Many Subject Matter Experts (SMEs) opine that ToT transfer is a myth. Experience over many 'years in dealing with multiple vendors on the ToT transfer' has shown several minefields and lacunae - 'last mile transfer?', keeping away the 'ustadi-nuktas up the sleeve, ensuring perpetual dependence, perfunctionary transfer of know-how but not know-why...
  • (b) Playing the game of BTP and BTS, creating confusion resulting in the progressively increasing graphs of work-share which are actually, a virtual reality, or at best, a gimmick in statistics representation which can be highly misleading.
  • (c) ToT is essentially a 'mind-to-mind and human-to-human transfer 'much more than a 'file-to-file transfer'. Unless the same is associated with hand-holding acts like co-production, co-development, guaranteed buy back, walking the post-production phase together, transferring know-why and ensuring zero perpetual dependency, the ToT doesn't work.
  • (d) Also the vendor trick of skewed costing of ToT getting exponentially exorbitant in the sacred bracket of 90-100% is well known. While the cost slope North Eastwards on a reasonably predictable gradient can be tolerated, what about the straight Northward surge after say 85-90% journey is over? I am sure the SMEs on both sides of the procurement fence would understand what I am trying to convey.
  • (e) In essence, there is a need to re-visit and re-elaborate Para 3.1 (c) of the Defence Offset Guidelines

Recent Offset Related  Amendments

The MoD has recently issued following significant amendments to Defence Procurement Procedure ('DPP') Offset provisions:

Offset on Buy (Global) contracts under DPP-2013

Vide a Notification No. MOD ID No. 1(6)/D (Acq)/13 - Vol. II dated December 11, 2015, this limit/ threshold of 50 percent has now been reduced to 30 percent.  Further, in case the threshold of 30 percent indigenous content is not complied with, offset obligation is required to be discharged only on the differential quantum or deficit i.e. (i.e. 30 percent less indigenous content %). In case the aforementioned limit of 50 percent was not complied with, then the offset obligation was cast on the foreign exchange component of the entire contract value.

'SOP' for processing offset contracts

As per Notification (MOD ID No. 1(6)/D(Acq)/13 - Vol. II dated 05.08.2015), the MoD had liberalized the scheme for change in offset partner and offset component and submission of offset workplans for an RFP issued under DPP, 2013 subject to approval of the Secretary(DP)  on recommendation of the Defence Offset Management Wing.

The Standard Operating Procedure ('SOP') for processing contract amendment proposals relating to only rephasing of offset schedule, change of offset partner and change of offset components under the erstwhile versions of the DPP (i.e. DPP 2006, DPP 2008 and DPP 2011).

Secretary (DP) shall be the final authority for approving requests for change in Indian Offset Partners, rephrasing within the performance period and change of offset component within the avenues available for discharge of offset obligation for all offset contracts.

Any amendments to the offset contract due to the aforementioned changes based on approval of Secretary (DP) shall be incorporated by JS (DOMW) in the offset contract through a supplementary contract.

Reinstating Services as Offset

Recently, the Defence Ministry has approved a new policy which restores "services" as eligible offsets, vide MoD ID No. DOMW/OP/GEN/03/2015/01 dated 07-dec-2015. Four out of the six services i.e. maintenance and repair, software, skill development and technology transfer has been retained, though with certain riders and conditions.

The above quoted Mod reference are available at www.mod.nic.in

The author is the Ex-Director General of Army Air Defence. (The views expressed in this article are those of the author in his personal capacity.)

 

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