Defence Offsets are Spreading Protectionism Across Commercial Sectors

As is known, Offsets are industrial compensation packages required by foreign governments as a condition for purchasing defence systems. They include co-production, licensed production, sub-contractor production, technology transfers, counter-trade, and investment in foreign firms.

Foreign governments use offsets to expand their own economic capabilities, gain technology, and create skilled jobs. Developed countries with established defense industries (i.e.,Europe) use offsets to channel work and technology to their domestic high-tech firms. Countries with newly industrialized economies utilize both military and commercial-related offsets to gain new technology and build manufacturing capacity. Offsets can displace U.S. subcontractors when they require work to be outsourced. Foreign competitors may also use transferred capabilities to bid away future contracts from the firms.

At both the 2006 and 2007 London Conferences, there was considerable interest shown in expanding offsets beyond defence procurement to cover government purchases in the Commercial Sector. This is already happening in Civil Aviation, as a natural progression from Military Aerospace.

There is also interest in applying the same principles to light railways, power plants, medical equipment and other high-value sectors where governments feel they can extract technology, capital, and a share of the work from exporters.

Govts. Need to articulate their defence offset policies in best interests of their countries rendering the desired flexibility to meet the contract imperatives.

For full Article Click: http://www.americaneconomicalert.org/view_art.asp?Prod_ID=2729
(William R. Hawkins is Senior Fellow for National Security Studies at the U.S. Business and Industry Council).


Brigadier (Retired) Sukhwindar Singh
http://www.defenceoffsetsindia.com/
http://www.freemarketsdefence.blogspot.com/

Thoughts on Defence Offsets in US Firms

The U.S. Government's policy, as stated in Federal Acquisition Regulation (FAR) 225.7303, is that the Department of Defense does not get involved with a defense firm's offset commitments. The decision to engage in offsets, and the responsibility for fulfilling offset commitments, is purely the firm's.

It is known that transactions involving large defense purchases from U.S. firms by foreign governments most often involve Offset Agreements between the Selling Firms and the Buying Governments. Policymakers in the Buying Nations can use the Offset Agreements to address a variety of economic and political issues within the Buying Countries. The desired Motivation & Effects in Buying Countries, identified in various studies on seeking Offsets, are:

1. Labor Market Corrections.

2. Promotion of Capital Investment.
3. Support for Strategic Industries.
4. Adjustments for Asymmetric Information.
5. Reduction of Risk and Uncertainty.
6. Alternative Sources of Financing.
7. Political Support for Defence Purchases.

In some of these situations, the use of offsets appears to be an alternative form of commercial policy, replacing a more direct form of intervention.

Recently provided information from industry appears to validate the work done in the 1980s. The changes in the defence environment over the past two decades do not seem to have changed the motives behind the use of Offsets. Offsets are a reality of the existing competitive nature of the marketplace.

Please Click: http://findarticles.com/p/articles/mi_m0JZX/is_3_10/ai_109353417 for details.

Brigadier (Retired) Sukhwindar Singh
http://www.svipja.com/ / http://www.defenceoffsetsindia.com/
http://www.indiandefenceindustry.com/

Credit: Defense Acquisition University Press, USA.

Flip Side of Offsets : European Union's Perspective

Offsets are widespread in the Defence Sector, despite being banned under the WTO's 'Agreement on Government Procurement' in all other areas of commercial business. Also , there is a growing recognition in Europe that "in principle, offsets are hardly compatible with transparency and fair competition in open markets" ("Defence Procurement in the European Union", Report of an EUISS Task Force, May 2005, Refers).

Offsets as a practice are vulnerable to corruption and abuse. Transparency International UK's Background Note "Offsets" (2005) describes the main trends and practices in the use of Defence Offsets. It illustrates how and why offsets are so open to corruption and outlines recommendations to remedy the current situation. General assessment :

1. Offsets are viewed as ‘largely ineffective over the long term and have minimal lasting impact on economic or military capability’.

2. Offsets are estimated to increase sales price by some 15 - 30%.

3. Direct offsets very rarely work.

4. Current EU Opinion (2005) on Offsets : ‘They are here to stay, and need to be harmonised’.

5. European Defence Association’s Opinion (Jan 2006) on Offsets: The "Study on the effects of offsets on the Development of a European Defence Industry and Market " (2007) financed by the European Defence Agency notes that "there are indications in some cases of lacking transparency and professionalism, which in extreme cases may even offer opportunities for corruption". Further the authors note that "it seems indisputable that opaque and un-professional offset implementation provides scope for corruption potentially leading to another system being chosen that would have occurred in an open and transparent market".

Corruption Risks

a. They are subject to less study than the main contract.

b. Their influence in the evaluation of bidders is often completely unclear.

c. They offer huge scope to reward intermediaries anonymously .

d. They are not settled until long after the contract is signed .

e. They are not well-monitored.

f. ‘Auditing’ and ’Value for Money’ assessments are almost never done.

Transparency International (UK) views Offsets as a significant and uncontrolled corruption risk. For details, pse Click : http://www.defenceagainstcorruption.org/index.php?option=com_content&task=view&id=26&Itemid=102


Brigadier (Retired) Sukhwindar Singh

http://www.svipja.com/ http://www.defenceoffsetsindia.com/ http://www.indiandefenceindustry.com/

93501 71232

Credit : Defence Against Corruption - A Project of Transparency International (UK).

Govt. Decison Process Under 'Three Cs' (the CVC, the CAG and the CBI)

Mr KP Singh, Secretary, Defence Production, has retired from Service on 31st December 2007. His three years in the Ministry of Defence (MoD) have seen some major policy changes, flowing from the decision in 2001 to allow the private sector into defence production, subject to licensing and an FDI cap of 26%.

There is speculation that Mr KP Singh might head a new regulatory body that is being set up to manage offsets at the MoD. He spoke exclusively to Business Standard about impending changes in the new offsets policy.

Full Text of the interview can be read on http://www.business-standard.com/lifeleisure/storypage.php?leftnm=5&subLeft=3&chklogin=Y&autono=309073&tab=r

Brigadier (Retired) Sukhwindar Singh

http://www.svipja.com/http://www.defenceoffsetsindia.com/ http://www.indiandefenceindustry.com/

93501 71232

Credit: Business Standard

Defence Offsets Management in the Indian Context : Some Strategic Thoughts

We are likely to have about 10 b USD flowing back as Defence Offsets during 2007-2012 and more would follow in the Years ahead. This ‘flow’ needs to be managed efficiently keeping in view the corrupt practices in defence deals. Lobbying, Personal Interest Groups, Sector-Specific Deployment of this Fund, Monitoring, are some of the important factors that would go in making an effective Offset Policy for Defence, or an Offset Policy in general.

Some thoughts that may help in developing the Apex Organisation for the Offsets are listed as under:

1. Whose ‘Money’ is it Anyway? Why should only Defence have a claim on it ?

2. Can we ignore ‘Dual-Usage’ Industry and ‘Infrastructure in Select Areas Used by Defence’?

3. Why should offset funds only flow to PSUs, DRDO, OFB or Large Private Sector Companies ? Their 'Efficiency Index' & 'Costing' needs to be evaluated stringently.

4. How could benefits of direct investments of the offset funds go to MSMEs which drive innovation & are credible ‘feeder’ industry to the Large Enterprises ?

5. Is there a need to develop special MSMEs Clusters of ‘Defence R & D’ and ‘niche’ dual-usage technologies. ‘Knowledge Power’ is with highly qualified entrepreneurs !!

6. Can the Defence Forces get ‘more-bang-for-the-buck’ ? Or they remain saddled with the profit-oriented pricing policy of the production agencies. Does ‘Defence Offsets Investment Policy’ have a Role in getting the products & services for the Defence Forces at the ‘right price’ ?

7. ‘Offset Banking’ and India's Concerns ?

8. Why would Global arms exporters allow India to develop as a defence suppliers' hub ? Create a Competitor ? What strategy are they adopting in ‘scuttling’ this’.

9. Organised ‘lobbying’ by the Chambers & Industry Association(s) needs to be seen through.

10. Interests of the Principals / Defence Vendors also needs to be monitored.

11. How could the offset funds be used as an ' indigenous technolgy development tool' in concert with the main contract?

12. How do we monitor correct usage of the Offset funds provided to the Industry ?

13. How do we involve ex-Defence Experts as Enterepreneor(s) for their self-employment with the Offset Agency utilising the vast expertise they have ?

---- And Many More Inter-related Strategic, Security & Governance Issues !!

We need to devise an Offset Policy that is all ‘Inclusive’, and devoid of any ‘tilt’ which should stand ‘tall’ in the long term. Defence Offset Facilitation Agency (DOFA) has just served Us about 2 years.

Brigadier (Retired) Sukhwindar Singh
http://www.svipja.com/ / http://www.defenceoffsetsindia.com/
http://www.indiandefenceindustry.com/

93501 71232

MOD to Announce a New High-Powered Offset Organisation

The MoD is planning to expand DOFA . A high-level committee has worked out what DOFA will need to include, and the announcement will take place shortly.“There is unanimity in the MoD that neither DOFA, nor the Director General (Acquisitions) can handle such a large volume of independent work”, said Secretary, Defence Production.

The expanded version of DOFA, according to the Secretary, Defence Production, will perform the following roles:

• Evaluating offsets proposals submitted by foreign vendors, during the bidding process.
• Keeping an account of the fulfilment of the offsets contracts, including the value of defence products manufactured, and exported, and the offsets liability carried forward each year.
• Once offsets banking is permitted, DOFA will perform the role of the bank, keeping a track of the offsets banked, encashed, and carried forward.
• When grey areas exist in the policy, the expanded DOFA will interpret and provide policy clarifications.
• When certain cases fall outside existing policy, decisions on those cases will be made by the expanded DOFA.

“This organisation will play a very important role in advising the Govt. what is in the best interests of the country. But foreign vendors and private companies --- they have no role to play in this body. This is a purely MoD housekeeping function”, said the Secretary.

The expanded DOFA will include a technology evaluation cell, consisting of Defence R&D Organisation (DRDO) personnel, a legal cell that is qualified in law relating to commerce and foreign trade, and a greatly expanded accounting capability in order to keep continuous track of individual offsets liabilities that are discharged over several years.

It is still unclear whether the expanded DOFA will continue to form a part of the Department of Defence Production in the MoD, or whether it will evolve into a separate regulatory-cum-advisory body, in which case a legislative framework will have to be enacted.

Brigadier (Retired) Sukhwindar Singh
http://www.svipja.com/ http://www.defenceoffsetsindia.com/
http://www.indiandefenceindustry.com/

Credit: Broadsword, Ajai Shukla.

L & T , and Astra First Two Beneficiaries of the Offset Policy

India’s new defence offset policy has started rolling with major private sector firms Larsen and Toubro and Hyderabad-based Astra defence software becoming the first beneficiaries. However, reports suggest that these deals are yet to be executed.

The two firms were chosen by Israeli defence major Elta as offset partners after it was awarded a Rs 833.4-crore deal to supply medium range radars to the IAF.

“This is the first major defence procurement in which the government has enforced the offset clause,” Secretary, Defence Production reporters here today. Without spelling out the details of the deal, he Secretary said Elta had agreed to plow back Rs 250 crore as offsets into these two companies.

India’s new defence procurement policy incorporates a 30 per cent offset clause for all deals worth over Rs 300 crore.

Brigadier (Retired) Sukhwindar Singh

http://www.svipja.com/ http://www.defenceoffsetsindia.com/

http://www.indiandefenceindustry.com/

Defence Imports in India

India's military imports are expected to reach $30 billion by 2012 with its armed forces expected to ink defence deals for multi-role fighter jets, 155mm howitzers, and a variety of helicopters and long range maritime reconnaissance aircraft over the coming years. A leading Industry Chamber has made these projections in a report on `Avenues for Private Sector Participation in Defence' in Dec 2007. The report points out that over the past three years, India has spent as much as $10.5 billion on military imports, making it amongst the largest arms importers in the developing world.

The report also points out that with an ever increasing demand for higher allocation for defence budgets, and with a limited capacity on the part of the government to meet the demand, the defence sector needs to re-think how it could procure its goods and services from existing allocations in a more efficient manner.

According to Assocham President, Venugopal N Dhoot, the Indian military spend was about $20 billion in the last fiscal and is expected to grow 7% annually over the next 5 years.

The country's military spend amounts to roughly 2% of GDP, which is without accounting for expenditure on Defence Pensions, PMFs and the MOD itself as part of budgeted Defence Expenditure.

The report points out that despite the MOD setting a target of achieving 70% self-reliance in defence production ten years ago, the country has only achieved about 30 % of self-sufficiency. Some of key civil industry players supplying defence equipment and services include Tata Group, Mahindra & Mahindra, Kirloskar Bros., Larsen & Toubro, Ashok Leyland, Jindal, Max Aerospace & Aviation and Ramoss India.

The report essentially argues that competitive bidding must be introduced for all defence tenders in order to generate greater involvement of the Private Sector in the Defence Sector and, in the process, reduce the burden of imports.

Brigadier (Retired) Sukhwindar Singh

http://www.svipja.com/ http://www.defenceoffsetsindia.com/
http://www.indiandefenceindustry.com/