NEW DELHI — About half of India’s offset obligations, worth $13.52 billion across a package of 57 contracts, have resulted in either sanctions or the threat of them, officials said. Department of Defense officials to Defense News.
The government imposed sanctions on several original equipment manufacturers from 2013 to 2021 for failing to meet their offset obligations, which could deter foreign defense companies from seeking business in the country. These penalized OEMs include:
- Lockheed Martin (a company based in the United States) during work related to the C-130J Hercules aircraft.
- Textron (US) for a Sensor Fuzed Weapon contract.
- Safran (France) during a Mirage modernization project and the acquisition of the Rafael aircraft.
- Dassault Aviation (France) during a Mirage modernization project.
- Thales (France) during a Mirage upgrade project and rocket-related efforts with Hindustan Aeronautics Limited.
- MBDA European consortium for an effort involving MICA missiles for the Mirage-2000H and during the acquisition of Rafael.
- Rosoboronexport (Russia) for contracts related to upgrades of Kamov Ka-28 helicopters, upgrades of MiG-29 fighter jets and Mi-17 helicopters.
- Fincantieri (Italy) for work on a fleet tanker.
- Pilatus Aircraft (Switzerland) during PC-7 MkII basic training aircraft efforts.
- Israel Aerospace Industries for contracts involving Harop and Heron drones.
Indian Ministry of Defense officials and analysts said at least a dozen more offset contracts could be penalized in the near future.
Offsets are compensation that a buyer requests from a seller for the purchase of goods or services. These can range from co-production agreements to investments in local partners to technology transfer.
Offsets in India are overseen by the ministry’s defense offsets management wing, DOMW, which oversees the implementation of agreements between original equipment manufacturers and domestic companies, with the latter serving as local partners. . However, the country is in the process of eliminating offsets.
“Without going into the merits of individual cases, it appears that several defense contractors failed to meet their legally binding offset obligations, resulting in the imposition of penalties,” said Vivek Rae, former chief Department of Defense acquisitions, to Defense News.
The government’s compensation policy, he added, has been difficult to implement. But department officials told Defense News that original equipment manufacturers failed to meet offset requirements due to their own lack of performance. The officials, who spoke on condition of anonymity because they were not authorized to speak to the media, said the government’s process is flexible and allows for changes to local partnerships and products to be made. compensation.
Department of Defense officials noted that OEMs are now allowed to submit their respective compensation plans a year before discharge. Previously, a full compensation plan had to be submitted when signing primary and compensation contracts.
Defense News contacted several OEMs who were penalized for breaching compensation terms, but they declined to be identified for the story, fearing it would upset their main customer, the Department of Defense. However, some OEMs have blamed the government for delays in implementing offsetting, citing excessive and rigid regulations as well as a lack of expertise and accountability within the DOMW.
Any offset policy where every second contract is penalized and prohibits the closure of contracts signed since 2007 will harm a country’s ability to do business, warned Mayank Patel, chief executive of Tri Polus, a consultancy based in London specializing in offsets.
Over the past five years, there have been 21 contracts for which clearing obligations have not been fulfilled on time. Minister of State for Defense Ajay Bhatt told lawmakers on April 4 that the Ministry of Defense had so far imposed a total of $43.5 million in penalties for 16 of those contracts.
Deepak Sangha, a former executive of the British branch of MBDA, said India’s approach to offsets does not benefit the nation and its defense industry in the long term economically. Sangha said OEMs face a lack of government flexibility when looking for minor deviations from stated or perceived guidelines. Moreover, the sanctions damage their reputation and could negatively impact opportunities elsewhere, he added.
Industry war games
Insighteon Consulting, a Delhi-based analytics firm, conducted a war game on Feb. 23-24 on penalization cases related to India’s offset contracts. He found that in the majority of cases, a breached offset agreement resulting in a penalty was due to either overambitious offset programs or ambiguity in policies.
The company also determined that a relationship based on trust and flexible compensation guidelines would have significantly reduced penalties.
Insighteon partner Rajiv Chib said wargaming experts recommend that in legacy situations, where compensation contracts have long expired, suppliers (or OEMs) be given a second chance to fulfill their compensation obligations. .
Chib also recommended that the ministry establish an empowered dispute resolution body, headed by a senior government official or seasoned industry professional, to facilitate this second chance.
The body’s objective would be to close out all expired compensation contracts – largely from before 2012 – and achieve the best possible result, as DOMW might find it difficult to play the role of both facilitator and of referee. An OEM’s second chance would fall under a new broad policy framework, in which the company is allowed to fulfill its offset obligations in accordance with the provisions of any government document of defense procurement procedure or procurement procedure defense.
According to the Department of Defence’s compensation guidelines, if a supplier fails to fulfill its offset obligation in a given year in accordance with the annual discharge plan, a penalty equivalent to 5% of the unfulfilled offset obligation will be imposed on the supplier. The unrealized compensation value will then be readjusted over the remaining term of the contract.
The compensation policy stipulates that the penalty may be paid by the supplier, recovered from the bank guarantee of the main supply contract, deducted from the amount payable under the main supply contract or recovered from the performance bond of the main supply contract. compensation.
The policy also states that any vendor that fails to meet offset obligations could be barred from participating in future defense contracts for up to five years.
The Department of Defense changed the offset threshold – the minimum contract value before offset agreements are considered – from $46 million to $305 million in 2016, in accordance with procurement rules. defense; from 2020, offsets have been excluded from agreements between governments.
This will eventually eliminate offsets related to Indian military purchases. However, the implementation of the current contracts will continue until 2033.
India introduced its offset policy in 2005. In the early years, smaller companies executed defense exports through offsets; the majority of these companies specialize in information technology or engineering.
Subsequently, several manufacturing companies had the opportunity to export components and sub-assembly parts, particularly in the aerospace sector. The policy was intended to require equipment suppliers to include local companies in their global supply chains.
Today, 220 domestic companies are listed with the MoD as Indian clearing partners.
Vivek Raghuvanshi is the Indian correspondent for Defense News.