DEFINING PERMISSIBLE OFFSETS DISCUSSION ON OFFSET POLICY MINISTRY OF DEFENCE, INDIA

Transcription

1 DEFINING PERMISSIBLE OFFSETS DISCUSSION ON OFFSET POLICY MINISTRY OF DEFENCE, INDIA

2 HISTORICAL PERESPECTIVE Post Independence Defence Industry with Public Sector only. Private Industry in partnership with DRDO/PSUs backward linkages significant role. May 2001 Defence sector removed from reserved category and transferred to Licenced Category. Opened up 100% for private industry participation, limited to 26% FDI. Objective :: Harnessing Expertise in the private sector towards total defence exports and search of Self reliance.

3 HISTORICAL PERESPECTIVE Kelkar Ctte recommended Offset Policy in 2005 as one of the instruments to boost exports DPP was amended in 2005 and then in July 2006 to accommodate offsets DPP 2006 incorporated Offset Guidelines Existing Policy framed for Modernisation Self reliance Growth in Industrial Base DPP 2008 revised to incorporate aspirations of Industry; DPP 2011 REFINED AND EXPANDED SCOPE

4 Offsets and India Offsets as leverages to promote local Industry has existed in defence sector all over the world in one form or the other. Various options such as Licenced production, ToT, Co-development, FDI have always been integral to the Indian defence procurement process. Offset policy demands Direct Offsets Policy tailor made to suit Indian requirement Best Global practices in Offsets are known to us not a good idea to pick one and put in here. No conditions attached.

5 Strengths of Our Policy Simple policy no frills Demands Direct Offsets Easy to understand and Implement Simple for Foreign vendor and Indian Industry as well as for MoD to monitor Freedom to Foreign vendor within the scope MoD not interfering with selection of vendors or of Programmes of the foreign vendor. Encourages sound relationships between Foreign and domestic industry Expanded scope for easy discharge by OEMs more Indian companies can participate

6 Scope :: Offset Policy All Capital Acqns in BUY or Buy and Make category Threshold 300 Crs($ 66 Mln) Uniform value of only 30% offsets. 30% of Buy value 30% of Foreign Exchange component of Buy and Make Value higher than 30% can also be prescribed (as in case of 50%) Provisions also apply to warship construction where gestation periods are longer and there are a number of individual contracts.

7 Discharge Of Offset Obligations-11 How - Direct purchase/execution of export orders For What? - for, eligible products and components In What?- Manufacture, services and Training By Whom? Indian industries Who are Indian Industries - DPSUs, OFB and any private industry conforming to guidelines issued by DIPP, with eligible products. Services. Maintenance, overhaul, up-gradation, life extension, engineering, design, testing, defence related software or quality assurance services and Training.

8 Discharge Of Offset Obligations Direct foreign investment in industrial infrastructure for engaged in research in defence R & D as certified by For R&D investment in civil infrastructure and for those Discharge of Offset obligations can also be through :- services, co-development, joint ventures and coproduction of eligible products and components. Direct foreign investment in Indian organisations DOFA. technologies that are otherwise available are not counted Co-Terminus Application. Offset obligations are to be fulfilled coterminous within the period of main contract.

9 How can you discharge offsets Offset Banking Direct Purchase of Eligible Services Direct purchase of Eligible Products Methods of Discharge of Offsets Execution of Export orders FDI in Defence R&D FDI in Eligible Infrastru cture Defence Services maintenance, overhaul, up gradation, life extension, engineering, design, testing, defense related software quality assurance training, including simulators Offset Banking- In DPP 2008, provisions allowing foreign vendors to create offset programs in anticipation of future obligations and Banking of offset credits from such programs were introduced. A vendor is able to discharge the banked offset credits for the RFPs which are issued within the two financial years of the date of approval of the banked offset credits.

10 Rules of Engagement (DPP 2011) On What? Buy Global Buy & Make Global Program Cost > Rs. 300Cr. Minimum 30% of Contract value, could be higher. (MMRCA) Rules All Offset offers which satisfy the minimum eligibility, will be placed at par. Offset Contract is co-terminus with Main Contract Penalty of 5% on unfulfilled portion of Offset Obligation Indian Offset Partner Defence Products- Same as DPP 2008 *Civil Aerospace- 100% FDI allowed. Internal Security Products- Clarity is required India follows a middle path for Implementing Offsets. The OEM is not restricted to the Platform that it is supplying, however at the same time it can discharge its offset obligation only through Eligible Products & Services

11 Indian Defence Industries Significant change The Indian Offset partner shall, besides any other extant regulations in force, also comply with the guidelines/licencing requirements for the Indian industry issued by the Department of Industrial Policy and Promotion. No requirement of IL for offsets implied; unless otherwise mandated

12 What we think will happen Equity infusion in KIND TOT permitted as Offsets Introduction of Multipliers Extension in Offset Banking validity Capping of Offset Penalty Change in Offset Partners Removal of Co-terminous clause

13 Managing a Dynamic Offset Policy 1.Direct Purchase :: invoice, PO, bank reconciliation 2.Execute Export Orders :: causality,..do 3.Services :: commitment, tripartite agreements, price escalation formula,..do 4. DFI in Industrial Infrastructure :: FIPB approval if required ( not in all cases), FDI instruments, extant regulations if any be specified do 5. DFI in R&D ::..do.. 6.Creating Banking proposals in any of above :: time bound approvals are required, monitoring is on the same format as is for the other proposals

14 Products for Internal Security Also includes Arms and their ammunition including all types of close quarter weapons. Protective Equipment for Security personnel including body armor and helmets. Vehicles for internal security purposes including armored vehicles, bullet proof vehicles and mine protected vehicles. Riot control equipment and protective as well as riot control vehicles. Specialized equipment for surveillance including hand held devices and unmanned aerial vehicles. Equipment and devices for night fighting capability including night vision devices. Navigational and communications equipment including for secure communications. Specialized counter terrorism equipment and gear, assault platforms, detection devices, breaching gear, etc. Training aids including simulators and simulation equipment.

15 Also includes Civil Aerospace Products D&D, Manufacture, upgrade of all types of fixed and rotary wing ac or their airframes, aero-engines, avionics, instruments and related components Composites, forgings and castings for their products Training aids(viz simulators) associated eqpt, software and comtr based modules Guidance and Navig equipment Test facilities and eqpt required for testing, certification, qualification and caliberation of above products Software specially designed, developed or modified for above products

16 Banking of Offset Credits Foreign vendors could consider creation of offset programmes in anticipation of future obligations. Offset credits so acquired can be banked and discharged against future contracts. Banked offset credits would not be transferable except between the main contractor and his subcontractors within the same acquisition programme. The main contractor would be required to submit a list of such sub-contractors at the time of signing the contract.

17 Banking of Offset Credits Proposals for banking of offsets will be submitted to the Joint Secy(ES) by the vendor. Format given in the DPP. A unique Project Identification Number would be allotted to each proposal. Offset banking proposals will be in conformity with the valid discharge of offset obligations Validity of Credits two Financial years, cut off date 01 Apr and 01 Oct. In case of Investment in Indian defence industry and R&D, the related foreign investment should remain valid and active throughout the duration of the MoD contract

18 Offset Banking- How? Complete the form as provided in Annexure- III to Appendix-D Submit the said form to Joint Secretary (ES) Approval from the MoD Inform the Offset Monitoring Cell about the RFP against which the Credits are to be used. Submit report on implementation as per Annexure-V, every 6 months, to the Offset Monitoring Cell. Allotment of Unique Identification Number after approval Rules Of Engagement A vendor will be able to discharge the banked offset credits for the RFP s which are issued within 2 Financial years of the sate of approval of the banked offset credits. The cut off date would be 1 st April and 1 st October of the Financial year. Example: Offset credits which have been banked on or after 1 st April 2009 would be valid for discharge against RFP s issued up to 30 th September Similarly Offset credits banked on or after 1 st October 2009, would be valid for discharge against RFP s issued up to 31 st march The Banked offset credits are non-transferable, except between the main contractor and his subcontractors within the same acquisition program. Wherever the Offset Banking is done by way of investment in Indian defence industry and R&D, the related foreign investment should remain valid and active throughout the duration of the MoD contract in relation to the RFP.

19 Offset Banking-Procedure (Forms)

20 Indian Offset Partners- Please keep in mind Post RFP is when the real work starts Offset proposal is submitted 12 weeks post submission of RFP response and not simultaneously Initially only a MoU is sufficient The initial Offset proposal undergoes multiple revisions during the TOEC stage. CNC is final stage for Offsets also During the CNC stage, a final and practical Offset proposal is submitted. At most times, this will be very different from the initial proposal. Keep in mind Para 6.4 of the Offset policy If the IOP is importing any of the contents of an Offset product, the OEM should be informed at the beginning itself. Tier-1 s are permitted to discharge Offsets. There is always more Offset work available from the Tier-1 s than from the OEM.

21 Offsets Facilitation To facilitate the MoD has established a DOFA to play an active role in helping the process. DOFA will assist potential vendors in interfacing with the Indian defence industry identifying potential offset products/ projects provide requisite data and information for this purpose. Chairperson Joint Secy(Exports) Directorate of P&C to coordinate Members drawn from all disciplines and services

22 Defence Offsets Facilitation Agency (DOFA) Under the offset guidelines a Defence Offset Facilitation Agency (DOFA) has been set up with JS(ES) as the chairperson. DOFA is a multi disciplinary organisation with representatives from the Army, Navy, Airforce, Integrated HQs, DRDO, DPSUs and Industry Associations

23 Envisaged Role DOFA s will assist potential vendors in interfacing with the Indian defence industry for identifying potential offset products/ projects as well as provide requisite data and information for this purpose.

24 Charter of DOFA Facilitate implementation of offsets policy. Assist in technical vetting of offset proposals. Assist in monitoring the offset provisions. Suggest improvements in the policy and procedures. Advise CNC in conformance of offset proposals. Interact with Headquarters Integrated Defence Services and Service Headquarters. Advise on areas in which offsets will be preferred.

25 Charter of DOFA Promote exports of defence products and services. Set up committees and sub groups for studies and evaluation when required. Engage reputed professional expert bodies to assist in its functions and commission studies by such bodies on offset policies, their implementation, utility and impact as needed.

26 MODUS OPERANDI AON Stage. SCAPCHC recommends application of Offset clause for proposals more that 300 Cr and DAC takes the final decision. This condition will form part of RFP and finally of the contract. Solicitation Of Offers. Vendor gives undertaking to meet the Offset obligation in the RFP BINDING; along with technical offer. TEC Stage. Single stage two bid system. Submission of Technical offers and their evaluation. Vendor is free to select Indian Offset Partner. For products with import components, only value addition in India will count towards offset obligations.

27 MODUS OPERANDI Submission of Offset Offers. These will be opened along with main commercial offer. DOFA will evaluate and give recommendations to CNC 4 weeks. Vendor can modify his commercial offer at CNC stage. Examination of Offset offers. To be examined in two stages, one for fulfillment of mandatory requirement and qualification for opening of commercial bid. CNC to incl official from DOFA. Commercial Offset offer to be examined with commercial bid, if satisfactory, L1 vendor is invited to sign main and offset contract.

28 Offset Process Offset Requirement: Part-1 of the RFP Submission of Offset Compliance Commitment- With RFP submission Technical & Commercial Offset offers in Separate Envelopes- Within 12 weeks Evaluation of Commercial Offset Offer by CNC- only for L-1 Acceptance by DG Acq. Evaluation by TOEC & Revised Submission- If required Signing of Main contract & Offset Contract Execution of Main & Offset Contracts. Total Time: weeks

29 CONTENTS AND MONITORING Contents. Model contract shown can be varied dependent upon facts and circumstances of each case. Offset contract to be signed simultaneously with main contract. Vendor will not under any circumstance delay execution of main contract under plea of failure by Indian defence industries to execute various offset contracts. Monitoring. Quarterly reports by vendor to Acqn Manager Monitoring Cell to assist. Audit by nominated official if necessary to confirm actual status. Rephasing by vendor only with approval of DG Acqn. Extensions duly considered by DG Acqn will be granted by DPB and DAC.

30 CONTENTS AND MONITORING Penalties. If a vendor fails to fulfill the offset obligation in a particular year, penalty equivalent to the unperformed offset obligation will be levied ( 5%). Unfulfilled offset value will be carried forward to the subsequent year. Vendor failing to implement the full offset obligations during the period of the main contract (or duly extended) will be liable to be disqualified for participation in future defence contracts. Any differences or disputes will be settled through discussions. Decision of acquisition wing will be final.

31 Govt Bodies Associated with Offsets MoD MoF MoC Defence Offset Facilitation Agency (DOFA) DOFA, was established to facilitate: Implementation of offset policy Evaluation of offset proposals Assistance to vendors to interface with industry to identify potential offset products or projects Keeping an account of the progress of offset contracts Keeping track of offset banking Provision of policy clarification and refinement Assist in monitoring the offset provisions DOFA is headed by the Joint Secretary (ES), with the Directorate Planning and co-ordination in DDP providing secretarial assistance. Foreign Investment Promotion Board (FIPB) The FIPB is a government body that offers : a single window clearance for proposals on foreign direct investment in the country that are not allowed access through the automatic route this high powered body discusses and examines proposals for foreign investment in the country for restricted sectors ( as laid out in the Press notes and extant foreign investment policy) on a regular basis. Currently proposals for investment beyond 600 crores require the concurrence of the CCEA. Directorate Of Industrial Policy & Promotion (DIPP) The DIPP is a government body that offers Provides an Industrial License (IL) for undertaking manufacturing activities in Restricted Sectors. It is assisted by the Sect. Of Industrial Assistance (SIA). The SIA is also responsible for the Issuance of Press Notes from time to time. While issuing licenses, the DIPP also takes into account views of the other concerned ministries. Approvals for SEZ s is provided for by the BOA which is covered under the Ministry of Commerce, consultation is taken from all concerned ministries.

32 ANALYSIS DPSUs and Private industry have equal access to Offsets level playing field Manufacturing and Services sector evenly involved IAF Base Repair Depot also a beneficiary Software services have got requisite focus foreign vendors have started to engage them too.

33 A look into the Future FDI At present it is 26%. What is the course ahead and possibility of increase in limit ToT Is there a possibility of it being treated as OFFSETS Multipli er In what form can it be possibly included in the Offset process Applica bility Will the New Offset policy have retrospective eff DOFA With the increased number of Capital acquisitions, there is a need to re-organize and strengthen DOFA

34 A look into the Future Co term Coterminus application less time for discharge DFI FDI How to address investment in kind Prime Prime contractor Vs the supply chain SME Silicon Valley Phenomenon how to energise Long Period Long gestation offsets structuring early in the process can it be delayed; is Tech Offset Offer necessary at all..

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