Defence offset policy performance dismal: CAG

Apex auditor Comptroller and Auditor General of India (CAG) has found that the performance of the central government's Offset Policy for Defence capital purchases since it was introduced 15 years ago, has been dismal.

Of the 46 contracts of offset commitments worth Rs 66,427 crores made by foreign vendors from 2005 till March 2018, only Rs 11,396 crore has been claimed, the CAG's Performance Audit Report on Management of Defence Offsets presented in the Parliament on September 23 said.

The fulfilment of the remaining commitment of Rs 55,000 crore by 2024, the year of completion, remains a major challenge, the auditor noted.   

Incidentally, even the offsets claimed to have been discharged by vendors have not been completely accepted by the ministry. "Only 48 per cent (Rs 5,457 crore) of these offset claims submitted by the vendors were accepted. The rest were largely rejected as they were not compliant to the contractual conditions and the Defence Procurement Procedure," the auditor said.  

In 2005, India adopted the Offset Policy for Defence capital purchases. This meant that for all capital purchases above Rs 300 crore made through imports, the foreign vendor was required to invest at least 30 per cent of the value of the purchase, in India. This investment was to be made in the Indian Defence and Aerospace sector. Various avenues were available to the vendor to discharge these offset obligations. This included Foreign Direct Investment, offering of free Transfer of Technology to Indian firms, purchase of eligible products manufactured by Indian firms (exports) etc. For the discharge of these offsets, the foreign vendor had to select an Indian firm as a partner (Indian Offsets Partner or IOPs).  

The Performance Audit was undertaken after a decade of Offset Policy implementation to assess the extent to which the above objectives were met.  

The CAG which test checked claims valuing Rs 2,710.98 crore submitted by vendors relating to 17 contracts in detail had found that only claims valuing Rs 409.83 crore were passed by the ministry (i.e. only 15 per cent) and the remaining claims were rejected due to various deficiencies including absence of essential details/documents like shipping bill, bill of lading etc. which are proof of the transaction.  

The auditor also observed that despite vendors failing to keep up their offset commitments, there was no effective means of penalising them. "Non-fulfilment of offset obligations by the vendor especially when the contract period of the main procurement is over is a direct benefit to the vendor", the report noted.

The analysis of the implementation of Offsets in terms of the various avenues of investment found that 90 per cent of the investment by the vendors was in the form of direct purchase of goods and services from the Indian industry. " Audit did not find a single case where the foreign vendor had transferred high technology to the Indian industry. The defence sector is ranked 62nd out of the 63 sectors in India in terms of FDI. Similarly, there was hardly any equipment supplied 'in kind' to the Indian industry by the foreign vendor. Thus, the objectives of the offset policy remain largely unachieved, even after more than a decade of its adoption", it said.  

It was also found that the foreign vendors made various offset commitments to qualify for the main supply contract but later, were not earnest about fulfilling these commitments. "In the offset contract relating to 36 Medium Multi Role Combat Aircraft (MMRCA), the vendors Dassault Aviation and MBDA initially proposed (September 2015) to discharge 30 per cent of their offset obligation by offering high technology to DRDO. DRDO wanted to obtain Technical Assistance for the indigenous development of engine (Kaveri) for the Light Combat Aircraft. Till date the Vendor has not confirmed the transfer of this technology", CAG observes.   

It was also found that despite all these changes made to the policy from time to time, the offset implementations by the vendors did not pick up significantly. "Offsets on the other hand delayed the main capital purchase because of the delay in evaluating the offset bids submitted by the vendors along with the main bid. This was primarily because the vendors could not submit the offset proposals according to the requirements of the DPP.  The repeated amendments also created ambiguity and uncertainty in the offset implementation".

Observing that the offset policy has not yielded the desired result, the CAG wanted the Defence Ministry to review the policy and its implementation.

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