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Draft DPP 2020 - Legacy Issues in Offset Guidelines

Mr Amit Cowshish is a former Financial Advisor (Acquisition), Ministry of Defence and former Distinguished Fellow, Manohar Parrikar Institute for Defence Studies and Analyses, New Delhi. Click here for Detailed Profile
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  • April 30, 2020

    The defence offset guidelines included in the draft Defence Procurement Procedure (DPP) 20201 is different in many ways than the elaborate guidelines promulgated in July 20122 and amended several times since then, most recently in November 2019.3

    Some policy changes proposed in the draft have attracted great attention. The exemption of single vendor cases covered by the inter-governmental agreements and Foreign Military Sales programme, for example, is a major perplexing shift in the policy as it will greatly shrink the offset-related business opportunities available to the Indian defence companies, especially the micro, small and medium enterprises.

    Deletion of ‘services’ as an avenue for discharging the offset obligation will also have the same effect, apart from restricting the options for the foreign vendors, who will also be impacted by the change in the system of multipliers and, most importantly, by the withdrawal of the provision for offset banking. It is not clear what now will happen to the already banked offsets, and banking proposals already in the pipeline or in the process of being submitted.

    The existing guidelines require the offset obligation to be discharged within a time frame extendable by a maximum of two years beyond the period of performance (PoP) of the main procurement contract. The PoP includes the warranty period of the equipment being procured under the main contract, effectively expanding the PoP beyond two years.

    The benefit of the warranty period being reckoned as a part of the PoP of the main contract is now proposed to be withdrawn. With there being no cap on the imposition of the penalty for non-performance of the offset contract beyond the PoP, the vendors will come under greater pressure and face uncertain liability in the event of failure to discharge offsets within time.

    There are some other proposed policy and procedural changes which are debatable on account of their underlying intent or textual ambiguity, but it is some of the legacy issues, especially the ones which have a bearing on the performance of the offset contract, which surprisingly remains unaddressed.

    First, the preamble of the model offset contract requires the vendor to undertake that he “understands and agrees to the Offset Clause given in the RFP and the Defence Offset Guidelines at Appendix-D of Chapter-II of the DPP, referred to as the Defence Offset guidelines.”4 (italics added) The blanket reference to the aforesaid appendix in the offset contract makes it open-ended.

    Ideally, all contracts should have an ‘entire agreement clause’ signifying that “the parties agree that the terms of the contract between them are to be found within the text of the contract document and nowhere else.”5 Every contract must be complete in itself to obviate interpretational disputes. This also requires a mention being made of all clauses of the main contract that are applicable to offsets in the offset contract itself.

    Second, the existing provision relating to the settlement of differences and disputes has been amended. It now provides that “any differences or disputes with vendors will be settled through discussion and, if not resolved, will be referred to the Independent Monitors (IMs) for advice with the approval of Secretary (Defence Production). IMs would provide their advice preferably within 02 months” and that the “decision of the Acquisition Wing and of the DOMW6 in respect of matters relating to offsets within their respective jurisdiction shall be final.”7This is not in harmony with the arbitration clause of the main contract which is also applicable to the offset contracts.8

    Fourth, the format for the submission of technical offset offer (along with the commercial offset offer) by the date stipulated in the request for proposal requires the vendor to give details of the avenues for the discharge of the offset obligation, the Indian offset partners (IOPs) through which the obligation will be discharged, timeframe for discharge, etc. The format needs to be synchronised with the following provision which allows the vendor other options.

    The provision in question says that the vendor is “expected to provide details pertaining to IOP wise work share, specific products and supporting documents indicating eligibility of IOPs in addition to conformity with other clauses in the offset guidelines” to the Technical Offset Evaluation Committee (TOEC) and if he is “unable to provide these details at the time of the TOEC, the same may be provided to DOMW either at the time of seeking offset credits or one year prior to discharge of offset obligations through that IOP.”9

    Fifth, considering the stringent penalties for default in discharging the offset obligation, it is important that there is no ambiguity in the provisions related to acceptance of the offset claim and affording of credit to the vendor. The provision in the draft DPP 2020 says that the “DOMW shall convey discharge of offsets to the vendors” on “approval of offset claims by the competent authority from time to time.”10 This is vague and can cause problems for the vendor, especially if a claim is rejected belatedly, putting him under pressure to make up for the rejected claim and, in addition, rendering him liable to pay penalty.

    Sixth, there is a provision which empowers the DOMW to have the actual status of implementation of offsets verified/audited by a nominated officer or agency on submission of the offset discharge claim.11 This entails an element of uncertainty, even risk, for the vendors. It will enable the vendors to submit audit-compliant claims if the audit drill followed by the auditing agency is notified.

    A provision also needs to be made to enable the vendors to interact with the auditing agency to offer clarification on audit observations. This will also expedite the processing of the claims and add to the transparency in the system. It would be useful if an audit report, with necessary redaction, is released by the auditing agency/Ministry of Defence every six months or so.

    Seventh, considering that the offset guidelines clear specify – or, at any rate, should specify, the criteria for selection of IOPs by the vendors, the admissible avenues for the discharge of the offset obligations, etc., the need for MoD’s prior approval of proposals for rephasing of the offset implementation schedule and change of IOPs requires reconsideration.

    It is not clear what value this opaque control by the MoD adds to the process.12 On the contrary, it can disrupt the vendor’s momentum and deny him flexibility in discharging the offset obligation for which he, and he alone, is responsible.

    It would be advisable to review the proposed offset guidelines keeping in view the feedback from the industry, especially the foreign vendors who carry the primary obligation to execute the offset contract, as also the legacy issues, some of which have been highlighted above.

    Views expressed are of the author and do not necessarily reflect the views of the Manohar Parrikar IDSA or of the Government of India.