SOURCE LIVEMINT The ministry of defence (MoD) may relax certain offset provisions that will be applicable to the proposed $10.8 billion order to buy 126 medium multi-role combat aircraft (MMRCA) for the Indian Air Force (IAF), according to two people with direct knowledge of the matter.
An indication to this effect was conveyed to all the six companies that are in contention for the contract, in a letter sent on 4 April, according to the people cited above. The letter had invited the companies participating in the contract to send in their offset proposals by 17 April.
Under its defence procurement procedure, India imposes counter-trade obligations on original equipment manufacturers (OEMs) that are awarded defence contracts worth more than Rs.300 crore by way of transfer of critical
technologies and production of components in India.
To meet this obligation, foreign vendors partner with Indian firms. At present, the offset obligation for the MMRCA contract is 50%, which roughly translates into a possible $5 billion worth of business being generated via the offset route.
The two people said that the MoD has formally allowed all six foreign contractors in the race for the deal to fulfil their offset obligations, in part, via the tier-1 foreign sub-contractors executing their projects.
The people cited above said that the MoD has formally allowed “tripartite memoranda of understanding (MoUs)” to be signed among the primary vendor, the sub-contractor and the Indian company that the vendor or sub-contractor may partner in order to fulfil offset obligations.
“In other words, any offset obligation fulfilled, say by an engine supplier, would be treated as having been fulfilled by the primary contractor who is selling the aircraft to the Indian government,” one of the two people cited above said. This person also said that the OEM will have to take a guarantee for the subcontractors executing the offset contract, failing which the OEM will be held liable for penalties.
In fact, industry officials point out that a similar practice “had been informally on” for several defence projects between 2007 and 2009, but some MoD officials in the defence offsets facilitation agency (DOFA) had raised objections to this in 2010.
In another anticipated change, the MoD may extend the maximum period allowed for fulfilment of offset obligations by five years for the jet deal. “The present regulations mandate the vendor to complete the offset requirements during the period within which the contract is being executed. This could be extended by two to five years,” said a second person.
Industry officials said that the MoD could come up with a fresh set of guidelines on defence offsets in the next few weeks.
Six foreign defence companies—Boeing and Lockheed Martin of the US, RSK MiG Russia, Dassault of France, SAAB of Sweden and EADS, a consortium of several European countries, are competing in the project billed as the single largest defence contract that India is likely to award.
Industry officials and analysts said that these changes, if effected, would be a positive step. “Foreign defence vendors had been asking the government for these relaxations for a while now, and this is a welcome step,” said retired colonel and defence analyst Rajiv Chib of PricewaterhouseCoopers India.
An indication to this effect was conveyed to all the six companies that are in contention for the contract, in a letter sent on 4 April, according to the people cited above. The letter had invited the companies participating in the contract to send in their offset proposals by 17 April.
Under its defence procurement procedure, India imposes counter-trade obligations on original equipment manufacturers (OEMs) that are awarded defence contracts worth more than Rs.300 crore by way of transfer of critical
technologies and production of components in India.
To meet this obligation, foreign vendors partner with Indian firms. At present, the offset obligation for the MMRCA contract is 50%, which roughly translates into a possible $5 billion worth of business being generated via the offset route.
The two people said that the MoD has formally allowed all six foreign contractors in the race for the deal to fulfil their offset obligations, in part, via the tier-1 foreign sub-contractors executing their projects.
The people cited above said that the MoD has formally allowed “tripartite memoranda of understanding (MoUs)” to be signed among the primary vendor, the sub-contractor and the Indian company that the vendor or sub-contractor may partner in order to fulfil offset obligations.
“In other words, any offset obligation fulfilled, say by an engine supplier, would be treated as having been fulfilled by the primary contractor who is selling the aircraft to the Indian government,” one of the two people cited above said. This person also said that the OEM will have to take a guarantee for the subcontractors executing the offset contract, failing which the OEM will be held liable for penalties.
In fact, industry officials point out that a similar practice “had been informally on” for several defence projects between 2007 and 2009, but some MoD officials in the defence offsets facilitation agency (DOFA) had raised objections to this in 2010.
In another anticipated change, the MoD may extend the maximum period allowed for fulfilment of offset obligations by five years for the jet deal. “The present regulations mandate the vendor to complete the offset requirements during the period within which the contract is being executed. This could be extended by two to five years,” said a second person.
Industry officials said that the MoD could come up with a fresh set of guidelines on defence offsets in the next few weeks.
Six foreign defence companies—Boeing and Lockheed Martin of the US, RSK MiG Russia, Dassault of France, SAAB of Sweden and EADS, a consortium of several European countries, are competing in the project billed as the single largest defence contract that India is likely to award.
Industry officials and analysts said that these changes, if effected, would be a positive step. “Foreign defence vendors had been asking the government for these relaxations for a while now, and this is a welcome step,” said retired colonel and defence analyst Rajiv Chib of PricewaterhouseCoopers India.
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