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Breakout Session # 706 Name: Sandeep Verma, LLM Candidate 2009

Offset Contracts under Defence Procurement Regulations in India: Evolution, Challenges and Prospects. Breakout Session # 706 Name: Sandeep Verma, LLM Candidate 2009 The George Washington University Law School Date: April 8, 2009 Time: 11:30 am to 1:00 pm. Offset Contracts 101:.

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Breakout Session # 706 Name: Sandeep Verma, LLM Candidate 2009

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  1. Offset Contracts under Defence Procurement Regulations in India:Evolution, Challenges and Prospects Breakout Session # 706 Name: Sandeep Verma, LLM Candidate 2009 The George Washington University Law School Date: April 8, 2009 Time: 11:30 am to 1:00 pm

  2. Offset Contracts 101: Definitions requiring or encouraging private firms to purchase national products, either as a condition of access to government contracts or to improve those firms’ chances of obtaining government contracts Offsets and Quasi-Offsets Objective Industrial Base Mobilization Effects Increased cost of performance, impacting both parties Increased contract risk, for both parties

  3. Offset Contracts 101: DISCHARGE OF OFFSET OBLIGATIONS TYPES OF OFFSETS

  4. Offset Contracts 101: Choices for Buying Countries Quantum of offset obligations Types/ mix of Offset obligations Vehicles for discharge of obligations Differing K-types Fixed-Price-Type of Main Contract v. Cost-Type Offset Contract, resulting in differing stakeholder interests

  5. Offsets under the WTO: GATT (General Agreement on Tariffs and Trade) Countertrade Prohibition National Security and Government Procurement Exceptions GPA (Government Procurement Agreement); including GPA Revised Text Offset Prohibition National Security and Developing Country Exceptions Defence offsets as a GPA-compliant tool

  6. An Introduction to the Indian Defence Market: Third largest importer of defence hardware National Defence Budget: INR 960 billion in FY 07-08, increased to INR 1.056 trillion in FY 08-09; 2% of the global market Defence budget is 14.06% of the National {Federal} Budget; 2% of India’s GDP Capex 45.5%, roughly US$ 9-10 billion worth of imports every year Offsets pegged roughly @ 30% on applicable contracts

  7. Laying down the Analytical Framework—I: Offsets, Quasi-Offsets and Industrial Base Mobilization Costs of offsets Heightened contract costs and risks for parties Schooner’s “Desiderata of Procurement Reform” Efficiency, Uniformity, Best Value, Risk Avoidance Competition, Transparency, End-User Satisfaction, Socio-Economic Benefits, Integrity, Accountability

  8. Laying down the Analytical Framework—II: Issues with Offset Ks are generally K-performance kind of issues Indian defence procurements are generally Fixed-Price type of contracts Offset Ks are Cost-Type Ks embedded within a Fixed-Price K Restatement (Third) of Contracts, §1 A procurement system is only as good as the people who run it

  9. Laying down the Analytical Framework—III: Reforms must address the primary objective of mandating offset obligations Desiderata of Procurement Reform: Efficiency, Uniformity, Best Value, Risk Avoidance Within that objective, the push should be one to reduce contract risks Increasing transaction efficiency Reducing uncertainty and enhancing predictability Using risk-allocation principles

  10. Analyzing Offset Clauses in Indian Defence Procurement Regulations: Defence Procurement Procedures (DPP-05, DPP-06 and DPP-08) in terms of Evolution of Offsets, generally Applicability and Quantum Scope and Partnerships Offset Contract Administration Banking of Offset Credits Others

  11. Evolution of Offsets, generally: First introduced in 2005 (DPP-05) 30% of indicative cost of RFP for all Ks > INR 3 billion Concurrent with main-K period Infusion or providing of technical or financial assistance not permitted DPSU/OFB to monitor Amended in 2006 (DPP-06) Offsets restricted to “Buy (Global)” and “Buy-and-Make with ToT” Partnerships permitted with private industries manufacturing under an industrial license from DIPP DOFA set up as a specialized agency Amended once again in 2008 (DPP-08) Waiver of offsets under FTP procurements DIPP industrial license condition removed Banking of offsets permitted

  12. Regulatory Guidance on Applicability and Quantum—I: Applicability w.e.f. September 1, 2008 Cases-under-process re DPP-05 and DPP-06 DPP-08/¶ 77: “This procedure would be in supersession of the Defence Procurement Procedure, 2006. DPP-08 will come into effect from 01 September, 2008. There are, however, cases, which would be under various stages of processing in accordance with provisions of DPP-05 and DPP-06 at the time of commencement of DPP-08. The processing of these cases done under the earlier procedures will be deemed to be valid. Only those cases in which RFP is issued after 1stSeptember, 2008 will be processed as per DPP-08.” DPP-06/¶ 1.2 (Appendix D) dealing with consideration of change in 30% obligations stands deleted

  13. Regulatory Guidance on Applicability and Quantum—II: DPP-08/¶ 1.3 (Appendix D) - permissible grounds for mandating higher obligations (“but de facto”) strategic importance of the acquisition or the technology (also in DPP-06) ability of Indian defence industry to absorb the offset (also in DPP-06) export potential generated (also in DPP-06) type of acquisition DPP-06/¶ 2.5 (Appendix D) dealing with considering implementation of multipliers stands deleted; but see DPP-8/¶ 3.1(g) (Appendix D) (DOFA may advise on areas of preference for application of offsets) DPP-08/¶ 1.6 (Appendix D)- No offset obligations under FTP (cut-and-dry exemption; FTP detailed in Chapter IV of DPP-08)

  14. Evolving Applicability and Quantum: Upper Bound (unspecified) INR300 crores, 30% of main contract DPP-05 DPP-06 DPP-08 0%

  15. Regulatory Guidance on Scope and Partnerships—I: Direct purchase and export of goods and services Direct, Indirect or Semi-Direct? Eligible Indian Industries DPP-05/¶ 1 (Appendix H) - FDI in DPSUs, purchases from DPSUs/OFB DPP-06/¶ 2.1 (Appendix D) - licensed privates industries included for both FDI and purchases; FDI in Defence R&D in Indian organisations DPP-08/¶ 2.1 (Appendix D) - “under an industrial licence granted for such manufacture” phrase relating to private industries stands deleted

  16. Regulatory Guidance on Scope and Partnerships—II: Eligible Offset Activities ToT not included in discharge right from the beginning (DPP-05/¶ 2(f) of Offset Schedule) list of letters of intent/ industrial licenses issued for manufacture of items under defence industries (DPP-06: http://mod.nic.in/DOFA.htm#W6) list of defence products eligible for discharging offset obligations (DPP-08, Annexure VI to Appendix D) deletion of civil infrastructure from eligibility list {DPP-08/¶ 2.1(c) (Appendix D) compared with DPP-06/¶ 2.1(c ) (Appendix D)}

  17. Evolving Scope and Partnerships: Permitted Offset Activities DPP-05 DPP-06 DPP-08 DPSUs only DPSUs + Private Industry DPSUs + +

  18. Regulatory Guidance on DOFA—I: DOFA’s Principal Charter of Duties (DPP-06/¶ 3.1, Appendix D) Facilitate implementation of the offsets policy Assist in vetting of offset proposals technically Assist in monitoring the offset provisions Suggest improvements in the policy and procedures Interact with Headquarters Integrated Defence Staff and Service Headquarters Advise, in consultation with the Headquarters Integrated Defence Staff, Services and Defence Research and Development Organisation, areas in which offsets will be preferred Promote exports of defence products and services Provide advisory clarifications on the policy and procedures (in consultation with the Acquisition Wing wherever necessary) Last item deleted in DPP-08/¶ 3.1, Appendix D But now also to “assist potential vendors in interfacing with the Indian defence industry”

  19. Regulatory Guidance on DOFA—II: Other DOFA responsibilities Assist in monitoring the offset provisions (DPP-06/¶ 3.1(c), Appendix D; continued in DPP-08/¶ 3.1(d), Appendix D) Assist MoD’s Acquisition Manager in monitoring the implementation of offset provisions (DPP-06/¶ 10.1, Appendix D); this assistance to be now provided by MoD’s Offset Monitoring Cell (DPP-08/¶ 10.1, Appendix D) No role in re-phasing of offset obligations under DPP-06; but now DOFA to assist MoD’s Director-General (Acquisitions) (DPP-08/¶ 10.2, Appendix D) No role in “exceptional grounds” extension of offset K under DPP-06; but now to assist MoD’s Acquisition Wing (DPP-08/¶ 10.3, Appendix D)

  20. Regulatory Guidance on DOFA—III: Advisory role in identifying areas in which offsets will be preferred remains on board (DPP-08/¶3.1(g), Appendix D), but see(deleted) DPP-06/¶ 2.5, Appendix D relating to multipliers No role in banking of offset credits, except that certifying authority JS(X) is also Chairman, DOFA DOFA’s composition (DPP-06/¶ 3.2, Appendix D, now deleted) Joint Secretary to Government, DDP (MoD) Reps from Service HQrs, HQ IDS, DRDO, DPSUs, and OFB Reps from CII, FICCI and ASSOCHAM Reps from other agencies

  21. Offset Contract Administration: K-Extension or Compression K-Formation Force Majeure K-Administration 2005 MoD DOFA DOFA 2006  2008

  22. Regulatory Guidance on Banking of Offset Credits—I: DPP-06 only contracts for export of defence products or services or investment made after the signing of the main contract would be reckoned for discharging offset obligations (¶ 6.4, Appendix D) DPP-08 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 sub-contractors 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 (¶ 2.1(d), Appendix D) If a vendor is able to create more offsets than his obligations under a particular contract, the surplus offset credits can be banked and would remain valid for the period of two financial years after conclusion of the said contract. The surplus offset credits would be valid for discharge against the new RFPs which would be floated within this period (¶ 5, Annexure 7 to Appendix D). The banked offset credits are non-transferable except between the main contractor and his sub-contractors within the same acquisition programme (¶ 3, Annexure 7 to Appendix D)

  23. Regulatory Guidance on Banking of Offset Credits—II: Retrospective Application of Offset Banking Provisions Offset banking will be permitted from the day DPP-08 comes in to effect (¶ 1, Annexure 7 to Appendix D) But see DPP-08/¶ 77: “This procedure would be in supersession of the Defence Procurement Procedure, 2006. DPP-08 will come into effect from 01 September, 2008. There are, however, cases, which would be under various stages of processing in accordance with provisions of DPP-05 and DPP-06 at the time of commencement of DPP-08. The processing of these cases done under the earlier procedures will be deemed to be valid. Only those cases in which RFP is issued after 1stSeptember, 2008 will be processed as per DPP-08.”

  24. Regulatory Guidance on Banking of Offset Credits—III: A vendor will be 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 (¶ 4, Annexure 7 to Appendix D) Possible issues on the table Valuation and Certification Registration and Verification Dispute-handling Main K, Offset K Government and Primes; Primes and Subs Timing issues re Approvals: incentives and disincentives Withdrawals, Splits, Trade

  25. Other Issues: Dispute Resolution Mechanisms Overall K, Offset Ks Efficiency v. Uniformity– Private Arbitration v. Administrative Tribunals Trading of Offset Credits Efficiency concerns v. “per se” offset objectives FTP exemptions from offset obligation Penalties and disincentives for non-performance

  26. Thank You sverma@law.gwu.edu sverma@rajasthan.gov.in

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