Monday, January 24, 2022

Explained: What Are The Offset Obligations For Which Rafale-Maker Dassault Aviation & Missile Giant MBDA Have Drawn India’s Wrath?

The Indian government has fined French business Dassault Aviation for delays on offset commitments tied to a 2016 deal for 36 Rafale fighter jets, The Times of India reported. 

India first adopted an offset policy for defense capital purchases in 2005. This required that for all capital acquisitions above Rs 300 crore acquired through imports, the foreign vendor had to invest at least 30% of the purchase price in India.

This investment was intended to bolster India’s defense and aerospace industries. The vendor has a number of options for addressing these offset commitments.

Dassault Rafale - Wikipedia
Dassault Rafale – Wikipedia

In September 2016, Paris and New Delhi inked a contract worth €7.8 billion ($8.8 billion). The recent fine was apparently “imposed and collected” from MBDA, the missile manufacturer that supplies the Rafale jets’ weapons packages.

The Meteor air-to-air missile and the Scalp cruise missile, both manufactured by MBDA, are the mainstays of the Rafale fighters’ weapon kit.

Under the terms of the agreement, 50 percent of the contract value (roughly Rs 30,000 crore) must be returned to India in the form of offsets or reinvestment. The offsets in the Rafale agreement are stretched out over a seven-year period, with no discharge in the first three years.

What Are The Offset Commitments?

Aside from the inter-governmental agreement and procurement procedures for fighters and weaponry, India has also signed a big offsets contract with Dassault and a smaller one with its partner MBDA.

MBDA was fined after it failed to meet its offset commitments for the first applicable year from September 2019 to September 2020, The Times of India reported

The foreign firms collaborated with India’s Defence Research and Development Organisation (DRDO) and more than 70 Indian companies to execute the offset.  According to Defense News, the DRDO is looking for technologies relating to stealth capabilities, radar, aerospace engines, missile thrust vectoring, and electronic materials from French companies. 

Meteor (missile) - Wikipedia

The penalty will come from a €185 million bank guarantee provided by Dassault Aviation as security against contractual infringement, top defense sources told TOI. The amount of the penalty levied, as well as the specific details of the obstacles impeding the execution of the offset responsibilities, are not revealed.

Manufacturers can fulfill offsets by buying linked goods or services from Indian suppliers, investing in India’s defense industry, or sharing sophisticated technology, according to the Ministry of Defense’s policy. 

Previously, the Comptroller and Auditor General of India (CAG) has criticized Dassault Aviation and MBDA for failing to meet their offset commitments under the Rafale agreement, which included transferring high-end technology to DRDO.

CAG noted that in numerous cases, foreign suppliers agreed to different offset obligations in order to qualify for the primary supply contract, but then failed to follow through on their commitments.

dassault-aviation
File Image Via Dassault Aviation

The report further added that in the offset contract for 36 Medium Multi-Role Combat Aircraft (MMRCA), for example, the suppliers, Dassault Aviation and MBDA, first offered (September 2015) to discharge 30% of their offset obligation by delivering high technology to DRDO.

The DRDO sought technical assistance for the development of an indigenous engine for the Light Combat Aircraft. The vendor has not confirmed the technology transfer to date.

Additionally, French Defense Minister Florence Parly met her Indian counterpart Rajnath Singh on December 17 to further strengthen Indo-French strategic and defense ties. During the 3rd annual dialogue, the MoD reportedly signaled that many French defense firms are not cooperating in the transfer of technology to DRDO. It was reported that the French companies have argued that Indian firms expecting technology transfers lack the essential core competencies. 

The fine imposed on MBDA is presumably less than Euro 1 million, with 5% of the shortfall in the discharge of offsets in a given year being collected as a penalty. Moreover, the gap has been carried over to the second year; the matter will be reviewed once more, according to reports. The company has also filed a protest with the Defense Ministry. 

Lapses On The Part Of Foreign Companies?

The Times of India reported earlier in August that the Ministry of Defense is cracking down on foreign armament companies that fail to meet their offset responsibilities, putting a dozen American, French, Russian, and Israeli companies on a watch-list.

The Ministry of Defense has warned underperforming firms that their existing performance bank guarantees may be revoked and that scheduled payments to them may be deducted. Four to five companies have already paid the penalties required to remove themselves from the watch list. 

Experts believe that India’s offset program also needs to be addressed carefully, as international companies frequently complain about difficulties in fulfilling their obligations.

Amit Cowshish, a former financial adviser for acquisitions at the MoD and presently on the panel with The EurAsian Times had earlier said: “It is well known that the original equipment manufacturers (OEMs) have been facing difficulty in discharging their offset obligations. This may partly be on account of the policy.” 

He suggested that the ministry should engage with OEMs to find out what problems they’re having and then take appropriate measures.

Rafale at Aero India 2017 - Wikimedia Commons
Rafale at Aero India 2017 – Wikimedia Commons

The CAG report, which was presented in Parliament in September last year, also advocated for a complete overhaul of the entire offsets policy, stating that it had barely attained the objectives” of inducting sophisticated technologies, attracting FDI, and strengthening the local defense industrial base.

CAG also stated that between 2005 and March 2018, 46 offset contracts worth Rs 66,427 crore were inked with overseas vendors. Vendors would have had to discharge Rs 19,223 crore in offsets by December 2018 to meet the commitments. However, only 59% of the total amount was discharged. 

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