CAG Report on Offset

The CAG has pulled up the MoD for allowing the selection of ineligible offsets partners for the offset contracts in cases in which the purported Indian Offsets Partner (IOP) was actually a 100 per cent owned subsidiary of the foreign vendor. Some of these are:-

Ø Russian company, RAC MiG, won a $964 million contract to upgrade 69 MiG-29 fighters, incurring an offset liability of $289 million. Six MiG-29s were to be upgraded in Russia and the remaining in India, for which MiG charged hefty licence fees in the contract. But MoD officials reveal that the Acquisition Wing permitted RAC MiG to also claim the licence fee as an offset. RAC MiG was also irregularly allowed to claim the cost of training IAF personnel as an offset. Training costs can now be claimed as offsets, but this was not permitted in the rules under which the contract was signed.

Ø Boeing signed a $2.1 billion deal to supply eight P8I Neptune Long Range Maritime Reconnaissance (LRMR) aircraft to the Indian Navy. The MoD decided that ultra-secret electronics e.g. Identification Friend or Foe (IFF) system would be procured from Bharat Electronics Ltd and Electronics Corporation of India Ltd. This was done to keep US components out of these sensitive systems. But the Acquisition Wing then permitted Boeing to claim their cost as an offset, as if it had indigenised them. Furthermore, Boeing is being allowed to claim the cost of ToT as a P8I offset even though ToT was ineligible for offsets then.

Ø Boeing has also benefited enormously from the Acquisition Wing’s clearance of half a billion dollars worth of offsets arising from the IAF’s purchase of ten C-17 Globemaster-III transporters for $4.1 billion. The Acquisition Wing has okayed Boeing’s proposal to supply the DRDO a “tri-sonic wind tunnel” which can develop wind speeds of Mach 3.7. Indian industry points out that this is vintage technology with the US having built a tri-sonic wind tunnel in the 1950s. Indian company, L&T, has recently built a Mach 12 wind tunnel for the Indian Space Research Organisation (ISRO).

Ø Boeing has also been allowed offset credit for a super-expensive “high-altitude jet engine testing facility” for the DRDO. DRDO is presently developing a jet engine with French company, Snecma, which already has its own high-altitude testing facilities. But now, after the Acquisition Wing cleared these offsets, the DRDO will get an old toy in new wrapping and Boeing will get offset credit worth dozens of millions of dollars.

Ø Agusta Westland AW-101 VVIP helicopters. This high profile $800 million (Rs 3700 crore) purchase of twelve AW-101 VVIP helicopters from Agusta Westland has violated multiple provisions of the DPP which does not permit the purchase of civilian aircraft, but the PMO pushed the MoD into the purchase, arguing that the IAF flies the helicopters. No relaxation was sought under para 75 of the DPP. The offsets irregularities include indirect offsets and ineligible offsets, such as the expenses of holding project committee meetings.

Ø US defence major Lockheed Martin’s offset proposal, arising from its sale to India of six C-130J Super Hercules transport aircraft for US $962 million (about Rs 3835 crores), is violating provisions of the offsets policy. The largest component of Lockheed Martin’s offset offer is a US $121 million proposal to import and operate a “weapons system trainer” (WST), which is a simulator on which instructors from Indian company, Mahindra & Mahindra will train IAF crews of the C-130J. The first shocker is the cost of the WST for which Lockheed Martin is claiming offsets credit worth US $121 million, almost 45% of its entire offset liability. Simulator was not included in the deal and would have given an additional 30% as offsets. On the contrary offset credit was claimed for $48 million to directly import the simulator. Straight imports of defence equipment cannot be treated as offsets under the Defence Offsets Policy. The other credits claimed by Lockheed Martin, in connection with the WST are: o Offset credit for US $15 million, for technology transfer while DPP-2008 had no provision for

technology transfer to be treated as offsets. o Offset credit of US $55 million, for contracts that will be given to the Mahindras to operate and

maintain the simulator. o Offset credit of US $3 million, for travel savings, which has been calculated in terms of air

tickets, lodging, TA/DA etc, for IAF personnel who would otherwise have had to travel to the US. This is not permissible as offsets in DPP-2008.

o Offset credit of US $20 million for “aircraft engine design services” with Bangalore-based engineering firm, QuEST. This would only be treatable as an offset if the design services were for military engines, but there is no way of ensuring that.

o Offset credit of US $15 million for “manufacture of F-16 avionics components” with Tata Power. While this would indeed be eligible for offsets, Tata Power confirms that there is no ongoing dialogue with Lockheed Martin.

o Finally, offset credit of US $119 million for “manufacture of RFID components” with Bharat Electronics. RFID components are not military equipment under the DPP-2008, and this manufacture does not qualify for offsets.

Ø French company, Thales, was allowed to get away with providing 100 cc motorcycles, domestic air-

conditioners, bicycles, cars, shelters, etc in its fulfillment of Rs 171 crore worth of offsets related to the Rs 570 crore sale of Low Level Transportable Radars (LLTR).

Ø Fincantieri, for the supply of a fleet tanker, was to source certain specified “buyer nominated equipment,” or BNE. This included engines from Wartsila India; a combat system from Bharat Electronics Ltd; an AK-630 gun from the Ordnance Factory Board; and several other components. Fincantieri quoted accordingly, factoring in the cost of building components in India. But then, again providing a double benefit, Fincantieri was also granted offset credits for the BNE that was sourced from India.

Ø Offsets worth Rs 1,485 crore arising from the Rs 4,950 crore purchase of eighty Mi-17V5 medium lift helicopters from Russia’s Rosoboronexport. In violation of the DPP, the IAF (rather than an Indian company) has been designated as the Indian Offset Partner (IOP), through which Rosoboronexport

will discharge offset obligations. Instead, offset proposals involve training the IAF’s Base Repair Depots in issues like spares management.

In two contracts, penalty charges of Rs 3.06 crore viable on vendors on account of unfulfilled offset obligation had not been recovered from defaulting vendors including American Lockheed Martin (Rs 1.02 crore) and Israeli IAI for Harop systems (Rs 2.04 crore).