The editor of India Infoline, Anil Mascarenhas interviewed David Hew on Offset in India and the interview was published in the “Leader Speak” column of www.indiainfoline.com on 10th October 2005.
1. What is Offset?
Offset refers to the commercial benefits provided by a seller to a buyer as an inducement or a condition, for purchase. Within Offset, there are two main subsets. Direct Offset where the benefits relate directly to the subject matter of the purchase. Indirect Offset where the benefits, although unrelated to the subject matter of the purchase, are considered beneficial by the buyer.
2. When is it applicable?
It should be applicable in certain situations only. For example:
- In an oligopolistic market where information in the marketplace is asymmetric and a government’s intervention in the marketplace is justified and necessary.
- Or situations may exist where competition is most keen, enabling buyers to extract value beyond, price, quality and service.
Offset is basically value adding. Buyers have been known to be pleasantly surprised by what is achievable through Offset. For some industries, e.g. the defence and aerospace industries, Offset can be a persuasive instrument, even decisive, as to whether a sale can be made or not. Many countries resort to Offset for a variety of reasons.
3. What are these reasons?
There are many. Foremost among the reasons is the need for government to obtain the best value that money can buy for the procurement made from taxpayers’ monies. Where a proposed expenditure is purely consumptive where little or no socio-economic benefit can flow from the procurement in question, the need to show real and tangible benefit is even greater. Offset is a way to flow-back socio-economic benefits arising from such procurement. Some of the kinds of benefits sought by governments through Offset are job creation, aiding local industries or compelling technology transfer which may not otherwise be available. The wish-list is as infinite as the creative mind.
Offset is most apt for a developing country to aid its development endeavours. If developed countries see it necessary to turn to Offset and there are many who do so, surely the less endowed a country is, the greater is their need for Offset. The problem developing countries face is having another country’s Offset program model being preached to them without sufficient consideration paid to its own unique characteristics and needs.
Specific to the defence industry, the form of Offset known as Direct Offset is resorted to by a government in order to build its own defence industrial base so that a country can be self sufficient and not depend on others for its defence needs.
4. Is Offset applicable to India?
India, like China, is on a buying spree. This is to be expected given the phenomenal growth of these two countries. The purchases they both need to make are wide ranging and across-the- board. India again like China, also has many social and economic challenges that it has to face. The large number of sometimes conflicting demands on scarce resources is a concern for both governments. Given the collective decision processes of the Indian parliament it will be hard to imagine that any purchases will be allowed without processes in place to ensure that the best value-for-money objectives are achieved and everything that can be possibly done to aid its socio economic needs – the bread and butter issues, if you like, – are addressed. Offset is one way to achieve this.
5. We hear that you were in New Delhi in March this year where you were consulted by the Confederation of Indian Industries (CII) and the Ministry of Defence. Can you tell us something about this?
I’m afraid I can only tell you what was discussed in the public forum organised by CII. Offset is not alien to the powers-that-be in India. Things are brewing. The private sector should seize the opportunities that Offset will present to them as it is a form of public-private-partnership. Having said this may I clarify that neither I nor APCA were consulted on the Offset provisions now contained in your Defence Procurement Procedure of 2005.
6. What would you say to the Indian people about what to expect from Offset?
In order to derive maximum benefits from Offset, attention should be focused on the design and development of a common program for the appropriate Ministry to adopt. A common program will enable consistency in the pursuit of agreed objectives and criteria and the implementation of an administrative system dedicated to the program. Bear in mind that a program should allow market forces to dictate the best value, give the creative mind full rein and allow each Ministry to meet its specific needs.
It is only when you do it right that you will derive the most benefit. It can be costly if you do it wrong. Offset is not a silver bullet applicable to all circumstances. Having said this applying Offset correctly can reap enormous dividends. We have one independent study by a developed country (which was confirmed by another) that the cost for doing Offset is only 3 cents for every $1 spent. The mind boggles when one sees that 97 cents worth of net benefit at a cost of only 3 cents is possible in the circumstances which are the subject of the respective studies. And we speak here of procurements running into billions and the possibility of getting a great deal of bang for one’s buck.
How much one can gain, at what costs depend on many factors. Although many countries have achieved enviable results from Offset, there are others who have not. In this situation, a study should be undertaken to determine why. Your Finance Minister once said, a good horse alone is not enough to win. One also need a good rider. This is where one should start.