A Defence Ministry policy to promote military industry in the country has come in for criticism by the CAG, which also questioned the waivers given to foreign defence firms for fulfilling their offset requirements.
Under the offsets policy, foreign vendors bagging deals worth over Rs 300 crore have to invest at least 30 per cent of the worth of the deal back in Indian defence, homeland security or the civilian aerospace sectors.
In its report tabled in the Parliament today, the CAG pointed out that monitoring mechanism of the Defence Ministry for offsets was "ineffective as it was created without a clear definition of its objectives and role. It has remained only a paper exercise."
The Government auditor also pulled up the Defence Ministry for allowing the selection of "ineligible offsets partners" for the offset contracts where in some cases the Indian Offsets Partner (IOP) was a 100 per cent owned subsidiary of the foreign vendor.
The report said Ministry allowed fulfilment of offset obligations through Foreign Direct Investment (FDI) by foreign vendors in specified Indian industry but "there was lack of clarity and type of foreign investment which would be eligible and interpretation of provisions of the clause."
The report said a Boeing proposal to set up a test facility at DRDO was an investment in kind, "even as it was not an eligible offset...The decision was taken without mandatory certification by the Defence Offsets facilitation Agency (DOFA)."
The CAG said the Ministry has stated that investment in the facility by Boeing "was accepted by the Defence Acquisition Council (DAC) and approval in principle for setting up the facility has also been accorded by the CCS."
"The reply is silent on whether the specific waiver of the Defence Minister was sought for the breach of provisions of Defence Procurement Procedures," it said.
The CAG said "It is also not acceptable because the DAC had maintained that investment in kind through non-equity route was not permissible for offset and only purchase of goods and services from vendors from IOP would so qualify."
The CAG report said a scrutiny of five offsets contracts showed that equipment involving Rs 3,410 crore was being directly provided by the foreign vendor in kind without any value addition.
"This assumes added significance since procurement contracts with an offset obligation invariable involve loading an extra cost element on that account," it said.
The examples in this regard cited by the CAG include offsets contracts signed with Boeing for the USD 4.1 billion deal for 10 C-17 aircraft and eight P-8I anti-submarine warfare planes.
The CAG report also pulled up the Ministry for "non-recovery of penal charges" from foreign vendors for the unfulfilled offset value every year.
"In two contracts, penalty charges of Rs 3.06 crore leviable 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)," it said.
The CAG asked the Ministry to "leave little room for ambiguity in its interpretation. The monitoring mechanism also needs to be review to ensure effective implementation of offset contracts."
Reacting to the CAG observations on it and various departments under it, the Defence Ministry said, "Appropriate corrective action with respect to CAG's observations will be taken."
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