Unless the MoD is able to formulate a template for offset investment that the vendors would have to comply with, the tendering process may not progress to the next step of opening of commercial bids. Inordinate procrastination could lead to the validity of commercial bids expiring, in which case, revision of commercial bids would entail further delay.

While addressing the media during Aero India 2011 in February this year, Air Chief Marshal P.V. Naik, Chief of the Air Staff (CAS) had stated that short listing of the contenders in the race for the tender related to the medium multi-role combat aircraft (MMRCA), would take place in a matter of weeks. A few days ago, in another forum, he stated that price negotiations would begin by the end of April and that he expected the contract to be signed by July 2011 when he is due to retire. However, two months have gone by since the declaration by the CAS in February and there is neither any news of short listing nor of further progress in the eight-stage labourious tendering process enshrined in the Defence Procurement Procedure (DPP). In fact, apart from the occasional rumours and speculation that usually lack basis, the MMRCA tender appears to have gone out of media focus. What then could be the reasons that the issue so live in early February, has suddenly receded into oblivion?

One possible factor impeding the process could be the issue of “offset investment”. As per DPP 2006 which is applicable to the MMRCA tender, it is mandatory for the selected vendor to invest in the Indian aerospace sector, 50 per cent of the value of the contract which in this case would be in the region of $5 billion ( Rs. 22,500 crore) or even higher depending on the product selected and the total value of the contract. It is understood that the privilege to spread offset investments over three other sectors i.e. civil aerospace, homeland security and training under DPP 2011, would not be available to the contenders in the race for the MMRCA contract denying them the flexibility the new DPP offers.

The concept of mandatory offset investment for contracts worth Rs. 300 crore or more has added a completely new dimension of complexity to the otherwise convoluted tendering process. As stated earlier, the offset investment of Rs. 22,500 crore or more in the case of the MMRCA tender is so large that it could well be outside the capability of the Indian aerospace industry to absorb. This can be better understood by the fact that the total turnover for Hindustan Aeronautics Limited (HAL) during the financial year 2009-10 was in the region of Rs. 11,000 crore. The Indian aerospace industry in the private sector is in a nascent stage and the public sector lacks the resilience to rise to the occasion quickly enough. The HAL virtually represents near total capacity of the aerospace industry and contribution by the private sector is still somewhat miniscule. Doubts in this regard have also been voiced by the original equipment manufacturers (OEM) from time to time in the past.