Livemint, August 28, 2012

Coal ministry objects to threshold; Planning Commission, civil aviation ministry say policy should be sector specific

At least three important government departments have opposed the commerce ministry’s move to formulate a common national policy on offsets, an obligation that an overseas vendor has to fulfil to sell equipment or services to the Indian government.

The ministries of coal and civil aviation and the Planning Commission have said that they are opposed to the move. They have voiced their opposition to a draft note on the matter that was circulated by the commerce ministry in April. Mint has reviewed a copy of an internal government note that contains their views.

The Union cabinet had given its in-principle approval to a national offsets policy in 2006. Following this, the commerce ministry circulated a note among various ministries on at least two occasions—in 2006 and 2009.

A new note containing revised proposals was again circulated in April this year. Mint had first reported on the new draft note on 6 April. Companies, typically, fulfil offsets obligations by generating business in the buying country worth a certain percentage of the deal value.

The coal ministry has said that it wants the coal sector to be “kept out” of the proposed national offsets policy. It is opposed to a minimum threshold of Rs.500 crore on procurement, on which the commerce ministry wants offsets.

“Some plants and machinery being used in coal fields are acquired through global tenders and the overall demand for machinery of CPSUs (central public sector units) is not very significant, being within Rs.500 crore,” the note cited the coal ministry as having said in its response to the commerce ministry note.

Offset obligations can also be fulfilled by the seller country by committing cheaper long-term supplies of strategically important commodities, including energy resources, up to a certain value, in lieu of equipment or goods bought. In effect, in such a transaction, the payment is made partly with goods and services instead of money.

Currently, equipment procured by the defence ministry is covered by an offsets obligation policy. In other cases, the offset agreements are entered into on an ad hoc basis and not through any policy guideline.

The civil aviation ministry has said that it “does not agree with the policy as contained in the CoS (committee of secretaries) note”. Further, the note says that the civil aviation ministry “would prefer an offset policy with a sector-specific approach to leverage the benefits”.

Voicing its total opposition to the move, the Planning Commission has said that the primary benefit out of offsets would be for developing technological know-how—particularly, indigenous design ability. “The potential for such technological gains rests primarily in defence, atomic energy and civil aviation sectors. Out of these three sectors, defence already has an offset policy; as regards the other two sectors, given the sensitivities involved in procurement, a generic offset policy may not be suitable,” the note cited the Planning Commission as saying in its response. “A common framework for administering offset policy run by some other department is likely to introduce delays, which, coupled with cost of offsets, may also increase the cost of procurement.”

Pradeep Mehta, secretary general of Jaipur-based consumer advocacy group CUTS International, disagreed with the Planning Commission’s view that costs would go up. “Such contracts are typically negotiated very hard. So if there is any extra loading of costs, that can always be checked. So the cost argument does not hold.”

An email query sent to the office of Saurabh Chandra, secretary, department of industrial policy and promotion, which floated the draft note, remained unanswered.

The finance and heavy industries ministries have also opposed key proposals in the draft note. “Offset agreements should not be at the cost of competitiveness, possible delays and element of subjectivity which can creep into the procurement activity,” the note cited the department of economic affairs of the finance ministry as saying in its response.

The heavy industries ministry, while being supportive of the offsets policy, has opposed the setting up of a National Offsets Authority—a nodal nine-member monitoring and regulatory agency to be headed by the cabinet secretary that would govern offsets.

The ministry has said that “instead of creating a centralized body, as proposed, it would be better to have a de-centralized approach”. “I think the real reason why the authority is being opposed is because the ministries do not want to lose their turf,” says Mehta of CUTS.

To be sure, several ministries and departments, including the shipping ministry, the department of electronics and information technology, department of pharmaceuticals and the department of telecom, have supported the commerce ministry’s latest proposals.

A senior fertilizer ministry official said that the ministry is in the process of formulating its response and is also likely to support the move. The spokesman for the oil ministry declined to comment on what was an internal government note.

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