Trimester - 8

Course -

Financing of Defence Projects Financing of

International Trade

Group 2
Avinash Srivastava (8)
Prof. Satinder Bhatia
Osamazaid Rahman (27)
Sachit (38)
Sneha Gosain (42)
 • Defence Acquisition Modes
• Process of Defence deal
• Contract Structure of Defence deal
Broad • Contract regulations
Defence • Price Structure of Defence deal
• Base + other costs
Financing • Offset
Structure • Financing of Defence Deal
• Time gap due to larger lead time in supply chain
• Finding the Buyer
• Fund creation : US DoD allowed a fund of $2.5 billion
• Loan/ Financing together with Offset
• LC role in Defence deal
• Rafael deal
 Department of Defence is neutral for FMS for DCS

Foreign Military Sales

 Purchase through
government to government
Direct Commercial Sales
 Same benefit and protection
as DOD  Purchase through
Defence  Works with Total Package
government to industry
Acquisition Approach  Open Tender

Modes  Purchasing government

becomes the buyer and the
 LC of the Buyer
 RFI and RFP as per the
vendor from industry requirements of the Buyer
becomes the seller, the
mediating government is
exporting the products under
the authority of LOA
 FMS (Foreign Military Sales)
 A way through which the US
government itself procures the
weapons system from an
How India-US American military contractor and
then sells it to a state after
Defence Trade charging a mark-up cost (
3.8% of the price in case of India)
Relationship  2003 and 2017, the US entered
into a total of around 9.2 billion
Matures over dollars of agreement to sell
military hardware to India through
Years the FMS mode, with agreements
peaking at 2011, at 4.5 billion
dollars.
 Used in“MH-60R Seahawk
helicopters ($2.6 billion), Apache
helicopters ($2.3 billion), P-8I
maritime patrol aircraft ($3
billion), and M777 howitzers ($737
million).”
DCS (Direct Commercial Sales)
 Government of India directly
buys weapons from US military
contractors subject to the
approval of the US Congress in
some instances and mandatory
State Department authorization
that grants the contractor the
license to sell weapons or even
enter into arms sales
agreements.
 Since 2008 India has purchased
6.6 billion dollars’ worth of
American military hardware –
including aircraft, electronics,
and gas turbine engines  –
through direct transactions with
American companies.
  Negotiations with the foreign Government agency / OEM will be
carried out by a Committee comprising of representatives of the
Acquisition Wing, concerned SHQ, Defence (Finance) and the
nominated domestic manufacturer, if any, to determine draft terms
of the IGA to include estimated price, availability, indigenisation plan
etc.
 There will be arrangements within IGA of:
Procurement by  Co-development
Govt- to-Govt  Co-production
 Import Substitution
Defence  Procurements from allied foreign countries due to Geo-strategic
Agreement advantages or imperatives of strategic partnerships or major military,
technological, economic, diplomatic or political benefits.
 Determine the choice of a specific platform or equipment on a single
vendor basis
 Terms and Contracts would be based on mutually agreed provisions
between the Governments of both the countries.
 Government of India Military Acquisitions are governed under Defence Procurement Procedure,
managed by the Ministry of Defence (MoD)

Evaluation of
Formulation of Evaluation of
Solicitation of Offset Offers by
Request for Services Technical offers
Acceptance of offers, including Technical Offset
Information Qualitative by Technical
Necessity (AoN) Offset offer, if Evaluation
(RFI) Requirements Evaluation
applicable Committee
(SQRs) Committee (TEC)
(TOEC)

Initial Payment by
the Buyer

Oversight by Commercial
Technical Approval of the Award of
Field Evaluation negotiations by
Oversight Competent contract/placing
Trials (FET) Staff Evaluation Contract
Committee (TOC), Financial of Indents
Negotiation
if required Authority (CFA)
Committee (CNC)

Indian Acquisition Process Post-Contract Management

  Advance Payment – 10 to 15 percent of the contact amount
 The date of delivery would be reckoned from the date of release of
Advance payment by the Buyer to the Seller (T0)
 Advance payment is released after First Off Production Model
(FOPM) is successfully validated
 Date of accord of Bulk Production Clearance will be date for
Payment reckoning date of delivery.
Timeline  However, for single vendor procurements, if there is a situation
where Government of India has entered into agreements with
that country regarding specific contractual clauses, then the
terms and conditions of such agreements would supersede the
corresponding standard clauses of DPP.
  Payment INCOTERMS will be DDP
 Advance payment: Fifteen percent of the Total Contract Price (excluding total
price of AMC/CMC/PBL, if any) shall be paid within 30 days of signing of
Contract through Direct Bank Transfer (DBT) and upon submission of claim and
Delivery a Bank Guarantee (BG) for equivalent amount, provided the Seller submits the
documents mandated by the DPP for release of advance by the Buyer within 45
Schedule and days of signing of contract.
Stages of  ___% of the Contract Price of the Goods shipped shall be paid through
Irrevocable Letter of Credit (LC). The payment will be arranged through any
Payment under Public Sector bank (as decided by the Buyer), to the Bank of the Foreign Seller.
DPP  The Letter of Credit will be valid for ___ days from the date of its opening. In
case the delivery is in multiple consignments and there is a long delivery
schedule, then Revolving LC can be opened.
 Stage-wise Payments: The payments will be done in stages as under:
 First stage- % on completion of ______
 Second stage-- % on completion of _______
 Third stage- % on completion of _____
 On Final Acceptance and Installation/Commissioning: __% of the Contract
Appendix M, Annexure VII
Price of Goods received shall be paid within thirty (30) days of receipt of Goods
upon submission of claim supported by the Acceptance Certificate issued by the
Buyer.
 The mode of payment could be either LC as mentioned above or through DBT
 For Delivery in a Single Lot
Sl Activity Delivery Scheme for Payment Scheme for submission and Return of Advance Remarks
Timelines Payment Bank Guarantees
(T0 + Wks)
 (a) Signing of contract 10% of the total contract APBG of equivalent amount to be submitted Bidder may choose to provide
price multiple APBGs, if return is
expected with each delivery
(b) On submission of 5% of the total contract APBG of equivalent amount to be submitted In case this stage is not
Detailed Project report price required, 15% of total
(DPR) and Project PERT contract price can be made
Chart. on signing of contract.
(c) On Delivery/Dispatch 55 to 75% of the cost of APBG is to be returned on completion of delivery Percentage of payment for
(as applicable) of all Equipment/ System (and of all equipment/ system (and associated spares if delivery of equipment/
equipment/ system associated spares if applicable). system shall be decided on
(and associated spares applicable) In case delivery of documentation and/or training the complexity/ scope of
if applicable) can be completed only on commissioning of the installation, STW and
(d) On delivery of 55 to 75% of the cost of equipment and cost of documentation/training is commissioning.
documentation & documentation and substantial (5%-8%, as specified), then APBG is to
Training training be returned on pro-rata basis as per completion of In case Installation/ STW/
delivery of equipment, documentation and Commissioning is not
training. required, the complete
(e) On Installation/ STW/   10 to 30% of the cost of   payments are to be done on
Commissioning and deliverables completion of deliveries and
Final Acceptance and APBG(s) are to be returned.
completion of delivery
of documentation and
training.
 For Delivery in a Lots / Batches
Sl Activity Delivery Scheme for Payment Scheme for submission and Return of Remarks
Timelines Advance Payment Bank Guarantees
(T0 +
Wks)
 (a) Signing of contract 15% of the total contract price APBG of equivalent amount to be Bidder may choose to provide
submitted multiple APBGs, if return is expected
with each delivery
(b) On submission of 5% of the total contract price APBG of equivalent amount to be In case this stage is not required, 15%
Detailed Project report submitted of total contract price can be made
(DPR) and Project on signing of contract.
PERT Chart.
(c) On Delivery of all equipment/ system
(i) 1st Lot/ Batch 55 to 75% of the cost of Equipment/ System APBG is to be returned on completion of Percentage of payment for delivery
(and associated spares if applicable) delivery of all equipment/ system (and of equipment/ system shall be
(ii) 2nd Lot/ Batch 55 to 75% of the cost of Equipment/ System associated spares if applicable). decided on the complexity/ scope of
(and associated spares if applicable) In case delivery of documentation installation, STW and
(d) On delivery of 85% of the cost of documentation and/or training can be completed only commissioning.
documentation on commissioning of the equipment and
(e) Completion of Training   85% of the cost of Training cost of documentation/training is In case Installation/ STW/
substantial (5%-8%, as specified), then Commissioning is not required, the
APBG is to be returned on pro-rata basis complete payments are to be done
as per completion of delivery of on completion of deliveries and
equipment, documentation and APBG(s) are to be returned.
training.
(f) On Delivery of all equipment/ system
(i) 1st Lot/ Batch 10 to 30% of the cost of Equipment / System
of the Lot
2nd Lot/ Batch 10 to 30% of the cost of Equipment / System
of the Lot
  The key objective of the Defence Offset Policy is to leverage the
capital acquisitions and technology to develop indigenous
defence industry by
 fostering development of internationally competitive enterprises,
and
 augmenting capacity for Research, Design and Development related
to defence products.
 In the case of the Indian acquisition process, Offsets provisions will
Why Offsets apply to all Capital Acquisitions categorized as ‘Buy (Global)’, i.e.
outright purchase from foreign/Indian Vendor, or ‘Buy and Make’
categories of procurements where the estimated cost of the
acquisition proposal is ₹.2000 Crore or more as on the date of
accord of AoN.
 30% of the estimated cost of the acquisition in ’Buy (Global)’
category acquisitions and 30% of the foreign exchange
component in ‘Buy and Make’ categories of procurements will be
the required value of the offset obligations.
  Direct purchase of, or executing export orders for, eligible products manufactured
by, or services provided by Indian enterprises, i.e. DPSUs, OFB and private and
public sector.
 Investment in defence manufacturing: This could be through FDI or direct
investment or joint ventures or through the non-equity route for co-
production, co-development and production or licensed production of defence
products. Such investment would be subject to the guidelines/licensing
requirements stipulated by the Department of Promotion of Industry and Internal
Avenue for Trade (DPIIT)/ Ministry of Home Affairs (MHA), Government of India.
Offset  Investment in ToT to Indian enterprises for manufacture of eligible products. The
investment in terms of ToT must cover all documentation, training and
Discharge consultancy required for full ToT (civil infrastructure and related equipment is
excluded).
 Acquisition of technology through ToT to Government institutions and
establishments engaged in the manufacture and/or maintenance of eligible
products
 Technology Acquisition by the DRDO in areas of critical technology
 Indian enterprises and institutions and establishments engaged in the
manufacture of eligible products and/or provision of eligible services, including
DRDO, are referred to as the Indian Offset partner (IOP).
 Offset obligations are to be discharged within a time frame that can extend
beyond the period of the main procurement contract by a maximum period of
two years.
  Where technology is proposed to be transferred, a third party valuation
from the recognized/certified valuation firms duly accepted by the IOP to
be submitted. The valuation so determined should be supported and
justified through following approaches:
 Cost Approach
 Current cost estimate of technology development effort
 Cost saving due to local purchase vs Global purchase
Offset Credits  Net present value of the expected proceeds from future sales
 Market Approach
 Revenues generated from the technology till date
 Exclusive use or territorial protection
 Creation of new market for IOP
 Jobs creation (Direct & Indirect)

 The concept of value addition will apply only for direct purchase/export of
eligible products. Value Addition will be determined by subtracting
 value of imported components (i.e.) import content in the product and
 any fees/royalty paid.
  In the discharge of Offset obligation under direct purchase the following
multiplier are permitted
 Eligible products - Multiplier of 1.0
 Components of eligible products - Multiplier of 0.5
 (where Indian Offset Partner (IOP) is an MSME a multiplier of 1.5 is
permitted).
Offset  In the discharge of Offset obligation under Investment in defence
Multipliers manufacturing, a multiplier of 1.5 will be permitted.
 If the investment is in Defence Industrial Corridors notified by the
Department of Defence Production, a multiplier of 2 will be permitted.
 In the discharge of Offset obligation under Investment in ToT to Indian
enterprises , a multiplier of 2 is permitted.
 In the discharge of Offset obligation under Acquisition of technology
through ToT to Government institutions, a multiplier of 3 is permitted.
 In the discharge of offset obligations under Technology Acquisition by the
DRDO in areas of critical technology, relating to critical technology
acquisition by DRDO, a multiplier of 4 is permitted.
Offsets

The case for

the Rafale
Deal
S. No.
Whether
Eligible Avenue for Multiplier Related
Offset
Products discharge (quote sub applicable Percentage of IOP/ Agency Time Frame for to Main
/Services Para of 3.1 of (quote Total Offsets for Discharge of Equipment Remarks
Appendix D to applicable discharge Offsets Being
Being
Offered Chapter II) Para) Supplied
(Yes/No)

Offsets Implementation
The Example in the Indian Defence Procurement Procedure
 For Indigenous Content stipulated in the RFP, OEMs and Indian vendors will
comply as per the acquisition category

Indigenous S. No. Acquisition Categories IC Requirement

Content (a) Buy (Indian-IDDM) Indigenous design and ≥ 50%
Requirement (b) Buy (Indian) In case of indigenous design ≥ 50%
otherwise ≥ 60%
(c) Buy and Make (Indian) ≥ 50% of the ‘Make’ portion
(d) Buy and Make ≥ 50%
(e) Buy (Global - Manufacture in ≥ 50%
India)
(f) Buy (Global) Foreign Vendor – Nil
Indian Vendor ≥ 30%
  The Fund is used to Defence research and capability development
project between its member states
 European Defence Agency’s “Cooperative Financial Mechanism” will be
ready by end 2020.
 One that has never been tried before at national or EU level (or among
NATO allies for that matter), namely: to function as a platform where
The EU Europe’s defence ministries can systematically borrow either from the EU’s
official bank or lend their own defence monies to each another for
Defence Fund: multinational capability efforts.
 The CFM will rest on two pillars of finance.
The “Cooperative  One will be the European Investment Bank, which is the EU’s lending wing
for infrastructure projects. The EIB will offer a three-year credit line worth 6
Financial billion euros to finance defence research or capability projects that are
Mechanism” dual-use in nature, meaning they must also have a civil application. The
bank will not finance any hard weaponry.
Scheme  The Second pillar is a sustained state-to-state lending among Europe’s
national defence ministries for joint capability development. The result is
that each participating CFM defence ministry will not have to return any of
its unused defence budget in a given year—as has normally been the case—
to its national treasury. Instead, it will be allowed to shift the left-over
funds to the CFM platform where each country will have and control its
own CFM bank account, with the EDA executing the inter-ministry
transfers.

https://www.atlanticcouncil.org/blogs/new-atlanticist/eda-soon-to-launch-new-financing-mechanism-for-boosting-multination-defence-projects
Thank
You
Rough Work
  Procurements from friendly foreign countries due to geo-strategic
advantages or imperatives of strategic partnerships or major
military, technological, economic, diplomatic or political benefits.
 Determine the choice of a specific platform or equipment on a single
Procurement vendor basis
through Inter-  Terms and Contracts would be based on mutually agreed provisions
Governmental between the Governments of both the countries.

Agreement  Negotiations with the foreign Government agency/OEM will then be

carried out by a Committee comprising of representatives of the
Acquisition Wing, concerned SHQ, Defence (Finance) and the
nominated domestic manufacturer, if any, to determine draft terms
of the IGA to include estimated price, availability, indigenisation
plan etc.
 There will be arrangements within IGA of:
 Co-development
 Co-production
 Import Substitution