Offset agreement
Encyclopedia
Defense offset agreements are legal trade practices in the aerospace and military industries. These commercial practices do not need state regulations but, since the purchasers are mostly military departments of sovereign nations comparable to the US Defense Department, many countries have offset laws, public regulations or, alternatively, formal internal offset policies. The international names for these commercial practices connected to weapons trade are various: industrial compensations, industrial cooperation, offsets, industrial and regional benefits, balances, juste retour or equilibrium, to define mechanisms more complex than counter-trade. Offset agreements are protectionist, and distort competition.
Counter-trade can also be considered one of the many forms of defense offset, to compensate a purchasing country. The main difference between a generic offset and counter-trade, both common practices in the international defense trade, is the involvement of money. In counter-trade goods are paid through barters or other mechanisms without the exchange of money, while in other defense offsets money is the measure and the medium of exchange.
. This is frequently an integral part of international defense contracts.
(BIS), that deals specifically with U.S. defense offset agreements with foreign nations as main subset of U.S. industrial security. BIS - whose main task is protecting U.S. security from the point of view of export of high technology, fostering commercially U.S. foreign policy, and U.S. economic interests- deals with U.S. aerospace and defense companies that export to foreign countries' defense products, systems or services, by way of the “offset agreements,” that is those sale's collateral or additional agreements requested by purchasers. BIS defines offsets as “mandatory compensations required by foreign governments when purchasing weapon systems and services.”
U.S. Government underlines the compulsory aspect of this trade practice, since United States, with other weapons exporting countries, such as Germany and France, opposes offsets as forms of protectionism and harmful transgressions of free market rules. These governments frown on offset agreements, consider them to be both market distorting and inefficient.
added.
Often defense offsets are more motivating than the primary defense acquisition, for personal or political reasons. This may seem irrational, but it is part of commerce. If one adds the prevalent political aspect of spending huge public funds on modern weapons, then the motivating significance of defense offsets could not be underestimated in contemporary decision processes of democracies. Prime defense contractors are well aware of offsets power in the psychologies of democracies. As anyone can understand, the seller will include the cost of the “Envelope B,” that is of the offset and an added value for the purchaser, in its total cost. In other words, the client will pay for the offset, it is not a free lunch. But the key question is: to what extent is the offset proposal a factor in the consideration of defense contractor’s tender during the evaluation and the decision procedures?
Transparency International
clearly summarizes the risks of corruption of offsets as marketing tools, that makes offsets "the ideal playground for corruption":
The universe of this military niche of offsets trade is sophisticated and less innocuous than commonly believed. In 2000 Daniel Pearl
wrote an article about the universe of offsets: “could the sale of U.S. weapons in the Persian Gulf help an oil concern unload gasoline stations in Europe? Yes, under the new logic of international arms deals.” Pearl describes the new-found world of indirect offsets:
The market size of the international offset business is related to the size of the international weapon export in the world. According to SIPRI
, in 2007 there were US$51 billion of weapons exports, an approximate value because it is open source, and not all weapons deals data are open source information.
Nation P also assigns a credit value for each typology of offsets offered by Company S. The credit value for the offset obligations is not the “actual value,” but it is the “actual value” by a multiplier, that expresses the degree of interest of Nation P (Purchaser) in the proposed offsets. In other words, something deemed very valuable by nation P will have a high multiplier that expresses the importance and the value to Nation P of that type of offset. The multiplier (for instance 2, or 5, or 7) translates nation P's attached value into the credit value, that eventually accounts for the fulfillment of the agreed sum of $480 (120% of offset); it is evident that with no multipliers, 120% offset would be a nonsense.
Most of the offset packages are divided into direct and indirect offsets. Here is a hypothetical complex offset offer, divided into direct and indirect offsets in Nation P.
Direct Offsets (military and related to the product of the Company S, i.e. tanks)
Indirect Offsets (civilian and not related to the production of the weapons item, the tanks. They could be also military or security related, but not directly connected with the main acquisition, i.e., the tanks)
Nation P controls not only the supply of the military systems or services, but also the implementation of the offsets according to the offset agreement included or related to the main supply contract. This control is within the Minister of Defense and/or Ministry of Economy or Finance, or Ministry of Industry and Trade. Often arms importing nations establish special agencies for the supervision of the defense offsets.
"Indirect offset" is when the supplier is expected to purchase goods from the buyer, which are unrelated to the initial product being supplied. These could include raw materials, agricultural commodities or other products.
One of the ways to legally compensate for the high-price purchase of military equipment or systems is to offer services, investments, counter-trade and/or co-production as offsets. For instance, Greek companies produce part of the Lockheed C-130 that they bought from U.S. The Greek co-production is a U.S. direct offset. Or, in a more sophisticated form of offset involving three countries, Portugal is in charge of the maintenance of Kuwaiti Lockheed Martin
aircraft. This is a Portuguese “direct offset"', since Portugal bought the aircraft, and is partner in charge for their maintenance. An investment in a security software company of Romania, or in assisting the export and marketing in difficult areas of a Belgian environmental company are other forms of actual indirect offsets.
The most common distinction in offset proposals is between direct and indirect offset.
Direct offset is a side agreement that has to do with the main product/service that is bought/sold, that is military equipment, systems, or services. They may be also called military offsets. Indirect offsets are side agreements that are not directly related to the product/service that is bought/sold. Most people refer to such category of offsets as civilian offsets, though there are many indirect offsets that are not civilian offsets.
The most common types of direct/indirect offsets are:
The most complete and accurate list of form of actual offsets can be found in BIS Annual Reports to Congress, where all forms of registered offset are codified, according to the old Standard Industrial Classification
.
One of the collateral benefits of offsets in U.S. (probably not offsetting the adverse effects of defense offsets on economy and jobs) is the proliferation of legal and economic jobs in the “offsets sector,” that goes from international legal companies to the fully staffed international offices of U.S. defense companies. In addition, the establishment of new companies in “offset” venture capital, in “offset” marketing assistance: offset fulfillers that provide their support services to the defense and aerospace industry. While many offset programs originally evolved as a result of defense and aerospace sales, today many new offset / Industrial Partnership programs have developed as a result of nations wanting to improve their industrial base, level of technology and desire to become more self sufficient across a broad range of industry sectors. As a result of this new interest and demand for Industrial Partnership, there has been both a growth and establishment of new offset associations. There are both Global and Domestic "Offset" / Industrial Partnership organizations. The largest and most widely attended global association is GOCA, the Global Offset and Countertrade Association, whose purpose is to promote trade and commerce between companies around the world and their foreign customers through a greater understanding of countertrade and offset. Each year GOCA hosts several industry meetings in partnership with other European and American offset organizations such as the ADS, Aerospace Defence Securityhttp://www.adsgroup.org.uk and DIOA, the U.S. Defense Industry Offset Associationhttp://www.dioa.org. DIOA was established in 1985 by members of the U.S. Defense Industry to foster education, networking and guidelines for professionalism in offsets implementations.
The industry meetings referenced above are attended by leading global industrial companies, companies that specialize in providing support services for Industrial Partnership fulfillment, and by various government and military authorities, mostly from national ministries of defense and economy, who oversee and monitor offset and Industrial Partnership programs. The purpose of these industry meetings is to educate, and to foster relationships between the various offset obligors and beneficiaries so that real and sustainable economic benefits can be delivered to nations who are seeking to improve their respective economies. Offsets and Industrial Partnership programs have been evolving for over three decades and there are dozens of articles that describe various successes and challenges that have resulted from implementing offset programs. The most widely read publication that deals with the developments in the Offset and Industrial Participation arena is Countertrade and Offset ("CTO")http://www.cto-offset.com.
Offset fulfillers /service providers may perform various support services including : marketing assistance, sourcing and structuring venture capital or other forms of corporate credit for Foreign Direct Investment
(FDI), or more complex things, such as a joint ventures to produce shrimp (Devcorp, Bahrain http://www.devcorpint.com/), a sugar factory, or, recently, environment and renewable energy.
Like in any contract, there are forms of penalty for failing to complete offset obligations. Many nations have rigid systems of penalties, including the use of bank guarantees, while other nations believe in a continued negotiations that are based on “the best effort” clauses. The list incentives and penalties for offset is no different from many other systems of procurement, with two notable exceptions:
1. In the offset business there are two contracts proceeding in parallel, i.e. primary (A) and side (B) contract:
2. In direct offsets contracts there are legitimate "clauses of confidentiality", that in several countries may even assume value of official classification, up to secret of state. In European Union States, however, extending state secret classifications to indirect offsets - that have nothing to do with military or state security - is and it is considered an abuse. For instance, classifying an offset not-related to state security or military preparedness - such as indirect and civilian offsets in pharmaceutical research, environmental technologies or export assistance of any non-military/security products - leads not only to major market distortion
s but also to possibly unpunished corruption protected by baseless secrecy.
Pre-offset activities are allowed and welcomed by several countries; they are like offsets without certainties to obtain “credit value”. These activities are straight marketing activities, similar to lobbying, to promote specific defense purchases. These pre-offset activities must be registered as such with national authorities. Often pre-offset activities will receive certificates, after a sale. Defense companies include them in the marketing budget, but after the sale, these offsets go into their offset budgets, and count toward offset fulfillment. These kinds of pre-offset activities are sales arguments to convince the buying state of the strength and reliability of the aerospace & defense company as potential supplier and partner. The pre-offsets arena is also the delicate and problematic field of sale-facilitators and, precisely because the client is a state, this must be monitored with additional care, since this field is prone to abuse and outright corruption.
", that is a government to government sale.
A Direct Commercial Sale is highly supervised by U.S. Government and even by the U.S. Congress, in spite of its free market appearance. The arms trade, because of its connection with national security, is never free from strict government supervision.
For a sale to a foreign country's Defense Department, a U.S. defense firm must be licensed. It is checked by the Defense Department and by the State Department, and, in the case of relevant sales, even authorized or vetoed by U.S. Congress. Direct Commercial Sales are highly regulated because of security, political, and commercial reasons. Even from the point of view of indirect and non-military offset agreements, U.S. Defense companies and their subcontractors (offset fulfillers) must present detailed report of their offset activities to the Commerce Department, Bureau of Industry and Security
(BIS).
Foreign Military Sales are indirect sales of weapons produced by one or more U.S. contractors through an agency of the Department of Defense
, the Defense Security Cooperation Agency
, DSCA. In a way, DSCA acts as Prime Contractor's agent in promoting and selling U.S. made weapons to foreign countries. The known FMS disadvantage is that DSCA adds to the final sale price a small percentage for its own administrative costs; the advantage is some free training with U.S. Armed Forces for joint international operations. In this type of sale, however, there are two important aspects in regards to the offset business.
1) Since 1990, under a specific directive by President George Bush, no U.S. Federal Agency or U.S. Government employee can be involved in the offset business. To each press release about a FMS (or of any documents regarding a FMS), there is a standard disclaimer: “There are no known offset agreements proposed in connection with this (potential) sale.”
The Defense Security Cooperation Agency acts on behalf of the prime contractor with a foreign government and refuses even the mere knowledge about offsets, but under the FMS program prime contractors are allowed to put all their offset costs into the final price.
The cost of the offset is not even itemized in the FMS
offer, and if the client wants to discuss or simply to know the cost of the offset, the client must speak directly with the Contractor and not with DSCA. In other words, U.S. Government cannot deal with offsets, U.S. Defense Prime Contractors can and do. DSCA has made available in its complete manual details and analytical explanations for U.S. Defense companies on how to include the offset various costs into their contract and invoices. So prime contractors, even under FMS, are allowed to recover all costs “of any offsets which are associated with those contracts.” To be sure, “U.S. Government agencies may not enter into or commit U.S. companies to any offset agreement.”
De facto during the cold war offsets had different functions and often U.S. Government Agencies were directly involved. President Bush, by ending the cold war with a victory, likewise ended U.S. agencies’ liability in delicate practices like the offsets (1990), since they lost the primary political value they had during the cold war.
2) U.S. funds assigned by United States Foreign Military Financing
(FMF) that may be connected with Foreign Military Sales
(FMS) cannot be used for any type of offsets, if they are non-repayable funds. On the other hand, FMF funds may be used for offset costs if they are loans. In any case, "U.S. Government agencies may not enter into or commit U.S. firms to any offset agreement."
A detailed list of the National Laws and Policies of the Countries of the European Union can be found in the website of European Defense Agency in a new “EU Offset Portal”http://www.eda.europa.eu/offsets/. Another very useful analysis of country policies can be found in Belgian Ministry of Economy (in charge of Belgian offsets). This publicly available document gives one of the most intelligent global analysis of countries offsets policies, with a purchaser's perspective, that is the point of view of weapons importer countries http://economie.fgov.be/organization_market/compensations/industrial_offset_en.htm. From a similar point of view, one can see the purchaser's point of view on offsets in UAE offset web-page http://www.offset.ae, in the new Kuwaiti articulated offset policy http://www.kuwaitnoc.com.
On the seller's point of view, in Bureau of Industry and Security
(BIS) Annual Reports to U.S. Congress one can find the position on offsets of weapons exporters countries like U.S. Magazines and specialized publications like Jane's Defense Industry http://www.janes.com, EPICOShttp://www.epicos.com, Countertrade & Offset or CTO http://www.cto-offset.com give detail accounts and updates on national policies, requests, changes, etc.
: A Royal Decree (6/2/1999, and modified-6/12/2001) is the legal foundation of the Belgian Industrial Benefits Program. The program is directed by Ministry of Economic Affairs (Industrial Benefits in the Field of Defense Procurement http://economie.fgov.be/en/binaries/industrial_compensations_en_tcm327-58443.pdf). The threshold value is usually 11 million euro, but it is lower if it is not a public and open tender. The minimum required offset is 100%. Multipliers are not specified. The focus is on high technology and new or additional business flow. The Belgian offset guidelines are very sophisticated. One of the most important and explicit points is the so-called “newness aspect:” offsets, such export assistance, “must create unambiguously a new or additional business flow in export” for Belgian companies. Belgium distinguishes three forms of offsets: direct, semi-direct, and indirect. Belgium has a specific problem with the Industrial Benefit Programme, related to the de facto split of the country into Walloonia and Flanders
. Belgian offset program is more meticulous than other European countries, but Belgian citizenry is aware that paying for offsets, instead of getting weapons at off-the-shelf price, implies not-so-transparent transfers of taxpayers money to designated Belgian companies through political decisions. One can rightly consider such offset-transfer as confidential state subsidy
. Flemish parties claim that subsidies to Wallonia cost proportionally more than the price West Germany paid for East Germany. The subsidies/offset issue was particularly acute in the repartition of direct and indirect industrial benefits for one of the recent acquisition with offsets: 242 Mowag Piranha
for the Belgian Army
from General Dynamics
, over 700 M Euro. One of the controversial offsets connected with the Piranha III is a direct offset for the Piranha III co-production, and the disputed choice of a 90mm gun (produced by a Wallonian company) instead of 105mm NATO standard cannon.
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: Offset regulations are set by Government Resolution 9 - 2005. The Ministry of Trade and Industry is in charge of Industrial Cooperation (also through an Offset Commission). The minimum value of the contract is CZK 500 million. The minimum offset percentage is 100 per cent. No multipliers are used. Offset focus is on new technologies, co-operation and technology transfer. Minimum 20% of direct offset. The Offset Commission issues Annual Reports on the status of the offsets. One of the major offset controversies in Czech Republic is about the purchase of General Dynamics Pandur II, between 2003 and 2009. In February 2010 anti-corruption police have opened an investigation. According to The Prague Post
"the investigation will center on two main issues: the alleged bribery of politicians and the military's reasons for paying three times more for the Pandur than Portugal, which also purchased" the same armoured vehicle.: Ministry of Defense is in charge, but the Ministry of Economic Affairs is monitoring offset implementations. The Industrial Cooperation policy was issued in 2005. The threshold is DKK 25 million. Minimum offset requirement of 100%. Multipliers but can be considered for R&D and technology transfers. Denmark signed a trilateral agreement with UK and The Netherlands on “best practice for the application of abatements in offset” regarding swaps of offset obligations.
: German official position is that offset arrangements are economically counterproductive in defense trade. However, Germany applies a policy of “industrial balances,” based on 100% of the contract value. German Federal Ministry of Defense (BMVg), and The Federal Office of Defense Technology and Procurement (Das Bundesamt für Wehrtechnik und Beschaffung - BWB, that is an Acquisition Agency) are in charge of procurement and cooperation. The Agency has a branch office for U.S. and Canada in Reston, Virginia http://www.bwb.org. It is worth noting that Germany, while being the third world exporter of weapons, does not have huge “defense corporations”, that is, large companies whose core business is weapons production, but civilian companies that produce weapons in addition to their main business. WT - Wehr Technik is a source of information on BWB activities. Germany has a quota of 11% of defense global export and, according to SIPRI data, between 2004 and 2009 German weapons export doubled.
: Offset regulation is in the official Procurement Law, 3433/2006. The Hellenic Ministry of National Defense is in charge through the department of General Armaments Directorate (GAD), and the Division of Offsets (DO). The threshold for offset request is EUR10 million. The minimum offset requirement is between 80 and 120%. Multipliers are from 1 to 10. Greece does not accept indirect offsets, since it is focused on the strengthening of its military capabilities. According to SIPRI data for 2006-2010, Greece is the 5th weapons importer of the world, with a global quota of 4%, about half of India (9%), and two third of China's import (6%). It is worth noting that Chinese GDP is about 20 times bigger than Greece's nominal GDP. Greece is the major EU importer of weapons and the first U.S. defense client in the European Union.http://www.mod.mil.gr According to K. Vasileios, editor of EPICOS, "currently, there are 122 open offset contracts that were signed between 1997 and 2010 but have not been executed due to various issues."
: New Guidelines for Kuwait Offset Program were published in 2007, following to a Minister of Finance directive, that regards all foreign procurements related to both military and non military contracts. The National Offset Company (NOC) is a state-owned company, and its activities in the Kuwait Offset Program are on behalf of the Ministry of Finance. The offset commitment is still at 35% of the monetary value of military contracts. Threshold is KD 3m, (for civilian contracts is KD 10m.) Since 2007 there have been fundamental changes, making offsets requirements more effective and complex, including the multipliers systems, with more attention on the tangible benefits for Kuwait.http://www.kuwaitnoc.com
: Ministry of Economy is in charge of offset. Polish Offset Law was issued in 1999; Offset regulations were approved in 1996 and revised in 2007. The threshold value for offsets is 5 million Euro and the request is for 100% of offset. Multipliers are between 2.0 and 5.0. Direct offsets for country's defense industry and opening of new export markets are Polish priorities.http://www.mg.gov.pl/English/ECONOMY/Offset+Programmes/Basic+information/ In 2003 Lockheed Martin sold 48 F-16 fighters to Poland for 3,5 billion USD via FMS. The Program is called Peace Sky, and it is financed with a U.S. FMF of 3,8 Billion USD for 15 years. Lockheed Martin offered an offset package to Poland of 6 Billion USD in U.S. business investments. Polish officials called the agreement "the deal of the century." The value of the offset is 170% of the contract price. The Baltimore Sun reported that "such side deals have long been criticized in Washington as a form of kickback that defies the natural forces of free trade, including when Duncan Hunter
called offsets "economic bribes" during a hearing on Capitol Hill this summer (2004)." Rick Kirkland, Lockheed Martin V.P. replied: "It's part of the price of international business, if we couldn't offer them an acceptable package of offsets, they wouldn't be buying an American airplane. It's that simple."
: Defense Minister's directive on Contrapartidas (offsets) has been issued in 2002. Decree-Law 153/2006 and 154/2006 regulates Portuguese Contrapartidas. The Permanent Commission on Offsets (CPC) is a government agency, which depends on the Ministries of Defense and of Economy, and it is in charge of negotiating and supervising offsets. The threshold is 10 million Euro, and the minimum offset request is 100 %. Multipliers have been set between 1 and 5 in 2006. There is no preference with regard to direct or indirect offsets. In 2005 the Portuguese government signed a deal worth 364 M euros to acquire 260 Pandur II armored vehicle from General Dynamics
. The Portuguese Pandur
II includes an associated offset agreement for a value of 516 M euro. Patria
, the only competitor of General Dynamics, was excluded on technical reasons in 2004. Patria unusually appealed the Portuguese Government's decision in court, complaining that General Dynamics's offset package - decisive for the assignment of the contract - was a fake. The Portuguese tender was the first of many in a European commercial war between Patria and General Dynamics, almost exclusively played on offsets and that ended in 2008 with the arrest of Jorma Witakorpi, Patria's CEO, for the Patria case
in Slovenia.
: Saudi Economic Offset Program is under the Deputy Minister of Defense. Saudi offset request is that 35% of their contract value is invested in Saudi jobs creation and training, economic diversification, technology transfer and foreign direct investments in general. Threshold is 400 million Saudi Reals (107 million USD). UK and France have established bilateral offset program with Saudi Arabia. UK Al Yamamah
Economic Offset Program (I, II and III) is the most complex and longest program, it began in 1987 and still alive. The French Offset is directed by Societe Francaise d'Exportation de Systemes Avances (SOFRESA), a private company operating on behalf of the French government. The U.S., in spite of the fact the most of its defense sales to the Kingdom are U.S. Defense Department Foreign Military Sales, leaves offsets to the private contractors, such as Lockheed Martin, SAIC, Boeing, and General Dynamics. Foreign Direct Investments are authorized and supervised by SAGIA http://www.sagia.sa, and they receive high multipliers according to the most strategic sectors and the Kingdom's priorities (such as water, electricity, communications, etc.). Saudi's offset market has an enormous significance for the Saudi non-oil economy since Saudi Arabia spends about 10% of its GDP in defense procurement.
The primary concern of the U.S. about direct offset is keeping a complete and self-sufficient industrial base for its military capabilities, since an erosion of such domestic industrial base is or may be taking place due to military (direct or indirect) offsets, such as co-production and technology transfers. The trans-nationalization of the U.S. defense industrial base is caused also by direct offsets, and this is considered a threat to national security. In U.S. there is also a more sophisticated and free market opinion on the issue of the dislocation of less advanced military components to allied countries, that is, a kind of re-visitation of the U.S. Defense Industry transformation due to the internationalization of the main U.S. Defense companies. This opinion opposes to the protectionist simplification that any dislocation of defense industrial manufacturing capabilities to other countries is a potential threat. A second connected concern is that direct offset, technology transfer, and high-tech indirect offset may help potential U.S. enemies to build a military capability to attack U.S. or U.S. interests around the world.
To be sure, both of the above concerns are real and justified, but not very realistic. The U.S. is so far advanced militarily when compared to the rest of the world that it is not reasonable thinking that direct offsets may create a threat against U.S. security, or at least, a threat that is more dangerous than the very American made exported weapons may pose to U.S. national security. Weapons export and connected military offsets are closely monitored by the Defense Department (on the military side) and by the State Department (on the political side) and by U.S. Congress. Methodologically speaking, it is an important point never to underestimate the enemy and relying on one's one superiority, but it is not realistic thinking that transferring 20 years old technologies to allied countries as offsets of a main U.S. defense sale is a threat to national security. As recent history teaches, most security threats come from domestic breaches, not from authorized tech-transfers abroad. In other words, if a defense technology transfer offset is a real defense security threats, it should not be authorized, if it is not, then using the “national security principle” in all arguments is an abuse that is detrimental to the very ground of the principle.
The most delicate and convincing issue is U.S. economic security. Economy (Competition) and War (Defense) do not follow the same principles and methods, in spite of many useful analogies and significant synergies, and this is especially true in U.S., the greatest Commercial Republic of all times. Commerce Department, through BIS, monitors U.S. offsets specifically from the point of view of the adverse effects on U.S. economy, and reporting yearly to U.S. Congress. President Bush I and Clinton nominated special Commissions to examine the issue of offsets on their unintended domestic adverse effects, focusing on their detrimental effects on U.S. and other weapons exporting nations.
To be sure, the most realistic concern is about the potential loss of jobs in U.S. The effects of almost all requested offsets by purchasing countries are the increase of turnover of the offset involved activities and the creation of more jobs. An exemplification: if the sales of Lockheed Martin
planes requires the offset financing of defense components manufacturing companies in Romania, these Romanian companies would subtract a piece of the market from U.S. companies, and therefore indirectly would cause a loss of jobs in U.S. The argument follows the protectionist view that a factory in U.S. closes because another similar factory opened in Romania or Japan. From the buyer's point of view, offsets are supposed to be a form of economic policy and state intervention. However, from a strict free trade point of view the creation of wealth (production and turnovers as well jobs) in other countries is not detrimental to commercial Republics like U.S., on the contrary, it increases their purchasing power to buy U.S. defense products.
The matter of indirect offsets, and specifically civilian offset, poses other types of problems and serious economic concerns. Generally speaking indirect offsets do not affect U.S. national security. But if indirect offsets, such as marketing or financing of foreign competitors of U.S. companies, help competitors to grow internationally, or even in the U.S. domestic markets, the problem of the adverse effects of indirect offsets on U.S. economy becomes real. The interaction of defense indirect offsets with non-military U.S. business is substantial, given the amount of offset obligations of U.S. toward competing economies. BIS monitors these effects closely in all fields, but it is clear that if a U.S. marketing assistance indirect offset, for instance, helps a European company to sell its products and services in a third importing country, where a U.S. companies may sell their own equivalent products, this may constitute a relevant adverse effects of U.S. defense industry offset practices.
The most uncontrollable effects, however, is when indirect offsets strike U.S. small and medium domestic companies with no information about it, and with a protection of secrecy. This point is also present in the internal/domestic European Union market, that expresses a similar concern for the unfair distortion of normal competitive market caused by indirect non-military offsets, protected by unjustified secrecy [see following section]
The actual situation in EU is described in detail in a study on defense offsets in the Union countries commissioned by the European Defense Agency and published in 2007. According to this study the volume of EU offset agreements in 2006 was above 4-5 billions euro. The distribution of these offsets is as shown in the diagram: Direct Offsets, Military Indirect Offsets, Civilian Indirect Offsets.
European policy on offsets is still regulated by the Treaty establishing the European Community. Art. 223 of the Treaty of Rome (1958), then article 296 of the EU Treaty of Amsterdam (1999); since December 2009, the Treaty of Lisbon (art. 346) protects member States weapons production and trade from competition rules of the common European market. In spite of 50 years of European history Article 223 (Rome) and Article 346 (Lisbon) are practically identical. Today the hinge of EU policy on offsets is still the same article, that is, Art. 346 of the Lisbon Treaty. This article preserves the national right to the secret of state related to it own security and military production and procurement.
This is the relevant part of Article 346:
The first part of the article states that European Union has no authority over national states policies and decisions on their defense/security choices. In other words, EU has no saying about domestic preference for homemade planes or tanks, or for preferred military offsets choice. The second part, however, asserts a shared principle by all EU states regarding the non military/indirect offsets, that is, EU reserves its right to supervise and regulate indirect-non-military offset effects, so that they do not “adversely affect the condition of competition” in the internal common EU market.
Any civilian-indirect-offset has distortion effects in the common market, and this distortion is amplified by the ignorance about specific offset agreements outside the circle of defense contractors and national authorities. U.S started monitoring offsets adverse effects in United States when a small paper-making equipments company in Wisconsin (Beloit Corporation) got in trouble without understanding that the reason was an hidden cause, that is, an indirect offset by Northrop (now Northrop Grumman
) with the Finnish Ministry of Defense. Only a concerned Wisconsin politician, Sen. Russell D. Feingold, discovered the real reasons in 1992, after being informed that a tender for supply of machinery of the value about 50M USD was not awarded to the Wisconsin company, but to a Finnish company (Valmet Corporation) as part of an offset deal with the Finnish Government.
This U.S. offset story brought to light the issue of the impact of confidential agreements by defense companies on U.S. non military business, in some instances with devastating effects. Feingold's discovery is enlightening for the EU common market as well, where interferences and adverse impacts on EU companies are allowed by an unjustified national attitude for confidentiality or secrecy on indirect, non military, offset deals. Art. 346 of Lisbon Treaty, written more than 50 years ago, is there to wisely avoid disruptive effects caused by unjustified military secrecy in civilian offsets in the common European market. In EU market of Defense, approximately of the size of $250B, with 27 sovereign state authorities that can claim secret of state -from Germany
to Cyprus
and Luxembourg
-, there is a potential for indirect non-military offsets of $60B, that is, more 1000 times the distortion problem caused by Northrop (and the Finnish Ministry of Defense) to Beloit.
One domestic U.S. based organization that deals with offsets is:
There are many regional or national offset conferences and symposiums, but recently GOCA and DMA jointly organize global offset meetings every two years. The first global meeting on offset took place in 2004 in Sintra, Portugal; then in Athens, Greece (2006); the third in Seville, Spain, in 2008. GOCA and DIOA hold both individual and joint conferences several times per year.
Countertrade & Offset is a fortnightly magazine on the offset industry; the same publisher has also a quarterly for the industry: The Offset Guidelines Quarterly Bulletin.
Counter-trade can also be considered one of the many forms of defense offset, to compensate a purchasing country. The main difference between a generic offset and counter-trade, both common practices in the international defense trade, is the involvement of money. In counter-trade goods are paid through barters or other mechanisms without the exchange of money, while in other defense offsets money is the measure and the medium of exchange.
Definition
An offset agreement is an agreement between two parties whereby a supplier agrees to buy products from the party to whom it is selling, in order to win the buyer's custom and offset the buyer's outlay. Generally the seller is a foreign company and the buyer is a government that stipulates that the seller must then agree to buy products from companies within their country. Often, the aim of this process is to even-up a country's balance of tradeBalance of trade
The balance of trade is the difference between the monetary value of exports and imports of output in an economy over a certain period. It is the relationship between a nation's imports and exports...
. This is frequently an integral part of international defense contracts.
Offset as unfair burden
The U.S. Government's definition of offset agreement is the most crucial, since the U.S. aerospace and defense industry is exporting the majority of the world’s weapons, and therefore engaged in the majority of the world’s offsets. The U.S. has a Commerce Department Division, the Bureau of Industry and SecurityBureau of Industry and Security
The Bureau of Industry and Security is an agency of the United States Department of Commerce which deals with issues involving national security and high technology. A principal goal for the bureau is helping stop proliferation of weapons of mass destruction, while furthering the growth of United...
(BIS), that deals specifically with U.S. defense offset agreements with foreign nations as main subset of U.S. industrial security. BIS - whose main task is protecting U.S. security from the point of view of export of high technology, fostering commercially U.S. foreign policy, and U.S. economic interests- deals with U.S. aerospace and defense companies that export to foreign countries' defense products, systems or services, by way of the “offset agreements,” that is those sale's collateral or additional agreements requested by purchasers. BIS defines offsets as “mandatory compensations required by foreign governments when purchasing weapon systems and services.”
U.S. Government underlines the compulsory aspect of this trade practice, since United States, with other weapons exporting countries, such as Germany and France, opposes offsets as forms of protectionism and harmful transgressions of free market rules. These governments frown on offset agreements, consider them to be both market distorting and inefficient.
Offset as partnership
In a less one-sided definition of offsets, more in line with the majority of world countries, and not so much connected with the seller's point of view, offset can be defined as compensation for major sales/purchases of weapons, somewhat an attempt to share profits connected with the weapon industry trade. In 2008 the Brazilian Minister of Strategic Affairs, speaking of a major defense purchase by his country, highlighted this key point: “We will not simply be buyers or clients, but partners.” The competition by different companies “in offering comparable weapons to a country" is also on the level of “sharing” or “partnership” with the purchaser, Roberto Mangabeira UngerRoberto Mangabeira Unger
Roberto Mangabeira Unger is a philosopher and politician. He has written widely on social, political, legal, and economic theory, much of which has laid the philosophical and theoretical groundwork for reimagining and remaking the social and political order...
added.
Offset as marketing tool
In weapons trade defense contractors are fully aware that offsets are powerful marketing tools to motivate the purchase, by showing and giving additional advantages for the purchasing country besides investing on military equipments. The U.S. defense industry position seems to be more practical, and somewhat quietly nonaligned with U.S. Government economic or political assessment of defense offsets. Generally speaking, one can understand offsets as a widespread sale technique. As such, they are not restricted to weapons sale, they belong to commerce itself, in the same way that rebates, price-pack deals, or loyalty rewards programs do. Understanding “defense offsets” as part of a sales technique, helps to curb the justified yet excessive emphasis on their mandatory nature.Often defense offsets are more motivating than the primary defense acquisition, for personal or political reasons. This may seem irrational, but it is part of commerce. If one adds the prevalent political aspect of spending huge public funds on modern weapons, then the motivating significance of defense offsets could not be underestimated in contemporary decision processes of democracies. Prime defense contractors are well aware of offsets power in the psychologies of democracies. As anyone can understand, the seller will include the cost of the “Envelope B,” that is of the offset and an added value for the purchaser, in its total cost. In other words, the client will pay for the offset, it is not a free lunch. But the key question is: to what extent is the offset proposal a factor in the consideration of defense contractor’s tender during the evaluation and the decision procedures?
Transparency International
Transparency International
Transparency International is a non-governmental organization that monitors and publicizes corporate and political corruption in international development. It publishes an annual Corruption Perceptions Index, a comparative listing of corruption worldwide...
clearly summarizes the risks of corruption of offsets as marketing tools, that makes offsets "the ideal playground for corruption":
The universe of this military niche of offsets trade is sophisticated and less innocuous than commonly believed. In 2000 Daniel Pearl
Daniel Pearl
Daniel Pearl was an American journalist who was kidnapped and killed by Al-Qaeda.At the time of his kidnapping, Pearl served as the South Asia Bureau Chief of the Wall Street Journal, and was based in Mumbai, India. He went to Pakistan as part of an investigation into the alleged links between...
wrote an article about the universe of offsets: “could the sale of U.S. weapons in the Persian Gulf help an oil concern unload gasoline stations in Europe? Yes, under the new logic of international arms deals.” Pearl describes the new-found world of indirect offsets:
The market size of the international offset business is related to the size of the international weapon export in the world. According to SIPRI
SIPRI
Stockholm International Peace Research Institute is an independent international institute dedicated to research into conflict, armaments, arms control and disarmament...
, in 2007 there were US$51 billion of weapons exports, an approximate value because it is open source, and not all weapons deals data are open source information.
Defense offset example
As an example of a defense offset proposal we could describe a hypothetical case of Nation P (Purchaser) buying 300 tanks from defense company S (Seller, of Nation S). The total sale contract is $400 and Nation P (Purchaser) requests 120 % of offset. Defense Company S (Seller) is obliged to fulfill an offset equal to 120% of the sales contract, that is 480 M USD. Nation P agrees on a list of specific offset deals and programs to fulfill the agreed total obligation with Company S (Seller). The offset agreement includes both direct and indirect offsets.Nation P also assigns a credit value for each typology of offsets offered by Company S. The credit value for the offset obligations is not the “actual value,” but it is the “actual value” by a multiplier, that expresses the degree of interest of Nation P (Purchaser) in the proposed offsets. In other words, something deemed very valuable by nation P will have a high multiplier that expresses the importance and the value to Nation P of that type of offset. The multiplier (for instance 2, or 5, or 7) translates nation P's attached value into the credit value, that eventually accounts for the fulfillment of the agreed sum of $480 (120% of offset); it is evident that with no multipliers, 120% offset would be a nonsense.
Most of the offset packages are divided into direct and indirect offsets. Here is a hypothetical complex offset offer, divided into direct and indirect offsets in Nation P.
Direct Offsets (military and related to the product of the Company S, i.e. tanks)
- Co-production: Nation P chooses one or more local companies to manufacture some components of the tanks, such as turrets and some of the internal components. The actual value of the components is $70 million dollars. Nation P assigns a multiplier of 3, since this develops capabilities of its military industrial base and creates jobs in Nation P. The total credit value for the fulfillment of the overall offset obligation is 70 M x 3 = 210 M.
Indirect Offsets (civilian and not related to the production of the weapons item, the tanks. They could be also military or security related, but not directly connected with the main acquisition, i.e., the tanks)
- Foreign Direct Investments: Company S makes investments in 5 (defense or non-defense) companies in Nation P. The total value of the investments is $14.5 M, and the multiplier is 4, a high multiplier, since nation P suffers from a chronic lack of Foreign Direct Investments. This makes an additional credit value for Company S of $58 M.
- Technology Transfer: Company S provides water desalination technologies to one Nation P company. This technology is particularly appreciated by nation P. Its actual value is $20M , but the credit value is 7 times the actual value, that is $140M.
- Export Assistance and Marketing: Company S provides commercial assistance to market products and services of a nation P's company in a difficult market, such as, for instance, the Middle East. The assistance is offered for 8 years, at the value of $3M per year. Nation P considers this assistance to export as important to create new revenue streams and jobs for its company, and sets a multiplier of 3. Credit Value $72M. (Since company S is not an expert on marketing and export assistance it may hire a specialist company to subcontract the job. Such a subcontractor is also known as an “offset fulfiller”).
Nation P controls not only the supply of the military systems or services, but also the implementation of the offsets according to the offset agreement included or related to the main supply contract. This control is within the Minister of Defense and/or Ministry of Economy or Finance, or Ministry of Industry and Trade. Often arms importing nations establish special agencies for the supervision of the defense offsets.
Types of offset
There are two types of offset. "Direct offset" is when the compensation offered to the buyer is directly related to the initial transaction. For example, a buyer of military equipment may be given the right to produce a component of a related technology in the buyer's country. The right is usually for a limited period."Indirect offset" is when the supplier is expected to purchase goods from the buyer, which are unrelated to the initial product being supplied. These could include raw materials, agricultural commodities or other products.
One of the ways to legally compensate for the high-price purchase of military equipment or systems is to offer services, investments, counter-trade and/or co-production as offsets. For instance, Greek companies produce part of the Lockheed C-130 that they bought from U.S. The Greek co-production is a U.S. direct offset. Or, in a more sophisticated form of offset involving three countries, Portugal is in charge of the maintenance of Kuwaiti Lockheed Martin
Lockheed Martin
Lockheed Martin is an American global aerospace, defense, security, and advanced technology company with worldwide interests. It was formed by the merger of Lockheed Corporation with Martin Marietta in March 1995. It is headquartered in Bethesda, Maryland, in the Washington Metropolitan Area....
aircraft. This is a Portuguese “direct offset"', since Portugal bought the aircraft, and is partner in charge for their maintenance. An investment in a security software company of Romania, or in assisting the export and marketing in difficult areas of a Belgian environmental company are other forms of actual indirect offsets.
The most common distinction in offset proposals is between direct and indirect offset.
Direct offset is a side agreement that has to do with the main product/service that is bought/sold, that is military equipment, systems, or services. They may be also called military offsets. Indirect offsets are side agreements that are not directly related to the product/service that is bought/sold. Most people refer to such category of offsets as civilian offsets, though there are many indirect offsets that are not civilian offsets.
The most common types of direct/indirect offsets are:
| Direct offset | Direct or Indirect offset | Indirect offset |
|---|---|---|
| Co-production | Technology Transfer | Export Assistance |
| Subcontracts | Training | Purchases |
| Licenced Production | Offset Swapping (compensation of offsets' obligation through reciprocal abatement) | |
| Foreign Direct Investment, Credit Assistance and Financing | ||
The most complete and accurate list of form of actual offsets can be found in BIS Annual Reports to Congress, where all forms of registered offset are codified, according to the old Standard Industrial Classification
Standard Industrial Classification
The Standard Industrial Classification is a United States government system for classifying industries by a four-digit code. Established in 1937, it is being supplanted by the six-digit North American Industry Classification System , which was released in 1997; however certain government...
.
Defense prime contractor, offset service providers
In medium and large tenders for weapons systems the bid can be very complex, involving one or more than one company as bidder. The main offer is guided by a prime contractor, that may have other companies associated to the bid as partners or as subcontractors. However, in regards to the agreed offset proposal only the prime contractor is liable toward the final client for its fulfillment. Since offsets are increasingly complex, the prime contractor may hire subcontractors to fulfill its contractual obligations. While the liability for the offsets stays with the prime contractor, the job can be executed by a subcontractor, or an offset fulfiller.One of the collateral benefits of offsets in U.S. (probably not offsetting the adverse effects of defense offsets on economy and jobs) is the proliferation of legal and economic jobs in the “offsets sector,” that goes from international legal companies to the fully staffed international offices of U.S. defense companies. In addition, the establishment of new companies in “offset” venture capital, in “offset” marketing assistance: offset fulfillers that provide their support services to the defense and aerospace industry. While many offset programs originally evolved as a result of defense and aerospace sales, today many new offset / Industrial Partnership programs have developed as a result of nations wanting to improve their industrial base, level of technology and desire to become more self sufficient across a broad range of industry sectors. As a result of this new interest and demand for Industrial Partnership, there has been both a growth and establishment of new offset associations. There are both Global and Domestic "Offset" / Industrial Partnership organizations. The largest and most widely attended global association is GOCA, the Global Offset and Countertrade Association, whose purpose is to promote trade and commerce between companies around the world and their foreign customers through a greater understanding of countertrade and offset. Each year GOCA hosts several industry meetings in partnership with other European and American offset organizations such as the ADS, Aerospace Defence Securityhttp://www.adsgroup.org.uk and DIOA, the U.S. Defense Industry Offset Associationhttp://www.dioa.org. DIOA was established in 1985 by members of the U.S. Defense Industry to foster education, networking and guidelines for professionalism in offsets implementations.
The industry meetings referenced above are attended by leading global industrial companies, companies that specialize in providing support services for Industrial Partnership fulfillment, and by various government and military authorities, mostly from national ministries of defense and economy, who oversee and monitor offset and Industrial Partnership programs. The purpose of these industry meetings is to educate, and to foster relationships between the various offset obligors and beneficiaries so that real and sustainable economic benefits can be delivered to nations who are seeking to improve their respective economies. Offsets and Industrial Partnership programs have been evolving for over three decades and there are dozens of articles that describe various successes and challenges that have resulted from implementing offset programs. The most widely read publication that deals with the developments in the Offset and Industrial Participation arena is Countertrade and Offset ("CTO")http://www.cto-offset.com.
Offset fulfillers /service providers may perform various support services including : marketing assistance, sourcing and structuring venture capital or other forms of corporate credit for Foreign Direct Investment
Foreign direct investment
Foreign direct investment or foreign investment refers to the net inflows of investment to acquire a lasting management interest in an enterprise operating in an economy other than that of the investor.. It is the sum of equity capital,other long-term capital, and short-term capital as shown in...
(FDI), or more complex things, such as a joint ventures to produce shrimp (Devcorp, Bahrain http://www.devcorpint.com/), a sugar factory, or, recently, environment and renewable energy.
Offset certificates, penalties, confidentiality clauses, pre-offset activities
Offsets are of various durations. They may be planned to last for 1 or 2 years, but 8-10 year plans are very common; exceptionally long is an offset like Al Yamamah Program, a BAE-UK offset in Saudi Arabia in place since 1987. Clients (sovereign countries) have in place mechanisms to control their implementations, and to certificate milestone accomplishments in their offset programs. An offset supervision authority certifies the advancement in the offset completion in percentages, issuing offset certificates. These certificates may be issued to prime contractors fulfilling their offset agreement, but also to offset fulfillers, that have subcontracted the job from prime contractors and registered as such in the foreign countries. When there are multipliers, such certificates express the percentage of completion in "credit value" ("actual value" X multiplier). Offset fulfillers redeems the offsets certificates through contracts or subcontracts with the prime contractor. More recently, given the importance and the growth of offset practices around the world, offset fulfillers can “sell” their certificates to prime contractors other than their initial one, as long as they have national offset commissions authorizations. In this profitable niche of defense industry made by offset specialists, lawyers and companies - there is also a “currency” and a “trade” of offset certificates.Like in any contract, there are forms of penalty for failing to complete offset obligations. Many nations have rigid systems of penalties, including the use of bank guarantees, while other nations believe in a continued negotiations that are based on “the best effort” clauses. The list incentives and penalties for offset is no different from many other systems of procurement, with two notable exceptions:
1. In the offset business there are two contracts proceeding in parallel, i.e. primary (A) and side (B) contract:
-
- A) The supply of defense equipment/services from the Defense Company to the Client (Foreign State), according to contractual specification (quality, quantity, time, etc)
- B) The offsets progress as monitored by the same Client (Foreign State), but most of by a different State entity, according to contractual offset agreement (quality, quantity, time, etc.).
- These two contracts impact on each other, and problems with one can affect the other. However, since most offsets today are not “direct,” this may create confusions and distortions, especially because of “indirect offsets.”
2. In direct offsets contracts there are legitimate "clauses of confidentiality", that in several countries may even assume value of official classification, up to secret of state. In European Union States, however, extending state secret classifications to indirect offsets - that have nothing to do with military or state security - is and it is considered an abuse. For instance, classifying an offset not-related to state security or military preparedness - such as indirect and civilian offsets in pharmaceutical research, environmental technologies or export assistance of any non-military/security products - leads not only to major market distortion
Market distortion
In neoclassical economics, a market distortion is any event in which a market reaches a market clearing price for an item that is substantially different from the price that a market would achieve while operating under conditions of perfect competition and state enforcement of legal contracts and...
s but also to possibly unpunished corruption protected by baseless secrecy.
Pre-offset activities are allowed and welcomed by several countries; they are like offsets without certainties to obtain “credit value”. These activities are straight marketing activities, similar to lobbying, to promote specific defense purchases. These pre-offset activities must be registered as such with national authorities. Often pre-offset activities will receive certificates, after a sale. Defense companies include them in the marketing budget, but after the sale, these offsets go into their offset budgets, and count toward offset fulfillment. These kinds of pre-offset activities are sales arguments to convince the buying state of the strength and reliability of the aerospace & defense company as potential supplier and partner. The pre-offsets arena is also the delicate and problematic field of sale-facilitators and, precisely because the client is a state, this must be monitored with additional care, since this field is prone to abuse and outright corruption.
Foreign military and direct commercial sales – "no known offsets" and FMF
For the U.S., the major world exporter of weapons by far, there are two main ways to sell weapons to a foreign country. The first is referred to as "Direct Commercial Sale" and it is a company to government sale. The second way is referred to as "Foreign Military SalesForeign Military Sales
The U.S. Department of Defense's Foreign Military Sales program facilitates sales of U.S. arms, defense equipment, defense services, and military training to foreign governments...
", that is a government to government sale.
A Direct Commercial Sale is highly supervised by U.S. Government and even by the U.S. Congress, in spite of its free market appearance. The arms trade, because of its connection with national security, is never free from strict government supervision.
For a sale to a foreign country's Defense Department, a U.S. defense firm must be licensed. It is checked by the Defense Department and by the State Department, and, in the case of relevant sales, even authorized or vetoed by U.S. Congress. Direct Commercial Sales are highly regulated because of security, political, and commercial reasons. Even from the point of view of indirect and non-military offset agreements, U.S. Defense companies and their subcontractors (offset fulfillers) must present detailed report of their offset activities to the Commerce Department, Bureau of Industry and Security
Bureau of Industry and Security
The Bureau of Industry and Security is an agency of the United States Department of Commerce which deals with issues involving national security and high technology. A principal goal for the bureau is helping stop proliferation of weapons of mass destruction, while furthering the growth of United...
(BIS).
Foreign Military Sales are indirect sales of weapons produced by one or more U.S. contractors through an agency of the Department of Defense
United States Department of Defense
The United States Department of Defense is the U.S...
, the Defense Security Cooperation Agency
Defense Security Cooperation Agency
The Defense Security Cooperation Agency , as part of the United States Department of Defense , provides financial and technical assistance, transfer of defense matériel, training and services to allies, and promotes military-to-military contacts....
, DSCA. In a way, DSCA acts as Prime Contractor's agent in promoting and selling U.S. made weapons to foreign countries. The known FMS disadvantage is that DSCA adds to the final sale price a small percentage for its own administrative costs; the advantage is some free training with U.S. Armed Forces for joint international operations. In this type of sale, however, there are two important aspects in regards to the offset business.
1) Since 1990, under a specific directive by President George Bush, no U.S. Federal Agency or U.S. Government employee can be involved in the offset business. To each press release about a FMS (or of any documents regarding a FMS), there is a standard disclaimer: “There are no known offset agreements proposed in connection with this (potential) sale.”
The Defense Security Cooperation Agency acts on behalf of the prime contractor with a foreign government and refuses even the mere knowledge about offsets, but under the FMS program prime contractors are allowed to put all their offset costs into the final price.
The cost of the offset is not even itemized in the FMS
FMS
-Government agencies:* Federal Magistrates Service, the former name of the Federal Magistrates' Court of Australia* Federated Malay States , historical British protectorate in then British Malaya...
offer, and if the client wants to discuss or simply to know the cost of the offset, the client must speak directly with the Contractor and not with DSCA. In other words, U.S. Government cannot deal with offsets, U.S. Defense Prime Contractors can and do. DSCA has made available in its complete manual details and analytical explanations for U.S. Defense companies on how to include the offset various costs into their contract and invoices. So prime contractors, even under FMS, are allowed to recover all costs “of any offsets which are associated with those contracts.” To be sure, “U.S. Government agencies may not enter into or commit U.S. companies to any offset agreement.”
De facto during the cold war offsets had different functions and often U.S. Government Agencies were directly involved. President Bush, by ending the cold war with a victory, likewise ended U.S. agencies’ liability in delicate practices like the offsets (1990), since they lost the primary political value they had during the cold war.
2) U.S. funds assigned by United States Foreign Military Financing
United States Foreign Military Financing
The Foreign Military Financing program provides grants and loans to help countries purchase weapons and defense equipment produced in the United States as well as acquiring defense services and military training. FMF funds purchases are made through the Foreign Military Sales program, which...
(FMF) that may be connected with Foreign Military Sales
Foreign Military Sales
The U.S. Department of Defense's Foreign Military Sales program facilitates sales of U.S. arms, defense equipment, defense services, and military training to foreign governments...
(FMS) cannot be used for any type of offsets, if they are non-repayable funds. On the other hand, FMF funds may be used for offset costs if they are loans. In any case, "U.S. Government agencies may not enter into or commit U.S. firms to any offset agreement."
List of countries' offset policies
The following is a cursory survey on some countries' offset policies. It does not enter into details, and basically it gives: 1) the legal base for the offset; 2) the purchase threshold above which there is a requests for offset; 3) the requested “quantity” of offset by the country in terms of percentages of the contract value; 4) the applied multipliers, that qualify (“quality”) through a number the appreciations of a certain type of offsets (the “Credit Value” of an offset is the “Actual Value” by the multiplier); 5) and some remarks or specific information, including the websites of the National Offset activities.A detailed list of the National Laws and Policies of the Countries of the European Union can be found in the website of European Defense Agency in a new “EU Offset Portal”http://www.eda.europa.eu/offsets/. Another very useful analysis of country policies can be found in Belgian Ministry of Economy (in charge of Belgian offsets). This publicly available document gives one of the most intelligent global analysis of countries offsets policies, with a purchaser's perspective, that is the point of view of weapons importer countries http://economie.fgov.be/organization_market/compensations/industrial_offset_en.htm. From a similar point of view, one can see the purchaser's point of view on offsets in UAE offset web-page http://www.offset.ae, in the new Kuwaiti articulated offset policy http://www.kuwaitnoc.com.
On the seller's point of view, in Bureau of Industry and Security
Bureau of Industry and Security
The Bureau of Industry and Security is an agency of the United States Department of Commerce which deals with issues involving national security and high technology. A principal goal for the bureau is helping stop proliferation of weapons of mass destruction, while furthering the growth of United...
(BIS) Annual Reports to U.S. Congress one can find the position on offsets of weapons exporters countries like U.S. Magazines and specialized publications like Jane's Defense Industry http://www.janes.com, EPICOShttp://www.epicos.com, Countertrade & Offset or CTO http://www.cto-offset.com give detail accounts and updates on national policies, requests, changes, etc.
- The Department of Defense (Defense Material Organization) is in charge of the offset. The threshold is 5 millions of Australian Dollars. Multipliers go from 1 to 6. By rule, Australia does not accept indirect (civilian) offsets, unless such offsets brings benefits to the Australian Defense Industry.http://www.defence.gov.au/dmo/
- Offset Agreements are negotiated by the Federal Ministry of Economic Affairs and Labor on a case by case basis; the percentage of offset is above 100%, up to 200% (and sometimes even more) of the contract values. Austria has one of the highest requests in the world for nominal quantity offsets. However, multipliers can go up to 10. The minimum value of the sale for mandatory offsets is 726.000 Euro. This high offset policy, applied to EADSEADSThe European Aeronautic Defence and Space Company N.V. is a global pan-European aerospace and defence corporation and a leading defence and military contractor worldwide...
Eurofighter TyphoonEurofighter TyphoonThe Eurofighter Typhoon is a twin-engine, canard-delta wing, multirole combat aircraft, designed and built by a consortium of three companies: EADS, Alenia Aeronautica and BAE Systems; working through a holding company, Eurofighter GmbH, which was formed in 1986...
s purchase in 2002 and still ongoing, was changed in 2008-9 when Austria signed the voluntary EU Code of Conduct on Offset. The relevant changes are the reduction of the offset quantity to 100% (that is the value of the purchase contract), the value of multipliers, and the monitoring function of the Federal Ministry of Defence and Sports http://www.eda.europa.eu/offsets/viewpolicy.aspx?CountryID=AThttp://www.bmwfj.gv.at/EN/
- Bahrain has no offset policy. The Kingdom imports about 80% of its weapons from U.S. via FMS, and the rest of weapons procurement comes from U.K. However, a specific offset policy is expected soon.
: A Royal Decree (6/2/1999, and modified-6/12/2001) is the legal foundation of the Belgian Industrial Benefits Program. The program is directed by Ministry of Economic Affairs (Industrial Benefits in the Field of Defense Procurement http://economie.fgov.be/en/binaries/industrial_compensations_en_tcm327-58443.pdf). The threshold value is usually 11 million euro, but it is lower if it is not a public and open tender. The minimum required offset is 100%. Multipliers are not specified. The focus is on high technology and new or additional business flow. The Belgian offset guidelines are very sophisticated. One of the most important and explicit points is the so-called “newness aspect:” offsets, such export assistance, “must create unambiguously a new or additional business flow in export” for Belgian companies. Belgium distinguishes three forms of offsets: direct, semi-direct, and indirect. Belgium has a specific problem with the Industrial Benefit Programme, related to the de facto split of the country into Walloonia and Flanders
Flanders
Flanders is the community of the Flemings but also one of the institutions in Belgium, and a geographical region located in parts of present-day Belgium, France and the Netherlands. "Flanders" can also refer to the northern part of Belgium that contains Brussels, Bruges, Ghent and Antwerp...
. Belgian offset program is more meticulous than other European countries, but Belgian citizenry is aware that paying for offsets, instead of getting weapons at off-the-shelf price, implies not-so-transparent transfers of taxpayers money to designated Belgian companies through political decisions. One can rightly consider such offset-transfer as confidential state subsidy
Subsidy
A subsidy is an assistance paid to a business or economic sector. Most subsidies are made by the government to producers or distributors in an industry to prevent the decline of that industry or an increase in the prices of its products or simply to encourage it to hire more labor A subsidy (also...
. Flemish parties claim that subsidies to Wallonia cost proportionally more than the price West Germany paid for East Germany. The subsidies/offset issue was particularly acute in the repartition of direct and indirect industrial benefits for one of the recent acquisition with offsets: 242 Mowag Piranha
Mowag Piranha
The MOWAG Piranha is a family of armoured fighting vehicles designed by the Swiss MOWAG , corporation....
for the Belgian Army
Belgian Army
The Land Component is organised using the concept of capacities, whereby units are gathered together according to their function and material. Within this framework, there are five capacities: the command capacity, the combat capacity, the support capacity, the services capacity and the training...
from General Dynamics
General Dynamics
General Dynamics Corporation is a U.S. defense conglomerate formed by mergers and divestitures, and as of 2008 it is the fifth largest defense contractor in the world. Its headquarters are in West Falls Church , unincorporated Fairfax County, Virginia, in the Falls Church area.The company has...
, over 700 M Euro. One of the controversial offsets connected with the Piranha III is a direct offset for the Piranha III co-production, and the disputed choice of a 90mm gun (produced by a Wallonian company) instead of 105mm NATO standard cannon.
- Under the Ministry of Defense, Air Force, Navy and Army have separate offset policies, or Industrial Cooperation Divisions. Offsets thresholds are different for each branch of the Brazilian Armed Forces (between 1 million and 5 million USD). The total offset request above 5 million USD is 100%. Multipliers are between 1 and 4. Brazilian offset policies emphasize technological development of its defense industry through technology transfers, cooperation, co-production.
- Public Procurement Law 2004, revised in 2009. Direct offsets are supervised by the Defense Ministry, and indirect offsets by the Ministry of Economy and Energy. There is however a Permanent Inter-Ministerial Council of Special Purpose Public Procurement to approve offset agreements. The Agency for Information, Technology and Communications (SAITC) assists and coordinates offset projects. The threshold for offset is 5 millions Euro. The minimum Value is 110% of the contract value. Multipliers are between 1 and 3. Offsets are generally 30% direct and 70% indirect.http://www.mee.government.bg/eng/offsetp/offsetp/docs.html?id=201014
- Canada's offset agreements (known as Industrial and Regional Benefits (IRB)) are managed by the IRB directorate within the Canadian government's Department of Industry. The IRB Policy was created in 1986 to assist Canadian companies in leveraging government procurement. The Policy requires that prime contractors place sub-contracts and investments in the high-tech sectors of the Canadian economy in an amount usually equal to the value of the defence contract won. Investments can be direct (transactions that give small- to medium-sized enterprises an opportunity to provide goods, services and/or long-term service support directly for the items being procured by the government) or indirect (transactions which are not directly related to the procured items and are, instead, related to investments, technology cooperation, and product mandates). http://www.ic.gc.ca/irb.
The Prague Post
The Prague Post is an English language weekly newspaper covering the Czech Republic and Central and Eastern Europe.It is the only English-language newspaper in the Czech Republic...
"the investigation will center on two main issues: the alleged bribery of politicians and the military's reasons for paying three times more for the Pandur than Portugal, which also purchased" the same armoured vehicle.: Ministry of Defense is in charge, but the Ministry of Economic Affairs is monitoring offset implementations. The Industrial Cooperation policy was issued in 2005. The threshold is DKK 25 million. Minimum offset requirement of 100%. Multipliers but can be considered for R&D and technology transfers. Denmark signed a trilateral agreement with UK and The Netherlands on “best practice for the application of abatements in offset” regarding swaps of offset obligations.
- No offset law. Estonia is particularly interested in counter-trade.
- No law, only public guidelines on Industrial Participation. The Ministry of Defense is in charge, Defense Materiel Industry and Industrial Participation, but with The Ministry of Trade and Industry. The minimum contract value for offsets is EUR 10 million. 100% minimum of offset requirement. Multipliers are between 0.3 and 3.0 (for Finnish export). Technology transfer multipliers are negotiated. Finland's focus is on its domestic defense industry.
- No formal offset policy, but has counter-trade and offset departments in the Ministry of Economic Affairs and in the Ministry of Defense. However, France like U.S., is almost completely independent on its own military needs, and it has a minimal amount of weapon procurements from foreign countries.
: German official position is that offset arrangements are economically counterproductive in defense trade. However, Germany applies a policy of “industrial balances,” based on 100% of the contract value. German Federal Ministry of Defense (BMVg), and The Federal Office of Defense Technology and Procurement (Das Bundesamt für Wehrtechnik und Beschaffung - BWB, that is an Acquisition Agency) are in charge of procurement and cooperation. The Agency has a branch office for U.S. and Canada in Reston, Virginia http://www.bwb.org. It is worth noting that Germany, while being the third world exporter of weapons, does not have huge “defense corporations”, that is, large companies whose core business is weapons production, but civilian companies that produce weapons in addition to their main business. WT - Wehr Technik is a source of information on BWB activities. Germany has a quota of 11% of defense global export and, according to SIPRI data, between 2004 and 2009 German weapons export doubled.
: Offset regulation is in the official Procurement Law, 3433/2006. The Hellenic Ministry of National Defense is in charge through the department of General Armaments Directorate (GAD), and the Division of Offsets (DO). The threshold for offset request is EUR10 million. The minimum offset requirement is between 80 and 120%. Multipliers are from 1 to 10. Greece does not accept indirect offsets, since it is focused on the strengthening of its military capabilities. According to SIPRI data for 2006-2010, Greece is the 5th weapons importer of the world, with a global quota of 4%, about half of India (9%), and two third of China's import (6%). It is worth noting that Chinese GDP is about 20 times bigger than Greece's nominal GDP. Greece is the major EU importer of weapons and the first U.S. defense client in the European Union.http://www.mod.mil.gr According to K. Vasileios, editor of EPICOS, "currently, there are 122 open offset contracts that were signed between 1997 and 2010 but have not been executed due to various issues."
- The offset legal base is a Government Decree 228/2004 and offset authority is the Ministry for National Development and Economy - Directive No. 23/2008. The threshold is HUF1 billion (3.5 Mil Euro) with a minimum offset requirement of 100%. Multipliers can go up to 15. The confidentiality clause on offsets is essentially commercial, as a normal Non Disclosure Agreement.http://www.nfgm.gov.hu/feladataink/kulgazd/ellentetelezes
- No formal offset policy. Japan Defense AgencyJapan Defense AgencyThe is a cabinet-level ministry of the Japanese government. As a result of a law enacted on December 15, 2006, it became a ministry on January 9, 2007. Prior to that, it was the Japan Defense Agency ...
(JDA) depended directly on the Prime Minister and was in charge of defense procurement, thorough the Bureau of Equipment and the Bureau of Finance. However, since 2007 the Japan Defense Agency (JDA) has been transformed into a full Ministry of Defense, with a minister in cabinet-level decisions. Most of the Japanese defense import is from U.S., and it is regulated by bilateral agreements. The majority of defense bidding goes through the representation of Japanese trading companies, though direct bidding is theoretically possible. There is an unspoken policy for the largest Japanese companies that is an understood as “Buy Japanese” products policy. Two remarks: Japan, Germany and Italy, in spite of evident cultural differences, have similar political attitudes in “balancing” foreign weapons procurements. But Japan, in the name of political principles and then of official laws, restrained itself on weapon exports, and since the 1970s Japanese defense industry is self-confined to Japanese domestic market.http://www.mod.go.jp/e/index.html - Government issued a Defense Procurement Procedure in 2006, revised in 2008. The threshold is 3 billion RS (65 mil USD), 30% of offset. Multipliers are not clear. Above 300 billion RS (697 mil USD), there is a requirement of “indigenization,” that is a Buy Indian requirement for 30-50% of the contract value. For offset are also accepted subcontract in outsourced services, such as engineering, design, and defense software.
- Ministry of Industry, Trade and Labor is in charge of the offset policy and implementation. Threshold is 100,000 USD. Minimum offset request is 35%, multipliers are either 1 or 2. The main point about Israel and its offset policy is the fact that Israel has been for a long time the largest beneficiary of United States Foreign Military FinancingUnited States Foreign Military FinancingThe Foreign Military Financing program provides grants and loans to help countries purchase weapons and defense equipment produced in the United States as well as acquiring defense services and military training. FMF funds purchases are made through the Foreign Military Sales program, which...
(FMF), getting more than 50% of the entire available U.S. FMF budget. This condition sets a limit to Israeli offsets request to U.S.http://www.moital.gov.il/CmsTamat/search.aspx?w=offset - There is no public law on offsets. There is not even an official name for the offset policy. The public position is that Italy has no general offset policy, just ad hoc (offset) policies. The National Armament Directorate of Ministry of Defense is in charge of offsets, while specific internal commissions of each branch of the Italian Armed Forces (Aviation, Army, and Navy) monitor offset fulfillment. The threshold for offset is 5 million Euro. The minimum offset request is 70%, but generally goes up to 100%. The highest multiplier is 3. The focus is on export opportunities for Italian defense companies. There is no website or web-page for a nameless offset program, the closest would be the Minister of Defense website http://www.difesa.it.
: New Guidelines for Kuwait Offset Program were published in 2007, following to a Minister of Finance directive, that regards all foreign procurements related to both military and non military contracts. The National Offset Company (NOC) is a state-owned company, and its activities in the Kuwait Offset Program are on behalf of the Ministry of Finance. The offset commitment is still at 35% of the monetary value of military contracts. Threshold is KD 3m, (for civilian contracts is KD 10m.) Since 2007 there have been fundamental changes, making offsets requirements more effective and complex, including the multipliers systems, with more attention on the tangible benefits for Kuwait.http://www.kuwaitnoc.com
- Resolution No. 918/03 of the Government of the Republic of Lithuania (15-7-03). The Ministry of Economy is in charge of offsets. The threshold is LTL 5 million, about 1.5 million euro. Minimum offset requirement of 100%. Multipliers are between 1 to 5.http://www.ukmin.lt/en/industry/compensation/doc/c_resolution_compensation.pdf
- The Ministry of Economic Affairs - Commissariat for Military Production (CMP) is in charge of offset policy and implementation (following to a protocol of agreement with the Ministry of Defense). The threshold for offset is EUR 5 million. Minimum offset requirement of 100% . Multipliers are between 1 and 5. The focus is on innovation and marketing support and it is directed by the Ministry of Economic Affairs http://www.cmp.ez.nl. Guidelines to an Industrial Benefits and Offsets Program in the Netherlands are available at http://www.ez.nl/dsresource?objectid=163139&type=PDF
- Norwegian Ministry of Defense has the responsibility for Industrial Cooperation Agreements (ICA) and the supervision of the agreements during their implementation. The offset threshold of contract value is usually NOK 50 million, (about 5.5 Million Euro). The required offset quantity is 100% of the contract value and multipliers are from 1 to 5. Note: Norway is not part of European Union, but has joined the European Defense Agency with no voting rights. The guidelines of procurement and offsets can be found at: http://www.regjeringen.no/en/dep/fd/Documents/Handbooks-and-brochures/2004/norwegian-defence-procurement.html?id=419462 and http://www.regjeringen.no/upload/FD/Reglement/Gjenkjoepsbestemmelser_14mars2008_engelsk.pdf
: Ministry of Economy is in charge of offset. Polish Offset Law was issued in 1999; Offset regulations were approved in 1996 and revised in 2007. The threshold value for offsets is 5 million Euro and the request is for 100% of offset. Multipliers are between 2.0 and 5.0. Direct offsets for country's defense industry and opening of new export markets are Polish priorities.http://www.mg.gov.pl/English/ECONOMY/Offset+Programmes/Basic+information/ In 2003 Lockheed Martin sold 48 F-16 fighters to Poland for 3,5 billion USD via FMS. The Program is called Peace Sky, and it is financed with a U.S. FMF of 3,8 Billion USD for 15 years. Lockheed Martin offered an offset package to Poland of 6 Billion USD in U.S. business investments. Polish officials called the agreement "the deal of the century." The value of the offset is 170% of the contract price. The Baltimore Sun reported that "such side deals have long been criticized in Washington as a form of kickback that defies the natural forces of free trade, including when Duncan Hunter
Duncan Hunter
Duncan Lee Hunter is an American politician. He was a Republican member of the House of Representatives from California's 52nd, 45th and 42nd districts from 1981 to 2009....
called offsets "economic bribes" during a hearing on Capitol Hill this summer (2004)." Rick Kirkland, Lockheed Martin V.P. replied: "It's part of the price of international business, if we couldn't offer them an acceptable package of offsets, they wouldn't be buying an American airplane. It's that simple."
: Defense Minister's directive on Contrapartidas (offsets) has been issued in 2002. Decree-Law 153/2006 and 154/2006 regulates Portuguese Contrapartidas. The Permanent Commission on Offsets (CPC) is a government agency, which depends on the Ministries of Defense and of Economy, and it is in charge of negotiating and supervising offsets. The threshold is 10 million Euro, and the minimum offset request is 100 %. Multipliers have been set between 1 and 5 in 2006. There is no preference with regard to direct or indirect offsets. In 2005 the Portuguese government signed a deal worth 364 M euros to acquire 260 Pandur II armored vehicle from General Dynamics
General Dynamics
General Dynamics Corporation is a U.S. defense conglomerate formed by mergers and divestitures, and as of 2008 it is the fifth largest defense contractor in the world. Its headquarters are in West Falls Church , unincorporated Fairfax County, Virginia, in the Falls Church area.The company has...
. The Portuguese Pandur
Portuguese Pandur
In 2005 the Portuguese government signed a deal worth 364 million euros to acquire 260 Pandur II armoured vehicle, with an option for further 33 worth 140 million euros, to equip the Portuguese Intervention Brigade of the Portuguese Army and the marines of the Portuguese Navy. Portugal was the...
II includes an associated offset agreement for a value of 516 M euro. Patria
Patria
Patria may refer to:* Homeland * Patria, a cycle of theatrical works by composer R. Murray Schafer* Patria AMV * Patria , of Finland...
, the only competitor of General Dynamics, was excluded on technical reasons in 2004. Patria unusually appealed the Portuguese Government's decision in court, complaining that General Dynamics's offset package - decisive for the assignment of the contract - was a fake. The Portuguese tender was the first of many in a European commercial war between Patria and General Dynamics, almost exclusively played on offsets and that ended in 2008 with the arrest of Jorma Witakorpi, Patria's CEO, for the Patria case
Patria case
The Patria case has been the political controversy over the unproven claims of bribery of Slovenian officials by the Finnish company Patria to help clinch an armoured personnel carrier order. There is currently a criminal investigation underway, and two employees of Patria have been arrested on...
in Slovenia.
- Qatar has no official offset policy but foreign Defense Companies involved with the Qatar Ministry of Defense are encouraged to invest and to build partnership in R&D and Education in Qatar.
- Ministry of National Defense and an Agency for Special Offset Techniques are in charge, and Law 336/2007 regulates offsets. Romania requests offset for defense purchase above 3 million Eur, and the minimum amount of offset proposals is 80% of the contract value. Multipliers can go to 5. Indirect offset are accepted, especially in ecology and shipbuilding. Romania is the only EU country that did not sign the EU Code of Conduct on Offsets (July 2009)http://www.acats.gov.ro/index_en
: Saudi Economic Offset Program is under the Deputy Minister of Defense. Saudi offset request is that 35% of their contract value is invested in Saudi jobs creation and training, economic diversification, technology transfer and foreign direct investments in general. Threshold is 400 million Saudi Reals (107 million USD). UK and France have established bilateral offset program with Saudi Arabia. UK Al Yamamah
Al Yamamah
Al Yamamah is the name of a series of a record arms sales by the United Kingdom to Saudi Arabia, which have been paid for by the delivery of up to of crude oil per day to the UK government. The prime contractor has been BAE Systems and its predecessor British Aerospace...
Economic Offset Program (I, II and III) is the most complex and longest program, it began in 1987 and still alive. The French Offset is directed by Societe Francaise d'Exportation de Systemes Avances (SOFRESA), a private company operating on behalf of the French government. The U.S., in spite of the fact the most of its defense sales to the Kingdom are U.S. Defense Department Foreign Military Sales, leaves offsets to the private contractors, such as Lockheed Martin, SAIC, Boeing, and General Dynamics. Foreign Direct Investments are authorized and supervised by SAGIA http://www.sagia.sa, and they receive high multipliers according to the most strategic sectors and the Kingdom's priorities (such as water, electricity, communications, etc.). Saudi's offset market has an enormous significance for the Saudi non-oil economy since Saudi Arabia spends about 10% of its GDP in defense procurement.
- Ministry of Economy is the governing body for offsets. The threshold (not established clearly) can go down to 130,000 euro. The amount of offset proposal is negotiable, but usually is equivalent to 100% of the contract value. Higher multipliers are for direct offsets.http://www.economy.gov.sk
- Ministry of Defense is in charge, and offset guidelines were issued in 2000. The threshold is around 500,000 Euro, and the offset request is of 100% of the contract value. Multipliers go from 1 to 7. Foreign Direct Investments and technology transfers have the highest multipliers. The 2006 purchase of 135 Patria AMV infantry fighting vehicles is the largest in Slovenian history of military procurement (278 million Euro,deliveries 2007-2013), and the Patria casePatria caseThe Patria case has been the political controversy over the unproven claims of bribery of Slovenian officials by the Finnish company Patria to help clinch an armoured personnel carrier order. There is currently a criminal investigation underway, and two employees of Patria have been arrested on...
is the political controversy over claims of bribery of Slovenian officials by the Finnish company Patria. The Patria AMV vehicles offset agreement has direct offset for 30% of the value of the contract (co-production of the AMV in Slovenia), and 70% of indirect offsets, mostly assistance to export for Slovenian companies. - DAPA, the Defense Acquisition Program Administration, is in charge of country offset policy, that was published in 2008. Threshold is 10 million USD. Minimum offset is 30%. Multipliers are between 1 and 6. The contractual Memorandum of Understanding on offsets is a substantial part of the main contract.
- Ministry of Defense - General Direction of Armaments and Material (DGAM) - Industrial Cooperation Agency of Spain (ICA) is responsible for the negotiation and the supervision of offsets. The guidelines for offset are not public, but issued by the Minister of Defense through internal and confidential procedures. The general request is 100% of the contract value. Multipliers are between 2 and 5.http://www.isdefe.es
- The offset policy was issued by the Government in 1999. The Industrial Participation program is directed by Minister of Defense, Defence Material Administration (FMV), and offset guidelines were issued in 2002. The contract value offset threshold is about 10 million Euro. The request for offset is 100%. Multipliers can be applied only to 10% of the total offset value. Only defense related offsets (direct offsets) are accepted, since Sweden applies art. 346 of the European Treaty of LisbonTreaty of LisbonThe Treaty of Lisbon of 1668 was a peace treaty between Portugal and Spain, concluded at Lisbon on 13 February 1668, through the mediation of England, in which Spain recognized the sovereignty of Portugal's new ruling dynasty, the House of Braganza....
http://www.sweden.gov.se/sb/d/2060. - The Federal Department of Defence, Civil Protection and Sport, division "armasuisse" is in charge of offsets. The threshold for offset request is 15 million Swiss Francs. The offsets are minimum 100% and multipliers are between 2 and 3.http://www.ar.admin.ch/internet/armasuisse/en/home.html
- The Minister of Defense through an undersecretary for the Defense Industries is in charge of the Industrial Participation / Offset Directive (2007). The threshold is about 5 million USD. The minimum required offset is 50%. Multipliers are between 1 and 6. The offset fulfillment time is 2 years, that is unusually short. Mostly interested in direct offsets to develop the Turkish defense industry.http://www.ssm.gov.tr
- The United Arab Emirates Offset Program Bureau (OFFSET) is in charge of offsets; Chairman of the bureau is the Crown Prince of Abu Dhabi. The criteria are more sophisticated than most offset policies. The request for offset is 60% of the contract value. The offset credit is not evaluated on the investments, but through profit over time of an offset venture (a kind of multiplier ex post). Joint ventures in the UAE and partnership with local companies are the most common offset proposal, as direct and indirect offset.http://www.offset.ae
- No official Policy. The Department of Defense is in charge, but offsets go through UKTI, UK Trade & InvestmentUK Trade & InvestmentUK Trade & Investment is a UK Government department working with businesses based in the United Kingdom to ensure their success in international markets, and encourage the best overseas companies to look to the UK as their global partner of choice ....
, under the Minister of State for Trade, Investment and Business. In 2007 the Prime Minister announced a change, transferring responsibility for defense trade from the Defense Export Services Organization (DESO) to UK Trade and Investment (UKTI). Since April 2008 UKTI DSO (Defense & Security Organization) has responsibility for supporting both defense and security exports. The general threshold is 10 million GBP, but through bilateral agreements with Germany and France, has been reciprocally set to 50 million GBP. The offset is generally around 100%, no multipliers. http://www.dso.uktradeinvest.gov.uk/ip.htm. - The U.S. is formally against offsets. To date, the U.S. is the only country that prohibits U.S. government officials and employees, as well as Government agencies, to get involved in any offset business. U.S. depends on foreign defense “prime” contractors for less than 2% of its defense procurement. However, many countries consider the Buy American ActBuy American ActThe Buy American Act passed in 1933 by Congress and signed by President Hoover on his last full day in office , required the United States government to prefer U.S.-made products in itspurchases...
an equivalent, for practical purposes, to offset policies of other countries. Partners or defense subcontractors of U.S. prime contractors of U.S. Government are subjected to Buy American ActBuy American ActThe Buy American Act passed in 1933 by Congress and signed by President Hoover on his last full day in office , required the United States government to prefer U.S.-made products in itspurchases...
.
Criticism of offset agreements
While widely practised, some, such as the US government, consider such agreements to be "market distorting and inefficient". On April 16, 1990, a US Presidential Policy statement was released, stating that "the decision whether to engage in offsets [...] resides with the companies involved" and that "no agency of the U.S. Government shall encourage, enter directly into, or commit U.S. firms to any offset arrangement in connection with the sale of defense goods or services for foreign governments."U.S. position on defense offsets
U.S. is by far the largest exporter of weapons in the world, and the U.S. Government officially declares the use of offsets as unfair practices, imposed by buyers, and is also trying to shape a political coalition of other arms exporter countries to support the U.S.’s official anti-offset position.The primary concern of the U.S. about direct offset is keeping a complete and self-sufficient industrial base for its military capabilities, since an erosion of such domestic industrial base is or may be taking place due to military (direct or indirect) offsets, such as co-production and technology transfers. The trans-nationalization of the U.S. defense industrial base is caused also by direct offsets, and this is considered a threat to national security. In U.S. there is also a more sophisticated and free market opinion on the issue of the dislocation of less advanced military components to allied countries, that is, a kind of re-visitation of the U.S. Defense Industry transformation due to the internationalization of the main U.S. Defense companies. This opinion opposes to the protectionist simplification that any dislocation of defense industrial manufacturing capabilities to other countries is a potential threat. A second connected concern is that direct offset, technology transfer, and high-tech indirect offset may help potential U.S. enemies to build a military capability to attack U.S. or U.S. interests around the world.
To be sure, both of the above concerns are real and justified, but not very realistic. The U.S. is so far advanced militarily when compared to the rest of the world that it is not reasonable thinking that direct offsets may create a threat against U.S. security, or at least, a threat that is more dangerous than the very American made exported weapons may pose to U.S. national security. Weapons export and connected military offsets are closely monitored by the Defense Department (on the military side) and by the State Department (on the political side) and by U.S. Congress. Methodologically speaking, it is an important point never to underestimate the enemy and relying on one's one superiority, but it is not realistic thinking that transferring 20 years old technologies to allied countries as offsets of a main U.S. defense sale is a threat to national security. As recent history teaches, most security threats come from domestic breaches, not from authorized tech-transfers abroad. In other words, if a defense technology transfer offset is a real defense security threats, it should not be authorized, if it is not, then using the “national security principle” in all arguments is an abuse that is detrimental to the very ground of the principle.
The most delicate and convincing issue is U.S. economic security. Economy (Competition) and War (Defense) do not follow the same principles and methods, in spite of many useful analogies and significant synergies, and this is especially true in U.S., the greatest Commercial Republic of all times. Commerce Department, through BIS, monitors U.S. offsets specifically from the point of view of the adverse effects on U.S. economy, and reporting yearly to U.S. Congress. President Bush I and Clinton nominated special Commissions to examine the issue of offsets on their unintended domestic adverse effects, focusing on their detrimental effects on U.S. and other weapons exporting nations.
To be sure, the most realistic concern is about the potential loss of jobs in U.S. The effects of almost all requested offsets by purchasing countries are the increase of turnover of the offset involved activities and the creation of more jobs. An exemplification: if the sales of Lockheed Martin
Lockheed Martin
Lockheed Martin is an American global aerospace, defense, security, and advanced technology company with worldwide interests. It was formed by the merger of Lockheed Corporation with Martin Marietta in March 1995. It is headquartered in Bethesda, Maryland, in the Washington Metropolitan Area....
planes requires the offset financing of defense components manufacturing companies in Romania, these Romanian companies would subtract a piece of the market from U.S. companies, and therefore indirectly would cause a loss of jobs in U.S. The argument follows the protectionist view that a factory in U.S. closes because another similar factory opened in Romania or Japan. From the buyer's point of view, offsets are supposed to be a form of economic policy and state intervention. However, from a strict free trade point of view the creation of wealth (production and turnovers as well jobs) in other countries is not detrimental to commercial Republics like U.S., on the contrary, it increases their purchasing power to buy U.S. defense products.
The matter of indirect offsets, and specifically civilian offset, poses other types of problems and serious economic concerns. Generally speaking indirect offsets do not affect U.S. national security. But if indirect offsets, such as marketing or financing of foreign competitors of U.S. companies, help competitors to grow internationally, or even in the U.S. domestic markets, the problem of the adverse effects of indirect offsets on U.S. economy becomes real. The interaction of defense indirect offsets with non-military U.S. business is substantial, given the amount of offset obligations of U.S. toward competing economies. BIS monitors these effects closely in all fields, but it is clear that if a U.S. marketing assistance indirect offset, for instance, helps a European company to sell its products and services in a third importing country, where a U.S. companies may sell their own equivalent products, this may constitute a relevant adverse effects of U.S. defense industry offset practices.
The most uncontrollable effects, however, is when indirect offsets strike U.S. small and medium domestic companies with no information about it, and with a protection of secrecy. This point is also present in the internal/domestic European Union market, that expresses a similar concern for the unfair distortion of normal competitive market caused by indirect non-military offsets, protected by unjustified secrecy [see following section]
EU position on defense offsets
The most recent common European Union quasi-agreement on defense offsets is The Code of Conduct on Offsets http://www.eda.europa.eu/offsets/, signed by all EU countries (with the exception of Romania and Denmark) in October 2008. The primary purpose of the voluntary and non-binding Code is to promote a "European Defense Technological and Industrial Base" and to outline a road map to arrive to a complete elimination of offset practices within the domestic EU market. In other words, to open to competitive bids the EU Defense and Security market and to overcome competition restrictions of EU Treaties of Rome and Lisbon, art. 346. The ideal goal is “competition in the EU Defense Market” and “Government-to-Government off-the-shelf sales.” The realistic target is humbler, though: to self-restrain and limit the offset quantity to 100% of the contract value.The actual situation in EU is described in detail in a study on defense offsets in the Union countries commissioned by the European Defense Agency and published in 2007. According to this study the volume of EU offset agreements in 2006 was above 4-5 billions euro. The distribution of these offsets is as shown in the diagram: Direct Offsets, Military Indirect Offsets, Civilian Indirect Offsets.
European policy on offsets is still regulated by the Treaty establishing the European Community. Art. 223 of the Treaty of Rome (1958), then article 296 of the EU Treaty of Amsterdam (1999); since December 2009, the Treaty of Lisbon (art. 346) protects member States weapons production and trade from competition rules of the common European market. In spite of 50 years of European history Article 223 (Rome) and Article 346 (Lisbon) are practically identical. Today the hinge of EU policy on offsets is still the same article, that is, Art. 346 of the Lisbon Treaty. This article preserves the national right to the secret of state related to it own security and military production and procurement.
This is the relevant part of Article 346:
The first part of the article states that European Union has no authority over national states policies and decisions on their defense/security choices. In other words, EU has no saying about domestic preference for homemade planes or tanks, or for preferred military offsets choice. The second part, however, asserts a shared principle by all EU states regarding the non military/indirect offsets, that is, EU reserves its right to supervise and regulate indirect-non-military offset effects, so that they do not “adversely affect the condition of competition” in the internal common EU market.
Any civilian-indirect-offset has distortion effects in the common market, and this distortion is amplified by the ignorance about specific offset agreements outside the circle of defense contractors and national authorities. U.S started monitoring offsets adverse effects in United States when a small paper-making equipments company in Wisconsin (Beloit Corporation) got in trouble without understanding that the reason was an hidden cause, that is, an indirect offset by Northrop (now Northrop Grumman
Northrop Grumman
Northrop Grumman Corporation is an American global aerospace and defense technology company formed by the 1994 purchase of Grumman by Northrop. The company was the fourth-largest defense contractor in the world as of 2010, and the largest builder of naval vessels. Northrop Grumman employs over...
) with the Finnish Ministry of Defense. Only a concerned Wisconsin politician, Sen. Russell D. Feingold, discovered the real reasons in 1992, after being informed that a tender for supply of machinery of the value about 50M USD was not awarded to the Wisconsin company, but to a Finnish company (Valmet Corporation) as part of an offset deal with the Finnish Government.
This U.S. offset story brought to light the issue of the impact of confidential agreements by defense companies on U.S. non military business, in some instances with devastating effects. Feingold's discovery is enlightening for the EU common market as well, where interferences and adverse impacts on EU companies are allowed by an unjustified national attitude for confidentiality or secrecy on indirect, non military, offset deals. Art. 346 of Lisbon Treaty, written more than 50 years ago, is there to wisely avoid disruptive effects caused by unjustified military secrecy in civilian offsets in the common European market. In EU market of Defense, approximately of the size of $250B, with 27 sovereign state authorities that can claim secret of state -from Germany
Germany
Germany , officially the Federal Republic of Germany , is a federal parliamentary republic in Europe. The country consists of 16 states while the capital and largest city is Berlin. Germany covers an area of 357,021 km2 and has a largely temperate seasonal climate...
to Cyprus
Cyprus
Cyprus , officially the Republic of Cyprus , is a Eurasian island country, member of the European Union, in the Eastern Mediterranean, east of Greece, south of Turkey, west of Syria and north of Egypt. It is the third largest island in the Mediterranean Sea.The earliest known human activity on the...
and Luxembourg
Luxembourg
Luxembourg , officially the Grand Duchy of Luxembourg , is a landlocked country in western Europe, bordered by Belgium, France, and Germany. It has two principal regions: the Oesling in the North as part of the Ardennes massif, and the Gutland in the south...
-, there is a potential for indirect non-military offsets of $60B, that is, more 1000 times the distortion problem caused by Northrop (and the Finnish Ministry of Defense) to Beloit.
Offset associations and publications
The two main global organizations that deal with offsets are:- G.O.C.A - Global Offset and Countertrade Association is a main source of information on the uses of counter-trade and offset http://www.globaloffset.org/
- DMA - Defence Manufacturers Association, based in UK but opened to many other countries.http://www.the-dma.org.uk/
One domestic U.S. based organization that deals with offsets is:
- DIOA - Defence Industrial Offset Association, membership is primarily open to U.S. based defense contractors.http://www.dioa.org
There are many regional or national offset conferences and symposiums, but recently GOCA and DMA jointly organize global offset meetings every two years. The first global meeting on offset took place in 2004 in Sintra, Portugal; then in Athens, Greece (2006); the third in Seville, Spain, in 2008. GOCA and DIOA hold both individual and joint conferences several times per year.
Countertrade & Offset is a fortnightly magazine on the offset industry; the same publisher has also a quarterly for the industry: The Offset Guidelines Quarterly Bulletin.
See also
- Al YamamahAl YamamahAl Yamamah is the name of a series of a record arms sales by the United Kingdom to Saudi Arabia, which have been paid for by the delivery of up to of crude oil per day to the UK government. The prime contractor has been BAE Systems and its predecessor British Aerospace...
- Arms industryArms industryThe arms industry is a global industry and business which manufactures and sells weapons and military technology and equipment. It comprises government and commercial industry involved in research, development, production, and service of military material, equipment and facilities...
- Canadian Arms tradeCanadian Arms tradeCanadian Arms Sales are governed by the country's Export and Imports Permits Act. Sales with the United States are also specifically regulated by the 1959 Defence Production Sharing Arrangement....
- Counter tradeCounter tradeCountertrade means exchanging goods or services which are paid for, in whole or part, with other goods or services, rather than with money. A monetary valuation can however be used in counter trade for accounting purposes. In dealings between sovereign states, the term bilateral trade is used...
- Defense contractorDefense contractorA defense contractor is a business organization or individual that provides products or services to a military department of a government. Products typically include military aircraft, ships, vehicles, weaponry, and electronic systems...
- Defense Security Cooperation AgencyDefense Security Cooperation AgencyThe Defense Security Cooperation Agency , as part of the United States Department of Defense , provides financial and technical assistance, transfer of defense matériel, training and services to allies, and promotes military-to-military contacts....
- European Defence AgencyEuropean Defence AgencyThe European Defence Agency is an agency of the European Union based in Brussels. It is a Common Foreign and Security Policy body set up on 12 July 2004, reporting to the Council of the European Union. All EU member states, except Denmark which has an opt-out of the CFSP, take part in the agency...
- European Union defence procurement
- List of countries by military expenditures
- List of United States defense contractors
- Offset loanOffset loan (finance)An offset loan is a type of lending arrangement, usually for a mortgage, in which a borrower also maintains a savings account with the lender. Instead of receiving interest on the savings account, the interest payment due on the loan is calculated only on the net balance of the loan less the...
- Patria casePatria caseThe Patria case has been the political controversy over the unproven claims of bribery of Slovenian officials by the Finnish company Patria to help clinch an armoured personnel carrier order. There is currently a criminal investigation underway, and two employees of Patria have been arrested on...
- Portuguese PandurPortuguese PandurIn 2005 the Portuguese government signed a deal worth 364 million euros to acquire 260 Pandur II armoured vehicle, with an option for further 33 worth 140 million euros, to equip the Portuguese Intervention Brigade of the Portuguese Army and the marines of the Portuguese Navy. Portugal was the...
- Quid pro quoQuid pro quoQuid pro quo most often means a more-or-less equal exchange or substitution of goods or services. English speakers often use the term to mean "a favour for a favour" and the phrases with almost identical meaning include: "give and take", "tit for tat", "this for that", and "you scratch my back,...
- Trade pactTrade pactA trade pact is a wide ranging tax, tariff and trade pact that often includes investment guarantees. The most common trade pacts are of the preferential and free trade types are concluded in order to reduce tariffs, quotas and other trade restrictions on items traded between the signatories.-By...