Offset agreement

Offsets can be defined as provisions to an import agreement, between an exporting foreign company, or possibly a government acting as intermediary, and an importing public entity, that oblige the exporter to undertake activities in order to satisfy a second objective of the importing entity, distinct from the acquisition of the goods and/or services that form the core transaction. The incentive for the exporter results from the conditioning of the core transaction to the acceptance of the offset obligation. [1] Offset agreements often involve trade in military goods and services and are alternatively called: industrial compensations, industrial cooperation, offsets, industrial and regional benefits, balances, juste retour or equilibrium, to define mechanisms more complex than counter-trade. Counter-trade can also be considered one of the many forms of defense offset, to compensate a purchasing country.[2] 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

Offsets can be defined as provisions to an import agreement, between an exporting foreign company, or possibly a government acting as intermediary, and an importing public entity, that oblige the exporter to undertake activities in order to satisfy a second objective of the importing entity, distinct from the acquisition of the goods and/or services that form the core transaction. The incentive for the exporter results from the conditioning of the core transaction to the acceptance of the offset obligation. [3]

Often, the proclaimed aim of this process is to even-up a country's balance of trade.[4] However, some forms of offsets transactions do not represent trade flows going from the initial importer towards the initial exporter. Offsets are frequently an integral part of international defense contracts.[5]

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 the biggest exporter of aerospace and defence products,[6] and therefore engaged in the majority of the world’s offsets. The U.S. has a Commerce Department Division, the Bureau of Industry and Security (BIS), that deals specifically with U.S. defense offset agreements with foreign nations as a 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 acceptable U.S. foreign policy, and protecting U.S. economic interests - deals with U.S. aerospace and defense companies that export defense products, systems or services, involving “offset agreements,” that is, those sales' collateral or additional agreements requested by purchasers. BIS defines offsets as “mandatory compensations required by foreign governments when purchasing weapon systems and services.”[7]

The U.S. government underlines the compulsory aspect of this trade practice, since the 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.[8]

Offset as partnership

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.”[9] 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 Unger 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 in military equipment.[10] 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 sales 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” to be 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.[11] 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 its 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.[12] 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 that using offsets as marketing tools makes offsets "the ideal playground for corruption":

There are three main categories of corruption risk from offsets:

1. Improperly influencing the need for a particular defence acquisition in the first place
2. Influencing the competitive decision for the main contract in non-transparent ways

3. Allowing favours to be repaid to corrupt government officials via the offset contracts

Defence Offsets: Addressing The Risks Of Corruption & Raising Transparency, Transparency International, 2010 [13]

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.”[14] Pearl describes the new-found world of indirect offsets:

For decades, countries that buy weapons have imposed "offset" requirements on their suppliers that keep some of the economic benefits of the deal at home.

Now, defense contractors are moving toward more exotic plans to satisfy their growing offset obligations.

Many deals have no relationship to the weapons being sold, and a few have only a tenuous connection to the country that is buying.
Daniel Pearl[15]

The market size of the international offset business is related to the volume of international weapons trade 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.

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).[16] The total sale contract is $400 million and Nation P (Purchaser) requests offset of 120%. Defense Company S (Seller) is obliged to fulfill an offset equal to 120% of the sales contract, that is $480M. 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 $480M (120% of offset); it is evident that with no multipliers, 120% offset would be 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. the tanks in this example)

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. 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 $70M x 3 = $210M.

Indirect Offsets (civilian and other agreements 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 $14.5M, 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 $58M.
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" 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.[17]

Types of offset

Offset proposals often make a distinction between direct and indirect offset.[18]

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. 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.

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. Indirect offsets may take the form of services, investments, counter-trade and/or co-production. 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 of their maintenance.[19] 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 types of direct/indirect offsets are:

Direct offset Direct or Indirect offset Indirect offset
Co-production Technology Transfer Export Assistance
Subcontracts Training Purchases
Licensed Production Offset Swapping (compensation of offsets' obligation through reciprocal abatement)
Foreign Direct Investment, Credit Assistance and Financing

The most complete and accurate list of actual offsets can be found in the BIS Annual Reports to Congress, where all forms of registered offset are codified, according to the old Standard Industrial Classification.[20]

Some offset mechanisms

Since offsets typically include military departments of sovereign nations comparable to the US Defense Department, many countries have offset laws, public regulations or, alternatively, formal internal offset policies.

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.[21] Each year GOCA hosts several industry meetings in partnership with other European and American offset organizations such as the ADS, Aerospace Defence Security and DIOA, the U.S. Defense Industry Offset Association. 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").[22]

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 ), 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.[23] 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 continued negotiations that are based on “the best effort” clauses. The list of incentives and penalties for offset is no different from many other systems of procurement, with two remarkable 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 the times 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 due to “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 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 distortions but also to possibly unpunished corruption protected by baseless secrecy.[24] 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.[25] 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.[26]

Foreign military and direct commercial sales – "no known offsets" and FMS

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 Sales", 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.[27]

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).[28]

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).[29][30] 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.[31] 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,[32] 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.” [33]

This language seems to imply that U.S. Government, as the broker for the FMS case, has special insight into the transaction and is almost certifying that there are, in fact, no offsets. Nothing could be further from the truth.
Mark Nackman, A Critical Examination Of Offsets In International Defense Procurements [34]

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.[35]

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.[36] 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.[37]

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."[38]

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”. 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 analyses of countries offsets policies, with a purchaser's perspective, that is the point of view of weapons importer countries . From a similar point of view, one can see the purchaser's point of view on offsets in UAE offset web-page , in the new Kuwaiti articulated offset policy .

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 , EPICOS, Countertrade & Offset or CTO give detail accounts and updates on national policies, requests, changes, etc.

Austrian Eurofighter Typhoon Bundesministerium für Landesverteidigung und Sport
Piranha III - Spanish Army
Pandur II 8x8
Agency for Defense Technology and Procurement
German submarines HDW-214 for Greece (Papanikolis) and Portugal (Tridente)
Kuwait Offset Program

The policy will not affect US companies, as the 2004 US-Morocco free trade agreement bars the imposition of such requirements on US firms. Since its election on 2012 as President of the CGEM Confédération générale des entreprises du Maroc, Miriem Bensaleh Chaqroun has been lobbying for the creation of a legal framework making mandatory for state controlled companies, offices, local authorities to sign offset agreements. The action was the creation of the commission compensation industrielle et accès aux marchés publics in 2012 which was headed by the former CEO of the CGEM Mehdi El Idrissi. The commission published in 2014 a Guide de la compensation industrielle in order to explain to them the concept of Offset agreements.[52] In 2015[53] the CGEM made a series of proposition to the government, including the creation of an agency of the offset. The role of this agency would be:

  1. To be the sole interlocutor in the development of offset contracts.
  2. To guide foreign businesses to feasible projects in collaboration with Moroccan companies and sectors to promote and encourage industrial activities based on the industrial policy and the competitive advantages of the country.
  3. To measure the chances of success of projects and help develop contracts that will bind the foreign company with the Moroccan suppliers.
  4. To monitor and evaluate the implementation of offset projects.
Polish F-16 "Hawk"
Portuguese Pandur II
Saudi Arabia and the Gulf Defense Offset Market in the world (Source: SIPRI)
Slovenian Patria AMV

Criticism of offset agreements

While widely practiced, some, such as the US government, consider such agreements to be "market distorting and inefficient". On April 16, 1990, a US Presidential Policy statement[63] 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."[5]

EU position on defense offsets

The most recent common European Union quasi-agreement on defense offsets is The Code of Conduct on 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.[64] According to this study the volume of EU offset agreements in 2006 was above 4-5 billion euro.[65] 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),[66] then article 296 of the EU Treaty of Amsterdam (1999);[67] 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 its own security and military production and procurement. This is the relevant part of Article 346:

1. The provisions of this Treaty shall not preclude the application of the following rules:
(b) any Member State may take such measures as it considers necessary for the protection of the essential interests of its security which are connected with the production of or trade in arms, munitions and war material; such measures shall not adversely affect the conditions of competition in the common market regarding products which are not intended for specifically military purposes.
Art 346 Treaty of Lisbon

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.[68] U.S started monitoring offsets adverse effects in United States when a small paper-making equipment 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.[69]

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.

Offset associations and publications

The two main global organizations in the USA 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
DMA - Defence Manufacturers Association, based in UK but opened to many other countries.

One domestic U.S. based organization that deals with offsets is:

DIOA - Defense Industrial Offset Association, membership is primarily open to U.S. based defense contractors.

In Europe, ECCO (European Club for Countertrade and Offset) hosts two symposiums a year and started publishing various volumes that explains offset in various domains, such as finance, ethics, the economy, and international law. Visit www.ecco-offset.eu

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.

A thesis that focuses on offset in the European Union and Directove 2009/81/EC, can be downloaded from www.furterdefence.com

Bibliography

See also

References

  1. Ianakiev, Gueorgui (2014), " Defence Offsets : Regulation and Impact on the Integration of the European Defence Equipment Market ", in Bellais, Renaud (ed) (2014), "The Evolving Boundaries of Defence : An Assessment of Recent Shifts in Defence Activities ", Emerald Group Publishing Limited.
  2. Counter-trade is an indirect offset. As a general introduction to the topic see J. Brauer -J. P. Dunne Arms Trade Offsets and Development, 2005 (Martin, 1996, Udis and Maskus, 1991).
  3. Ianakiev, Gueorgui (2014), " Defence Offsets : Regulation and Impact on the Integration of the European Defence Equipment Market ", in Bellais, Renaud (ed) (2014), "The Evolving Boundaries of Defence : An Assessment of Recent Shifts in Defence Activities ", Emerald Group Publishing Limited.
  4. 1 2 http://www.acq.osd.mil/dpap/cpic/ic/offsets_of_foreign_military_sales.html
  5. "Aerospace Exports by Country"
  6. BIS, Annual Report, 2006 p. 28. See also the definition: “Offset: Compensation practices required as a condition of purchase in either government-to-government or commercial sales of “defense articles” and/or “defense services” as defined by the Arms Export Control Act (22 U.S.C. § 2751, et seq.) and the International Traffic in Arms Regulations (22 C.F.R. §§ 120-130). – BIS, 2007, page . For a Glossary on Defense Offsets see Appendix E, p. 30
  7. In 2002, U.S. companies had 49% of global defense industry export, EU% 35. Data from AECMA 2002 Facts and Figures.. See also . In 2007, according to SIPRI open source data, the U.S. percentage of global export in arms was 61%.
  8. ; Roberto Mangabeira Unger, Brazilian Strategic Affairs Minister up to June 2009, now Harvard University professor.
  9. Lloyd J. Dumas, Do offsets mitigate or magnify the military burden? in J. Brauer - J.P. Dunne, Arms Trade and Economic Development. Theory, Policy, and Cases in Arms Trade Offset London-New York, 2004,
  10. Markunsen describes (and opposes) defense offsets not as economy or politics, but as “political economy.” Most EU countries have their Ministries of Economy in charge, or at least heavily involved in, the offset business, since they understand offsets precisely as “political economy.”
  11. And the connected question: are defense offsets a benefit to the buyer greater than a negotiation for a weapons acquisition off-the-shelf? See on this point J. Brauer and J.P. Dunne, Arms Trade and Economic Development. Theory, policy, and cases in arms trade offsets. Routledge, Abingdon - New York 2004
  12. Magahy, B, Vilhena da Cunha, F., Pyman, M., Defence Offsets: Addressing The Risks Of Corruption & Raising Transparency, Transparency International, (J. Muravska and A. Wegener eds.), 2010. ISBN 978-3-935711-49-4, p. 2 [92]. See also Shana Marshall, The Modernization of Bribery: The Arms Trade in the Arab Gulf, Jadaliyya, Dec. 22, 2010,
  13. April 20, 2000 - Offset Requirements Of Defense Deals Often Have Little To Do With Purchaser -- By Daniel Pearl – Staff Reporter of the Wall Street Journal
  14. April 20, 2000, Offset Requirements Of Defense Deals Often Have Little To Do With Purchaser Daniel Pearl, Wall Street Journal
  15. See also U.S. Bureau for Industry and Security's example to explain the offset. BIS Annual Report 2007, p. 136.
  16. The example above is a simplified and graphic version of one of the best examples of offsets by the U.S. Department of Commerce: "OFFSET EXAMPLE: This example is for illustrative purposes only and in no way represents an actual offset agreement. The fictitious nation of Atlantis purchased ten KS-340 jet fighters from a U.S. defense firm, PJD Inc. (PJD), for a total of $500 million with a 100 percent offset. In other words, the offset agreement obligated PJD to fulfill offsets equal to the value of the contract, or $500 million. The government of Atlantis decided what would be required of PJD in order to fulfill its offset obligation, which would include both direct and indirect compensation. The government [of Atlantis] also assigned the credit value for each category." BIS example then illustrates the fulfillment of the offset agreement with direct and indirect offset. See U.S. Department of Commerce, Bureau of Industry and Security Offsets in Defense Trade, Eleventh Report to Congress, 2007, Appendix G, Glossary and Offset Example
  17. “Offset comes in different types, the most basic division being:
    Direct offsets: Transactions that are directly related to the defense items or services exported by a defense firm – the supplying prime of offset.
    Indirect offsets: Offset transactions that are not directly related to the defense items or services exported by the supplying prime. These are further subdivided into:
    Defense (related) indirect offsets
    Non-defense (related) indirect offsets.
    Final Report of 06-DIM-022 Study on the effects of offsets on the Development of a European Defence Industry and Market By E. Anders Eriksson with contributions by Mattias Axelson, Keith Hartley, Mike Mason, Ann-Sofie Stenérus and Martin Trybus, 12 July 2007. The study was financed by the European Defense Agency and contracted to FOI and SCS. , p.3
  18. For the definition of semi-direct offset see Belgian Policy of Industrial Compensation
  19. See for instance the Offsets in Defense Trade, Sixth Study.- BIS Annual Report to Congress, 2002. . Also Appendix D: Offsets Transactions by SIC based Economic Sectors (spreadsheet) ; Recently BIS moved to NAICS
  20. To obtain a more in depth overview of offset or Industrial Partnership activities, see GOCA website .
  21. A sampling of some of the articles written include .....; See also Ann Markusen, Arms Trade as Illiberal Trade, 2004: Defense contractors as trading companies in J. Brauer - JP Donne, Arms Trade and Economic Development, 2004
  22. Security Assistance Management Manual (SAMM) DoD 5105, Ch 5, page 247, Figure C5.F14. Offset Certificate.
  23. "Offsets are under much less scrutiny during their negotiation than the main arms deal. This holds true for both governmental scrutiny and for public awareness of such contracts. Worse, in many countries, there is almost no due diligence on potential improper beneficiaries from the offsets, no monitoring of performance on offset contracts, no audits of what was delivered compared to the pledges, and no publication of offset results, benefits or performance at all. This makes offsets an ideal playground for corruption. The lack of surveillance of the offsets contracts is amplified by their complexity. Offsets processes involve a range of complicated and detailed contracts and often include investments into a variety of companies and subsidiaries, making monitoring even more difficult." Magahy, B, Vilhena da Cunha, F., Pyman, M., Defence Offsets: Addressing The Risks Of Corruption & Raising Transparency, Transparency International, (J. Muravska and A. Wegener eds.), 2010, p.2
  24. “Defence companies often avoid significant spending on an offset project, prior to the award of the defence contract for an obvious reason; the defence market is characterised by uncertainty - programme delays, budget overruns and economic problems at national and corporate level are common. However, there are exceptions to the rule, such as in the case of Swedish defence aerospace group Saab.” Keri Smith JDIN Reporter Offsets in Europe: A matter for debate Jane's Defence Weekly - November 28, 2007
  25. Ann Markusen, The Arms Trade as Illiberal Trade, Conference on Defense Offsets, Cape Town, South Africa, September 24-6, 2002. Ann Markunsen, Senior Fellow at the Council on Foreign Relations, directed also a 2 years long “Study Group on the Arms Trade and the Transnationalization of the Defense Industry: Economic versus Security Drivers” in 1998-2000
  26. The most insidious damages to U.S. economy are unexpected problems and losses that may arise in all economic sectors (the area of U.S. indirect offsets) to unaware U.S. companies and business. The unjustified secrecy of civilian offsets, supported by a strong defense contractors' lobby: a) prohibits a definitive evaluation of the economic successes or, alternatively, of the economic adverse effects of indirect offsets; b) creates unknown and hidden source of losses and problems for U.S. companies; c) establishes clandestine niches of business areas, unnecessarily and unjustly protected by secrecy, where abuses, violations, frauds and corruption escape laws. d) damage the concept of “state secret” by extending it to things that do not deserve such high, noble, and restricted protection.
  27. U.S. Defense Department – Defense Security Cooperation Agency: “Strength through Cooperation. The FMS Advantage: Frequently Asked Questions About Foreign Military Sales”
  28. All public releases by DSCA regarding FMS sales must include this disclaimer.
  29. Mark J. Nackman, M. A Critical Examination Of Offsets In International Defense Procurements: Policy Options For The United States, Public Contract Law Journal, Vol. 40, No. 2, Winter 2011, p. 526
  30. “Note 9. OFFSET COSTS. The Department of Defense is not a party to any offset agreements/arrangements that may be required by the Purchaser in relation to the sales made in this LOA and assumes no obligation to administer or satisfy any offset requirements or bear any of the associated costs. To the extent that the Purchaser requires offsets in conjunction with this sale, offset costs may be included in the price of contracts negotiated under this LOA. If the Purchaser desires visibility into these costs, the Purchaser should raise this with the contractor during negotiation of offset arrangements.” Security Assistance Management Manual (SAMM), DoD 5105, Ch.5, pag. 22 –
  31. See above.
  32. The Lockheed bribery scandals in Japan, Germany, The Netherlands and Italy is one of the most known for the political liabilities involved in the side agreements of weapons sales. In this famous case, the involvement was of military officers and main politicians of U.S. allied countries. A more recent affair is the Belgian Dassault Agusta scandal.
  33. SAMM, C6.3.9, Offset, as amended in 2006, DSCA Policy 06-31
  34. Heinrich, Mark (June 26, 2007). "UPDATE 1-Austria, Eurofighter agree cut in jet purchase". Reuters.
  35. “The MOWAG proposal further includes a comprehensive Industrial Benefit Programme worth 100% of the contract value in Belgian value added combining direct work, semi direct effort as well as a significant commitment to other industrial sectors through indirect benefits....MOWAG notes that the industrial offsets program will be proportionally balanced between Flemish and Wallonian companies, as indeed it must in a country that is no longer a strict unitary state after the St. Michael’s agreement.... Recent public complaints that the Airbus A400M program has seen 80% of its industrial benefits flow to Belgium’s southern Walloon districts haven’t helped matters.”
  36. Police launch investigation of Pandur military vehicle deal The Prague Post, 24/02/2010
  37. de:Bundesamt für Wehrtechnik und Beschaffung
  38. http://www.monch.com
  39. See also Complicit in Corruption. How German Companies bribed their Way to Greek Deals, by Joerg Schmitt in Der Spiegel Nov 5, 2010,
  40. SIPRI:, see also The Economist, Global Weapons Imports, 2009
  41. Greek Offsets: A new era, Kyriazis Vasileios, Epicos Newsletter Head Editor,2011
  42. Between 2004 and 2008 the largest beneficiary was Iraq and, since 2008, Afghanistan
  43. http://www.medias24.com/A-suivre/11101-Un-nouveau-guide-de-la-CGEM-sur-la-compensation-Industrielle.html. Missing or empty |title= (help)
  44. http://www.lopinion.ma/def.asp?codelangue=23&id_info=45879. Missing or empty |title= (help)
  45. 1 2
  46. Patria Alleges Misconduct in Portuguese Pandur II Deal
  47. Multipliers for "technology and knowledge transfer" and for "direct foreign investments" can go up to 7.
  48. According to Jorma Witakorpi, Patria CEO at the time of the sale, a kickback of about 21 M Euro (7,5% of the total contract price) has been paid to decision makers, Slovenian politicians and military, to further the sale.
  49. Final Report of 06-DIM-022 Study on the effects of offsets on the Development of a European Defence Industry and Market By E. Anders Eriksson with contributions by Mattias Axelson, Keith Hartley, Mike Mason, Ann-Sofie Stenérus and Martin Trybus, 12 July 2007. The study was financed by the European Defence Agency and contracted to FOI and SCS.
  50. Idem, p. 3-4.
  51. s:The Treaty establishing the European Economic Community (EEC)
  52. L. Sigal, The Changing Dynamics of U.S. Defense Spending, Praeger Publishers, Westport (CT), 1999, p. 200-1. See also Ann Markusen, The Arms Trade as Illiberal Trade, Conference on Defense Offsets, Cape Town, South Africa, September 24-6, 2002, The Hidden Injuries of Privileged Trade.
  53. Now Velmet has a different name after a merging in 1999: Metso ; In 2000 Metso bought Beloit for $160M, hiring all Wisconsin workers and paying also for Beloit patents.
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