Shaping the Future

A Study of the Relevance of Offsets in Defence

Procurement during austere time

Kogi Balakrishnan

Principal Fellow

WMG, University of Warwick 14 August 2014

Structure of the Presentation

Introduction

What is Offsets?

Rationale for Offsets

Benefits and Costs

Dimensions for Offsets in defence procurement

Are Offsets still relevant in defence procurement?

Conclusion

Introduction - Rationale

Global defence budget has shrunk

Governments have to find remedies to cut down costs

However, in defence, sovereign capability works against the logic of economically effective procurement

To enhance military and other capabilities, many countries use offsets to help achieve choose to overall national interests

What are offsets?

Two dominant schools of thought:

Offsets as an economic compensation tool (Udis and Markus, Martin, Hartley)

Offsets for economic development to acquire additional socio-economic, industrial and technological benefits (Matthews, Spears, Brauer and Dunne)

The Rationale for offsets

• Demand perspective

self-reliance/self sufficiency

Industrial ‘take-off’

Closing the technological gap

Breaking the technology monopoly

Protection of local industrial base

• Supply perspective

Firm competitive advantage

Widening of the supply chain base

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Benefits and Costs of offsets

• Benefits of Offsets

Creation of indigenous industrialisation

Advancing technology development

Increase in defence-civil integration

Expanding job creation

Promotion of exports

Value-added activities

• Costs of Offsets

Against free market ideals

Market distortion

Hidden cost resulting in increase in price of equipment

Protection of local industries resulting in inefficiency

Dimensions of Offsets in defence procurement

Offsets Weightage To what extend is offsets a deciding factor in the procurement exercise?

Offsets proportion What is the direct versus indirect proportion of offsets as a total value of offsets obligation?

Mandatory versus voluntary Is offsets requirement mandatory part of the defence procurement or is it voluntary or on ‘best endeavour’

Selection of technology recipient Is the technology recipient /project finalised on a competitive basis or awarded to specific industries based on strategic reasons?

Organisation Which is the organisation responsible for offsets?

Tender process Whether offsets features as part of the tender process or is offered separately and not tied at all to the main procurement exercise

Implementation Is there a penalty for non-performance or monitored based on track record for future sale?

Is offsets still relevant in defence procurement?

For the European Union?

– 25 countries have some form of offsets policy and an average 135% offsets value is required

– Financial crisis of 2008 resulted in European Defence Agency eliminating offsets (unless under Article 346 of the TFEU) but in reality offsets continue for many reasons e.g. acquiring technology for

protection of strategic industries

employment

Is offsets still relevant in defence procurement?

Rest of the World?

– Rise in demand for technology

– Stringent offsets policy with greater requirements

– Offsets given higher weightage in defence procurement

– Many countries revising offsets policies

– Increase in number of new countries demanding offsets

Offsets is predicted to stay relevant in other parts of the world for purposes of acquiring military and other industrial and technological benefits.

Improvement suggestions - offsets

o During austere time, greater emphasise on measuring the not just outputs but the strategic outcomes (impact) of offsets

o Demand for a transparent management of offsets life cycle

o Demand for high quality metrics to offsets projects

o Greater clarity and structure to offsets management as part of defence procurement

Conclusion

Offsets have a long history in defence procurement

Trend across the world is increasing

Performance to date has been mixed

Opportunities to improve offsets include greater transparency, clearer defined outcomes, better quality metrics (especially strategic), etc.