What are defence offsets?

Offsets are arrangements made by purchasing governments with their suppliers, requiring the contractors to reinvest a percentage of the value of the deal in the importing country. For example, if a deal is worth US $100 million, the government might require the contractor to invest an additional $50 million into developing goods or services in the country.

Offsets receive little attention because of their complexity and opacity. Under many trade agreements and in most industries, offsets are illegal. The Government Procurement Agreement (GPA) of the World Trade Organization, the North American Free Trade Agreement (NAFTA) and the European Union prohibit them, for example. However, the GPA and the EU make an exception for defence procurement, while the GPA also allows exceptions for developing countries.

TI’s Defence Offsets: Addressing the Risks of Corruption and Raising Transparency report explores the issue of offsets and focuses on practical, preventive anti-corruption measures to increase their transparency and reduce scope for abuse.

Big business

A total of 130 countries are known to require offsets and the percentage of the offsets arrangement in the contract, in relation to the order, can exceed the size of the original contract. Some EU member states in particular have reported offset arrangements of 100 per cent or more, though in reality the contracts are rarely completed or monitored.

The United States is the largest offsets provider. From 1993 - 2008 the average value of offset agreements entered into by US defence companies with 45 different countries amounted to approximately 71 per cent of the total value of the contracts, or in money terms, US $68.93 billion.

When the stakes are so high the temptation to try and influence decision-making is also high. That’s where bribery and influence peddling can occur, and because of the complexity of offset deals reward payments are relatively easy to disguise. Taxpayers can end up paying for low priority or even inappropriate services simply because someone was able to influence the deal in exchange for an offset reward.

Filling the governance gap

Corruption in offset contracts can be avoided. It requires plenty of due diligence, transparency and a clear recognition that this is a complex area. The new TI report makes a series of recommendations:

• Governments should publish long-term defence spending priorities so questionable purchases and potential conflicts of interest are immediately apparent.
• Offset negotiating teams should be staffed with specially trained personnel bound by a robust code of conduct.
• Purchasing governments should require due diligence on all contracts to prevent members of the government benefiting improperly, and to ensure potential conflicts of interest by officials, military officers and parliamentarians are disclosed.
• National governments should require that every offset obligation contract is specific about how performance will be monitored and publish the results.
• Contracts that have offset arrangements should have a dual pricing requirement, one with the offset package and one without to make them easier to monitor.

Anti-corruption guidance systems

Defence links and resources:

Report 'Defence offsets - Addressing the risks of corruption and raising transparency', Ben Magahy, Francisco Vilhena da Cunha and Mark Pyman, Transparency International-UK, April 2010

or view and navigate the report as an e-book

Defence Integrity Pacts (DIPs) developed by the TI Defence Against Corruption Programme
Interview with Francois Vincke, Chairman, Anti-Corruption Commission of International Chamber of Commerce & Chairman, Transparency International Belgium

Further Reading on Offsets: