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Offsets are a curious and rather hidden feature of defence business. They are a form of barter, whereby the seller agrees to provide extra services to the purchasing government over and above the weapons sale itself. These extra services are large – often to over 100% of the value of the weapons contract. Offsets are usually poorly controlled and almost unregulated. They are a major corruption risk.
Definitions
- Offsets are compensation practices required as a condition of sale/purchase
- Direct offsets are contractual arrangements that involve defence articles and services referenced in the sales agreements for military exports
- Indirect offsets are articles and services unrelated to the defence items or services in the sales agreement (example: marble statues)
Facts and figures
- Offsets started after 1945 - part of the US effort of European reconstruction and formation of NATO
- Used almost exclusively in defence deals. WTO bans their use
- Most countries require 100% offsets. High is Austria (174%), Netherlands (118%). Low is Taiwan (20%), Thailand (27%)
- Most offsets are indirect (60%, vs 40% direct)
- Offset demands are increasing (103% in 2005, 49% in 1993)
- General assessment: ‘largely ineffective over the long term and have minimal lasting impact on economic or military capability’
- Offsets estimated to increase sales price by some 15 - 30%
- Direct offsets very rarely work
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Current opinions
‘They are here to stay and need to be harmonised; they are currently unregulated’
(EU 2005)
‘There should not be offsets in EU procurement’
(European Defence Agency (EDA) January 2006
Ulf Hammarstrom, EDA Director of Defence Industry and Markets to Defence Conference, Brussels. Quoted in Jane’s 43(10) March 8, 2006)
A current EDA study into offsets is underway
(See for instance "Get set for offsets" Euro Correspondent 11 October 2006)
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Corruption risks
- Offsets are subject to much less study, and scrutiny, than the main contract
- Their influence in the evaluation of the bidders is often completely unclear, and confuses the value for money choice
- Offsets offer huge scope to reward intermediaries anonymously
- Specific offset deals are not settled until long after the contract is signed, and when there is thus much less scrutiny
- Offsets are usually badly monitored
- Auditing and value for money on offsets is almost never done
TI views offsets as a significant and uncontrolled corruption risk in defence procurement
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