In any highly competitive trade environment, every seller has to make his offer irresistible and more lucrative than those of others. This is the basic canon of marketing. International defence trade is no exception and offsets have come to be accepted as an integral part of all defence deals. A buyer views them as a means to recompense and defray the outflow of resources. On the other hand, a seller willingly offers offsets to grab orders. For him, it makes perfect marketing and economic sense. Additional expenditure (to fulfill offset obligations) is generally amortised by factoring it in the initial commercial quote itself. It will, therefore, be prudent to consider offsets as a natural interplay of the market forces.
National Offset Policy and Objectives
Different nations have used offsets differently to suit their specific requirements. As offsets entail billions of dollars worth of economic benefits, they are considered to be of critical importance to overall national economic endeavour and hence, are always in consonance with the national economic objectives. They fulfil an economic need or fill a technological void. Countries formulate their national offset policy with the aims that are sought to be achieved through them clearly spelt out. Offset policy and objectives vary as per the perceived needs of a nation. Different nations use offsets differently to suit their specific requirements.
Additional expenditure (to fulfill offset obligations) is generally amortised by factoring it in the initial commercial quote itself. It will, therefore, be prudent to consider offsets as a natural interplay of the market forces.
UAE policy mandates that all sellers of arms to it must generate, within a period of seven years, commercially viable products worth 60 percent of the contract value. The Swedish policy on offsets gives primary importance to the creation of long-term employment opportunities in the country. It seeks newer markets for its goods to improve balance of trade. Additionally, it also demands technology and know-how to ensure maintenance of the purchased defence equipment. Malaysia demands a mix of compensatory exports (palm oil), technology transfer and direct investment in infrastructure.
South African offset policy seeks to leverage government procurements to extract support for the development of its industry for sustainable economic growth. It has a policy of seeking three faceted offsets – about 20 percent of the contract value as direct defence oriented offsets, 45 percent as counter purchase by the seller and 35 percent as foreign investment in South Africa. The UK, on the other hand, stipulates that offsets have to be defence related, new and of equivalent technical quality. It permits both direct and indirect offsets. Although the US has no declared offset policy and its defence imports are negligible, it still demands complete transfer of technology and an assembly line to an US company.
As seen, every country has a national offset policy and defence offset policy flows from the national policy. India is perhaps the only exception. It has no national offset policy. Seeking offsets in defence deals is purely a Ministry of Defence (MoD) initiative. Understandably, the policy lacks coherence and well defined aims. As a matter of fact, the Indian policy is totally silent as regards the objectives that it wants to achieve. It appears that India has decided to demand offsets because it is in vogue and everyone else is demanding them.
Also read: Parameters for Indian Army 2020
Many feel that the origin of India’s defence offset policy can be traced to the inability of the Indian defence public sector to increase exports. The MoD decided to leverage its substantial imports to promote exports. The initial policy, as announced in 2005, sought direct purchase of products, components and services by foreign vendors. It also wanted market access and creation of new markets. However, the Government soon realised that the policy was very restrictive and unrealistic. It, therefore, attempted to widen the scope of offset programmes in its policy of 2006.
Oversight and Administration of Offsets
Most countries have a central body to oversee offsets in their entirety. It could be a specially empowered central agency or a central ministry. UAE had set up an empowered Offset Group way back in 1990. It demands and negotiates offsets in varied fields like health care, ship building and other industrial activities. It also seeks joint ventures with local partners.
Every country has a national offset policy and defence offset policy flows from the national policy. India is perhaps the only exception. It has no national offset policy. Seeking offsets in defence deals is purely a Ministry of Defence (MoD) initiative.
In Belgium, Denmark, Kuwait, Netherlands and Taiwan, it is the Ministry of Economy that oversees offsets. Handling of offsets has been assigned to the Ministry of Trade/Commerce in Canada, Finland, Israel, Philippines, Thailand and Turkey. The Ministry of Defence plays an important part, albeit in conjunction with commerce and trade ministries, in countries like Australia, Germany, Greece, South Korea, New Zealand, Norway, Spain, Sweden, Switzerland and the United Kingdom.
In the US, all firms with more than 5 million dollars of offset liability are required to report to the Secretary of Commerce. The US Department of Commerce (Bureau of Industry and Security) has been tasked to submit reports to the Congress.
In India’s case, it is not a nationally co-ordinated effort. The offset policy has been conceived by MoD in isolation. That is its biggest flaw. No cognizance has been taken of national economic or technological priorities. The whole policy lacks focus and clarity.
Selection of Offset Programmes
Depending on the nature and quantum of offsets, their fulfilment may cost a seller up to 10 per cent of the indicative contract price. Some sellers defray the cost of risk involved as well. Most importing countries are aware that their demand for offsets may result in their having to pay a higher price for the equipment being bought. But they tend to overlook it in the belief that accruing benefits will validate additional cost penalty.
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