The use of offsets is now commonplace. Today, virtually all countries who import defense equipment require some type of offset. There are approximately 130 countries using offset agreements (Suman M. G., Offsets In International Arms Trade Need For A National Policy, 2005). Between 1993 and 2009, the average value of 736 offset agreements signed by 49 U.S. firms with 46 different countries amounted to 70.14% of the value of the contracts. The total value was $75.90 billion (U.S. Department of Commerce Bureau of Industry and Security, 2010). A European Defense Industry and Market report estimated that, among European Union Members, the value of offsets was around $5,880 M, and the average offset percentage was 135% (E. Anders Eriksson, 2007). These numbers imply the total value of the offset programs provided by the arms sellers to the European defense equipment buyers.
Indigenous development and production of defense equipment will, theoretically,
“provide an independent capability for the required equipment, as well as the most benefit for the domestic economy in terms of jobs and technology acquisition” (Martin, 1996, s. 1). States that are unable to possess this ability have sought “offset” agreements in order to achieve this goal. Yet, even if offsets are thought to hold “important potential for developing and emerging economies, until recently there has been little research on
25
how well offsets work in practice” (Jurgen Brauer, 2005). The economic and developmental contributions of offsets to countries importing arms have questionable efficiency and effectiveness.
Normally, it is expected that offsets reduce the costs of procuring arms for the importing country by stimulating job creation, creating a foundation for defense industrial bases, and transferring general and specific technology, “since technology is seen as the key to future economic prosperity” (Jurgen Brauer, 2005, p. 7). Furthermore, it is assumed there will not be more costs than from off-the-shelf arms purchases (Jurgen Brauer, 2005, p. 8). However, no country is eager to transfer their latest technology as an offset to an importing country without commercial gains (Suman M. G., Offsets In International Arms Trade Need For A National Policy, 2005). “As Dumas points out, the foremost objective of the arms seller is to make a sale and profit, not to contribute economic development” (Haines, 2004, p. 312). “Even if the technology is deemed free as an offset, the seller invariably tries to charge an inflated price for jigs, fixtures, test beds, training and technical documentation” (Suman M. G., Offsets In International Arms Trade Need For A National Policy, 2005).
From a contractor’s perspective, contractual offset requirements impose added risks and penalties for non-performance. Because, they include the potential cost of offset program failure in their weapon sale programs (Martinez, 2010). Markusen states that the administrative cost of offsets for seller companies runs from 7% to 10% of a contract’s value (Baskaran, 2004). Because of these additional costs, companies usually attach premiums that include expenses not present in the absence of offsets (Jurgen Brauer, 2005, s. 4). Briefly, offset contracts were more expensive than off-the-shelf arms purchases (Jurgen Brauer, 2005, s. 1).
In addition to cost inflations, economists approach arguments of job creation suspiciously (Julia Muravska, 2010). For example, Saudi Arabia’s $3.8 billion defense offset for the 1985 U.S. Peace Shield program was expected to create approximately 75,000 jobs, but employed only 3,540 members staff (as of 2009) (Pfeifer S. , 2010).
Another example is South Africa, which approved a R29.9 billion arms contract, and
26
expected the attached offsets, worth of R106 billion, to create 65,000 jobs over a 7 year period (Lamb, 2004, p. 284). However, Dunne and Lamb criticized this promise: “a cost of R1.6 million per job is extremely high, nearly 20 times the average cost per job in South Africa’s defense industry” (p 288).
Regarding offsets associated with the transfer of technology, it is crucial to highlight that an importing country should have a “high degree of local technological absorptive capacity” to accomplish the expected improvements in the industrial base (Matthews, 1996).
The technology sought should be such that the recipient can exploit it fully by developing its other applications as well. That will provide the necessary economies of scale. The buyer nation should also match the technology sought with its own capability for absorption. The greatest drawback of technology transfer as an offset is that it is very difficult to measure its real impact and effectiveness. (Suman, 2005)
Successful offset projects should establish long-term industrial partnerships that continue to benefit countries even after the contractual obligation has been fulfilled and, the “transferred technology must make the local defense industry self-sustaining”
(Martinez, 2010, s. 3) (Suman M. G., Offsets In International Arms Trade Need For A National Policy, 2005). However, this is not guaranteed (Martinez, 2010). Offsets operate on a contract-by-contract basis, and sub-contracting benefits wane once the foreign supplier has completed its offset obligations; this is because compensation contracts do not compel the principal contractor to maintain industrial ties with subcontractors (Struys, 1996). For example, India’s defense industry was able to obtain certain technologies, but
“failed to acquire capabilities sufficient to close the technology gap with developed countries and keep pace with technological change in weapon systems” (Baskaran, 2004, s. 219).
In summary, offset programs are widespread, and theoretically offer important benefits to an acquiring country. Yet, proper selection, detailed planning, close supervision, and regular monitoring are keys to their success and value (Suman M. G., Offsets In International Arms Trade Need For A National Policy, 2005). Otherwise,
27
offset programs can be wasteful and uneconomical. For this reason, a careful program selection method should be devised in order to evaluate their “viability, estimated credit value, monitoring ease, and demonstrability of accruing benefits.” (Suman M. G., Offsets In International Arms Trade Need For A National Policy, 2005As Brauer (2004) mentions, each country should organize an audit team for arms trade offsets that would be responsible for measuring the full economic costs of defense acquisition deals (Lamb, 2004).