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An Insight on Defense Offsets and Military Procurement

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The Third Offset Strategy which the USA has initiated through the foundation of Strategic Capabilities Office brings a new approach to the concept and business of offsets. Offset offers are made through proposed programs that aim to generate efficient economic performance and development of estimated reports. So far, experience shows that the estimations generally do not hold up to actual related economic performance. Ascribed confidence on the defense companies have produced only little satisfaction; because the related industry when funded and worked through the dynamics of the vendor company, may remain dependent to foreign industry concerning manpower, technological and scientific know-how and mentality; which does not ensure a sustainable impact on the target country. Therefore, countries decided to raise the bar to meet the requirement of the agreements, furthermore impose strict oversight and feedback on the performance of the vendor company. The ultimate goal being to create a capable economy which produces and export technology with little dependence on any foreign entity; governments now tend to focus on technology transfers and direct investments.

As Western companies slowly cut their defense spending, defense companies turn towards developing countries that demand defense technologies. Vendor companies’ offset obligations usually are worth 50 to 100 percent of the value of the proposed contract. Offset agreements require the supplier companies to fund economic initiatives in the target country or provide investment incentives. The contracting governments heavily counted on the offset agreements with a view to justify their defense spending, correct for trade deficits and imbalances and stipulate local investment in various sectors.

The shrinking trend of defense budgets, especially in USA and Europe, correspond also to a change concerning the nature of the offset agreements. Governments that are parties to the related contracts seem to put their focus on indirect offsets that differ from direct offsets in the sense that they are not related to the defense products that are sold through the original contract. Thereby, governments provide for and encourage the nourishment of other sectors that have the potential to have a say in the global market economy regarding its field. This can be ensured by industrial cooperation between the vendor company and local producers byways of technical assistance, joint ventures and venture capitals. Israel as an instance is a leader in the market for unmanned vehicles, even extending its trade in the field to Latin America.

Offset strategies, once an innovative and a popular concept, seem to be less favorable nowadays as they are considered to be risky in the sense that they are open to distortions. When purchasing equipment, the first terms to consider are usually price and quality. As offsets are included for a long time in the sales contracts to countries, the conditions of the offset agreements are included in the offer also. This can distort the negotiation process since agents of a government to the contract may focus only on the conditions of the offset offer unknowingly ignoring the terms to the price and quality of the equipment that is intended to be purchased. Hence, defense companies have become highly competitive in their offers that raise the bar for the requirements of the offset offer at hand, which in turn increases the possibility of non-compliance of the already agreed terms of the liabilities. This non-compliance or the inability to comply because of unrealistic propositions can lead to awfully important consequences such as judgments about unfair competition, damaging of the reputation of the company and default on the contracts at hand.

Having examined some downsides to offset agreements, it should go without saying that governments put emphasis on technology transfers and direct investments, also concentrating on dual-use technologies that can be converted into various sectors of the country’s economy in a beneficial and sustainable way. The adoption of an effective policy with the purpose of commercialization of dual-use technologies is expected to create a highly cooperative, profitable and beneficial market regarding the sale of defense technologies. Dual-use technologies allow for the usage of the technology at hand for both military and civilian functions. They can be used in a variety of applications ranging from protection against nuclear and chemical hazards to industrial control systems and public transport. It is foreseeable that this can enable a win-win situation. Integration of the transferred technology into civilian technologies will also furnish and encourage investment initiatives which would be of vital importance as an opportunity to develop a robust economy in the global market.

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