Strategic Trends

Speculating the Future Evolution of Defence Offset

18 Feb 2024

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IBAN: 978-9948-762-00-3

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Offset is a controversial and poorly understood field of defence endeavour. For decades, it has been viewed as an important mechanism for accelerating economic, industrial and technological development, activated simply by procuring expensive military systems. Billions of dollars are spent buying arms that lead to a reverse flow of billions of dollars of ‘offsetting’ investment into the buying country’s economy. Driving this process is the idea that the offset benefits provided by the foreign defence contractor act to ‘compensate’ the customer country for buying costly military kit. This begs the question, however, as to why a defence contractor would succumb to what appear to be ransom payments. It smacks of blackmail but is actually completely legal, and reflects an (albeit pressured) agreement to provide reciprocal benefits linked to the signing of the primary defence contract. If the contractor expresses reluctance to comply with the offset requirement, the customer, operating in a ‘buyer’s market, can then discontinue negotiations and switch interest to another competitor that will comply. Similarly, the contractor can walk away, but if the deal is highly profitable, this will unlikely happen. So, the solution is inevitably one that benefits neither party in the long run: the contractor wins the contract and agrees to be fully compliant with the offset demands but fails to deliver on them. Unsurprisingly, offset programmes often struggle to deliver, due to the lack of goal convergence between the customer country, seeking development, and the overseas defence contractor prioritising profit.

Yet, offset endures. As of August 2023, around 40 countries, many of them major arms importers, have published offset policies. This means that out of 196 countries worldwide, one in five countries demands offset when buying military equipment. This is a remarkable statistic, given the inherent contradiction in policy goals between the two principal stakeholders. The demand for offset has been around since the 19th century, but policy proliferation only really began in the 1980-90s. Since then, the offset club has steadily expanded, however, the outright acceptance of the benefits offset can bring has been replaced by a more cautious and reflective approach. Evidence, as detailed later in this paper, shows that offset can create development opportunities for the procuring nations, including manufacturing capabilities, skill enhancement, product/process quality improvements and exports. These are nevertheless invariably sporadic impacts rather than ubiquitous, transformative and sustainable processes. As a consequence, policymakers have begun to express dissatisfaction and disaffection with offset, leading to a gradual transition of offset business models, from those characterised as prescriptive to an emphasis on cooperation and partnership.

Hence, the goal of this paper is to explore the industrial and technological performance of global offset policy, particularly its ability to deliver on country policy objectives. It is an intellectual journey that will commence by evaluating the policy apparatus of offset, which acts to shape the scope, direction and delivery of the offset package. The customer’s focus will be most of the time on technology transfer, but this is an elusive goal, given the obvious reluctance of offshore vendors to part with their hard-won intellectual property. Therefore, offset policy may offer incentives to tease contractors into providing access to their in-house capabilities that will enhance local learning and technological advancement. Various policy instruments will be identified and explained before analysing offset’s potential costs and benefits. Assessment of country success stories will firstly be examined, prior to offering a critical review of offset implementation challenges. This sets the scene for a final closing section offering conclusions from the analysis conducted, leading to consideration of likely future offset trends. The judgement is made that if offset is to survive, it will need to change, and if it is to prosper, it will need to generate more effectively indigenous development and prosperity that has long been touted as the endgame in this process.