The Rationale for Offsets in Defence Acquisition from a Theoretical Perspective

Introduction

Offsets are a controversial, complex yet an intriguing subject within the field of defence acquisition. Offsets are claimed to create distortions in a free-market environment, to increase the cost of defence acquisition and to cause unnecessary, additional burdens to defence contractors. Most academic journals have been extremely critical about offsets and how effective they have been in creating an industrial base, supporting economic development, generating genuine technology transfer, and increasing employment or exports. Several academic studies claim that offsets do not bring the necessary benefits and long term impact as claimed by governments and industries. There is an increasing debate as to the relevance of offsets and whether they truly contribute to the economic development of nation states (The Economist, 2013; Hoyos, 2013). In Europe, for example, a policy has been passed to severely reduce and eventually eliminate offset requirements as part of defence procurement (Zriksson, Axelson, Hartley, Mason & Trybus, 2007).¹

Despite policy initiatives to reduce offsets, there is considerable evidence to show that there is an increasing demand for offsets. Governments view offsets as a policy tool for economic development, technology and industrial benefits. Offsets have been made a mandatory requirement in around seventy-eight countries as part of their defence procurement strategy (US Department of Commerce, 2012).

Frost and Sullivan (Kimla, 2013) estimate that the global offset obligation is expected to reach £296.45 billion by 2017. This management consultancy also forecasts that twenty countries’ cumulative value of military offsets will reach £251.73 billion between 2012 and 2021; Saudi Arabia’s market is predicated to have the largest growth of military offset obligation worth £37.13 billion by 2021. Avascent (2012), another management consultancy, believes that the United Arab Emirates (UAE) and Saudi Arabia will have the highest growth of cumulative offset obligation with an approximated £92.49 billion by defence companies between 2005 and 2016 (Kremer & Sain, 1992; Udis & Maskus, 1991). Both organisations predict that that the value of offset obligation will increase tremendously.

In practice, offsets are often offered as part of a large defence acquisition. When a buyer enters into a procurement exercise, offsets will automatically feature as a mandatory component in the procurement activity if the value is above a certain amount which requires offsets. The question then is as to why is it that offsets are required as part of a defence acquisition activity? Although there are a many journal articles that claim offsets practise are becoming increasingly popular, these works have not clearly addressed the theoretical underpinnings behind why offsets are required as part of defence acquisition. To date, this literature has tended to be offer simplistic ways of explaining the case for offsets. This chapter seeks to redress this lack of deeper understanding by discussing the rationale for offsets in defence acquisition from a theoretical perspective. To that end this chapter firstly defines offsets and evaluates the costs and benefits of offsets. It then discusses the role of offsets within defence acquisition and finally provides an in-depth analysis as to the rationale for offsets in defence acquisition from a theoretical perspective.