An offset agreement is a type of side deal, sometimes best described as a sweetener. This is an agreement between two or more parties that provides additional benefits and is ancillary to another negotiated contract.
The deal is between a government and company, often a defence company but it can also be used in big civil deals for items such as infrastructure and transport. The company is the one that provides the additional benefit, usually one that is meant to create jobs or wealth for the country’s economy.
Companies do this because it boosts their chance to win lucrative government contracts, particularly in developing countries. Countries do this because it makes it easier to justify large expenditures.
A company’s offset obligation is usually worth 50-100 per cent of the value of the contract and can be direct or indirect. Direct offsets are linked to the original defence contact. Companies often agree to transfer relevant technological knowhow or use local suppliers to build the equipment they are selling to the government.
Indirect offsets, though prompted by the defence sale, have nothing to do with what the country is purchasing. These can include the company making or drumming up investments in local industries, or helping export a country’s goods.
offset agreement in the news
In 2013, a Financial Times investigation found that western defence companies had agreed $75bn of side deals, ranging from helping Omani fishermen to financing an Emirati beachfront metropolis, to win lucrative arms contracts.
The FT’s probe – based on data provided by IHS Jane’s, the defence industry analyst – revealed the scale of the outstanding promises or “offsets” made by the world’s 12 largest defence companies to win orders from countries seeking investments, jobs and technology.
Defence companies had traded Tunisian olive oil for military transport planes; invested in fledgling airlines in Kazakhstan and Jordan; created a domestic aerospace industry for Turkey; and sent the first Malaysian astronaut into space.
In Oman, BAE Systems had satisfied part of its offset obligation by luring fish to big, brightly coloured buoys, easing the work of local fishermen.
Executives said that these side deals are becoming increasingly crucial to winning big international defence contracts as developing countries rank competing bids by the companies’ willingness to commit billions of dollars to their economic and industrial development.
Penalties for not delivering on side deals – which can run into the tens of millions of dollars – are kept even more secret than the deals themselves.
Critics of these deals – such as the US government, the EU, World Trade Organisation and campaign group Transparency International – said they distort the market, lead governments to order arms they do not need and create opportunities for corruption.