Military Offsets as a Tool for

1
Military Offsets as a Tool for Development
Poland, A Case Study  

2
Military Offsets as a Tool for Development
F-16 Deal with Poland

• 1998 Poland admitted to NATO in 1998
• 2001 Polands Parliament approved 3.5 billion
  to upgrade its fighter planes
• 2002 US Congress approved 15-year, 3.8
  billion loan to Poland
• US Governments Deal with Poland
• 3.8 billion Foreign Military Financing loan
• Interest payment through 2010 Interest plus
  principal 2011 through 201
• Advanced Medium- short-range air-to-air
  missiles
• Maverick air-to-ground missiles
• Laser-guided and other bombs
• Radio-frequency countermeasures
• Potential for acquisition of new F-35
• 2003 Poland negotiated a 6 billion offset
  deal with Lockheed Martin

3
Military Offsets as a Tool for Development
Offset Practices

• Reciprocity arrangements conditions on foreign
  suppliers
• Designed to compensate the buyer for selecting
  a foreign supplier
• Commit the seller to certain obligations
• Up to 100 of purchase price
• Used in reference to military
  high-dollar-value civilian contracts
• Buying Country Stategies
• Hard currency generation to alleviate shortages
  of foreign exchange
• Technology transfer to build competitiveness
• Domestic content to promote locally
  manufactured goods
• Marketing assistance
• Economic stimulants forming part of a countrys
  economic recovery program
• Selling Country Strategies
• Competitive or commercial reasons
• Standardization interoperability reasons
• Concern for job losses distortion of world
  trade
• Work to mutual advantage
• Low-cost suppliers

4
Military Offsets as a Tool for Development
Offset Agreement for Procurement of Lockheed
Martin F-16s

• 3.5 Billion Contract for 44 F-16
• Improving NATO fleet interoperability and
  standardization
• 6 Billion Offset Arrangements
• Responsibility lies with Lockheed Martin
• 47 Projects
• Some of the Companies Organizations Involved
• Lockheed Martin
• Pratt Whitney
• Goodrich
• Halliburton
• CH2M Hill
• Sandia National Laboratories
• University of Texas

5
Military Offsets as a Tool for Development
Offsets Their Valuations Creativity Leverage

• Setting Offset Values
• Buyer Seller work together to identify
  projects potential investment value
• Multipliers applied in many countries
• Set by law
• Dependent upon project type

• Result
• Less than reported value actually flows into
  buying country

6
Military Offsets as a Tool for Development
Benefits vs Cost

• Pros
• FDI Projects worth 6 billion
• Alignment w/govt strategy
• Countertrade
• US commercial aircraft parts
• Improve competitiveness thru technology
  acquisition
• Joint ventures in high tech areas
• Co-production
• Aftermarket opportunities
• Technology centers/institutes
• Improved infrastructure
• Telecommunications
• Increased foreign trade
• Establish markets in high tech areas
• Venture funding
• Training
• Joint ventures/mfg expertise
• Business development
• Managerial

7
Military Offsets as a Tool for Development
Benefits vs Cost (cont.)

• Cons
• FDI Multipliers result in less dollars flowing
  in
• Use of scarce resources to buy military
• equipment
• 0.2 billion/yr (2004-2010)
• 0.8 billion/yr (2011-2015)
• Joint ventures independent of offset reqts
• Necessary infrastructure improvements
• neglected
• Roads
• Railroads
• Health service
• Agriculture
• Risk of losing EU funding
• Selling companies
• Slow on meeting investment reqts
• Market distorting
• Lack of openness
• Limit on forces to improve business climate

8
Military Offsets as a Tool for Development
Summary

• Offsets Role
• Major role in decision contract negotiations
• Offset Function
• Major role in economy of buying country
• Issues
• Offset valuation
• Offset multipliers
• Developing countries spending resources on
  large military equipment
• Alternate use of resources
• Alternative FDI
• Market distortions
• Direct government intervention in markets

9
Back-up
10
Military Offsets as a Tool for Development
Offset Agreement for Procurement of Lockheed
Martin F-16s
11
Military Offsets as a Tool for Development
Funding Offsets

• Selling Company Allocates Small Budget
• Typically 4 10 of selling cost
• Program funding used
• Typically charged back to buyer as part of
  overhead cost of purchased equipment
• Partner Companies
• Often through new or existing investments in
  the buying country
• Offset Credit Trading Account
• Sellers own account
• Purchased credits from other companies

12
(No Transcript)
13
Polish Stats
14
Polish Stats