Non-Defence Company Services

A1: Offset legislation for each country is often published in government web sites. This should clarify the technologies that are eligible.

In general however, as offset continues to grow in popularity among purchasing countries, so the large Defence Companies accumulate an increasing volume of offset obligations that need to be discharged. Failure to do so will incur financial penalties for defence companies and a loss of reputation in the market.

Outsourcing defence work has practical and economic limitations, and in some circumstances, issues of National Security can prevent Defence Companies from outsourcing certain technologies. This increases the potential for non-defence alternatives to be considered. The ratio of ‘defence’ versus ‘third party’ related offset is roughly 50:50. However the current trend is that offset projects involving third parties are on the increase.

The resulting rise in third-party civil offset projects has created a parallel investment activity and has opened an alternative source of finance for the civil sector. This is still a niche market, but one that is expanding in line with the growth of offset.

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A2: Under offset, assistance from Defence Contractors can take several forms, the exact nature of which will depend on the circumstances of each project and the offset regulations in each country. An overriding assumption made by Defence Companies in virtually all situations is that offset is not about doing bad business. Offset is about Defence Companies facilitating new, commercially sound business for their customers. Experience suggests that every penny invested by defence companies will be carefully managed and will be subject to proper contractual and legal arrangements.

When working with Non-Defence Companies, the role of the Defence Contractors can take several forms; e.g. as purchasers of goods and services, facilitators of business, as investors, providers of marketing support etc. The assistance that can be legitimately provided by Defence Companies under offset is only bounded by the legislation that applies in a particular country and the requirements of a particular transaction.

In terms of the ‘amount’ of assistance, as a general rule, Defence Companies will limit their financial exposure to the minimum that is required to satisfy their offset obligation. They do not invest for the sake of it!

Benefits typically provided by defence companies under offset can include (a) non-recourse loans, (b) equity (c) financial assistance towards start up costs (d) due diligence costs etc.

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A3: As a rule, Defence Companies make fairly ‘benign’ investors that do not necessarily require the same return on investment as demanded by commercial lenders. Offset can therefore provide a cheap source of finance for companies that are prepared to work overseas with the Defence Companies. The potential rewards to third party companies that have an appetite for expansion in overseas markets can be great, but this must be weighed against a different set of considerations specific to international Defence business.

The relationship with Defence companies can be, for example as ‘arms-length’ debt providers, equity providers, JV partners etc. Interested parties should allow for the possibility of forming Joint-Venture companies when the business case can be justified. In these situations, the Defence Company may be encouraged to invest in the Joint Venture, which is normally situated in the client’s country.

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A4: Technologies eligible as offset are determined by the regulations and priorities in each country. In general, high Technology (Civil) Industrial Projects are eligible under several Defence Offset programmes around the world. It is increasingly common for Defence Companies to invest in civil projects in order to provide the technologies and benefits their customers require under offset.

In general terms, any investment by Defence Contractors under offset should satisfy the following criteria:

• The project must be eligible as offset in that country,
• The investment must generate a good return in offset ‘credit’ for the Defence Company,
• There must be ‘causality’, i.e. The Defence Contractor must be able to prove responsibility for facilitating the project,
• The project must be commercially viable

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A6 – Whilst the potential rewards of working under an offset programme can be very attractive. Seldom does offset offer companies a ‘quick buck’. Companies interested in working under offset should appreciate that funding is dependent on several factors outside their immediate control. Some examples are given below.

A key issue for a Defence Firm when working with third parties is proving causality, i.e. the Defence Company must be seen by its customer to be directly responsible for bringing about a new or additional piece of business or a benefit to the host country. In a practical sense, the Defence Contractor must clearly show his customer (the government) that it has directly influenced a project, without which the project would not have gone ahead in that country, or it would have occurred at a much later date.

A further issue to be managed is timing, i.e. synchronising the start of the offset project with the start of the Defence Contract.

Defence Companies will avoid substantial outlay in an offset project prior to award of the Defence Contract. There are some exceptions to this rule, for example in situations where the Defence Contractor invests in advance of a contract decision to enhance his marketing position. This is a risk, and examples of such speculative investments are rare, as Defence Companies have little appetite for increasing their exposure to risk, particularly in non-core activities.

Moreover, Defence Contracts can be delayed through no fault of the Defence Contractor (programme delays, governmental procrastination etc). Such delays only serve to frustrate dependencies on the offset projects that are waiting on a contract decision. Under these circumstances, the Defence Contractor will limit any exposure to costs or risks until the contract is signed and sealed. Thus, where the Defence Contract is subject to significant delays, the opportunity to work on a project with a third party may be lost.

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No!  Under offset, Defence Companies work with both large and small third party companies. Irrespective of size, it is important that Non-Defence Companies can clearly identify what they require as tangible business benefits from offset.

Legislation will define what type of transaction and technology that is eligible, and again this will differ between countries. Broadly speaking, for a transaction to be accepted as a genuine offset, it must translate into an additional, tangible benefit to the end customer’s economy.

Whether Defence or Civil, offset projects usually encompass the following types of transactions;

• Transactions that generate employment and other added value (e.g. manufacture, assembly, technical labour)
• Sourcing local components and materials.
• Investments and other forms of financial support (for the development of existing facilities or the creation of new businesses.)
• Transfer of know-how, technologies (training, intellectual property, for)

Marketing support (usually calculated as export sales)

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