Defence offset is a controversial subject, attracting heated debate by policymakers, industrialists, and academics alike. Offset forms part of an acquisition programme and occurs because of the leverage a customer country can exert on overseas defence contractors to transfer technology and skill-intensive work. The leverage arises due to the existence of what is termed a defence buyers’ market, characterised by a paucity of high value sales opportunities and thus a preparedness by vendors to offer concessions to win orders.
Such concessions include offset whereby the procuring country literally seeks to ‘offset’ the high costs of acquisition through reciprocal vendor investment into the local economy. This offsetting investment may be directed towards commercial endeavour (civil or indirect offset) or defence work (direct offset), with the latter directed towards accelerating development of indigenous defence industrial capability. An example of defence offset is where Brazil purchases 36 Swedish JAS 39 Gripen fighters and as part of the deal ‘demands’ local capacity for in-country assembly and possibly also production capability of selected high-tech components and sub-systems.
In the early 2000s, well over 100 countries, rich and poor, had offset policies in place, but recently their popularity has been declining. A major reason is that offset usually incurs additional cost, which translates as a cost premium embedded in the primary defence contract price. A good example of the added costs associated with offset is the UK licensed build of the Boeing AH-64D Apache Longbow attack helicopter. The MoD procured 67 of these rotary platforms, with the first eight produced in the US, and the remaining 59 locally assembled over 1998-2004. The program cost around $4.75 billion,, meaning that the unit cost was about $70 million. By contrast, Israel ordered 24 similar Apaches off-the-shelf from the US in 1999, paying around $23 million per helicopter.
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