Offsets are meant to counterbalance the cost of the arms procurement contract but will they?

PUT yourself in somebody else's shoes. Your job is to manage the state in a large developing country which also happens to be a brand new democracy.

Among the things you have inherited from the racial dictatorship that preceded you is the war machine that kept it in power.

It was an impressive force in its day, and it was built and maintained by an impressive gamut of local technological capacities. Yet by the time you take the helm, it has become old and rusty.

Most of its fighter jets have been grounded; its navy is obsolete. Your local arms industry would need an unthinkable chunk of public funds to build a new one. You have a choice; replace it or lose it.

You decide to replace it, but your decision is not an uncontroversial one. Your coffers are meagre and you have to run a tight ship. So buying new war machines comes at great cost; either amass a large deficit or cut domestic spending. That is not an easy decision; your population is undereducated, you have a housing backlog and your electorate is expectant.

Weighed against these costs, it is by no means self-evident you need a state-of-the-art defence force.

Questions have also been raised about the particular machines you have chosen. Why three attack submarines? Why the most expensive fighter jets on the market?

Let us put these questions aside. Let us take it as given that you have decided to recapitalise your defence force, and that you reckoned to fork out some $4bn-5bn to do it. Debating the prudence of this decision can be banked for another day.

You have decided to buy the arms; from whom do you buy; what sort of deals do you try to strike?

There are three major arms industries on the planet; one in northern America, a second in western Europe and a third in the Middle East. You go for western Europe, because there are other things you want from that region as well, like investment in your local civilian industries, and you reckon the arms deal could be used to get them. But more of that later.

Second question: how to buy the arms? Getting them off the shelf is a crazy idea. For a start, buying arms is horribly import-intensive and you want to protect your balance of payments; you want as much of the machines to be produced locally as you can possibly help.

Second, your own domestic arms industry developed valuable technologies under the old regime, particularly in electronics and avionics. Indeed, much of your local electronics sector established itself through arms contracts supported by generous state subsidies. You want to save this technological capacity, rather than lose it.

So you insist that the arms companies with whom you are negotiating make major investments in your local industry. You find that they are receptive. BAE Systems, for example, from whom you bought 52 jets, agrees to sink $829m in your aeronautics industry.

Your local industry will be contracted to make aeroplane tails for the Swedish and British air forces and landing gear and fuselage equipment for the European Union. BAE has also pledged to find a market for your Rooivalks a state-of-the-art helicopter you have been battling to sell abroad.

So you have used your purchase to integrate your local producers into the mainstream of the international arms industry. Detractors insist your arms firms would have found solid international partners anyhow, irrespective of your purchase. But let us give you the benefit of the doubt let's say the foreign investments in your local producers offset your procurement.

There are other temptations, however, that have little to do with the arms industry.

Since coming to power you have done everything foreign investors have told you to do; the deficit is below 3% of gross domestic product, the currency's falling value is enticing for exporters, you are in the process of privatising parastatals. And yet foreign direct investment is still not forthcoming.

You begin to suspect the lack of interest has more to do with prejudice than economics. You believe that you have a branding problem.

Could the multinationals from whom you are buying arms perhaps do some branding for you? They are big European market players, after all. Maybe they can open the doors you have been banging on in vain.

Companies like BAE tell you that networking and country branding are among their core functions. They have an office in Europe whose sole purpose is to attract investment in their clients' civilian industries. You also believe that European governments will throw their weight behind their own arms sectors; they need the economies of scale that export markets facilitate.

So you start talking to the arms companies about industrial offsets. You draw up draft contracts that oblige them to brand your civilian industries. You make it their responsibility to get other companies in other industries to invest billions of dollars in your local economy.

Is this too good to be true?

Well, you are not really sure. For one, you know the arms companies are not going to network for free. No company will make an uncertain commitment without hedging.

You know they have offset a portion of their risk by upping the purchase price. You calculate the arms are costing as much as $800m more than they would have without the industrial offsets. Is that $800m worth paying? If the arms companies deliver, it is more than worth your while. But will they deliver?

You have penalty clauses in the contracts, and by industry precedents they are high. Yet your trade negotiators tell you they are still not high enough. If the going gets tough, it may be worth the arms firms' while to pack their bags and run.

There are other nagging doubts. You do not want just any foreign direct investment. You want to transfer new technologies and skills to your local producers. You want to increase productivity in the sectors in which your foreign partners invest. And you know this depends as much on you as anyone else. The contracts you signed are not magic wands. The nuts and bolts of industrial policy must still be put in place.

Prudence tells you to say no. But you are not feeling prudent. Everything else you have tried has failed and your back is against the wall.

Governing this country, you reckon, requires a taste for adventure a taste for risk.  

With acknowledgment to Jonny Steinberg and Business Day.