Publication: Business Report Issued: Date: 2006-10-08 Reporter: Wiseman Khuzwayo

No Significant Upside to the Defence Agreement, say Academics

 

Publication 

Business Report
Date 2006-10-08

Reporter

 Wiseman Khuzwayo

Web Link

www.busrep.co.za

 

Johannesburg - An increasingly important facet of the international arms trade is offsets. These offsets are arrangements that oblige the arms seller to reinvest arms sales proceeds in the purchasing country.

In justifying arms expenditure and promoting industrial activity, offsets are to offer significant benefits to developing countries. Until recently, there has been little research on how well offsets work in practice. But J Paul Dunne, of the School of Economics at the University of the West of England, and Jurgen Brauer, of the College of Business Administration at Augusta State University in the US, have now done such research.

"We find no case where offset arrangements have yielded unambiguous net benefit for a country's economic development. As a rule, arms trade offset deals are more costly than 'off-the-shelf' arms purchases, create little by way of new or sustainable employment, do not appear to contribute to economic development and, with very few exceptions, do not result in significant technology transfers, not even within the military sector," say Dunne and Brauer.

The authors have found that to date the evidence does not suggest that offsets advance countries' long-term economic or military goals. They say offsets do not result in cost reductions in arms purchases; they do not stimulate broad-based civilian economic development; and that neither substantial nor sustained job creation occurs, not even within the military sector.

They say almost no successful technology transfer into the civilian sector is observed, and only limited technology transfer into the military sector occurs.

"Moreover, whatever technology is transferred is quickly outpaced by continuous technology advances in the main developed countries," say Dunne and Brauer.

The authors say the difference between the expected benefit and the actual ones is stark, and South Africa is involved in dealing with the fallout.

"The degree of coverage, transparency and debate is unprecedented and has provided important and disturbing insights into the workings of the international trade, and the problems and pitfalls for both buyer and seller countries."

Competitive bidding leads firms to compete on offsets and invent ways *1 to deal with them. This leads to unrealistic offset agreements.

Dunne and Brauer say elements missing in offset characteristics are contract monitoring, auditing and feedback to the importing country's defence contract-issuing organisation. Few countries, say the authors, have carried out even a single formal and independent offset audit to determine to what degree the hopes with which offset contracts are invested come to fruition.

"In the political and news media arena, the expectation is that offsets will reduce arms procurement costs to the importing country and that there be cost premium as compared with the off-the-shelf purchases. But this is illusionary: the administrative cost of offsets alone is believed to cost arms sellers anywhere from 7 percent to 10 percent of contract value, and this cost must be recovered in some form."

Dunne and Brauer say the most infamous job creation claim is that of South Africa, with the deal to result in 65 000 jobs over five years. They find that this sounds impressive but amounts to a cost of R1.6 million per job and is high, nearly 20 times the average cost per job in the defence industry.

The authors conclude: "The benefits of offsets to the procuring country are open to question, and the only way of determining the true value of an offset arrangement to a country is to make a detailed analysis. When this has been done, the impact on the economy has been much smaller than expected or promised. The onus to prove otherwise lies with those who would champion the case of offsets. Regrettably, their case relies on pre-offset assertions rather than post-offset evidence."

With acknowledgements to Wiseman Khuzwayo and Business Report.


*1       Lies, damned lies and offset.


Riddle

Before 15 February 1999 in Germany, before some time in 2004 in the UK and at some time between 1999 and 2000 in France it was legal in these countries to bribe foreign decision-makers to win contracts and then claim the bribes as useful expenditure and therefore as tax deductions in the provider country.

But can these same bribes be claimed as offset credits in the recipient country?