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

Military Offsets as a Tool for Development F-16 Deal with Poland 1998: Poland admitted to NATO in : Poland’s Parliament approved $3.5 billion to upgrade its fighter planes 2002: US Congress approved 15-year, $3.8 billion loan to Poland US Government’s 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 : Poland negotiated a $6 billion offset deal with Lockheed Martin

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 country’s 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 Transferring technology, but not creating competitors Building customer relationships 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 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 Military Offsets as a Tool for Development Result: Less than reported value actually flows into buying country

Benefits vs Cost Pros: FDI: Projects worth $6 billion Alignment w/gov’t 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 Quality Commercial investment Oil refinery, steel mills, shipyards Military Offsets as a Tool for Development

Benefits vs Cost (cont.) Military Offsets as a Tool for Development Cons: FDI: Multipliers result in less dollars flowing in Use of scarce resources to buy military equipment $0.2 billion/yr ( ) $0.8 billion/yr ( ) Joint ventures independent of offset req’ts Necessary infrastructure improvements neglected Roads Railroads Health service Agriculture Risk of losing EU funding Selling companies Slow on meeting investment req’ts Market distorting Lack of openness Limit on forces to improve business climate Direct gov’t intervention in market Gov’t choices in industries

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 Military Offsets as a Tool for Development

Back-up

Offset Agreement for Procurement of Lockheed Martin F-16s 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” Seller’s own account Purchased credits from other companies Military Offsets as a Tool for Development

Polish Stats