Expert: what will be the future of the offset in Poland?

In recent days, the offset agreement related to the first phase of ‘Wisła’ programme and contract for the supply of equipment under the first phase were concluded.

In general, it is very good news for the Polish Armed Forces and the industry. Our air defense is weak and if I may put it rather colloquially- is “somewhat lacking” – with the exception of the lowest level and missile defense simply just does not exist. Our industry got a huge chance but if it will seize that opportunity, depends only on it, partners and MoD’s politics in the field of purchase- in the part which is handled by the Inspectorate for Armed Forces Support.

At the end of 2017, we were informed about the conclusion of contract for purchase of ‘Patriot’ system by Romania and consent of Department of State for potential sale to Sweden. In both cases, a principal supplier is Raytheon. Both contracts do not provide for purchase of ICBS system (developed by Northrop Grumman for the US Army), offset or industrial co-operation. As Swedes could reach something in the field of industrial co-operation in the future – because they negotiate very skillfully, and they have a lot to offer for the Unites States- in case of Romania, I do not expect contracts which will be favorable for the local industry.

When purchasing military equipment, the 30/70 rule applies. 30% is paid when purchasing, the remaining 70% - throughout the life cycle of the equipment - usually 20-30 years. American corporations know it very well and use it very well. For the post-warranty service, consumables and, in particular, any modernization, adaptation to the changing conditions of the battlefield it is necessary to pay very dearly. The cooperation with American companies is such that if you do not provide something in the initial contract - then it is very difficult to change its terms.

30/70 rule is well-known by lobbyists and advisors, who instigate decision-makers to simple purchases, without any offset and industrial co-operation -  they act in their own interest.  They obtain commission for all invoices paid by our country. It is nicer to receive a significant commission when the contract is signed, then when the last instalment is paid and later, every once in a while (for example every 2 years) obtain significant amounts. Obviously, commissions in trade between NATO members don’t achieve percentages similar to the purchases to Arab or Asian counties, but they are really trustworthy- even a little percentage of a big value does their bit. Well, what’s the harm to talk  a little with the decision-makers and try to persuade them  that offset and industrial co-operation is not profitable, because it increases the price of the purchased military equipment.

After the information that Romania and Sweden purchased the ‘Patriots’ some of our prominent media started a discussion: why do we need offset? We should buy immediately, because it will be cheaper, etc. Will it be cheaper? - There is no guarantee- but for sure it will be better for those who order goods like these.

 With this ‘cheapness’, it is not so simple. Offset or industrial co-operation in the arms trade appear in over 140 countries in the world. Both those belonging to the western world and those that purchase arms mainly from Russia or China. Global corporations spend large sums on it. For example, a corporation which annual turnover is USD 20 billion spends for offset/industrial co-operation USD 2 billion. Therefore, to each sold piece of military equipment, it must add at least 10% or even more for example 15-20% costs of offset/industrial-operation. Member of the board, who is responsible for financial matters in corporation like this, never authorizes to deduct offset costs from the offer, even if purchaser does not want offset. It simply gives to counterparty 2-4% discount and a bonus is shared by the board, there is still some money for those who worked directly on the contract. Also, lobbyists and advisors would earn much more. They would benefit from service, repairs, etc.  It should be remembered that prices of military equipment are not comparable to the prices of washing machines in supermarkets.

And now, a few words about the offset law. Essential interests of State security are mentioned at least seven times in the act directly or in reference to the Article 346 of the European Treaty. The conclusion is clear – the essential interests of the state security are the key to understood offset and interpret the new offset law. It does mean that to one supply contract it is possible to apply offset to its one part, to another part buy a license and start production of some equipment or its part. All methods may be applied simultaneously. That issue will be further explained in the next article. Here also raises a very important issue for domestic industry – how to ensure that inputs in offset’s implementation will pay back and will be rewarding. To consider that purchase of some armament equipment needs offset it should be taken into consideration at first that well-implemented offset needs considerable personal and organizational expenses. Furthermore, implementation of a particular technology needs costly equipment for production lines, etc. However, tenders for the repair of the equipment, modernization, etc. is organized by Inspectorate for Armed Forces Support according to public procurement rules.

And here is the huge risk for industry because it is possible that Inspectorate for Armed Forces Support will ignore the fact that a given capacity has been acquired with significant expenditure incurred and it will announce a normal tender. That is a mistake because at first, to apply offset it must be found that the purchase is related to essential interests of State security. Therefore, a tender for modernization and service of military equipment purchased along with offset may be entrusted to companies-beneficiaries of the specified offset.