Principles

Offset refers to a specific kind of contractual obligations applying to major international public procurement markets, such as markets in the fields of defence, energy, transport, telecommunications or other kinds of infrastructure.

Under such obligations, the supplier commits to add value in the buyer’s country.

Profile of international government procurement

Government acquisitions are often related to the establishment of infrastructures that directly contribute to the development of a given country’s economy and industry. In certain sectors, government procurement is linked to strategic planning based on sensitive information.

    • Defence and security acquisitions guarantee peace and protection of a country’s territory, assets and citizens;
    • Power plants ensure security of supply for electricity ;
    • Telecommunications facilitate crucial exchanges of information; and
    • Transport activities (roads, rails, aeronautics) support trade and the movement of people and goods.

Such purchases can amount to major government contracts and because they are financed by public funds, the purchasing entity must ensure that it gets the best value for money and/or that the acquisition protects the country’s fundamental interests.

Yet, many countries have to rely on foreign companies or multinationals to establish the required infrastructure. When signing a contract with a foreign supplier, the purchaser wishes to:

    • retain or recover a share of the economic activity created by the purchase;
    • make good for the significant imports that negatively affect the balance of payments;
    • develop the related industry;
    • acquire new technologies that enable the country to limit its reliance on foreign suppliers
    • justify the major investment towards the citizens and esnure public acceptance.

The compensation explained above is termed “Offset” and has for years been a pre-condition to the validity of the main contract.  In some countries, an assessment of the benefits in the Offset agreement is part of the award criteria.

WTO definition of Offsets

In the 1994 Government Procurement Agreement, signed by over 40 countries, the World Trade Organisation (WTO) states in Article XVI:

Offsets in government procurement are measures used to encourage local development or improve the balance-of-payments accounts by means of domestic content, licensing of technology, investment requirements, counter-trade or similar requirements.

Types and categories of Offsets

Offset is usually categorized in terms of the product being purchased:

  • Direct offsets relates to products, equipment, technology or activities directly linked to the purchase. In this case, Governments may require the supplier to:
    • transfer technology related to the product;
    • subcontract a minimum share of the contract to local companies;
    • train the end-user to effectively use and maintain the product purchased.
  • Indirect offsets has no relation to the product being purchased and can include value-add in any other industry or high-technology field. Indirect offset projects may take the form of investments, transfer of technology, licencing, export assistance, etc.
Creation and fulfilment of an Offset obligation

Under direct Offset, the purchaser and supplier define the share of the work that will be performed by foreign and local suppliers respectively, as well as the conditions of such performance (value to be added, timeline, stakeholders, penalties).

The Offset contract indicates the milestones, conditions and procedure to be followed to comply with the country’s Offset rules and regulations, as well as Offset project eligibility – industrial sector, causality, additionality, etc.

Fulfilment of an Offset obligation is reached by implementing a specific value-creating project that is pre-approved by the Offset authorities in a given country. The added-value eventually created yields “Offset credits” with a monetary value, which are used to fulfil  the Offset obligation.

The Offset contract generally makes provision for penalties in the case of non-performance. Such penalties depend on the value of the main contract, and are often guaranteed through bank or corporate guarantees.