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