By Salamatu Q. Yunusa
Technology and industrial development is essential in attaining self-reliance and national competiveness in today’s rapidly changing global business environment. Offset is defined as an economic development tool been employed by many nations in developing defence and non-defence industrial base.
Offsets are national polices often referred to as industrial participation in UK, South Africa, Turkey and Belgium, industrial cooperation in Taiwan and Denmark. Irrespective of the name, the main objective of an offset program remains enhancing local industrial competence and acquiring high technology that are commercially viable.
Defence offset is compensation mechanism agreed between purchasing government and foreign supplier of defence related products or services. As a result of a defence deal, the foreign supplier agrees to conduct a number of additional investments, or projects in the local economy especially in the defence sector. The two main type of offset are direct and indirect offset.
Direct offset refer to offset (compensation) agreements directly related to the actual defence item or service being purchased mostly in form of subcontracting, co-production, technology transfer, licensed production. For instance, if Nigeria purchases America aircrafts and the landing gear for the aircrafts comes from a Nigerian supplier or is built in Nigeria, this implies that a factory for the landing gear will be built in Nigeria and Nigerians will be employed. While Indirect offset are compensation agreement that are not directly related to the item or service being purchased such as such as countertrade, overseas investment, purchases, training, exporting assistance, and technology transfer; they can be generally defence related or entirely civil. For instance, when Nigeria purchases aircraft from BAE systems in the UK and part of the offset arrangement is to invest or aid Nigeria tourism or agriculture industry. Another recognised form of offset is the mixed offset, for large defence contracts the military offset agreement will cover many compensation projects both direct and indirect.
Offset helps in building a nation’s defence industrial base; diversify the economy and establishing commercially viable business. It can help to promote export and develop in house capabilities. Udis and Markus (1991) claims that offset technology transfer promotes skills enhancement through upgrading the average skills of the local labor force and exploiting technological diffusion to other sectors will stimulate economic growth. Offset can be used as a way to access and absorb technology that enables self-reliance and indigenization.
There are example quoted by nations as the cost and benefits of offset. Government argues that offsets have been used to successfully obtain various economic and industrial benefits including technology, jobs, export opportunities and skills development. However, offsets are not a ‘one size fit all’ and the introduction of offsets has different impact on each country. Buyers of defence systems often use offset to bring in high technology into the defence and aerospace instead of the off the shelf purchase, because most government believes that offset collaboration helps in creating in-country capabilities that enable self-reliance.
Embrare Corporation a Brazilian Aeronautic firm manufactured its first plane, the EMB 326 Xavante trainer under a license from the Italian firm Aeromacchi. Embraer also had a TT agreement with Piper a US firm in the 1970s to manufacture Seneca light aeroplanes, they took part in producing various fuselage components when 49 F-5 aircraft were procured from Northrop a US firm. Turkey is currently a global player; via offset they have patterned with Lockheed Martin to develop the F-35 fighter jet, with Augusta Westland to develop the T-129 helicopter. Turkish firms have developed Type 214 Submarine, the A400M transport aircraft with HDW and Airbus respectively.
Offset has played a role in the diversification of the Saudi economy, industrialization and active participation of the private sector in national economic development. Offset gave birth to both high technology and low technology ventures with long-term favorable business prospect.
The secretary general of the Saudi Arabia economic offset program reported that the offset program brought about 36 industrial services project with investment worth US$4.5 billion. The sales of the firms that were formed under the offset reached about US$8 billion with export at about US1.5 billion in 2006. It was observed that 13 percent of the investment was in electronics, aircraft and electric industries, 12 percent in food and medicine and 6 percent in chemical and petrol chemical. Glaxo Saudi Arabia is successful offset joint venture; under the offset program a plant is being built in Jeddah to produce tablet, antibiotics, liquids and ointments. This project has resulted in real technology transfer, including R&D capabilities. Tate &Lyle is another joint venture with a Saudi food company Savola, this joint venture resulted in the construction of a Sugar refinery in Jeddah.
South Africa, Nigeria’s rival in terms of technology development, so far is the only Africa country that employs offset. It was observed that many indigenous firms have benefited from Defence Industrial Participation (offset) activities, foreign suppliers now buy sub-system and components from the South Africa defence industry, these was achieved through licensing or/ and collaboration with foreign suppliers. South Africa offset policy has led to collaborations with foreign firms that resulted in local firms wining orders and has open the doors of opportunities for local firm to develop niches in the international market. Denel and other private firms have joined the international clique of defence production. For example, Denel won the contract to build the tail section of the RAF’s fleet of Hawk fighter trainer, and benefited from the BAE-Denel collaboration for the final assembly of hawk aircraft at Denel Aviation manufacturing.
The growing number of offset has led to valuable contributions to the development of commercial production capacity and local defence industry. Offset played a vital role in Malaysia becoming a newly industrialised nation, the Malaysia offset program is now a model for other nation within the region to emulate. Malaysian offsets gave birth to many successful firms, one of the notable successful offset venture is AIROD an aerospace company that was established in 1976 as an overhaul and repair depot, they provide first and second line service to the Royal Malaysia Air force (RMAF). Malaysia offset programs had led to the increased number of aerospace –related defence and ICT firms mostly because Malaysians focused on the aerospace and electrical and electronic sector. Furthermore, defence offset also nurtured a number of low technology firms that manufacture items like uniforms, boots, and parachutes and ration pack not only for the MAF but the local and regional market.
Although military spending may be necessary but economically costly, the use of offset is expected to increase. Research by Frost and Sullivan 2013 suggests that the offset obligation for top 20 offset nations (like Germany, Greece, Poland, UAE, Indonesia, South Africa, brazil among others) will worth about US$424.57 billion between 2012 and 2021, with a Compound Annual Growth Rate of 3.5% and Saudi Arabia will generate the highest cumulative value of offset obligation at US$62.63 billion.
Today, more than 120 countries practices offsets today, most of the countries are centred in Europe and Asia with a few Latin America and least popular in the Africa continent. Considering this, the question is whether offset is relevant to a country like Nigeria to develop its defence industrial and technological capability?
Over the years, different administrations have introduced different policies and agenda to enhance Nigeria’s technology and industrial base, yet Nigeria is technologically stagnant nation. Therefore can offset finally be the developmental tool that will be the key to fast tracking technological development in Nigeria and Africa at large.
The Nigeria security and defence gulps the highest share of the national budget at the expense of other sectors like health, education, agriculture and science and technology. So why not use this huge defence spending to bring in additional benefits to Nigerians. Nigeria’s vision 2020 dreams of becoming an industrialised nation is still far from reach, offset play a vital role in achieving this dream. So many questions comes to mind with regards to offset in Nigeria, why has the government not explored offset, if a structured offset is introduced who should manage it, who should be involved in developing the offset guidelines, what type of offset will best suit Nigeria, what type technologies should be transferred etc.
As the largest economy and the largest population in the continent, and regional leader: it is time for Nigeria to explore offset as a means of enhancing its industrial and technological base. It is time to use our huge defence spending to develop both the defence and non-defence sector by leveraging in important technologies and investments. Offset can contribute to stimulating economic activities in Nigeria.
Yunusa wrote from Warwick, Canada. Email: [email protected]