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What level of competition are offset contracts subject to?


SCORE: 25/100

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No information on offset contracts is made available to the public. None of the institutions contacted or interviewees were able to provide information on offset contracts [1].

As has been answered in previous questions, no information specific to offset contracts could be found. Art. 9 of the 2006 Anti-Corruption Law states that public procurement procedures have to be based on transparency, fair competition and objective criteria (1). However, as has been noted in the country’s last assessment (2), the lack of evidence suggests that there is likely no competition. Tenders published on the website of the Ministry of Defence also did not include any offset contracts (3). Algeria signed a Memorandum of Understanding with an Italian company to build a factory to build helicopters in Algeria in 2016. No justification or explanations from the Algerian government could be found in newspaper articles (4), (5).

IIt needs to be noted that the offset contract legislation and respective policy is very recent and depends on the equally recent rules for public procurement, with all its known weaknesses in implementation and oversight. That said, it is too early to assess its impact in practice.

There is still no legislation in Argentina regarding offset agreements. Moreover, as Aldazabal and Breerton point out, that is a “long-standing requirement, coming from local industrial entrepreneurs and producers,” especially in the field of defence where the authors indicate that “in the fields of war material and communications Argentina lost 30 years of development potential.” [1] [2]

The concept of offset contracts has no definition in the Armenian legislation. It has also never appeared in the media outlets [1].

This indicator is scored ‘Not Applicable’ given Australia does not allow offsets to be a part of public procurement contracts.

The Law on Procurement (1) and the Law on Tender (2) do not regulate offset contracts issues. The Azerbaijani government does not refer to any law in the selection of foreign military supply companies to meet the needs of defence and security structures. Here, political, economic and corruption interests play a role (3, 4, 5).

Most of the acquisitions of Bahrain’s Ministry of Defence (MoD) and the Bahrain Defence Force weapons are through offset contracts. They are not justified at all to the public or even to the army itself [1, 2, 3]. According to one source, the army sometimes receives equipment that they do not need [1]. Following a search of the websites of the Parliament, the MoD, the Ministry of Finance, the government and other media sources, and then verified by interviewees, no further information on this subject could be found.

In the absence of any verifiable official records, it was not possible to conclude whether offset contracts, if any occur, are conducted through open competition or through single sourcing [1]. Given the lack of conclusive evidence on this issue, this indicator is not scored and is marked ‘Not Enough Information’.

What this assessment understands as “offset contracts” are, in Belgium, actually not separate contracts. When Belgium deems it necessary to take measures aiming at the protection of its essential security interests (which means that the Council of Ministers has approved taking such measures), this requirement is included in the technical specifications of the procurement, just as other operation or logistic requirements [1, 2].

The proposals of the tenderers are evaluated based on all the requirements of the technical specifications, including those related to the essential security interests. During the evaluation of the tenders, Belgium will reject the measures proposed by the tenderers that do not comply with the requirements of EU law for invoking an exemption. The contract is then awarded to the most economically advantageous tender on the basis of all award criteria, such as price, technical and operational characteristics, as well as the measures to protect the essential security interests, which is therefore only one of the award criteria.

The measures to protect the essential security interests are therefore part of the main contract, and not in a separate contract. They are therefore concluded though the same competitive process as the main contract.

There is no legislation regarding offset contracts. The Ministry of Defence (MoD) does not negotiate offset contracts [1, 2, 3, 4]. “The PPL defines procedures which describe “operationally necessary” and “single source” procurement exceptions. Some 90% of procurement is conducted under open procedures while there were no classified procurement tenders in 2013. The MoD does not now use agents or intermediaries for procurement and offsets are not used in BiH.” (NATO: Building Integrity: Process and impact, Bosnia and Herzegovina, p. 23, paragraph 43) [3, 4].

There are no examples of offset contracts that the Botswana Defence Forces have been involved in [1,2].

Since offset contracts are subject to the Public Procurement Law, the competition is the standard procedure. Exceptions need to be justified and are often audited by the Court of Auditors (TCU) [1]. The assessor did not find evidence of single-source contracts that might be illegal or unjustified, that does not mean that they cannot occur.

The lack of legislation, specific policies or procedures organizing offset contracts, makes it difficult to ascertain whether they are open to competition. However, the practice of offset contracts is recurrent, as the “government does not apply “offset” requirements, obliging procurement authorities to approved bids from foreign companies only if they invest in manufacturing, research and development, or service facilities in areas related to the items being procured” (1). Moreover, despite most defence procurement contracts being single-sourced (2), it is hard to assess whether offset contracts accommodate better than single-source contracts. The key issue with offset contracts lies in foreign ‘investment’. Though, according to the US Department of State, “all investment specific incentives deriving from such contracts are outlined in the revised investment code, act number 007-2010/AN” (1). Of course, these incentives apply the same way to both national and international investors. No other requirement is imposed on contractors of offset contracts. For example, the government does not impose the purchase of local materials or export of a certain amount whatsoever (3).

It is not known whether Cameroon utilises offset contracts. This is unsurprising given the level of secrecy surrounding defence and security procurement in Cameroon [1]. This lack of information has not changed since 2015.

Offset (IRB/ITB) contractors are included in the initial bid package submitted to PSPC (the contracting authority) and are therefore subjected to the same amount of scrutiny and (open) competition as the main bidder. [1] The ITB policy specifically requires companies “awarded defence procurement contracts to undertake business activity in Canada equal to the value of the contract” – this applies to all eligible defence procurements valued over CAD100 million. [2] [3] However, it is not clear that single-source contracts are conducted without clear justification. Criticism has been raised for apparant sole-sourcing of COVID-19-related personal protective equipment under National Security exemption. [4]

There is very little evidence on the degree of competition to which compensation contracts have been subjected. Indirect background information of the use of offset contracts in the Caza 2000, Trident and Frigate projects suggests that compensations have been taken into consideration [1], and a share of them effectively implemented [2], but contracts and negotiations seem to have been mostly single-sourced. For instance, reports have emphasised negotiating contracts and the implementation of offset obligations, particularly in the contract between Chilean Air Force and the national aerospace company Enaer and Lockheed Martin. However, there is no mention of the competence involved in the initial bidding process (e.g., Lockheed Martin, 2019; Flight International, 2006; Wastnage, 2005) [3, 4, 5]. Although some authors have emphasised the priority given to the definition of defence needs over the possible compensation obtained as the primary criterion for purchases, the degree of competence to which the contracts are subject is not mentioned.

China does not have an official policy on offset contracts [1] but has used them extensively to secure technology transfers and other benefits. [2] Offset contracts, which are mainly used for major weapons systems, are not competitive and are almost entirely single-sourced from Russia. They include technology transfer and co-production incentives. [3] Single-source contracts are justified politically since Western countries have imposed an arms embargo on China post-1989 and Russia provides a reliable source of competitive technology that can match China’s strategic rival, the USA. China has been using offset contracts in its arms exports deals with Pakistan, including fighterjets, submarines and warships. [4]

According to Permanent Directive 6 of 2009, [1] the structuring and negotiation of industrial and social cooperation agreements fall within the framework of direct procurement with reserved resources, as stipulated in Decree 1510 of 2013 [2] and Law 1150 of 2007. [3] The specificity of the goods and services to be contracted mean that there is no plurality of bidders, so a single person or entity can provide this good or service. The executing units of the contract must consult previous studies on the acquisition of equipment or services, and present a list of the different possible suppliers or single supplier. The Industrial and Social Cooperation Group verifies the data of the supplier or suppliers to start the process of rapprochement, such that the contract can be evaluated and approved. The proposal process can be carried out with several suppliers, but the agreement is only awarded to the person who wins the contractual process. Offset agreements can be given to exclusive suppliers in the context of reserved procurement, or government-to-government contracts. [4] Legislation stipulates that offset agreements cannot be published in the SECOP because of their direct procurement and use of reserved resources, which reduces free competition. It is also not clear that these types of agreements generate external scrutiny by the Second Committee of the Congress or by control units before the acquisition of the good or service.

The 2009 Code of Public Procurement does not contain any provisions regarding offset contracts or evoking the use of this type of legal arrangement. It is not part of standard legal practice in Côte d’Ivoire (1).

Research indicates that offset contracts are conducted as open competition according to the stipulations for defence procurement as described in Q64 etc. [1]. The Ministry of Industry, Business and Financial Affairs also assesses whether the contract will skew the competition on/from the civilian market [1, 2].

Offset contracts in the defence sector, just like normal contracts, are most likely to be single-sourced and secret according to legal exemptions provided in procurement-related laws (1), (2) which allow defence sector procurements to be single-sourced and secret. This means that there is no open competition for offset contracts in defence procurement.

There is not enough information to score this indicator.

According to a written response provided by the Headquarters of the Defence Forces, ordinances and procedures related to industrial cooperation in defence material projects have changed fundamentally when Directive 2009/81/EC of the European Parliament and of the Council on the coordination of procedures for the award of certain works contracts, supply contracts and service contracts by contracting authorities or entities in the fields of defence and security has come into force. [1, 2]

In Finland, the Act on Defence and Security Procurement (1531/2011) came into force on January 1, 2012. [3] In principle, procurement that takes place according to this act no longer includes a mandatory injunction on industrial cooperation for the supplier. Thus, the Defence Forces have an obligation to tender out its defence and security procurement accourding the the EU directive 2009/81/EC. This principle can only be deviated from on the basis of the article 346 of the Treaty on the Functioning of the European Union.

In these kinds of exceptional circumstances an obligation for industrial cooperation can be set. In practice, in these exceptional cases the justifications relate to the Government resolution on critical technologies for national defence. The necessity and extent of the obligation for industrial cooperation to be set are always estimated in advance and on a case-by-case basis by the procurement authority. The justifications must meet the criteria set in the aforementioned article 346 of the Treaty on the Functioning of the European Union. The rules of industrial cooperation from the year 2012 (further specifications on 25.4.2013, 11.5.2017, 25.6.2018) are applied to these potential agreements on industrial cooperation. At the moment, an obligation for industrial cooperation is included in both of the ongoing strategic procurement projects of the Defence Forces, the HX project and the Squadron 2020 project. In both of the aforementioned projects, the minimum share of industrial cooperation is 30 per cent of the overall value of the acquisition. Taking into account the rules of industrial cooperation and the basis of domestic defence industry, this amount of industrial cooperation ensures, in principle, that domestic industry has a significant role in the implementation of the acquisition, that military security of supply remains at an adequate level, and that the technological and industrial basis for Finnish national defence can be deepened. [1]

France does not appear to have an official offset policy which makes it difficult to evaluate how often or in what manner it engages in offset contracts. Single source offset contracts are rarely (if ever) justified. Only when scandals happen and breaches of contracts and corruption behaviours are reported in the media does the public hear about offset programmes. This was the case recently for the contract of 36 Rafale fighter jets being sold to India and the scandal about one of the companies, the main beneficiary of the offset contract, Reliance Group, being close to PM Modi. [1]

This indicator is marked ‘Not Applicable’ as offsets are prohibited under German and EU law [1,2,3].

In the absence of a formal policy or regulations on offset contracts, this indicator is scored as zero.

Offset contract are prohibited in Greece via legislation. As such, this indicator is marked ‘Not Applicable’.

Since the new EU level regulations have come into force, there have been no ongoing or projected offset programmes in the country [1]. As such, this indicator is scored Not Applicable.

India’s offset policy has centered on the nation’s core defence objective of promoting indigenisation to achieve self-reliance. It was created to reduce the level of defence imports and essentially build a domestic defence manufacturing hub. The government’s Make In India initiative seeks to achieve this [1]. At present, defence purchases are acquired through standard procurement, Inter Government Agreements (IGAs) and strategic deals.

Offset policies have been routinely updated to address industry concerns and supposedly be more investor friendly. A Defence Investor Cell has been created to educate and help investors navigate policies and regulatory framework. Steps have been taken to promote greater participation of industry such as FDI has been increased to up to 49% through automatic route and above 49% with government approval and the introduction of a Strategic Partnership model. Time for banking offset credits has been increased with multipliers introduced [2]. In the draft Defence Production Policy 2018, it is stated that:

“Necessary enabling provisions will be brought in to enable Startups and MSMEs to participate in transparent and fair manner, without having restrictions of turnover, prior experience if they meet technical and functional requirements” [3].

As stated in Q.64, the proportion of open competition cannot be ascertained. As illustrated previously, these offset agreements have often been government-to-government, with the US having the largest share among foreign vendors [4]. FDI limits could be further raised under the new DAP-2020 and offset policy simplified further. All of this points to India’s willingness to create a fairer playing field and encourage broader public and private sector participation.

The basis for mandatory offset in the procurement of weapons equipment from abroad is Law No. 16/2012 [1]. Article 43 Paragraph (5) of this law states that procurement from abroad must meet the following requirements: 1) the technology is not yet made or cannot be made by a domestic manufacturer; 2) the process involves a domestic defence company; 3) there is mandatory technology transfer; 4) there is a guarantee against embargos, political conditionality or any other impediment to using the technology; 5) countertrade, local content and offset (CTLCO) equivalent to at least 85% of procurement contract value; 6) local content and/or offset equivalent to at least 35% of procurement contract value, with a 10% increase every five years. Government Regulation No. 76/2014 and Minister of Defence Regulation No. 30/2015 provide more detailed directions for implementation [2,3]. While no discriminators are mentioned, such as a certain value of procurement serving as a threshold for the application of CTLCO, the mandatory CTLCO is not intended as a ‘blanket policy’. In reality, it is implemented on a case-by-case basis, depending on the amount of information contained in the list in the procurement plan provided by the Directorate General of Defence Planning (RENHAN) and the Defence Facilities Agency (BARANAHAN) to the Directorate General of Defence Potential (POTHAN) [4]. Also, CTLCO is not applicable to maintenance service contracts because Law No. 16/2012 stipulates that all maintenance shall be conducted within the country. Article 28 of Minister of Defence Regulation No. 30/2015 also states that CTLCO is not applicable for foreign procurement of spare parts, medical equipment, research equipment and/or laboratory equipment [3]. Mandatory CTLCO applies to all kinds of procurement, whether conducted by sole-sourcing, open competition or repeat order [4]. In practice, suppliers can negotiate for CTLCO not to be fully applied. For example, in cases of limited bidding, they can negotiate to leave direct offset (compensation related to technology procured such as co-production) and only commit to countertrade [4,5]. It is not clearly defined which type of procurement (sole sourcing or open competition) is mostly used for offsets.

As mentioned in Q71, there is no publicly available evidence to indicate that Iran has offset contracts [1, 2, 3]. At the moment, and given that Iran is under an arms embargo until 2020, there is only speculation about potential arms details that may come to fruition after that date [4, 5, 6].

Iraq has no developed framework for regulating offset contracts or upholding suppliers accountable for their contractual responsibilities. There is little evidence to imply that these contracts are regulated any differently when compared other defence deals.

There is evidence that offset contracts are conducted as open competition. However, it seems that single source contracts are sometimes conducted without clear justification (1). No further information could be found on this issue.

Offset contracts are officially forbidden in Italy as they prevent competition, but they can occur under the form of Government-to-Government (G2G) agreements, which are outside the national [1] and EU [2] legislation on public contracts. As such, offset contracts are the result of political considerations and agreements. Being part of G2G agreements, the level of competition leaves room for political considerations. Nonetheless, the content of such agreements is scrutinised by both the Parliament and the Court of Auditors, in the yearly annual report of the Court of Auditors to the Parliament. In addition, competent parliamentary committees express their opinion on the programmes. Justification of offset contracts are related to the requirements of the armed forces [3].

The Japanese subcontractor contracts are all single source contracts. Such contracts contradict the general principle that public procurement should be determined through competitive bidding, and that they must be approved by the Minister of Defence. [1] The justification for awarding a single source contract to an enterprise is written in the list of contracts that the Acquisition, Technology & Logistics Agency (ATLA) makes. Here, we can read that Mitsubishi Heavy Industries was awarded a single source contract for the development of a vertical launching system for missiles (VLS MK41) on February 13, 2017. To be selected, the enterprise had to have a technology cooperation agreement with the US enterprise Lockheed Martin approved by the US Government, as well as have permission granted under the Japanese Ordinance Manufacturing Act to produce weapons, and the only company meeting these requirements was Mitsubishi Heavy Industry. [2] According to the Board of Audit, ATLA asked several enterprises for proposals for subcontractor contracts for the production of the F-35A. Upon having examined the received proposals, the agency concluded that only one enterprise within each of three examined fields of technology met the requirements for a subcontractor, and the agency made contracts to provide them with the necessary facilities to do engineering work on the F-35. [3] ATLA thereafter made contracts with these three Japanese enterprises for deliveries of smaller amounts of products, usually one product. In the annual lists of ATLA’s procurement contracts, it is stated that under a single source contract from February 20, 2018, IHI was to procure components for an F-35A engine. A single source contract had been selected because the enterprise had to have a technology cooperation agreement with the US enterprise Pratt & Whitney approved by the US Government, and the only company meeting this criterion was IHI. [2] It should be noted that the Government of Japan does not use the term offset contract about any of its contracts in the sources cited.

The Government does not reveal information about defence contracting procedures. There is no possible way to assess the level of competition over offset contracts, as no information or regulations around them exist. In fact, there is no evidence of the existence of offset contracts at all [1, 2,3,4].

There is little evidence on this issue, and therefore this indicator is marked ‘Not Enough Information’. There are no records or information about the use of offset contracts in defence procurement. Going by the provisions of the law on treaties, the use of offsets in procurement is prohibited. [1] As reported in the media, research by the Stockholm International Peace Research Institute (SIPRI) indicates that Kenya has in the recent past acquired military arms from various countries. These include the United States and Italy. [2] Thus, no evidence exists of offset contracting between the Kenya military and any countries or manufacturers.

Offset contracts are not regulated in Kosovo’s current legal framework. It is important to emphasise that there is no evidence that offset contracts occur in practice [1].

There is no reason to believe that offset agreements (like all other defence agreements which are conducted in almost complete secrecy) are struck after an open and fair contest, an auditor and analysts said (1, 2 and 3).

The overwhelming majority of Kuwait’s procurement deals are with the US, which doesn’t suggest that non-US contractors are treated fairly. It is also important to note that all these agreements are not subject to the scrutiny of the PTA, according to article 2 of Law no. 49 of 2016 for public tenders (4).

Defence purchases, according to the Government guide of doing business in Kuwait, include all weapons, communications and monitoring systems related to defence and security. There are internal policies regulating these purchases but the Government admits that they are “more flexible” than the ones applied by the PTA and not available to the public (5).

This indicator is marked Not Applicable as there is no evidence that offset contracts are concluded in the defence sector of Latvia. Offset contracts are prohibited by the law based on EU legislation. [1] [2]

Offsets are requirements by governments to foreign selling entities to compensate and return a portion of the money spent directly or indirectly invested (1). Since Lebanon does not purchase military equipment due to a lack of resources from the defence budget (2) offsets are not applicable.

National offsets are banned in Lithuania, as such this indicator is scored Not Applicable. Back in 2012, the European Commission informed Lithuania that national offset agreements violated European Union Law [1]. As the European Commission has stated, such contracts “go against the basic principles of the Treaty, because they discriminate against economic operators, goods and services from other Member States and impede the free movement of goods and services. Since they violate basic rules and principles of primary EU law, the Directive cannot allow, tolerate or regulate them”. The Assessor found no evidence that offset agreements had taken or would take place.

Under the general guidelines of government procurement, offset contracts are subject to an open tender system. The Malaysian Offset Programme Management Framework provides guidelines for the development and implementation of offset contracts. But, according to a senior MINDEF official, offset contracts in defence are not made public because the projects can involve national strategic matters. Hence, direct negotiations have been normal practice. [1] The selection of the beneficiary for the offsets programme is often based on the specificity of the project, national interest, suitability and capability of the technology partner and government preferences for recipients of sensitive technologies. [2] Although offset contracts are subject to normal tender or procurement processes, the government usually opts for a direct negotiation with selected companies to expedite the process. There was a case, however, where a few offsets contracts were subject to open tender with technical and price specifications. One example is the coastal surveillance helicopter tender, where Eurocopter EC 725 helicopters won the contract in 2010. Nonetheless, it is hard to implement an open competition for offset contracts and the selection of offset recipients in all cases. The transparency in offsets is mainly in the monitoring and reporting of projects, making them publicly available and measuring the outcome and impact on the national economy and development. The Pakatan Harapan government was contemplating doing away with direct negotiation practices. However, Dr Mahathir has already made a statement that direct negotiation practices would continue in special cases, especially in military procurement. He argues that if “the Armed Forces wanted to acquire certain equipment from one particular company (…) it may identify the equipment (needed) and that equipment only comes from that one company, then they can have a direct negotiation (..) But, they must state the reason why they want to have a direct negotiation and they have to get the permission of the Finance Ministry.” [3] [4]

The assessor found no evidence that Malian law contains any provision for the use of offset agreements.¹ ² The Procurement Code makes no reference to the concept of an offset agreement, making it unclear whether such a deal would be legal or illegal in the country. Indeed, it is highly possible that such a deal would fall foul of article 29 of the Code, which states that:
“Offers and submissions must contain a commitment by the candidate or tenderer to:
– neither grant nor promise to grant to any person involved in the process of awarding a contract an improper advantage, financial or otherwise, directly or via an intermediary, with the intention of securing the contract.
– inform the contracting authority of any payment, advantage or privilege accorded to the benefit of any person, acting as an intermediary or an agent, to recompense them for any service provided.
– to respect, in general, legal provisions, notably those outlawing acts of passive corruption or trading of favours or any constituting offences of this nature”.¹
What is clear is that were the Malian government to negotiate an offset contract, the contract would not be subject to any special or additional scrutiny under the existing law. An offset contract would be subject to the normal levels of anticorruption oversight for public procurement contracts, as carried out by the ARMDS and the CRD (see Q59).
The assessor found no evidence of the Malian government contemplating, signing or expressing a desire for an offset agreement. Google searches reveal that the only reference to an “accord de compensation” in connection with Mali concerns a media article about Moroccan-Malian economic ties. The author speculates hypothetically whether it would be wise for IBK to negotiate such a deal with Moroccan companies in the event of them finding vast reserves of natural resources in Mali.³

In Mexico, no commercial compensation offset agreements are made (domestically) [1] and legally there are no restrictions or policies that delineate their implementation. [2] [3] [4]

The government claims that there are no offset contracts or specific legislation for such contracts. [1][2] Annual reports of the Ministry [3][4][5][6] as well as reports on oversight adopted by the Parliamentary Committee [7][8][9][10] do not provide any information about offset contracts.

In practice, when offset contracts are used, a Minister appoints a commission for offset contracts, but does not provide it with instructions relating to the competitiveness of the procedure, so members of commission decide whether to invite one or more companies to submit offers. [11] Exact information is not available, but there are cases in which only one company is directly contacted to provide an offer for the offset contract. [11]

Myanmar’s military mostly makes its defence purchases in secret and rarely makes them public. As a consequence, Myanmar’s defence market lacks transparency and we are not able to access enough information to evaluate the level of competition among offset contracts. Given the lack of conclusive evidence on this issue, this indicator is not scored and is marked ‘Not Enough Information’.

The Defence & Security Procurement Law enshrines competition as a procurement principle in all cases except in extreme crises (Article 2:23). [1] The circumstances that constitute a crisis are clearly defined within the same document. Offset contracts (referred to as industrial participation measures) are also subject to competition. As an active part of industrial policy, offset contracts in Defence see strong involvement from the Ministry of Economic Affairs. The Ministry of Defence publishes its tenders on online portals, namely TenderNed. [2] Offset contracts are usually required by the Ministry of Defence if military materiel is from a foreign supplier and concerns orders worth more than €5 million. [3] Like all procurement matters, offset contracts are scrutinised by the independent Court of Audit, who in turn report irregularities to the Parliament. The Court of Audit would thus also scrutinise cases of single source contracts, which can only be justified during a crisis. While neither the Parliament nor the Court of Audit have the power to reject purchases, their advice to do so will not be ignored by the MOD. [4] When it comes to competition, a difference exists between Defence-specific and dual-use objectives in the offset contracts: there are far less companies in the Netherlands that can compete for >€5million projects in the Dutch defence industry, than there are companies and organisations that could compete for dual-use technological or innovative projects. It also appears that in the past certain regions of the Netherlands had only limited chances in tenders that arose from offset contracts, and the ministry of Economic Affairs actively tried to include more companies from those regions to diversify the options and increase competition. [5] At the same time (although this information is from 2010), it gets mentioned that it is difficult to ‘get it’ due to the ‘political games’ that are played, but ‘once you are in you are essentially set’. [6, 7]

Offset contracts are explicitly prohibited via legislation. As such, this indicator is marked “Not Applicable” [1].

The assessor found no formal policies or procedures that outline the reporting and delivery obligations for offset contracts in the case of Niger (1, 2).

Offset contracts are secretive and not openly discussed in the media. Off-set agreements may be discussed where there is some particular benefit such as a technological transfer to be gained by the government and there exists some political capital to be gained out of such disclosure. These contracts are outside the requirements of open competition. Although the PPA 2007 requires that there is open competitive bidding in procurement, there are exceptions even within the Act where the items can only be sourced from a limited number of contractors or where the cost of open bidding is disproportionate to the cost of the items. Single sourced acquisitions, like pre-selected bids, are treated as anomalous exceptions to the Act which requires adequate and substantial justification within the exception categories. “Abubakar said Comp Air Aviation was selected from three US companies that responded to Nigeria’s call for collaboration.” News reports indicate a call was made, but it is unclear if it was an open call or restricted call with pre-selected companies (1).

There is not enough information to provide a score for this indicator. The Law for Production and Trade of Arms and Military Equipment does not explicitly regulate how offsets are implemented [1]. These offsets are not mentioned nor explicitly regulated by the Law bon Public Procurement [2]. Since no further information exists, it is assumed that general procurement rules also apply for this type of contracts and therefore these contracts are to be conducted openly. In contrast, classified contracts are to be executed under clearly defined circumstances. The Difi report notes that no information is available on whether offsets have been used as a condition for the participation of foreign contractors in specific procurement processes, or as an award criterion in the procurement processes run by the Ministry of Defence [3]. So far, no offset contracts for defence procurement have been concluded [4].

The regulations detailing the procedure for offset procurement do not include any explicit rules on competitive processes. The Norwegian Defence Material Agency negotiates industrial cooperation agreements on behalf of the Ministry of Defence. The Regulations on Industrial Co-operation Related to Defence Acquisitions from abroad state that the Norwegian company must be competitive in order for the offset to be approved [1]. The foreign company (obligor) can choose which Norwegian companies they will collaborate with to fulfil their obligations. The Norwegian Defence Material Agency publishes a list with current industrial cooperation agreements [2]. The Norwegian companies may contact the foreign companies and make a business offer [3]. According to regulations, offset contracts cannot be in conflict with Article 123 of the EEA-agreement which states that industrial cooperation agreements relating to the production of, or trade in, arms, munitions and war materials or other products indispensable for defence purposes or to research, development or production indispensable for defence purposes, cannot impair the conditions of competition in respect of products not intended for specifically military purposes [1, 4]. In addition, Norway is one of the subscribing countries to the European Defence Agency Code of Conduct on Offsets which, while not binding, aims to reduce the use of offsets [5]. The Code of Conduct on Offsets states that “when used as a criterion for tenderer selection or award of contract, offsets will be considered of a less significant weight or used as a subsidiary criteria in case of offers with the same weight” [6]. At the same time, the Government admits that, as long as most of the defence markets apply protective measures, Norway will have to use offsets as a tool to secure enhanced access to foreign defence markets [7].

The whole polity and policies of Oman are based on non-justification in general in almost every aspect of the country. This includes the justification of offset contracts, military purchases, and others. Our resources confirmed that there is no competition over single-sourced offset contracts (1), (2). Research has revealed that there is no competition regulation over offset contracts (3), (4). There is no evidence that offset contracts are subject to competition regulation, therefore it is not clear whether contracts are competed for, in the first place or whether they are granted to single-suppliers. There is also no evidence of open competition on defence-related institutional websites or in domestic media outlets (5), (6), (7), (8).

Offset contracts are generally conducted outside the law as they have no defined policies and no regulations to manage them (1). Single source contracts are often conducted without clear justification (1).

The Philippine government’s offset policy is managed by the Philippine International Trading Corporation (PITC) under the Department of Trade and Industry, but the agency does not give detailed justifications for the level of competition of offset contracts beyond favorable countertrade terms; this is despite previous commitments to disclose more information [1, 2, 3, 4].

In line with the art. 7 of the Offset Act the offset contracts are single-sourced. Even if the procurement is not single-sourced the offset contract is negotiated with the winner of the tender solely. However, in such legal conditions, single-sourced offset contracts are always justified.
It is worth to add, that such legal approach both reduces and increases corruption risk. Reduces it, as the offset negotiations and offset offer do not influence the results of tenders provided.
On the other hand, in cases where the offset law applies, the sign of the delivery contract with a tender’s winner is conditioned by reaching successful agreement on offset obligations. It creates the risk of undermining tender results by intentional failure of offset’s negotiations by the state officials. Such suspicions were raised when in 2016 new government could not agree on offset contract with winner of helicopter tender conducted by a previous one. [2]
As such a situation is not included in model answers to score, 2 applies, due to medium level of corruption risk.

Offset contracts are explicitly prohibited via legislation [1]. As such, this indicator is marked ‘Not Applicable’.

As the country does not have a mechanism of public deliberation, it is hard to justify offset contracts. [1] Additionally, offset contracts are granted to a single source and there is no competition. [2,3]

The ordering party may be the Russian Federation (with a regional or municipal authority) for special investment contracts (SIC) and a regional authority for contracts with mutual investment obligations [1]. Article 111.3, Clauses 1 and 7 of Federal Law No. 44 states that one or several contractors are appointed for SICs [1]. As for contracts with mutual investment obligations, the regional authority shall conduct an open competition, as detailed in Article 111.4, Clause 1 [1].

The contractor for the first and only SIC was chosen via open competition, with two initial bidders [2].

According to our sources, there is no competition with regards to offset contracts. All offset contracts are single-sourced and suppliers are invited by the Tender Board and the MoD. Offset contracts of strategic purchases such as multi-billion deals are not managed by the MoD, but the Office of the Crown Prince and therefore, they are not part of the general procurement. The offset contacts discussed here have a maximum value of 10 million in purchases (1), (2).

There is no indication that the offset contracts Saudi have pursued with various foreign defence firms since the 1980s, including with the US, UK and French governments, have involved open competition. This is especially the case given that defence procurement decisions in Saudi Arabia are often made based on political objectives rather than solely based on quantified requirements. This includes long-term security and protection arrangements with allies such as the US, and the wider goal of cementing and ensuring the continuation of alliances with Western powers. Evidence shows that Saudi defence policy, as it relates to its offset programme, is continuing along this path, for example, the announcement of a US-Saudi USD 110 billion arms deal in June 2017, which included industrial participation agreements with the various partners involved including Lockheed Martin, General Dynamics and Raytheon. It is unlikely that this deal was subject to open competition; industry analysts suggest that factors such as access to the US government likely drive countries like Saudi Arabia to continue to award such deals to US-based defence conglomerates (3).

The Saudi government looks set to expand the application of direct offsets and “multipliers” in defence contracts, the latter being investment incentives where firms are granted additional credit towards satisfying offset obligations in exchange for collaborating in particular sectors). This is in line with Crown Prince Mohammed bin Salman’s Vision 2030 reform programme, one of the goals of which is to localise 50% of defence procurement from Saudi companies by the year 2030. Saudi Arabian Military Industries (SAMI), a military industry body created in May 2017 to increase local defence manufacturing, is reportedly tasked with managing new projects related to offset contracts and has launched several joint ventures and partnerships with foreign defence firms as part of these plans (4), (5). The General Authority for Military Industries is a complementary industry regulatory body, was launched in August 2017, it regulates and manages any kind of military and defence-related or security-related procurements, as well as monitoring the military industry sector in general (6). However, it is unclear whether these new developments will lead to more open competition or regulation in Saudi offset contracts, and there is still no transparency surrounding the tender or procurement process.

There is no explicit legislative provision in Serbia either allowing or prohibiting offsets and the government has denied that they were legal [1]. In practice, the contract with the Airbus Group for helicopter procurement does show features of an offset arrangement (please refer to question 70). The contract was signed under procurement in the field of defence and security exempt from the law so that there was an obligation to implement an open procedure. Through details of negotiations with the Airbus Group are unknown, there is no hint in the media’s coverage, the MoD’s reporting or officials’ statements that the MoD provided any competition for contracting, even within the negotiation procedure by inviting other potential suppliers to submit bids. As of July 3, 2018, the contract with the Airbus Group has not been discussed in the National Assembly [2, 3]. As it has not been executed yet, it could not be subject to scrutiny by the State Audit Institution (SAI) so far, but it theoretically could be in the future, as the SAI does employ auditors who have security clearance to review top-secret files.

This indicator has been marked Not Applicable, as offset contracts are prohibited.

Offset contracts through both the National Industrial Participation Programme (NIPP) and the Defence Industrial Participation Programme (DIPP) are subjected to the same levels of competition as in any other acquisitions or procurement process. The only aspect worth noting is that interviewee 2 made a distinction in failure between the NIPP and the DIPP. In the latter, the interviewee stated that there was a much higher rate of success in contract completion, as the terms were far more stringent, whereas NIPP offsets were highly prone to market conditions and broader corruption risks [1]

Offset contracts are made under the terms of the Defence Acquisition Programme Act, Enforcement Decree of the Defence Acquisition Programme Act and Defence Acquisition Programme Regulations. [1] [2] [3] Offset contracts are not subject to competition because they are part of main contract proposals. Under Article 4 of the DAPA’s Offset Trade Guidelines, offset contracts are applied when the contract is worth over $1million. [4]
According to the Stockholm International Peace Research Institute, the main supplier to South Korea is the United States, accounting for 50% of the total defence imports in the country between 2014 and 2019. As mentioned in Q75, due to the close military alliance with the United States and its military involvement in South Korean territory, many defence purchases and offset contracts, which are not subject to open competition, are made with the United States. [5] [6]

As outlined in 70A and 71A, there is no mention of any policy on offset contracts in the the procurement act, the public financial management act or the SPLA White Paper on Defence [1, 2, 3]. No information on offset practices, including sourcing arrangements, could be identified.

There is not enough information to score this indicator. A study by the Comisión Nacional de los Mercados y la Competencia (CNMC) [1] revealed that in Spain “the intensity of competition is low in the contracting processes of the State Public Sector: in 33.6% of the cases there is only one bidder, in 15.3% of the cases there are two offers and in 15.9% of the cases three offers. Only in 35.3% of the lots is the number of participants greater than or equal to four.” In 61.2% of contracts with a single bidder, the procedure was negotiated in private (only 32.4% were open processes). The contracting organs with a higher percentage of single bidders were related to the defence sector [1]. This means that, in the defence sector, there is little open competition for contracts in general, with a significant number of contracts being single-sourced. Due to their nature, offset contracts are not expected to be more open and with a higher number of bidders. In fact, Industrial Cooperation Agreements are negotiated prior to the adjudication, and little competition is expected as they involve selected companies. When asked about the level of competition of offset contracts, the official response by a representative of the Ministry of Defence did not answer the question and declined to do so when that asked again [2]. Given the lack of conclusive evidence on this issue, this indicator is not scored and is marked ‘Not Enough Information’.

In separate phone interviews, two experts on Sudan’s security sector verified that single-source offset contracts are not only rarely (if ever) formally justified, they are also usually never reported to any entity that has the oversight or audit authority to review such contracts [1,2]. No evidence could be found in the media that single-source contracts or contracts awarded through other-than-open competition in the defence sector are formally scrutinised or found to be problematic by Sudan’s government. The International Budget Partnership’s 2017 Open Budget Survey for Sudan scored Sudan’s transparency 2 out of 100, its public participation 0 out of 100 and its budget oversight 31 out of 100 [3]. Sudan’s security and defence activities are exceptionally secret and opaque.

Offering offset contracts is a common practice in Swedish arms trade, and especially in negotations concerning expensive weapon systems such as the fighter jet JAS Gripen [1]. However, no national legislation regulates competition or transparency with regards to the content of offset contracts, with most contracts being single-sourced and rarely justified [2]. An interviewee states that both public officials and companies tend to refuse to answer questions regarding the content of offset deals [3], and NGO research has found that in export negotations, offset contracts tend to be offered by companies from the same corporate group (Investor) as the leading arms exporting firm, Saab – suggesting that the same ownership profits simultaneously from both the arms deals and offset packages [4] [5].

Offset contracts are concluded under the assumption of a competitive Swiss industry [1]. The Federal Council stated that offset contracts should not be a means to preserve undesirable economic structures and should serve to improve competitiveness. However, the Federal Council also accepts the regional distribution as a potential criterion for granting these contracts [2]. It is an explicit requirement for the participating national firms that they compete in the process. There is no right to a contract, and the firm’s competitiveness is a prerequisite [3]. There has been substantial criticism of offset contracts in the past, and the Swiss Federal Audit Office (SFAO) issued a report in 2008 with recommendations on controlling and transparency which is still used as a point of reference [4]. Switzerland has implemented some of the recommendations since then. Especially for major armament procurements offset contracts remain a contested topic in parliament before approval of the necessary credits [5, 6].

Prospects of offset are open to the public and local industries in the “List of Prospective Items for Offset” for competition [1]. Due to Taiwan’s unique “status quo”, circumstances are not always clearly defined and processes are not always clarified [2].

There is not enough information to score this indicator. We cannot definitively say that there are no offset contracts in place, and therefore cannot address issues of reporting and delivery obligations regarding them. They are not provided for in legislation, and they are not mentioned by any of the regulatory and oversight bodies. [1] [2] [3] [4] [5]

There is still no official offset policy in Thailand to this day. As mentioned above, there are no laws focussing on offset contracts, including the Public Procurement and Supplies Administration Act B.E. 2560 (2017) [1]. The Regional Comprehensive Economic Partnership (RCEP), a proposed regional trade agreement between the ASEAN members, including Thailand, Australia, China, India, Japan, Korea and New Zealand, does not contain a government procurement chapter regulating the use of offsets either. This reluctance of developing countries to surrender the use of offsets as a policy tool may reflect their long-standing view that domestic content should be preserved in the special field of government procurement as an appropriate way to remain competitive in markets dominated by firms from the developed world [2].

According to Interviewee 1, a political scientist, single-source offset contracts are rarely justified and few, if any, are subject to external scrutiny. The only case in which that might happen is if the procurement in question becomes a major issue to the public [3]. An example of offset deals is the purchase of small arms simulators at a business-to-government level between the Thai government and small arms simulators suppliers, including Amornmas Co., Ltd, Astra Technology Co., Ltd., and Global Technology and Ex-Im Co., Ltd.

One of the key factors of a successful buying agreement is a well-established connection, so purchases are not conducted through open competition. In general, there are no contracts signed to commit the Thai government to a particular supplier once they buy the product. However, suppliers normally offer a limited-time warranty, training sessions for instructors who need to familiarise themselves with the system, maintenance and technical service and regular on-site visits [4].

According to our sources, the Tunisian MoD and armed forces have not had a policy of offset contracts or regulations for a long time (1,2).

Given the lack of conclusive evidence on this issue, this indicator is not scored and is marked ‘Not Enough Information’. According to Interviewee 4, offset contracts are generally conducted as open competition, but circumstances are not always clearly defined. Single-source contracts are often conducted without clear justification [1]. As explained above, all offset contracts are managed by the SSB in a private fashion. There is neither information about this question, nor do the other interviewees have expert views on this question.

Unfortunately, there is no open-source content available on online sources published in the past two years to confirm this suggestion. Regarding the Offset and Industrial Participation (O/IP) Regime in Turkey, Herdem’s brief provides good insights [2].

There is not enough information to score this indicator. No evidence of offset contracts was identified for the period of research covering this index. Therefore, it is difficult to ascertain the level of competition regarding offset contracts. There was no response from the Procurement Disposal Unit in the Ministry of Defence and Veterans Affairs (MoDVA), despite several attempts at getting an interview.

Following the start of Russian aggression [1, 2] in Ukraine, the VRU amended the Law On State Defence Order [3] in 2015, making the use of offset contracts non-mandatory. This led to the situation when offset contracts are de-facto not used anymore [4]. However, even before the beginning of the armed conflict in 2014, the share of offset import contracts was insignificant [4]. The MoD does not have any information on the evaluation of offset proposals during the tender process, evaluation and monitoring of offset contracts after the determination of the contract participants and measures to limit the risk of corruption with respects to the lack of use of the offset mechanisms [5].

There is no competition concerning offset contracts. The offset contracts are managed by the Office of the Crown Prince, and therefore, the suppliers are usually targeted (approached by the office) without advertising contracts to the public (1), (2), (3).

This indicator is marked Not Applicable, given the fact that offsets are prohibited under the World Trade Organisation’s (WTO) Agreement on Government Procurement (GPA) [1].

This indicator is scored ‘Not Applicable’ because the United States prohibits any federal agency from entering into any offset agreement [1].

Military-technical cooperation agreements made by the Venezuelan government in recent years cannot be classified as offset agreements; these agreements are bilateral and competition for these agreements has become increasingly restricted. Although agreements have been made with European countries and some Latin American countries, most have been established according to political interests, with allies of the regime such as China and Russia [1].

Despite the current arms embargoes imposed on Venezuela [2], in the previous period when most cooperation agreements were established, and high levels of military equipment acquisition were sustained, most agreements were signed with Russia and China without any evidence of selection processes or justifications for these decisions [3]. The lack of interest in requiring and regulating offset-type agreements also parallels Russia’s lack of interest in this type of agreement [4], Venezuela’s main partner in military matters.

Verifiable information on how how offset contracts are negotiated and finalised is not readily available. Given the lack of relevant evidence, this indicator is not scored and is marked “Not Enough Information” [1, 2].

Country Sort by Country 72. Sort By Subindicator
Albania 0 / 100
Algeria 0 / 100
Angola NEI
Argentina 0 / 100
Armenia 0 / 100
Australia NA
Azerbaijan 0 / 100
Bahrain 0 / 100
Bangladesh NEI
Belgium 100 / 100
Bosnia and Herzegovina 0 / 100
Botswana 0 / 100
Brazil 100 / 100
Burkina Faso 0 / 100
Cameroon 0 / 100
Canada 75 / 100
Chile 0 / 100
China 25 / 100
Colombia 0 / 100
Cote d'Ivoire 0 / 100
Denmark 100 / 100
Egypt 0 / 100
Estonia NEI
Finland 100 / 100
France 0 / 100
Germany NA
Ghana 0 / 100
Greece NA
Hungary NA
India 50 / 100
Indonesia 50 / 100
Iran 0 / 100
Iraq 0 / 100
Israel 50 / 100
Italy 25 / 100
Japan 25 / 100
Jordan 0 / 100
Kenya NEI
Kosovo 0 / 100
Kuwait 0 / 100
Latvia NA
Lebanon 0 / 100
Lithuania NA
Malaysia 25 / 100
Mali 0 / 100
Mexico 0 / 100
Montenegro 0 / 100
Myanmar NEI
Netherlands 75 / 100
New Zealand NA
Niger 0 / 100
Nigeria 25 / 100
North Macedonia NEI
Norway 50 / 100
Oman 0 / 100
Palestine 0 / 100
Philippines 0 / 100
Poland 50 / 100
Portugal NA
Qatar 0 / 100
Russia 75 / 100
Saudi Arabia 0 / 100
Serbia 0 / 100
Singapore NA
South Africa 50 / 100
South Korea 25 / 100
South Sudan 0 / 100
Spain NEI
Sudan 0 / 100
Sweden 0 / 100
Switzerland 75 / 100
Taiwan 50 / 100
Tanzania NEI
Thailand 0 / 100
Tunisia 0 / 100
Turkey NEI
Uganda NEI
Ukraine 0 / 100
United Arab Emirates 0 / 100
United Kingdom NA
United States NA
Venezuela 0 / 100
Zimbabwe NEI

With thanks for support from the UK Foreign, Commonwealth and Development Office (FCDO) and the Dutch Ministry of Foreign Affairs who have contributed to the Government Defence Integrity Index.

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