Interview on Offset in the Asia Pacific region by Jane’s Defence

Date Posted: 03-Sep-2009

Jane’s Defence Industry

Briefing: APCA chief urges review of Asia Pacific offset policies

Jon Grevatt Jane’s Asia-Pacific Industry Reporter

Key Points

  • Asia Pacific countries are struggling to implement effective defence offset policies
  • The director of the Asia Pacific Countertrade Association says a flexible approach is needed

Defence offset policies in the Asia Pacific region need to be better designed and implemented in order to bring more benefits to the countries’ defence industries, the co-founder and director of the Asia Pacific Countertrade Association (APCA) has told Jane’s .

David Hew – who is also a consultant advocate and solicitor at the Singapore-based law company Robert Wang & Woo – said on 3 September that most Asian governments were struggling to implement policies that proved effective.

“The objectives of defence offsets in Asia have principally been to develop industries, attract technology transfer, build a knowledge economy and create jobs,” he said. “Australia, among all of them, is the most developed, and is way ahead in the learning curve.

“[But] many other countries in the region are either still struggling to get it right or determining how to do offsets better. Unfortunately for many of them, there are specific factors within their own countries that must be addressed before they can attain success, let alone make any progress.”

Hew said that, in general terms, Asia Pacific governments have pointed to the number of joint ventures or limited technology transfers as evidence of the success of their offset policies. He believed that some of these governments were not weighing up the costs of offsets.

“Success should be viewed in terms of the benefit, utility and efficiency gained through offsets not in isolation but measured against the costs incurred,” he said.

“Some argue that the benefit may not otherwise be attainable if not for offsets. The costs even in such a situation should be weighed. If the offset project can be executed just as well if not more efficiently with less risks, where is the added value gained through offsets?”

Hew added: “Generally speaking, offsets in the Asia Pacific region have not been as successful as governments claim they have been. Offsets could be a lot more effective at creating jobs in the region as well as transferring military technologies.

“There have been some successes, but generally the offset policies need to be better designed and developed and have better methodologies – and then they will be capable of much more. Look at IndiaIndia introduced its offset policy in 2006 and then updated in 2007 and 2008, and they will do so again in 2009.”

In July the Indian government revealed that work, training and technologies valued USD1.5 billion had been discharged to domestic defence companies since the offset policy was introduced. An Indian defence analyst noted at the time that the figure suggests that India will struggle to meet its own target of generating work through offsets worth USD10 billion by 2011.

Deba R Mohanty, a senior fellow at a New Delhi think-tank, the Observer Research Foundation, said one of the main reasons why the target is unlikely to be reached included an inflexible offset policy “that is making foreign companies hesitate”.

Mohanty pointed to Bell Helicopter’s decision in December 2008 to pull out of the reconnaissance and surveillance helicopter competition.

Citing a “restrictive and narrow” offset policy, a Bell Helicopter spokesman said that the company would not pursue the request for proposals because “the Bell executive leadership team felt the offset and contractual obligations for this programme do not meet our current business objectives”.

Hew said that, when India “overcomes its offset teething problems”, the benefits for the country’s defence industries should be numerous. He added that, because of the size of their respective markets, India – as well as China – are in a position to influence Asian Pacific offset policies in future years.

“The main drivers for the region’s offset policies are likely to be India and China – and at present neither are signatories of the World Trade Organisation’s Agreement on Government Procurement [a legally binding agreement that relates to procurement policies].

“The day will come when India will get better at doing offsets and China will have a formal policy. China has had an ad hoc policy for many years and has been successful in the civil aeronautical space; but if China formalised a well designed and developed policy the impact would be considerable.”

According to Hew, factors that contribute to an effective offset policy are robust design, development and implementation, a non-discriminatory tender system with effective risk assessment, and constant review and assessment initiatives.

At present, however, offset policies in the region face a number of challenges that are hindering progress, Hew suggested. They include low transparency of procurement deals, a lack of oversight or good governance, a lack of effective and proven tender disciplines, and a failure to adopt known best practices.

Hew added that, if Asia Pacific countries were able to address these largely administrative challenges, the benefits of offsets would be wide-ranging – especially if countries adopted a flexible approach to their policies.

“The biggest contributions from defence offsets are as a tool to build a defence industrial base, a tool for industrial development, a tool to attract collaborations and investment, a tool for acquiring knowledge and technology, and a tool to retain or create jobs. The needs of Asia are many,” he said.

“The enormity and extent of these needs are such that both direct and indirect offsets would become important. In my opinion, an Asian government will be well advised to exploit both direct and indirect offsets to the fullest extent possible.”