Transcript Military Offsets as a Tool for Development

Military Offsets as a Tool for
Development:
Poland, A Case Study
Military Offsets as a Tool for Development
F-16 Deal with Poland
• 1998: Poland admitted to NATO in 1998
• 2001: Poland’s Parliament approved $3.5 billion to upgrade its fighter planes
• 2002: US Congress approved 15-year, $3.8 billion loan to Poland
• US Government’s Deal with Poland
• $3.8 billion Foreign Military Financing loan
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Interest payment through 2010; Interest plus principal 2011 through 201
Advanced Medium- & short-range air-to-air missiles
Maverick air-to-ground missiles
Laser-guided and other bombs
Radio-frequency countermeasures
Potential for acquisition of new F-35
• 2003: Poland negotiated a $6 billion offset deal with Lockheed Martin
Military Offsets as a Tool for Development
Offset Practices
• Reciprocity arrangements conditions on foreign suppliers
• Designed to compensate the buyer for selecting a foreign supplier
• Commit the seller to certain obligations
• Up to 100%+ of purchase price
• Used in reference to military & high-dollar-value civilian contracts
• Buying Country Stategies:
• Hard currency generation to alleviate shortages of foreign exchange
• Technology transfer to build competitiveness
• Domestic content to promote locally manufactured goods
• Marketing assistance
• Economic stimulants forming part of a country’s economic recovery program
• Selling Country Strategies:
• Competitive or commercial reasons
• Standardization & interoperability reasons
• Concern for job losses & distortion of world trade
• Work to mutual advantage
• Low-cost suppliers
• Transferring technology, but not creating competitors
• Building customer relationships
Military Offsets as a Tool for Development
Offset Agreement for Procurement of Lockheed Martin F-16s
• $3.5 Billion Contract for 44 F-16
• Improving NATO fleet interoperability and standardization
• $6 Billion Offset Arrangements
• Responsibility lies with Lockheed Martin
• 47 Projects
• Some of the Companies & Organizations Involved:
• Lockheed Martin
• Pratt & Whitney
• Goodrich
• Halliburton
• CH2M Hill
• Sandia National Laboratories
• University of Texas
Military Offsets as a Tool for Development
Offsets & Their Valuations: Creativity & Leverage
• Setting Offset Values
• Buyer & Seller work together to identify projects & potential investment value
• Multipliers applied in many countries
• Set by law
• Dependent upon project type
• Result:
• Less than reported value actually flows into buying country
Military Offsets as a Tool for Development
Benefits vs Cost
Pros:
• FDI: Projects worth $6 billion
• Alignment w/gov’t strategy
• Countertrade
• US commercial aircraft parts
• Improve competitiveness thru technology acquisition
• Joint ventures in high tech areas
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Co-production
Aftermarket opportunities
Technology centers/institutes
Improved infrastructure
• Telecommunications
• Increased foreign trade
• Establish markets in high tech areas
• Venture funding
• Training
• Joint ventures/mfg expertise
• Business development
• Managerial
• Quality
• Commercial investment
• Oil refinery, steel mills, shipyards
Military Offsets as a Tool for Development
Benefits vs Cost (cont.)
Cons:
• FDI: Multipliers result in less dollars flowing in
• Use of scarce resources to buy military
equipment
• $0.2 billion/yr (2004-2010)
• $0.8 billion/yr (2011-2015)
• Joint ventures independent of offset req’ts
• Necessary infrastructure improvements
neglected
• Roads
• Railroads
• Health service
• Agriculture
• Risk of losing EU funding
• Selling companies
• Slow on meeting investment req’ts
• Market distorting
• Lack of openness
• Limit on forces to improve business climate
• Direct gov’t intervention in market
• Gov’t choices in industries
Military Offsets as a Tool for Development
Summary
• Offsets Role
• Major role in decision & contract negotiations
• Offset Function
• Major role in economy of buying country
• Issues:
• Offset valuation
• Offset multipliers
• Developing countries spending resources on large military equipment
• Alternate use of resources
• Alternative FDI
• Market distortions
• Direct government intervention in markets
Back-up
Military Offsets as a Tool for Development
Offset Agreement for Procurement of Lockheed Martin F-16s
Form of Offset
Definition
Countertrade
Commitment to purchase goods &
services from buyer country (from supplier
himself, subcontractors, or third parties
Coproduction
Assembly, processing, manufacturing of
components or equipment in buyer's
country
Technology
Transfer of new techology to buyer's
transfer
country under direct contractual
arrangements between supplier and
buyer's country; may take the following
forms: research and development,
technical assistance, or other activities
under direct commercial arrangement
Subcontracting
Investment
Lockheed Martin & Other US Companies
Offset Projects (partial list)
Subcontracts to make commercial jet trainers
Parts for business aircraft for export to the U.S.
Agreement potentially worth $200 million with
PZL Mielic, Poland's major aircraft
manufacturer
Industrial Memorandum of Agreement with PZL
Swidnik (helicopters), WZL-2 military works
facility, Radwar, Institute of Aviation
A partnership with the University of Texas to
start a technology accelerator at the University
of Lodz
Venture with Accenture for a new technology
center in Lodz
Manufacture of compatible components in Goodrich's plant in Krosno to produce landing
buyer's country
gear
Funding of a joint company in buyer's
Pratt & Whitney's PZL Rzeszow facility to
country; Other direct investment
assemble F100 engines
$70 million technology venture capital fund in
coordination with Sandia National Laboratories
High technology ventures
Investment in Polish steel mills and shipyards
Environmental and water treatment projects
with Polish unit of CH2M Hill Inc.
Type of
Compensation
Indirect
Indirect
Direct
Indirect
Indirect
Indirect
Direct
Direct
Indirect
Indirect
Indirect
Indirect
Indirect
General Motors to expand a car plant in Poland
$540 million oil refinery for Polish Lotos oil
company to be built by Halliburton, partially
financed by Lockheed Martin
Telecommunications technology
Indirect
Indirect
Military Offsets as a Tool for Development
Funding Offsets
• Selling Company Allocates Small Budget
• Typically 4 – 10% of selling cost
• Program funding used
• Typically charged back to buyer as part of overhead cost of purchased equipment
• Partner Companies
• Often through new or existing investments in the buying country
• Offset Credit “Trading Account”
• Seller’s own account
• Purchased credits from other companies
Exhibit 3.
Boeing’s Offset Arrangement with South
Korea
Total Contract
Offsets to South Korea
US$ (Billion)
$4.40
$3.30
Technology Transfer
30 projects, including design & development of portions of
the plane, its instruments, & armament system
$1.50
Parts Manufacturing
11 projects, including the wings and front fuselages of the
plane
$1.30
Maintenance Projects
2 projects involving sophisticated maintenance depots
$0.50
Wayne, 2003
Polish Stats
Exhibit 7. Foreign Exchange Rates: Zloty, Euro, & US$
5.0
New Polish Zloty/euro
4.5
United States Dollar/euro
New Polish Zloty/US$
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Polish Stats
Table 1. Key Economic Factors in Poland
1995
1996
1997
1998
1999
2000
2001
2002
GDP (nominal,
bnUSD)
127.05
143.85
144.04
159.28
155.06
164.15
183.3
189.28
GDP (% real change)
7.1
6.0
6.9
4.9
4.0
4.0
1.0
1.4
Inflation Rate (%)
28.0
19.8
15.1
11.7
7.3
10.2
5.5
1.9
Interest rates (%)
25.0
22.0
24.5
18.2
19.0
21.5
14.0
7.5
Capital
Investment/GDP (%)
18.6
20.7
23.5
25.1
25.5
23.9
20.9
19.1
Foreign direct
investments (bn USD)
3.7
4.5
4.9
6.4
7.3
9.3
5.7
6.1
Unemployment (%)
15.2
13.2
10.5
10.4
13.0
13.9
16.2
17.8
PAIZ, 2003; Political Risk Services, 2003; Annual economic indicators, 2003