July 09, 2012
Credit: Credit: Dassault Aviation
Global aerospace and defense companies have racked up a cumulative $500 billion of obligations in order to secure weapons sales with foreign countries through 2016, according to a leading consulting firm.
Jon Barney, a partner with Avascent, said the huge and rising bill for so-called “offset” agreements presented an unprecedented challenge given that many big defense companies are now looking to foreign sales to keep revenues growing as military spending declines in the United States and Europe.
Offsets, which first appeared after World War Two, are incentive contracts that weapons makers sign with procuring governments to facilitate arms sales. They often take the form of investments in the buying country’s own defense industry, but they vary widely in form and complexity.
Barney said many countries were ratcheting up their demands for such agreements, even on smaller weapons deals, but that aerospace and defense firms often lacked a strategic approach to the issue, leaving oversight to lower-level executives and treating offset agreements on a case-by-case basis.
The lack of oversight created “unnecessary risks” for companies, and prompted Avascent to study the issue for nearly a year, Barney said, resulting in what he described as the first comprehensive estimate of offset agreements across the sector.
Previous industry estimates had put the total at about a fifth of the level calculated by Avascent.
While incentive deals are growing in number and complexity, the United States, Britain and other countries are also increasing their efforts to crack down on corruption, with offset agreements seen as a particularly fertile area.
Barney said taking a proactive, transparent and strategic approach to the issue could be an important “differentiator” for companies as they bid to supply fighter planes, warships and other military equipment.
On the flip side, companies that failed to impose strategic and analytical rigor on their offset proposals could be at a competitive disadvantage and open themselves to unnecessary financial and reputational risk, the study found.