The end of offset in Poland or just a temporary shortness of breath?
Author: Jarosław Kruk - attorney at law, managing partner
Some press information has appeared that PGZ and Raytheon didn’t reach an agreement regarding an execution contract to the offset contract. According to the information from my home portal Defence24.pl, a total breakdown has occurred in negotiations. Of course MON and PGZ have denied, claiming, that such situation didn’t took place. In the interview for Defence24.pl the chairman of PGZ Andrzej Kensbok said that the offset proposals didn’t guarantee for PGZ the return of the assets engaged in its absorption.
After two purchases without the offset procedure, of Himars and F-35, it can be said, that the end of the offset is taking place. If that is going to happen foreign weapon suppliers would be the biggest winners. Let’s hope it’s not going to happen.
A brief reminding – offset was discovered many years ago as a method to equalize chances of development of own weapon industry. This is not a miracle cure but while used reasonably, together with other methods like licence purchase it allows the development of own weapon industry. It is enough to take a look at the industrial defence potentials of Southern Korea and Turkey.
Why offset is used? First of all, according to the basic principle of the cost share, up to 30% is paid while the purchase of the military equipment, and 70% or more during the life cycle of the equipment – 20 to 30 years.
So if you don’t wish to pay foreign suppliers huge sums each time you need a service you need your own industry to have such ability. Of course offset is not a cheap thing, so are the parts and the upgrade of the equipment.
As a result of using the offset one can achieve:
A technology significant from the point of view of the state's security or economic interests, which could not be obtained without the use of offset. It is obvious to me that the costs of absorption and offset should be borne by the ordering party, i.e. the Ministry of National Defense;
Technology for servicing and modernization of purchased weapon systems plus possibly technology for the production of such a system. In this case, financing of the implementation should be provided by the Ministry of National Defense or based on long-term contracts for servicing or modernization of the purchased weapons. Legally, there is nothing to prevent the modernization and service of weapons purchased with the application of the basic interests of state security, to apply the same procedure and guarantee the industry certain orders for many years. Unfortunately, the practice of the Support Inspectorate in this respect is completely different. The public procurement law applies here, and they do not want to hear about anything else because there is also risk, and when the most important criterion is price - there is no risk.
Entering the so-called "Supply chain" of a foreign manufacturer, i.e. the production of elements for the needs of such a supplier for our army and foreign customers. Here, the basis is to fulfill the manufacturer's quality requirements, submit to its audit requirements, procedures and prepare an attractive price offer. Of course, no one will allow us to produce the entire system, but only some components. In principle, the absorption costs should be covered by the offset recipient with the support of the Ministry of National Defense;
Ministry of Defence is doing everything to avoid polish private industry from getting any offset at all. Arguments for that are very weak and they just look like they are from the eighties. There are no any legal obstacles for that. Unwillingness to take risk is the basis of such attitude is convenience and thinking that “state officials are allowed to steal”.
There is also no flexibility depending on whether you can buy licenses and use offset when shopping. Anyway, this was the case with the purchase of a Rosomak license from Patria. In renegotiating the license agreement, the offset agreement was very helpful, or rather the fact of "non-fulfillment" by the foreign supplier of the offset obligations. It is worth remembering such an experience and having it once. But that's more of the past.
It seems that the Ministry of National Defense will completely depart from the offset. Foreign industry insists that it is easier to buy off the shelf. Definitely easier and faster. Yes, but the state loses (because it will pay more in the cost of "living" the equipment), the industry (because it will not gain the capacity) and the army (because it becomes dependent on a foreign supplier).