the offset market
“Offsets” are based on the old principles
of barter and counter-trade and have been around since the early
1950s.
Offset obligations are compensation required
as a condition of purchase in either government-to-government or
commercial sales of primarily aerospace & defence equipment
and services to a government. They can take the form of
industrial, commercial and political arrangements under which
suppliers implement specific projects aimed at partially or fully
compensating the buyer's procurement costs or to help the buyer
country meet its socio-economic objectives.
Major tenders for purchase of large value
projects will ask for proposals on how the supplier will meet its
offset obligations. They are now seen as key differentiators in
the award of major contracts and are a fast growing market. Offset
obligations imposed on suppliers can, in some cases, be as much as
300% of the original contract price.
Values of offset obligations are usually set
by the buyer country at a percentage of the full contract price.
However, suppliers are at liberty to offer more, giving them a
distinct advantage over other bidding suppliers.
The aerospace and defence market is a highly
competitive buyer's market. This intense international competition
allows buyer countries to extract very favorable deals from
suppliers.
As a result, suppliers are finding they need
new skills, tools and infrastructure to handle both the increased
volume and diversity of offsets they need to fulfill if they are
to be seen as a credible supplier.
In 2003, the unfulfilled global offset market
was around $50bn and is expected to double by the end of the
decade.
why are offsets important?
Offsets are used as a key differentiator by
procurement agencies of 120 countries around the world, when
assessing bids for high value projects. They are seen as an
integral part of the sales process for multi-national companies
and, due to their high value and stringent terms imposed at the
outset, can be a significant burden for suppliers who do not have
the capability to deal with them efficiently.
If a company wants to bid for a big project,
it has to be prepared to undertake offset obligations as part of
the contract.
There are many benefits for each party:
For the buyer country:
the offset fulfilment challenge
In 2003, the unfulfilled global offset market was around $50bn and
this is expected to double by the end of the decade.
The problem for most suppliers is that
fulfilling offset obligations is a non-core activity and because,
in most cases, there are heavy penalties imposed for
non-fulfilment, they can be a costly burden.
The number and cost of offset obligations are
growing at an alarming rate which is not matched by suppliers’
ability to fulfill them so we are seeing a widening “offset gap”
in the marketplace. Tricolom works with companies to plug the
offset gap, helping them to fulfil their offset obligations more
efficiently.
There is no uniform legislative or regulatory
body to monitor the delivery of offsets so it is up to the buyer
country and the supplier to negotiate terms for delivery and
penalties to be imposed.
consequences of not delivering the
offset projects
There are major penalties imposed on a
supplier who cannot fulfil this part of the contract:
