Welcome to the niche world of offset and countertrade policy and program execution. Termed ‘offset’ in the US and ‘countertrade’ in much of the rest of the world, it is the 21st Century’s sophisticated form of barter. In essence, a country publishes a policy that requires foreign companies to invest in the country in exchange for a major procurement. The devil is in the details.
To start, the WTO and its predecessor organization, the GATT, have a regulation that supposedly prohibits governments from levying offset in government contracts except for reasons of national security. This would presumably (and in practice generally does) restrict the practice of offset to defense related products. However, many countries have government-owned enterprises in the civil sector and, for major infrastructure projects (think rail, ports, extractive industries) will levy – formally or informally – offset requirements.
Since 80+ countries require offset in either a formal or an informal policy, companies going abroad should at least be aware the potential exists. Normally there is a kick-in threshold value for a contract below which offset is not required. The most common threshold values are between $5M and $20M of contract value, though a sizable percentage go as low as $1M. Once a threshold is crossed, the next issue is the value expected for the offset. The most common range is 20% to 80% of contract value (e.g., $100M contract, $50M offset required at 50% offset). However, 100% of contract is fairly common, as is ‘negotiable deal on deal.’
How, you may ask, can a company be expected to offset a contract at 100% of value? This leads to the concept of project multipliers. Some areas of investment or purchase will be rated more important by a country than others. For these projects, they will provide a 2x, 5x, even 10x multiplier to the actual value proposed. For example, if local work / employment is desired, and a company offers to place $1M of work with local companies, a country may give a 5x multiplier, making that work ‘worth’ $5M in offset credit.
The challenge is that no two offset polices are alike, just as no two countries are alike. All have different requirements, goals, local industries and interests. So, on approaching a country for a major deal (i.e., over $1M), it behooves a company to research the potential offset policy to be ready to comply. This is especially important, as offset has a cost. Countries typically will not allow offset to be costed in a proposal. Therefore, a company must build into its proposal the cost of offset carefully hidden in the numbers. The worst-case scenario is to be in the lead position for landing a major international program … and to be asked, prior to contract award, “So, what does your offset proposal look like?” No time to research, no chance to re-price to cover the costs. The only bleak choices are to refuse the contract, or go ahead and hope the costs of the offset program are well within the projected profit margin.
Research offset before you go. Many countries have increasingly transparent offset policies, and there are several organizations (Global Offset and Countertrade Association, Defense Industries Offset Association to name two) and a host of consultants who can help.
Dr. Alan S. Colegrove, P.E., Ph.D., President, Offset Collaboration, Incorporated