WHAT IS OFFSET ?

The concept of offsets, especially in high-tech applications such as defense and aerospace, is defined as the exports and other transactions providing foreign currency inflow to compensate deficits that may arise in the balance of payments as a result of those to be made in foreign currency, in the framework of ongoing projects.

Nowadays, offsets are not only used as an intermediate to increase the standards of quality and productivity of existing capabilities as well as those to be established, through exports and therefore creating local content and produce goods and services that are competitive in the international arena, but also used as a tool by industrialized countries to develop their defense industry and to augment their market shares.

BACKGROUND

In 1984, the offset-related efforts to minimize deficits in the balance of payments started in the defense area with the contract for the co-production of F-16 aircraft locally. The offsets committed to by the US General Dynamics within the scope of the offset agreement of the F-16 programme are implemented and supervised by Ministry of National Defence (MND).

With the establishment of the Undersecretariat for Defence Industries (UDI) in 1985 – better known by its Turkish acronym of SSM, the new organisation also became responsible for the export of defence industrial products and for the coordination of offset trade.

As a consequence of the meeting held in March 1990 at the Undersecretariat of Treasury and Foreign Trade (UTFT), a decision has been reached on the creation of an ‘Offset Commission’ under the coordination of SSM to determine the offset policy in Turkey.

This was followed by an ‘Offset Report’ prepared by the Commission, which is made up of the representatives of government organizations like the MND, State Planning Organization, UTFT, Union of Chambers of Commerce and Commodity Exchanges of Turkey and the Export Promotion Center. This report recommended the preparation of a handbook to shed light on the developments in the defence industry and the principles behind the steps taken along the aims stated in the Law No. 3238 concerning the establishment of SSM.

As a result of the above, ‘SSM Offset Guidelines’ has been prepared, as the first systematic document for the purpose and was published in July 1991. The Offset Guidelines has become a reference document in determining the direct and indirect offset commitments for offset agreement already signed, or for projects whose RFP was issued by 12 May 2000.

Within the framework of the projects performed by SSM, an ‘Offset Section’ has been established in June 1991 for the purpose of coordinating the offset activities, preparing offset-related parts in the RFP, evaluating proposals, negotiating offset issues with the contenders, supervising offset activities and creating new policies.

'The Directive on Offset Implementations in Defence Procurement Transactions’ prepared by SSM in the light of its extensive experience and under the coordination of the General Staff, MND, Undersecretariat of Foreign Trade, Defence Industry Manufacturers Association and Defence Industry Association has been published on 15 July 2003 by the MND. All defence projects to be contracted after this date will be carried out in accordance with the rules and principles of this Directive.

Within the framework of the defence projects carried out by SSM, the offset proposals submitted by the bidders are evaluated by the Offset Section and the project group, based on 7 principal criteria.

Those are as follows:

• The total value of the offset commitment
• Offset realization period
• The definition of Net Turkish Added Value
• Penalty
• Letter of Bank Guarantee
• Resolution of Disputes
• Escalation

The main objective of ‘The Industrial Participation/Offset Directive’ which became effective on 14 February 2007 is to use the production potential and capabilities of local industry, to increase the competitiveness of the local industry in the international markets through export and to provide technological cooperation, investment and R&D opportunities .

As of 31st December 2007, the numbers of contracts signed by SSM have reached 76 and within the scope of these projects, a total of US$6.94 Billion has been committed. To date, 21 of the offset contracts awarded by SSM have been successfully completed. The remaining 55 are still effective and continue to be performed. Outstanding offset obligations under the existing offset agreements will be fulfilled by the end of 2016.

Summary of the total offset commitments by 31 December 2007.

Total Offset Commitment : 6,94 Billion US Dollar

Offset obligations due : 3,11 Billion US Dollar

Total Realisation Amount (%111) : 3,47 Billion US Dollar