Dimitrov promised to help companies with their offset proposals
and projects. The state is firmly supporting arms trade offsets,
Dimitrov told more than 100 representatives of international arms
trade companies and manufacturers on November 28.
Photo: PETAR KOSTADINOV
Since the mid-1990s, arms trade offsets have become something of a worldwide fashion for countries who want to decrease the burden on their economies imposed by sustaining the ever-demanding organism called the defence industry.
Analysts say that the need to gain economic benefits in return for offshore procurement has driven countries to require direct and indirect offsets, which explains why offset is considered a positive tool to boost the economy and fund the defence industry at the same time.
Bulgaria has discovered this fashion in the past five years. It appealed to the current and previous governments so much that a special directorate on offset policy was set up within the Ministry of Economy and Energy. Today Bulgaria has several offset deals on its agenda with some more under discussion. The value is hundreds of millions of euro and the countrys offset policy has attracted strong attention from abroad. Proof of this was the recent third international conference entitled Development of an Offset Policy in Bulgaria, organised by the Atlantic Club of Bulgaria, the Nato information centre in Sofia, the Ministry of Economy and Energy and the Defence Ministry. So far, as a result of military trade offsets, Bulgaria has managed to attract investments amounting to 158 million euro.
But as with any other fashion, critics started to appear, questioning the economic benefits of indirect offset deals and their advantages to any direct offset deal.
A debate about the real benefits of offset deals already exists within the European Union and today it seems that the days of offset deals might be numbered.
The official stance
The message that participants in the November 28 conference got from Prime Minister Sergei Stanishev was that offset will remain on Bulgarias agenda. Offset deals will not remain a thing of the past, despite the debate that is going on in the EU about these deals, he said. Stanishevs main argument in support of offset deals was that the Bulgarian military needed modernisation and the funds to achieve this could come from such offset contracts.
The same message came from Economy and Energy Minister Petar Dimitrov who said that offset deals were a modern policy to attract investments in high technology and know-how.
For a very long time, Bulgaria had accepted any kind of investment, but now it needed to attract second generation investments, which meant high technology and know-how.
Dimitrov promised to assist all companies with their offset projects because one of the goals we have is to modernise the army, but the major goal is to modernise the economy. This would be achieved with offset deals, he said.
This last sentence in a way summarises an internal war between the Economy and Energy Ministry and their colleagues at the Defence Ministry.
Billed as a way to modernise the armed forces - the first priority of the Bulgarian military - offset deals have become a source of fresh money for the Economy and Energy Ministry which the latter can direct at its discretion.
This means that the Economy Ministry has a list with sectors defied as priority sectors and the contract is asked to invest in one of these sectors. The ministrys reasoning is that this mechanism allows the country to update its economy with high-technologies and save the countrys money in the long-term by creating brand new production. The priority sectors, according to the ministrys website, are industry, transport and telecommunications. So if any major international company wants to sign an offset deal with Bulgaria, these are the sectors in which it must invest. Moreover, it is the Economy and Energy Ministry that in a way holds sway over an offset deal, because without meeting the ministrys criteria, no company will be allowed to sign an offset contract with the Defence Ministry.
Furthermore, an offset deal usually complicates the delivery of the end product, and delivery is the Defence Ministrys priority. Indeed, studies of the offset policies of various countries have shown that the administrative costs regarding an offset deal can add up to 30 per cent to the original price.
Questioned by The Sofia Echo, Ivan Zherkov, director of the Offset Programme Directorate at the Ministry of Economy and Energy, said: Indeed an offset deal raises the administrative expenses by 10 to 18 per cent. However, if you take the expenses regarding a direct offset, you will see that the administrative expenses within it are up to 20 per cent.
According to Zherkov, offset was a chance to ease and help, not complicate, the modernisation of the army. As to what the Defence Ministry had to say on the subject, he said, offset eases this process by two-thirds, unlike what the Defence Ministry says.
As for what his directorate is costing the state, Zherkov said that the monthly expenses of the directorate came to 4360 leva. At the same time, we have attracted investments of 158 million euro, so you can do your own arithmetic.
A few hours later, Zherkov took a different approach. At the opening of the second session of the conference he said that the directorate had reached the limit of its capacity, and an agency had to be formed to meet the needs of all with an interest in the matter. Should there be agreement to set up such an agency, the sum of 4360 leva will undoubtedly grow to millions.
The Defence Ministry
The Defence Ministry position on arms trade offsets was that there should be market logic when it comes to indirect offset deals. Deputy Defence Minister Simeon Nikolov said that the country lacked a national strategy on offset policy.
We need experts in this field because it is a major weakness. For me, an indirect offset deal worth more than a 100 per cent, burdens the budget of Defence Ministry with expenses that are not getting re invested.
According to Nikolov, the debate within the European Union was about whether offset was in contradiction with the EUs common defence policy and strategy.
We have a statement from the European Commission that indirect offset contradicts the European Community Treaty, Nikolov said.
He said that the current provision that offset should be at least 110 per cent of the value of the deal and to have direct offset of only 30 per cent (aimed at the defence industry) was a problem for the Defence Ministry.
Another problem was for the ministry to secure funds for the maintenance of the goods after the delivery was made, which led to further additional expenses.
The VAT on the deliveries is a big problem because in most cases VAT is not calculated in the contract and the ministry takes all the consequences when there is an import from non-EU countries. Such was the case when the first of five Spartan C-27J transport aircraft made by Italys Alenia was detained by the Customs Agency when lading in Bulgaria on November 6. It appeared that VAT had to be paid for some of the equipment installed on the aircraft because it was made in the US. It was an embarrassing moment for the Defence Ministry because the official ceremony, which clearly had been foreseen as a tailor-made opportunity for favourable media coverage, had to be cancelled at the last moment.
Nikolovs list of the challenges before indirect offset in Bulgaria was not short. Some of his remarks clearly included indirect criticism of the Economy and Energy Ministry. Ninety-six per cent of the Bulgarian companies that are part of an offset deal export what they produce to countries from the EU. Little if nothing is invested in scientific research, which in the long-term perspective will have a negative effect on Bulgarias defence industry.
He did not omit to mention the pride and joy of Stanishev and Dimitrov: the corvette deal with France. During his one-day visit to Bulgaria on October 4, French president Nicolas Sarkozy discussed a 750 million euro offset deal between Bulgaria and French company Armaris, finalisation of which has been dragging on for years.
Armaris is to produce four GOWIND corvettes for the Bulgarian navy. Three of the corvettes will be built at Varna-based Bulyard Shipbuilding Industry which means that Armaris is to create a regional centre to employ 1000 individuals directly and a further 1000 indirectly through subcontracting jobs to local companies over a 10-year period. Furthermore, Armaris committed itself to continue working with the Varna-based regional centre after the completion of the offset deal. The French shipbuilder has won a deal to build European multi-mission frigates under the FREMM programme. Since this is Europes largest wartime shipbuilding contract in 50 years, Armaris does not have sufficient capacity to complete the order at its own shipyards. This deal was widely advertised by Dimitrov as the most successful offset deal in Bulgarias history.
Lets be realistic about the corvette deal, please, Nikolov said. We should all know that Bulgaria will never become a centre of shipbuilding industry as a result of this deal. First there are the world trends. Look at what is happening in Asia. We have no chance of competing with these countries in shipbuilding. Secondly, look at what is going on in France right now. Look at the media there. There is substantial public pressure for funds to be relocated from the FREMM programme building an air carrier and I frankly doubt that all the ships that were agreed to be built in the Black Seas Varna will actually be built in Varna.
Nikolov was supported by the armys representative at the conference, Colonel Dimo Demirev, head of the Bulgarian militarys general staffs logistics department. We have a high regard for offset deals, including as a useful way to modernise the army, but at the same time there are problems such as the delay of the construction of a hangar for helicopters for example (French Eurocopter has to supply 12 Cougar and six Panther helicopters worth 360 million euro). This tells us that there is a need for a more comprehensive analysis about the effectiveness of the offsets compensations mechanisms, Demirev said.
More critics
The critics about EEMs offset policy did not end with Nikolov and Demirev. Concerns about the way offset investments had been managed by the Economy Ministry were expressed by Professor Stefan Vodenicharov, chairman of the Bulgarian Defence Industry Association (BDIA) that represents 17 leading Bulgarian defence industry companies.
The real question here is not whether offset is good or bad but to which sectors of the economy to point its effect at and, more precisely, the compensation mechanisms. In order for an offset to be successful, companies should be given more freedom in choosing partners. This is one of the main problems when it comes to offset in Bulgaria. There are cases when companies put their own commercial interests above the interests of Bulgaria. Such companies act irresponsibly in the long-term perspective. All this comes as a result of lobbying at high government level.
Vodenicharov said that none of the companies that are members of BDIA had been included so far in any of the offset deals, which brought into question the Economy and Energy Ministrys selection criteria.
Indeed the EEMs list of approved Bulgarian companies meeting the criteria to be part of an offset deal adds up to 61. Thirteen of the 17 BDIA companies are on that list, but none has been selected by the EEM to receive funds under any of the offset deals, as opposed to a small company that will get funds from Alenia to build a greenhouse for roses that will be exported. This was given by Stanishev as a successful example of an offset deal in Bulgaria.
The expert says
Speaking to The Sofia Echo on December 1, Georgi Angelov, senior economist at Open Society Institute in Sofia, said that offset as a mechanism should not be used in arms trade deals at all. According to him, forcing suppliers to invest in sectors considered by the state as a priority but unprofitable according to market trends, raised the price of the delivery.
That way companies are forced to invest in Bulgaria through an offset deal in unprofitable sectors which in effect are being subsidised by the price of the deal.
The result, according to Angelov, was that offset deals cost the state and taxpayers more.
This leads to companies investing funds in unprofitable sectors which is a recipe for low productivity and slow economic growth.
Furthermore, the projects approved by the Economy Ministry so far had little to do with high tech but were rather trivial things such as mechanics shops and greenhouses.
These are projects that need small-scale investments that could be funded by any banking institution and there is no reason for the MEE to make companies invest in them as part of an offset deal. Angelov said that the only way investments could have a positive effect on the economy was when they were being directed by market signals, not by the Economy Ministry.
When bureaucracy is trying to control these signals, a negative effect is inevitable, Angelov said.
What is an offset deal?
An offset is a mechanism to partially compensate (offset) the significant outflow of a buying countrys resources in large purchases of foreign goods and services by either re-investing a part of the money or placing orders locally.
