glossary of terms
Actual value of an offset - An offset
transaction measured in terms of dollars or agreed upon currency
Barter - This relates to the direct
exchange of goods-for-goods where no cash is involved. Oil
payments for arms are a widespread form of barter used in the
Persian Gulf, for example.
BOOT - Build Own Operate and Transfer
is a common form of PFI contract, similar to a
BOT
BOT – Build Operate Transfer. The
private sector finances, builds and operates a new infrastructure
facility or system according to Government performance standards.
The operations period is long enough to allow the private company
to pay off the construction costs and realise a profit, typically
10 to 20 years. The government retains ownership of the
infrastructure and becomes both the customer and the regulator of
the service.
Classical offset - The exporter sells
goods and is paid in the local currency of the buyer. The currency
must be used within the country and cannot be exchanged.
Compensation (or buy back) - An
agreement by the original exporter to accept as full or partial
repayment products derived from the original exported products.
Under this deal, the exporter sells equipment and at the same time
agrees to buy back the resulting products manufactured with the
help of the original sale.
Co-operative venture - A form of
buy-back, this is a long-term agreement involving capital projects
or production sharing ventures. Both parties own equity in
production facilities and payment is taken from the results of the
manufacturer.
Co-production - Overseas production
agreements that permit a foreign government or producer to acquire
the technical information required to manufacture all or part of a
piece of defence equipment. Co-production is highly favoured by
recipients because of the employment and technology transfer
implications of these types of deals.
Counter-purchase – It is the most
common and fastest growing form of counter-trade. Here the
exporter agrees to buy (or to find a buyer for) a specific value
of goods from the original importer. Counter-purchases are often
avoided because they incur extra transaction costs. In addition
many counter-purchase agreements impose quite rigid specifications
relating to time for completion of the counter-purchase and
penalties for non-performance.
Counter-trade - Refers to the
reciprocal and compensatory trade agreements involving the
purchase of goods or services by the seller from the buyer of his
product, or arrangements whereby the seller assists the buyer in
reducing the amount of net cost of the purchase through some form
of compensatory financing.
Credit value of an offset - The offset
transaction value applied against the offset agreement, which may
be greater that the actual value of the offset.
DBFO - Design Build Finance and Operate
is the most common form of PFI contract.
Direct investments/in-flow of capital – When tangible items such as primary materials or finished
goods are supplied by the foreign contractor at no charge. Usually
encountered in co-production arrangements which require the prime
supplier to provide local subcontractors with machinery, hardware
or other materials required for the production process. Since the
subcontractor does not have to purchase these items, the effect on
the host country is the same as an inflow of currency, a direct
investment by the prime contractor.
Direct offsets - Through
"direct" offsets, the purchaser receives work or
technology directly related to the equipment being purchased or
through projects in sectors the buyer country deems strategically
important to it.
Implementation period - The total
implementation period for the Offset Benefits is usually the same
as the period for the implementation of the main procurement
contract, with a period not to be exceeded.
Indirect offsets - These typically
involve barter and counter trade deals unrelated to the equipment
being purchased such as inward investment to the buying country,
transfer of technology or access to new markets for goods and
services originating in the buyer country. Particularly common in
many developing countries where the industrial base and
infrastructure are poorly developed.
Industrial Participation Programme -
This has the same meaning as 'offset' though some countries prefer
not to use this expression.
Joint venture - An entity formed for a
specific purpose and duration between two or more parties, this
may take a variety of legal forms.
Licensed Production - This involves
production within the purchasing country of defence equipment
based upon the transfer of technical information under direct
commercial arrangements between an exporting manufacturer and an
importing government or producer.
Multiplier - The credit coefficient
which is defined in the basis of the criteria accepted by the
purchasing government.
Obligee - Refers to the party
benefiting from the obligation.
Obligor - Refers to the party that must
satisfy an offset obligation
Offset - An offset can be defined as
compensation required as a condition of purchase in either
government-to-government or commercial sales of defence equipment
and services to a government. They take the form of industrial,
commercial and political arrangements under which suppliers
implement specific projects aimed at partially or fully
compensating (offsetting) the buyer's procurement costs.
Offset Agreement - A counter contract
to a military export sale negotiated separately between the
procuring country and the exporter as a condition of the export
sale. The offset agreement requires the exporter to compensate the
purchaser with various types of offsets in the form of assigning
subcontracting work, investments and/or grant of
materials/services.
Offset Threshold - Refers to the
contract value above which an offset obligation is mandatory.
Offset Transaction - An offset
transaction is an actual delivery of an offset against the
outstanding balance of an existing offset agreement.
PFI - The Private Finance Initiative is
a partnership where the private sector provides and operates an
asset in order that the public sector can procure a service (which
can only be provided through that asset).
PPPs - Public/Private Partnerships is
the term used to cover all partnerships between the public and
private sectors. It usually takes the form of a joint venture
arrangement which then undertakes to provide the required service.
Pre-Offsets - This refers to offsets
which are fulfilled in advance of the award of a contract.
Privatisation - The process of moving
from a government controlled system to a privately run, for-profit
system.
Subcontractor Production - This
involves overseas production of a part or component of a piece of
defence equipment. A prime contractor would substitute an existing
supplier with one located in the buyer country.
Swap - An exchange of streams of
payments over time according to specified terms.
Switch - This is similar to swap but is
more complex in that it can include different currencies, rates of
interest and loan terms. Technology Transfer - This occurs as a
result of an offset agreement that may take the form of research
and development conducted abroad; technical assistance provided to
the subsidiary or joint venture of overseas investment; or other
activities under direct commercial arrangement between a
manufacturer and a foreign entity.
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