Offsets Quo Vadis
May 9, 2020
Developing the future economy Post Covid
Today, with countries grappling with COVID-19 and its effect on the world as a whole, socially and economically, governments will need to utilise every economic stimulus tool available to them to support their economies as a whole. Global supply chains have been disrupted, factories shut and the down-turn as a consequence impacts us all.
The question now more than ever is ‘Offsets Quo Vadis’? An opportunity exists today in a way it has never presented itself, to use offsets truly as an economic stimulus across a country’s total procurement process in restarting its own economy; act as a medium in stimulating bi-lateral and multi-lateral trade; and being socially supportive and responsible in underpinning not only one nation’s economy as a whole but also acting as a facilitator in supporting the economies from which it buys and therefore sustaining the global economy of which we all are a part of. The sooner countries embrace ‘Social-Economic Enhancement’ and look to effectively use this mechanism to support national needs in education, health care, housing, infrastructure, local industries, SMEs and every aspect of a country’s economy and its people, the sooner the world will pulls itself up from this current quagmire we find ourselves in.
Justification of budgets and spending pegged against state revenue generation is a difficult task for all countries without exception. In the case of countries where a significant portion of Gross Domestic Product (GDP) is generated by a commodity (e.g. Hydrocarbons) that has a constant fluctuation in both its demand and therefore price, coupled with extreme sensitivity to real or perceived changes in global security acting as a further marker in its pricing, other dimensions have to be considered. When all of these and other factors are taken into account the need exists of a ‘crystal ball’ and the best minds, to determine a way forward in meeting all of the demands of the nation state, while being fiscally sound and pragmatic in a secure environment. Few if any national offset programmes looked originally at offsets being an economic stimulus tool and the leveraging in multiple ways, the relationship between buying nation, supplying company and indeed the supplying companies home nation in further socio-economic development of that purchasing nation.
Today, offsets have grown to encompass some 82 plus countries with variations of offset models and regulations. Nonetheless they all have one or more of the following objectives being common:
- Job creation
- Foreign direct investment
- Creation of joint ventures and long term partnerships
- Export creation / enhancement
- Profitability Page
- Economic Sustainability
The debate and differences between countries rests on the application of offsets on the ‘how’ and ‘where’ the above objectives are in part or as a whole used. Are offsets being effectively used to mitigate the use of foreign reserves to acquire foreign goods in a manner which supports all eight of the above objectives? Is the economy able to measure the benefit derived from offset use? These are questions which should be asked. Offsets are labelled as a ‘black box’, with little spoken about their true use and application, due to a historic attachment to defence procurements and thus wrapped in the blanket of a ‘need to know’ secrecy.
If effectively used, offsets or as it should be better referred to as economic enhancement and should be used as an economic stimulus tool by leveraging the financial and technology strengths of the company from which a foreign government purchases goods and services from, to further stimulate and develop its own economy either directly or indirectly, but in either case, satisfied in a manner which is structured and independently quantifiable in terms of the results.
There are those who will argue that this is a burden companies are ill-suited or prepared for, and indeed that may be the case in certain circumstances. The question is therefore, should they be obligated or somehow forgiven from having to support a national economic enhancement programme? The answer is fairly simple. If they are prepared to be the beneficiary of monies from a foreign government as a consequence of selling their goods and services, then they should and must be prepared to support those countries seeking to further develop and strengthen their economies and in so doing support their own.
When looked at in a more constructive way, economic enhancement provides the opportunity and potential to not only open new markets, but rather to create a permanency in those markets through the creation of sustainable, profitable joint ventures where the country and the company both benefit from a ‘win-win’ situation. Thus, a positive contribution for all.
Economies over time also change and with it the flexibility to adjust and change structural issues within a country’s offset regime is necessary or once again a loss to an economy will prevail over time as it grows in itself.
The answer to ‘Offsets Quo Vadis’ is simple. It should engage and embrace (a) all national procurements above a certain threshold level; (b) be measured against realistic markers;(c) governed by a holistic and transparent regulatory framework; (d) be measured on a best practices basis; (e) importantly not be restricted to one sector of the economy, but the economy as a whole and; (f) it should embrace supporting national development needs and national ‘Vision’ objectives.
COVID-19 has shown us all one very important thing - it is global and its effects have been global socially and economically and that will not change. The leaders of countries need to be receptive to new innovative ideas and approaches in assisting the world get back on its feet. Now more than ever, a new ‘Marshall Plan’ is required. The question governments now need to answer is generally ‘Quo Vadis’.
Blenheim Capital Group