The time has come to question Lithuania’s position on defence offsets

Major Donatas PALAVENIS

In Lithuania, in 2016 a decision was made to purchase infantry fighting vehicles Boxer. They were not purchased using the offset method, which allows part of the costs to be recovered in the state budget and strengthen the competencies of the national industry. Other countries, such as the Kingdom of Denmark, then and now continue to use offsets to strengthen the strategic competencies of their defence industry. It is likely that Lithuanian decision-makers, having become acquainted with the experience of Denmark and other countries in the field of offset in the field of arms procurement, will review their negative position towards them in the future.

Acquisition of infantry fighting vehicles Boxer and discussions about offset in Lithuania

More than five years have passed since 2016 August 22 when a contract was signed for the purchase of 88 infantry fighting vehicles (IFV) Boxer for 385.6 million. euros. According to the agreement, all IFVs should reach Lithuania this year. In one of the interviews, the Minister of National Defence Dr. Arvydas Anušauskas identified that this year only 80% of Boxers will reach the Lithuanian army. The rest of IFVs will be delivered only early next year. It was explained that the delay was due to the COVID-19 pandemic and the rectification of deficiencies observed during the operation of IFVs. So far, it remains unclear whether the Lithuanian Ministry of National Defence (MND) is involved in litigation.

During the process of acquiring IFVs in 2015–2016. there has been nearly no debate about the use of offset, otherwise known as the compensation mechanism. Representatives of the MND explained that there was simply no possibility to use offsets in the deal. In their view, the offset requirement would have violated EU law. It was also mentioned that the negative decision on offset execution was possibly caused by the urgent implementation of the armaments acquisition process, the lack of proposals from the Ministry of Economy, at that time, on the practical implementation of offset, the need to create a legal regulatory mechanism. Furthermore, the corruption scandals in Croatia and Slovenia that were linked to defence acquisitions, and particularly with the implementation of the offset mechanism in those countries were portrayed in a bad light and therefore fully discouraged Lithuanian decision-makers even start considering the offset options.

Paradoxically, apart from the negative opinions in the public discourse at the time, no positive words could be found about the practice of other NATO / EU countries in acquiring weapons using offsets. Additionally, the position of the director of the Lithuanian National Defense Industry Association, which stated that “offset would allow the country to intensify the creation of new defence companies and the improvement of existing ones by creating a national modern military industry with new technologies and jobs in both industry and academia” was not even heard.

A few years later, completely unexpectedly, at the beginning of 2021, the Minister of MND expressed that the Lithuanian MND would support the initiatives of local companies in developing capabilities able to service complex military equipment. It is likely that already in 2016 if Lithuania had chosen the offset option, this function would have already been performed by a local company.

Knowing that the Lithuanian MND will continue to make large arms acquisitions, it is necessary to examine the experience of other countries in the implementation of defence offsets. The Danish example is chosen because of the publicly available data, and because starting from  September 8 the Danish Arms Acquisition Guidelines will enter into force. The guidelines were revised following an EU Commission inquiry. Back in 2018, the EU Commission has complained about Danish, Dutch, Italian, Portuguese and Polish non-compliance of arms procurement procedures with the EU law.

New term, but the meaning is the same

Based on the requirement from the EU and the negative association with the offset term, most of the countries renamed the term offset to industrial cooperation. Many critics have seen this move more as a cosmetic operation that has not changed anything. A state acquiring armaments from a supplier abroad requires that the production of arms or munitions would be transferred to the state, or that the part of the arms production would be carried out using the competencies of local companies, or that the acquisition costs would be reimbursed in other ways.

Researchers do not fully agree on the benefits of offset in the defence industry, but most of them point to the following advantages: self-sustained armaments production, job creation, acquisition of new technologies and skills, specialization, export expansion. Offset makes the acquisition of arms more expensive, a mechanism for monitoring their implementation status is needed, and the results are difficult to assess, as they depend on the goals set by the country’s political leadership.

Danish armaments procurement procedure

From September 8, the necessary amendments have been made to the Danish Arms Acquisition Guidelines, so it is highly likely that no further complaints from the EU Commission will be received. The purpose of the guidelines is to ensure that the actions necessary to protect the essential interests of Danish national security in connection with the production of or trade in arms, munitions and war material comply with Denmark’s obligations under EU law, in particular Article 346 TFEU. Under the new guidelines, industrial cooperation remains a key tool for maintaining and developing strategic competencies in the Danish defence industry, thus ensuring the protection of Denmark’s essential security interests.

The guidelines apply to the purchase of armaments and services from abroad, the value of which exceeds 6.72 million euros. The Danish MND identifies areas where specific competencies and capabilities of the defence industry need to be developed in order to protect specific essential national security interests. The Danish MND, in coordination with the Ministry of Industry, Business and Finance, decides how the missing competencies will be developed or strengthened. In addition to industrial cooperation, other means can be used to achieve this goal, such as supporting exports, funding training programs, covering R&D costs, grants, loans, using local subcontractors, and concluding direct contracts with national producers or service providers. Regardless of the support method chosen, risks are assessed and measures are selected to create a minimum of competition in the internal market.

Offset / industrial cooperation in Denmark

Almost all foreign arms suppliers have industrial cooperation agreements with local manufacturers or service providers. According to today’s data, more than fifty contracts have been concluded in that regard. The amounts of some of the contracts are not made public but among the publicly available ones the most expensive ones: the acquisition of the Swiss-made Piranha V IFVs from General Dynamics European Land Systems – Mowag GmbH for 262 million euros, where the maintenance work IFVs valued 68 million euros; the acquisition of Eagle armoured reconnaissance vehicle from the same Swiss company for 78 million euros; purchase of small-diameter bombs from Boeing for 93.5 million euros. The list of ongoing industrial cooperation commitments includes almost all of the world’s leading global defence companies, such as Krauss-Maffei Wegmann GmbH & Co., L3 Harris, Kongsberg Defense & Aerospace AS, Thales, Northrop Grumman, Rheinmetall, Raytheon Technologies, Lockheed Martin, General Electric, Nexter Systems, Leonardo, SAAB AB, and BAE Systems.

According to the established rules of industrial cooperation, foreign companies have to find local producers or R&D partners in Denmark on their own. Assistance in this aspect could be provided by the Danish Business Administration, the Danish Defence and Security Industry Association, other enabling organizations: CenSec, Naval Team Denmark, Danish Maritime.

The status of industrial cooperation agreements is monitored by the Danish Business Administration. A coefficient is applied to calculate the number of industrial cooperation commitments depending on the type of cooperation chosen. For example, if a foreign armaments supplier buys or mediates in the sale of a Danish entity’s products or services, then the coefficient applies to 1. If the technology is transferred by a foreign arms supplier, which later becomes the property of a Danish entity and could be used in further projects, then a maximum factor of 7 may be applied. The government has set these coefficients in order to strengthen the production potential and competitiveness of Danish companies.

According to the publicly available report released in 2017 by the Danish Business Administration to the Danish Parliament, as many as 98 Danish entities have been included in industrial cooperation programs. 97 per cent of the total liabilities went to 25 companies working in the field of defence. New industrial cooperation commitments during 2017 were concluded for 135 million and disbursed for 242 million euros.

Instead of an epilogue

The example of Denmark and Lithuania is a good illustration of how countries interpret EU law differently on the same issue. Lithuania’s overly cautious position in the application of offset in the acquisition of armaments differs significantly from the path chosen by Denmark to apply an offset to acquisitions in the field of a defence exceeding 6.72 million euros.

From this September, the Danish Arms Procurement Guidelines, agreed by the EU Commission, have entered into force continue to require industrial cooperation in state’s defence procurement. The guidelines identify other measures that the government may take to maintain and develop strategic competencies in the Danish defence industry, thus ensuring the protection of Denmark’s essential security interests.

The issuance of new guidelines is likely to force other EU countries to reconsider their approach to the industrial cooperation option in their future arms acquisitions.

There is no one-size-fits-all answer as to whether it is worthwhile for the state to pursue industrial cooperation while acquiring armaments, nevertheless, decision-makers, together with business, scientific institutions and other stakeholders, should consider this option for future arms acquisitions in Lithuania.

The national debate on this issue could be a good starting point, but that will require time, resources and initiative, which is expected to come from the Lithuanian MND, the Ministry of Economy and Innovation, two defence industry associations, other institutions or simply enterprising citizens.

It is to be hoped that the Lithuanian MND, the Ministry of Economy and Innovation, the Government, the National Security and Defence Committee at the Seimas (Parliament) and the State Defence Council will take into account the experience of other countries and begin to assess the possibilities of implementing the industrial cooperation option in Lithuania or acting together with other countries.

Author. MajorDonatas Palavenis, Junior researcher in the Baltic Institute of Advanced Technology (BPTI).

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