Defence groups' sweeteners swell to $75bn

Western defence companies have agreed $75bn of sweetener deals, ranging from helping Omani fishermen to financing an Emirati beachfront metropolis, to win lucrative arms contracts, a Financial Times investigation has found.

The FT's probe - based on data provided by IHS Jane's, the defence industry analyst - reveals the scale of the outstanding promises or "offsets" made by the world's 12 largest defence companies to win orders from countries seeking investments, jobs and technology.

Defence companies have traded Tunisian olive oil for military transport planes; invested in fledgling airlines in Kazakhstan and Jordan; created a domestic aerospace industry for Turkey; and sent the first Malaysian astronaut into space. In Oman, BAE Systems satisfied part of its offset obligation by luring fish to big, brightly coloured buoys, easing the work of local fishermen.

Lockheed Martin alone is on the hook for at least $27bn of offset deals - 10 times its net profit last year - while Boeing has $12.6bn of such obligations and Raytheon has $7.9bn. In Europe, EADS has the biggest obligations with $7.6bn in promises, while the UK's BAE Systems and Sweden's Saab have pledged close to $4bn each.

The numbers represent the value assigned by governments to companies' outstanding obligations under the agreed side deals. Their actual costs vary and depend on how each company chooses to fulfil their obligation to benefit the local economy.

Executives say that these side deals are becoming increasingly crucial to winning big international defence contracts as developing countries rank competing bids by the companies' willingness to commit billions of dollars to their economic and industrial development.

Penalties for not delivering on side deals - which can run into the tens of millions of dollars - are kept even more secret than the deals themselves. In 2010 alone, Greece applied penalties to 70 offset programmes, while in India 13 of 18 offset contracts agreed between 2005 and 2013 were subject to penalties.

But these offset projects will be dwarfed by future deals, with analysts predicting a significant rise in arms sales to countries who demand sweeteners.

Concern about these sorts of deals goes well beyond the boardrooms of the world's big defence contractors. Critics - including the US government, the EU, World Trade Organisation and campaign groups such as Transparency International - say they distort the market, lead governments to order arms they do not need and create opportunities for corruption.

However, Thomas Culligan, head of international business at Raytheon, argues that offsets have become crucial amid shrinking defence budgets in the US and Europe. "If you are not having to deal with offsets, you are probably not selling internationally," he says. "Yes, it's a challenge. Yes, it's a problem. But it sure beats the alternative."

Offsets in the spotlight

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