The offset shuffle
The intended local beneficiaries of the historic multi-billion dollar offset agreement signed between Lockheed Martin and the Economy Ministry have kicked time-sensitive corporate negotiations into high gear as they head toward the August 19 deadline, when the as-yet tentative offset deals are to be set in motion.
Like most formal agreements, this one has bred disagreements, especially over just how much the country's ailing economy would benefit from it, and whether current offset value estimations of $6 billion-$12 billion (zł. 22.6 billion-zł. 45.2 billion) were overblown. Despite the feeling of buyer's remorse on the part of a few, beneficiaries Wojskowe Zakłady Lotniczne Nr 2 (WZL2), the University of Łodz and the Aviation Institute, to name three, are all digging in to seal their deals with foreign partner corporations by the deadline.
Should they not make it in time, it's likely another company will take their place. This month the government is compiling a reserve of offset projects proposed by domestic companies which were not included in the Lockheed offset agreement or in another one signed with Finnish military vehicle producer Patria Industries for the delivery of 690 military personnel carriers. The latter deal is expected to generate €1 billion (zł. 4.4 billion) in offset value.
In March the Polish government awarded Lockheed a $3.53-billion contract to supply the military with 48 F-16 fighters, which would help Poland's armed forces meet Nato requirements. A common practice in military contracts, Lockheed sweetened the F-16 deal by committing itself to provide the country's economy with at least $6 billion (zł. 22.6 billion) in offset value.
To offset the billions spent on the jets (which were financed by an enticing loan from the U.S. government), Lockheed is to ensure compensation for Poland's expenditure. Polish law states that the supplier must compensate at least 170 percent of the value of the deal in question. This includes direct investments, technology transfers as well as other value-adding projects directly from Lockheed or other U.S. companies.
However, market watchers point out that offsets do not amount to Lockheed selling F-16s to Poland and then investing 170 percent of that price tag back into the economy.
Piotr Rutkowski, head of marketing in WZL's commercial division, says executives will have to finalize the company's offset contract with Aircraft Technologies Inc. (ATI) during the 11th hour.
"For the time being, in my opinion, the progress is not that much," Rutkowski said. He explained that WZL plans to next meet with ATI at the end of June, and he expects negotiations to be concluded on August 18, just before the deadline.
Rutkowski commented that he is confident the deal will be signed, but added that at present he has limited influence on the pace of negotiations. "The ball is in the hands of ATI." The next stage is ATI's side of the offer, he explained.
The contract provides WZL, which has largely conducted contracts for the Ministry of Defense, with assignments to modernize, maintain and repair business aircraft.
He said that he could not accurately quantify the value of WZL's offset contract, but noted that the new business, which would continue even after the 10-year contract expires, will enable it to save jobs it would have had to cut otherwise.
In the middle of last week Elżbieta Guzek, director of the Polish-American Management Center at the University of Łódź, returned from a business trip to the University of Texas at Austin. Both schools are in the advanced stages of completing their technology transfer offset contract, which Guzek said could be sealed in the next few weeks, well before the deadline.
Still, though, for Guzek there is work to be done.
"We will be working the whole summer on this," she said, explaining that, besides a direct transfer of technology between the schools, UT Austin would also aid the University of Łódź in developing a master's program in information technology.
"The aim is that the whole region of Łódź should benefit," she said, noting that the technological and academic improvements from the offset agreement would spill over into the country's second largest city.
Leszek Rams, technical manager at the Institute of Aviation in Warsaw, is eager to see the offset agreement the institute plans to conclude with U.S.-based Pratt & Whitney come to fruition.
Pratt & Whitney, which is partaking in a number of offset contracts, is to establish a material test center at the Warsaw-based institute.
At present, the institute operates as a design, research and development center that completes work for the government and the local aviation industry.
"This technology transfer will improve our capabilities," Rams said. He added also that, once the institute has new technology in-house, it will be able to develop newer technology on the back of it.
He expects to have the contract signed in the next month or so.
But with at least three companies feverishly pursuing the offset-related business, some watching the events are critical of - among other things - how the government chose companies to be included.
"Everything was done in such a secret way," said Bohdan Wyżnikiewicz, head of the Gdańsk Institute for Market Economics' Warsaw office. "A lot of the companies involved seem to have strong political ties. I see this when I look at the list of companies. I am really disgusted."
Specifically, Wyżnikiewicz pointed out that it is probably not a coincidence that the University of Łódź was tapped to be an offsetee, when at the same time Łódź is Prime Minister Leszek Miller's constituency.
This is a charge the University of Łodz's Guzek does not deny. "Probably, sure. These things helped," she said.
Wyżnikiewicz added: "I don't like this environment."
However, he didn't paint the whole deal with the same brush, noting that whether or not most of the offset projects were politically motivated does not discount the fact that they will create jobs at a time of heightened unemployment. "Yes, this I cannot exclude: this program may help to save jobs," he said.
"But still I am not sure if choosing company 'X' over company 'Z' was the right choice," he said.
Jan Winiecki, chief economist at WestLB, said a key benefit of these offset projects is that they will be governed by the principles of a market economy.
"Unlike with EU funds, which are public, or nobody's money, the private companies will stop unprofitable projects from being pushed through," Winiecki said. "The fact that the money will come from private companies will ensure a higher level of pressure for efficiency."
He did note, however, at least one disadvantage.
"Offset is a form of barter and barter is inevitably less efficient than a cash transaction," he pointed out. But "in our situation it is not such a bad thing. It can create links and partnerships in technology and finance that otherwise the Americans wouldn't have bothered to get involved in, or wouldn't have had the opportunity to do so."
And thus, some of the intended beneficiaries take a levelheaded approach to the business advantages won by the government's pursuit of the military contract.
WZL's Rutkowski realizes that, whatever the critique and whatever the actual material benefit provided by Lockheed, the onus of success or failure falls on WZL.
"This is a business agreement," he said. "Everything in a business agreement depends on us - we're not getting it for free."
