Offsets: Under Fire Down Under

Multinationals doing business with Australia have an effective way to maintain profits: They are quietly reneging on agreements made with the country under its offsets program.

Under the program, which was initiated by the Australian government in 1970 to help offset its imbalance of trade and lessen its dependence on foreign corporations, a company under contract with the government must redirect a certain percentage of the value of the contracted work into the country. Many countries try to make similar agreements with foreign companies. So far in Australia, however, the program has met with poor compliance.

About 2 billion Australian dollars ($A2 billion) has been committed to Australia in offsets, but only $A I billion worth of business has been scheduled-and less than $A400 million worth of business has actually been completed. U.S. companies are some of the worst offenders. A report released in February by the Australian Department of Defense Support (DDS) reveals that U.S. corporations., or their Australian subsidiaries, have offsets obligations totalling over $A7(>0 million to the DDS alone. These include McDonnell Douglas ($A370 million), General Electric ($A 104 million), Lockheed ($A101 million), and Hughes Aircraft ($A52 million).

Like many countries, Australia lacks the resources and expertise to domestically manufacture certain "high-tech" products. It has historically relied on non-Australian multinationals to provide commercial and military aircraft, communications equipment, and a host of other products. The government spends $A 1-$A 1.5 billion each year on these products of overseas corporations.

The offsets program was designed to combat this drain of capital. Under the program, an overseas supplier receiving an order in which the Commonwealth Government is involved must direct work worth 30 percent of the value of that order back into the country. (There are exceptions where the requirement can be waived or modified.) The program further requires that the domestic production be such that the Australian producer will gain expertise in "comparable . . . areas of technology" that will eventually allow independent Australian production.

The benefits of the program are clear. First, the government addresses the trade imbalance directly by retaining a portion of the costs of imports in the country. In addition, the

II comparable technology" Clause provides for expansion of domestic technological expertise, eventually decreasing imports and potentially increasing exports.

In Australia, offsets are required for all purchases worth over $A I million in which government funds are expended: the government is involved in the purchasing decision-, the purchasing firm has the government as a partner, shareholder, or joint owner; or the purchasing firm uses loan funds guaranteed by the government. Offsets commitments can be satisfied by the overseas supplier in several ways:

• by arranging for the manufacturing of certain assemblies, or parts, in Australia (keeping within the "comparable technology" clause);
• by arranging for the Australian manufacturer to participate in the conceptual, design, development, and production stages;
• by purchasing, or marketing to third parties, certain Australian products; or
• by participating in the transfer of technology "over and above that inherent in the contract . . . "

The Australian business community is upset by the multinationals' intransigence, and even some members of the Australian government believe that the companies don't simply ignore their responsibilities under the program, but go to extravagant lengths to circumvent them. One of the avoidance tactics, for instance, involves offering Australian companies orders for uneconomic production runs. Multinationals can also avoid offsets by disclosing bids of Australian companies to non-Australian sub-contractors, so that the Australian companies can be underbid (the program allows exceptions to offsets requirements where Australian bids are uncompetitive). And some make it difficult for Australian companies to compete by demanding higher standards than they demand from their usual sub-contractors.

Some of the multinationals deny that they purposely undermine the government's program. "You can't put those people on anymore," one General Electric employee says. "They've gotten sophisticated -you ignore them at your own peril."

Others are more frank about the multinational companies' distaste for offsets. "No company is going to be wildly enthusiastic over them," says Joel Johnson, Vice President for Economic Affairs at the American League for Exports and Security Assistance (a group which represents American defense contractors and labor unions). Johnson points to merchandizing agreements, where the overseas supplier markets a country's product, as one reason why. "If a country doesn't have trouble with a product, it doesn't need offsets to sell it," he argued. He believes that offsets agreements are used by countries to "dump" products they are unable to sell otherwise.

The Australian government itself has contributed to the low compliance with offsets terms. Because of poor recordkeeping, some non-Australian multinationals have been granted offsets credits they didn't deserve. And the government has been inconsistent in its application of the program: Some offsets arrangements have been for as little as 10 percent of the contract value, instead of the required minimum of 30 percent. Other problems include sole-source procurement policies that limit the government's ability to negotiate the best offsets agreements by reducing competitive bidding on contracts; the program's exemptions, which encourage corporate recalcitrance; and the absence in contracts of a stipulation linking payments by the government to satisfactory implementation of offsets commitments. Finally, the Australian government has simply relied on the "moral obligations" of overseas corporations to comply with the offsets policy in situations where a legally enforceable obligation cannot be applied, such as the purchase of military equipment through the U.S. government.

But whatever the administrative shortcomings of Australia's offsets program, the "less than enthusiastic" attitude of U.S. corporations threatens much more harm. This attitude is reflected in the statement of one industry representative whose clients do business in Australia. "In offsets," he said, "in the long run you're dead. You're creating your own competition."

With companies clearly eager to avoid offsets, it is up to the Australian government to come up with ways to implement the program effectively. Under Prime Minister Robert Hawke, there are signs that the program will in fact be enforced more vigorously than it has been under previous governments. A study was commissioned in February to review the administration of the offsets program, and a report is scheduled for December. The Australian business community and labor leaders are waiting to see if the government will take the necessary steps to achieve the full benefits of the program. %,

Louis Nemeth is a Washington D.C.-based freelance writer.