Chapter 5: The industrial dimension
Quite apart from the occasional truly enormous project such as the JSF acquisition (discussed in the previous chapter), Norwegian defence procurement involves everything from small local purchases of office supplies to more “routine” multi-million dollar contracts for ships, aircraft and weapons systems as well as a range of major building and construction projects. Procurement in the defence sector is divided into two main categories. The first, systems and equipment, includes weapons systems, aircraft, vessels, vehicles, ammunition and communications equipment, computer systems, office equipment, clothing, etc. This category also includes the procurement of provisions, furniture and fittings and the purchase of services not directly associated with building and construction (e.g., washing and cleaning, printing, consultancy fees). The second category, building and construction, covers permanent facilities including fortifications and other installations, complete with fixtures and equipment, and all expenditure incurred either as capital investment or running costs. Building and construction costs can in turn be subdivided into two main groups: nationally financed projects and programmes commonly funded through the NATO security investment programme. Many of the building and construction contracts are awarded to Norwegian companies. Defence contracts are placed with Norwegian suppliers wherever possible; but Norway does not have the necessary resources to maintain a national defence industry capable of meeting all its defence requirements: a great many deals therefore involve foreign defence contractors. Access to the international defence market is not easily obtained. In order to maintain a national defence industry, the Ministry of Defence emphasizes its commitment to industrial cooperation agreements (ICAs), also known as offset agreements, when placing major contracts abroad. | ||||
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KNM Fridtjof Nansen, the first Fridtjof Nansen class frigate, in the Gulf of Aden off Somalia | ||||
Offset agreements Investment in the development of high technology products has contributed to the healthy growth and high levels of competence in many Norwegian industrial sectors. The national policy is therefore to continue to encourage this positive development through measures including the placing of research and development contracts with Norwegian defence companies. The defence authorities encourage Norwegian companies to compete in the international defence market not least because this helps to maintain a robust technological and industrial environment. In this way the Norwegian defence industry can sustain its ability to meet the future needs of the Armed Forces for technologically advanced systems and equipment. This policy inevitably means that defence exports involve some difficult choices between conflicting interests and objectives. The trend towards more technologically advanced equipment requiring substantial R&D investment means that the procurement of defence equipment from abroad is likely to remain at a high level. The Ministry of Defence will continue to require ICAs, offset purchase arrangements, in the case of major contracts with foreign suppliers. Offset contracts must be such as to bring new technology to Norwegian industry. An additional policy objective is the establishment of strategic alliances aimed at long-term cooperation between Norwegian and foreign companies in R&D and in the production of high technology equipment. Levels of expertise Specific areas of particular interest in this context include:
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Growth area: underwater security systems and technology | ||||
Defence-related transactions in certain technologies – material, maritime, information and communications, medical – may also satisfy the criteria for offset agreements. A transaction may qualify as offset if the overseas supplier conducts, or is involved in, the setting up of offset transactions that are advantageous to Norwegian industry. Such transactions must fall within those areas of defence technology to which Norway allocates priority or in some other areas of relevant dual-use products. The level of technology must be equivalent to, or higher than, the level of technology employed in the product supplied to the Defence Forces. As the nature of armed conflict evolves, the demand for research expertise increases. In this context, offset transactions include procurement of weapon systems, subsystems, individual weapons, or components for any of these, and the promotion of industrial cooperation through the acquisition of Norwegian products. Other qualifying transactions might include R&D cooperation, transfer of technology and knowhow, investments which result in new commercial activity in Norway, and the creation of new export markets or the improvements of existing export opportunities. However, the further development of established business relationships is not normally assessed for offset value. Low-technology finished goods outside the priority areas, raw materials, semi-manufactured goods, and services are not often regarded as offset, although exceptions may be made for high technology, partly finished products as well as for engineering projects and related R&D services. Ethical considerations also play a vital role in Norway’s procurement policy, in particular issues related to prudence, non-disclosure and conflict of interest.
Codes of conduct The defence procurement authorities aim to set a leading example in their compliance with national and international safety regulations in all aspects of their activities. The Armed Forces are therefore expected to press suppliers to deliver products which are safe to use, cause minimum harm to the environment and have been produced using environmentfriendly methods. No procurement is to be undertaken without prior clarification of the environmental effects. Identifying an offset transaction is a complicated business. Does the product in question fall within a priority area, for example, or is it a finished product which is supplied to the Defence Forces? Has the product or the production technology been developed in Norway? Then it must be established whether any competitive Norwegian industry exists, whether the technology is new in Norway, what significance the transaction will have for Norway or for the future of the Norwegian company involved. Will the investment be used for production, development, or as production funding including testing equipment? Will the anticipated turnover be achieved through exports? These are just some of the most obvious criteria to be covered in negotiating an offset agreement. In addition to the Ministry of Defence, the main government players in the industrial cooperation (offset) process are the Norwegian Defence Logistics Organization (NDLO) and the Norwegian Defence Research Establishment (FFI). The ministry has the overall responsibility for negotiating the industrial cooperation agreement and following it up during its lifetime. The ministry signs the agreement before or at the same time as the main procurement contract, and pre-approves individual industrial cooperation activities relating to existing ICAs. It is also responsible for coordinating bilateral issues with the NDLO, on behalf of the ministry, is responsible for following-up the reporting and calculating requirements of the ICAs. The agency evaluates the annual claiming reports and issues the annual formal approval letter, updates the status and the history of each ICA and advises the ministry regarding new industrial cooperation proposals. With an advisory and supporting role related to new ICAs, NDLO serves as a focal point for all involved in the process. FFI has an advisory and supporting role, evaluating the technological level in specific industrial cooperation proposals while participating in negotiations. | ||||
