Ladies and Gentlemen,

It is a great pleasure for me to participate at this symposium on Defence procurement and industrial offset. The Ministry of Defence is responsible for both the procurement and the offset agreements. However, the defence procurements are large and technologically advanced, and they have a general influence on the Norwegian industry. This is why the Ministry of Trade and Industry is interested in the development of the defence sector, and I guess this is why I am here today.

The defence market is not a market of free competition. This is historically based on the governments’ need to secure a sufficient supply of defence equipment even in periods of crisis or war. Although national security reasons are also present today, they are less significant, and I believe technological and industrial reasons are hidden behind the “national security” argument.

As long as the countries are free to favour their national industry, the market is far from being free and open. We have a situation with a market imperfection.

Favouring the national industry when procuring is the first step, entering into barter trade or offset agreements is the next. But why?

Let me first say that I am convinced, as is the present government, that free markets are best left alone without any interference from the government. The market, supply and demand, will then make up the correct price and secure the most efficient use of resources. However, the defence market is not based on free competition, and the countries have adapted to the situation by entering into offset agreements.

The main argument is to secure market access. The offset agreements grant access to the otherwise closed defence market. The larger countries can produce most kind of defence equipment themselves, and they purchase the equipment in large quantities, which keeps the price at a reasonable level. The smaller countries purchase a lot of the defence equipment abroad, and through offset agreements their defence industry is granted access to the larger markets. This applies to Norway as well. To maintain a defence industry at all we need the offset agreements to open the doors to foreign markets.

Other arguments to use offset agreements are industry development, technology transfer, employment, the trade balance and need for foreign currency. Many of these arguments have been valid for Norway over the last decades, but today market access, industry development and technology transfer are relevant, and this is reflected by the offset guidelines.

Non-functional markets and government interference comes with a price, however. Firstly, with a free functioning market we would have had better products at a lower price. This would have applied to large countries as well as small. The offset agreements are probably not for free either. I have seen estimates that the price increases some five percent when we require offset agreements from the defence suppliers.

In return we get increased sales and production for our defence industry, industry development, technology transfer and development and access to international cooperation in the development of future defence systems.

Although the offset agreements represent means to level out the market imperfections of the defence market, it is hardly an accurate instrument. We are therefore interfering with the domestic labour and capital markets, and the chances are that the resources are not allocated optimally. This has a cost as well.

So we have imperfect markets today. What are my thoughts about the future?

To start with, I have seen no signs of change in the way the United States favour their national defence industry. In Europe there have been attempts to at least create free competition within Europe, but there has been little success.

There has been a restructuring of the defence industry, however, both within the United States and within Europe. Today there are fewer and larger companies, and many of them are international.

As regards offset agreements, there is no sign within our trading partners in Europe that these regimes are being relaxed. The tendency is rather the opposite. Many countries see the disadvantages of a defence market without free competition. But they also see that if they unilaterally abandon offset, they will lose their defence industry. This is valid for Norway as well. Any liberalisation of the market would have to be multilateral. I’m afraid I can’t see when this is going to happen, if at all.

Being stuck with the offset regime, at least we will try to be dynamic, and we should adapt our industry policy to best prepare our country for the future. The same applies to the offset guidelines, and I am aware that the Ministry of Defence will be initiating a revision of the guidelines shortly.

Without prejudicing the upcoming revision process, I would like to emphasize that we have an interest in the offset regime’s future and the industrial effects it creates. Elements like research and development, technology transfer, access for small and medium sized enterprises and access to international development projects will be discussed.

The offset policy has always created a lot of interest from a broad audience of industry and industry representatives. Some of the aspects that are brought to our attention are of particular interest.

One challenge is where to draw the line between the defence industry and the civilian industry. In other words, who can benefit from the offset agreements? Traditionally military products have found their way into civilian applications, but today we see that more and more civilian products get military applications. This is also reflected by the industrial structure, with the traditional defence industry serving the civilian market as well.

Another challenge is how to ensure the fulfilment of the offset obligations in an optimal way. And we may soon face the challenge of handling an offset obligation in connection with the purchase of new fighter aircraft. The size and impact of such an obligation can hardly be imagined.

We also have to consider the international restructuring of the defence industry. Will it be possible for our defence companies to survive as separate entities, or will they have to become part of larger industrial structures?

Even the regulated defence market is evolving, and the industrial consequences will be considerable. We must adapt ourselves to the changes, and make sure that we have the flexibility we need in our policies. This is to the benefit of industry and government. We have a common goal in maintaining a technologically advanced, sound and competitive defence industry in the future.

Thank you!