Shaping a new offsets policy for UK defence procurement
The UK Government is consulting on a new offset policy for UK defence procurement. Such a policy presents both opportunities and risks for the defence sector and supply chains in the UK, and for foreign-based defence contractors looking to participate in UK defence procurement. We set out here some of CMS’s international experience with offsets and our thoughts as to how the industry may wish to engage with this initiative.
What are offsets and how should they be used?
At the heart of this consultation is the objective of ensuring that when awarding defence contracts to foreign defence contractors, those contractors make commitments to support domestic industry and the wider domestic economy. This “offsetting” of benefits that would otherwise flow to the country procuring (i.e. in the case of the UK, if the defence spend from the contract was received by a UK company as opposed to a foreign company) can take different forms.
It can take the form of direct benefits associated with the procurement, but can also take the form of wider benefits that are not associated with the contract being procured.
The UK Government’s stated aim with an offsets policy for UK defence procurement is to strengthen the UK’s industrial base – especially those parts of the economy that are essential for national security or offer the highest potential for UK economic growth.
Having previously taken a policy decision not to explore formal offsets arrangements in defence procurement, the UK’s new Procurement Act 2023, effective from February this year, provides a framework within which such a policy can be developed. This includes giving the Ministry of Defence (“MOD”) maximum flexibility over its approach to defence procurement (the award of “defence and security contracts”).
Insights and experience on offsets
At CMS, we have an international defence team advising on many areas of defence law including defence procurement, export control and the use of offset agreements in other countries. This has included advising various defence contractors across multiple jurisdictions in their negotiations with national governments on offset agreements. This experience has given us a detailed understanding as to how offset policies differ from country to country, as well as identifying their strengths and weaknesses.
A key consideration for the UK Government will be that, in contrast to many other countries applying an offsets policy, the UK defence sector is already a relatively mature and developed industry sector. In designing a policy that is right for the UK, the UK Government should be focussing on identifying specific gaps in its national security and defence capabilities, as well as identifying the specific opportunities to leverage those capabilities and technologies into other sectors of the economy. This is an exercise that has been looked as part of the UK Government’s Defence Industrial Strategy (Making Defence an Engine for Growth) published in September, and is currently being considered as part of the development of a series of Defence Growth Deals. In addition to those strategic issues, it is also important to appreciate how such agreements need to be structured and deployed as part of any major procurement exercises, whether competitive or single-sourced. This requires complex contractual and procurement expertise.
By way of examples of some of our experience at CMS, our partners Wladek Rzycki and Patrik Daintry, both experienced in negotiating offset agreements in, respectively, Poland and the United Arab Emirates (UAE), share some of their personal insights:
Poland
In Poland, CMS has negotiated over 12 offset programs and also supervised the performance of the offset programmes; with the latter experience providing us with the unique perspective on how offset programmes should be structured efficiently and pragmatically. The Polish offset law is in line with the European Union rules and also the inherent limitations arising from the perspective of the European Commission.
The potential impact of offsets cannot be overstated. Arguably, the very existence of the offset model in Poland has contributed to the creation of the Aviation Valley in south-eastern Poland. The region is characterised by a high concentration of aviation industry companies, scientific and research centres and educational and training facilities. This is an area where multiple aerospace and defence contractors, including U.S. primes, have set up production and maintenance centres, including signature projects like the production of the Blackhawk helicopters at PZL Mielec, a Sikorsky Aircraft/Lockheed Martin company. The lessons learnt from the creation of the Aviation Valley could be valuable in terms of exploring an offset model for the UK.
The Polish model is not mandatory, instead being applied on a “case by case” basis. Only direct offsets are permissible and the model does not permit multipliers. The offset programme structures and related agreements are heavily negotiated - penalties are often required to ensure compliance with the offset programme. Our experience in Poland suggests that any UK model rules governing offsets will never be exhaustive enough to implement the accepted offset goals unless the procuring teams are provided with detailed guidance, outlining the consequences of choices made during the negotiations.
UAE
In the UAE, CMS has extensive experience advising defence contractors on offset arrangements, most notably the Tawazun Economic Program, covering strategy, contract drafting, compliance, credit claims and disputes.
The UAE’s offset regime, overseen by the Tawazun Council, is mature and has been a key driver in diversifying away from the hydrocarbon industry. The regime centres on mandatory economic value creation tied to defence procurements and measurable key performance indicators that prioritise strategic sectors such as advanced manufacturing in the aviation sector, defence industrialisation, technology transfer, and SME capability building.
Some unique characteristics of the UAE regime include a requirement that the defence contractor must satisfy an offset obligation amounting to 60% of the contract value which it enters into with the UAE, a threshold of approximately USD10m before any offset obligations are required and an unconditional, on-demand bank guarantee equal to 8.5% of the offset obligation.
The Tawazun Council also deploys multipliers to defence contractors’ offset obligations rewarding defence contractors who focus on higher local UAE content, export orientation out of the UAE, IP development in the UAE, and Emirati workforce development.
For the UK consultation, helpful features that could be of interest include outcome-based crediting linked to national industrial priorities, transparent and predictable multipliers, early project pre-clearance, rigorous—but practical—monitoring, flexibility mechanisms that encourage consortium projects and indirect offsets where these demonstrably build domestic capability (either in the defence industry or key industrial priorities to the UK) and export competitiveness. Further any remedies against defence contractors for non-performance should be fair and prioritise remediation over excessive penalties, in order to sustain defence contractors’ participation in offset projects.
Responding to the consultation
We are currently engaging with clients in the sector on responses to the consultation. Responses are due by 23 December 2025. Designed and implemented well, there are real opportunities and benefits to introducing an offsets policy. There are however also potentially significant risks with any poorly designed and/or poorly implemented offsets policy. It is therefore important that the industry engages with this initiative, bringing its experience with different foreign country offset models and identifying the opportunities for effective offsets and how they could support the UK Government’s aims, and specifically:
- supporting UK industrial growth by driving investment into the domestic defence sector;
- enhancing strategic outcomes such as greater SME participation in defence supply chains, skills development, innovation, and supplier resilience;
- strengthening international partnerships and industrial collaboration delivering measurable economic benefits to the UK taxpayer; and
- adopting a proportionate approach to requirements, with active consideration of the competitiveness of the UK’s defence industry and particularly of SMEs and non-traditional suppliers.
