Turkey’s defense industry exports have largely been possible through offset arrangements made with foreign arms suppliers. Defense offset agreements, as legal trading practices in the aerospace and military industries, are widely used by many countries as a means of bringing some of the foreign currency going abroad back to the country through arms procurement deals to strengthen local industries through a work share to be given to local companies in a defense project. Yet Turkey’s heavy reliance on offset arrangements in its defense exports, among other things, is hindering its defense industry companies from becoming globally competitive companies.
It is difficult to say that Turkey has used offset commitments in a rational manner to build a stronger local defense industry base. Instead, offset commitments pledged by foreign contractors are sometimes realized in areas such as building additional military headquarters within military compounds instead of focusing on creating technology-based infrastructure.
In essence, offset agreements are protectionist and distort competition.
Hence, any country that receives defense offset commitments must govern these pledges in a transparent and rational manner, minimizing the effects of protectionism, which hinders defense companies from competing at a global level.
Turkey has not yet been able to utilize offset pledges made by foreign contractors to strengthen its defense industry base through the production of critical military technologies despite some of the efforts to this end which have been under way lately.
Defense Minister İsmet Yılmaz emphasized in a November 2013 speech the importance of offset arrangements with foreign contractors for the development of local industries and for the industry to receive work share as well as for defense exports.
According to figures he released, Turkey’s total defense and aerospace turnover reached $4.75 billion as of 2012 while its exports exceeded $1.26 billion.
Turkey’s exports, however, would have been well below those figures stated above without its offset commitments with foreign arms suppliers.
At the end of the day, Turkish defense industry companies are only being fed with offset arrangements and are not encouraged through state policies to create an export industry based on high military technologies.
Turkish companies have been turning into monsters being fed by offsets instead of the country producing global companies.
As a matter of fact, according to a report released by the Turkish Union of Chamber and Commodity Exchanges (TOBB) on March 15, there were only five defense industry companies out of the 500 largest Turkish companies and only one defense company out of the 100 fastest growing Turkish companies.
One of the recipes for Turkey to create global defense industry companies is through the privatization of military-owned defense companies, including Aselsan, Roketsan and Havelsan as well as the Turkish Aerospace Industries (TAI).
However, the government’s long-time plan to privatize a large portion of the nation’s defense industry companies and increase efficiency through new competitive bidding processes which could force the liquidation of firms that fail to compete faces opposition from the military. The privatization policy was intended to improve the efficiency of these military firms through downsizing and opening them up to competition.
The current unaccountable status of 18 Turkish military companies, whose shares are partly or fully owned by the Foundation to Strengthen the Turkish Armed Forces (TSKGV), stands as a big hurdle to privatization. Added to the problem is the absence of real will within the government to bring these companies under civilian oversight and to finally privatize them.
As a report released by Sweden-based Stockholm International Peace Research Institute (SIPRI) in March of this year and written by Professor Nurhan Yentürk pointed out, these 18 military companies — whose military spending is not available either — operate according to the law for private commerce but are managed by public officials, namely the TSKGV’s board of trustees consisting of the defense minister, the deputy chief of General Staff and the undersecretary affiliated with the defense minister.
The government’s legislation from February of this year introducing non-defense commercial offset agreements — a practice that runs contrary to international free trade regulations — in the meantime, has the potential to cause a headache for Turkey in its international trade dealings.
It remains to be seen whether the government will finally implement a privatization plan for defense companies while facing serious accusations of corruption and bribery, some of which are linked to the privatization process of civilian local companies.