CTO Newsletter

Main headlines from this issue

U.S. company sues Kuwait over offset bank guarantee – alleges fraudulent intent

A Louisiana shipbuilder has commenced legal proceedings in New York’s Supreme Court against the Kuwait Direct Investment Promotion Authority (KDIPA) and the National Bank of Kuwait (New York). United States Marine Inc. (USMI) is seeking an injunction to prevent KDIPA from triggering a bank guarantee for the discharge of offset commitments. Court documents allege fraudulent intent.

DR. Andreas Schwer out as SAMI appoints Saudi CEO

Saudi Arabia has replaced Dr Andreas Schwer as CEO of Saudi Arabian Military Industries (SAMI). Walid Abukhaled took over on April 23 as acting CEO. In a government-approved statement to the domestic media Schwer was damned with faint praise. “The decision of the Board of Directors was made after the assessment of SAMI’s achievements since its inception, which included...”

Malaysia: Zailani Safari’s contract terminated

The CEO of Malaysia’s Technology Depository Agency (TDA), Zailani Safari, has left the agency. Mohd Shahar Abdullah, the recently appointed Deputy Minister of Finance, communicated the surprise decision not to renew Zailani’s contract last month. Shahar was appointed March 10. Zailani left the agency on March 31.

Australia announces new AIC contractual framework to support SMEs – pledges stronger enforcement

Australia’s Minister for Defence Industry, Melissa Price, is planning to toughen the Australian Industry Capability (AIC) program. The move comes in response to shortcomings exposed by the COVID-19 pandemic. The minister said that COVID-19 is creating “unprecedented challenges” for the local defence industry and additional support is needed to support small businesses in the defence sector.

Former Finnish Air Force Commander: “Local fighter assembly not important”

Heikki Nikunen, a former Lieutenant General of the Finnish Air Force, has said that local assembly of fighter jets is not an important part of the country’s HX Fighter Program. The HX Fighter Program will see Finland procure new fighters to replace its ageing fleet of Hornet jets at a cost of €7bn-10bn.

Main headlines from this issue

What’s wrong with India? “Draft DPP 2020 is a step in the wrong direction in so many ways”

U.S. contractors are overwhelmingly disappointed with India’s draft Defence Production Policy (DPP-2020), reviewed in CTO 7 dated April 6. The general consensus is that the draft adds yet further complexity and confusion to India’s offset policy while lowering multipliers and raising indigenous content quotas. “I’ve honestly not heard a single positive thing from [U.S] industry...” Indian government officials are equally confused.

Turkey allows temporary extensions - claiming cancellation could lead to dispute

Turkey’s Presidency of Defence Industries (SSB) is allowing obligors to extend the performance periods of offset contracts because of the effects of COVID-19. The government has passed Memorandum No. 2020/5 to allow contractors whose contracts have been temporarily, permanently, or partially affected, or are absolutely impossible to perform because of the virus, to apply to...

Poland passes emergency legislation for ongoing offset contracts

An emergency bill presented to Poland’s parliament will allow contractors with offset commitments to claim extensions to performance periods because of the COVID-19 pandemic. The lower chamber has approved Bill No. 330, entitled “Special support instruments in connection with the spread of the SARS-CoV-2 virus”. The upper chamber was due to pass the bill, possibly with minor amendments, as we went to press.

U.S. Trade Representative identifies countries with offset programs that are “areas of concern”

The Office of the United States Trade Representative has named the offset programs of numerous countries as areas of concern. Several countries are said to attract particular disquiet because of their effect on U.S. contractors. They include the UAE, Canada, India, Israel, Turkey, and Greece.

KPMG characterises “changing developments” in Australian policy

Mike Kalms, a partner at KPMG Australia, has warned contractors that the government’s approach to the Australian Industry Content Policy (AICP) is changing, and that the “good old days” no longer exist. Kalms told the Australian Manufacturing Forum...

Main headlines from this issue

India: DPP 2020 pushes local content, changes multipliers, adds new discharge category

India has released a long-awaited draft of its new Defence Production Policy (DPP). Weighing in at over 740 pages, the document has revised the country’s offset guidelines, making significant changes to the Make in India defence procurement categories, indigenous content levels, and multipliers. Thresholds, quotas, penalties, performance periods, and a high level of general confusion remain unchanged. The unending categories and sub-categories read like a struggle between Holmes and Moriarty.

India: DOMW still investigating $1.2bn of credit claims; “very few takers” for technology transfers

A report from India’s Parliamentary Standing Committee on Defence predicts that sellers will have discharged offsets worth $11.8bn by 2024. India signed 54 offset contracts between the program’s inception in 2005 and October 31, 2019.

New report on Australian submarine project: “local content includes lunches at resort hotel”

A new report by Insight Economics has criticised Naval Group’s level of local content on Australia’s Attack-Class Submarines contract. Insight Economics, commissioned by the lobby group “Submarines for Australia,” has called for Canadian-style Industrial and Technological Benefits obligations on future procurements.

South Africa warns of tighter local content monitoring – “bid prices have been manipulated”

The South African Department of Trade and Industry has warned that it will intensify auditing of local content claims. The warning comes amidst alerts of a number of problems with the administration of the policy. Some state bodies have advertised for tenders without local content requirements and have failed to properly evaluate bids and tenders in line with requirements.

Israeli bus offset saga comes to a sad end for ICA

The long-running conflict between Israeli ministries over the use of offsets in public transport tenders has finally drawn to a close. The court ruled that the state is not obliged to impose reciprocal procurement demands on public transport tenders.

Main headlines from this issue

Royal Thai Air Force introduces “Purchase and Development” provision

The Royal Thai Air Force has released a white paper introducing industrial participation. The white paper says the Purchase and Development (P&D) approach will be adopted for key RTAF project requirements over the next ten years (2020-2030). P&D focuses on technology transfer, RTAF capability enhancement, local content, and support for the domestic defence industry with materiel development.

Israel: Inter-ministerial offset spat continues: mediator resigns, tenders stuck

A long-running clash between the Israeli Ministry of Economy and the Ministry of Finance, and involving the Ministry of Transport, over the use of offsets in civil transport tenders is continuing. Projects are facing further delays. A mediator threw in the towel after only nine days.

Denel seeks offset service providers

South African defence manufacturer Denel Land Systems has issued a tender to establish a pool of third-party service providers to assist with its global portfolio of obligations. The selected candidates will need to compile feasibility studies and business plans for Denel to execute its contractual offset obligations.

On or off? Conflicting reports on status of Russo-Indonesia jet barter

Contradictory reports emerged in mid-March regarding the possible cancellation of a deal by Indonesia to procure Russian fighter jets under a countertrade arrangement. Bloomberg reported the U.S. government has forced Indonesia to abandon the deal under the threat of sanctions, while Defense World.net reported that the deal is still on, but delayed by the complexities of the barter element.

Mexican company barters corn for Venezuelan oil

Libre Abordo SA, a privately owned Mexican company with no prior experience in the oil trade, has begun bartering corn and water trucks with Venezuelan state-run oil company Petróleos de Venezuela, S.A. Libre Abordo has so far taken 6.2 million barrels of Venezuelan heavy crude for resale in international markets and has two more cargoes of oil and fuel due to be loaded this month.

Main headlines from this issue

DAPA re-defines its offset criteria, encourages “novelty value” projects

South Korea’s Defence Acquisition Program Administration (DAPA) has redefined its process of determining offset requirements for each of its programs. The organisation has also added logistics and MRO activities to its ‘A’ list. The guidelines, published with an English translation, have grown from a mere 402 pages to 406.

MALAYSIAN offsets - Prime Minister has a senior moment

The Malaysian Prime Minister, Dr Mahathir Mohamad, 94, found himself in hot water over a remark suggesting alleged bribes paid by Airbus to two Malaysian airlines were in fact legitimate offsets. Less than 24 hours later, he backtracked. His office released a righteous storm of protest insisting that Mahathir did not at any point suggest that. For unrelated but unexplained reasons he then resigned abruptly as prime minister.

Germany lays framework for using Article 346 TFEU

The German government has published a new strategy paper that defines key defence technologies. The paper also lays the groundwork for the use of Article 346 TFEU to allow locally restricted procurement tenders. The new paper is designed to safeguard essential national security interests. The move was forecast in CTO 3 after domestic industry criticised the decision to use a Dutch shipyard.

Naval Group executive faces Australian anger as local content target fades

Naval Group Australia’s CEO, John Davis, has won a rebuke from the Australian Department of Defence (DoD). In an interview published in The Australian Davis stated that local content on the AUD80bn ($59.5bn) Attack-class submarine project may not reach 50 percent. The French company is encountering difficulties with local suppliers and says the capability of these defence suppliers is falling short of expectations.

Australia warns UK that building frigates is for its national industry

Tony Dalton, the head of National Naval Shipbuilding in the Australian Department of Defence (DoD), has warned the UK government that it must maximise Australian industry involvement in the Hunter Class frigate program. Dalton reminded the UK government it must honour its commitment to include Australian companies in the program and that it was not to be used simply to prop up British shipbuilders.

Main headlines from this issue

Modi hails defence manufacturing success amid U.S. offset criticism

India’s Prime Minister Shri Narendra Modi has hailed the country’s success in developing a local defence industry. He made the comments in a speech inaugurating DefExpo 2020 in Lucknow. Attendees, including the U.S. Ambassador, were less impressed. They’ve called for changes to the country’s offset guidelines...

South Africa’s DTI to amend offset guidelines, make pharma companies compliant

UK company accuses Chinese investor of tech theft

British precision-engineering company Smiths (Harlow) has accused a Chinese investor of stealing its intellectual property following a tech transfer-for-investment deal. The allegation resonates with criticism that Beijing supports the state-backed theft of intellectual property and forced tech transfers.

Poland’s F-35 deal: an offset in all but name

Poland’s Minister of National Defence, Mariusz Blaszczak, has signed an agreement with Lockheed Martin for the delivery of 32 F-35 multi-purpose jets. In accordance with earlier announcements, the government said the deal does not include an offset agreement. The price has been reduced instead.

Five OEMs respond to Finland fighter RfQ

Finland’s HX Fighter procurement program has entered its evaluation phase after five contenders responded to a revised Request for Quotation (RfQ). Finland requires 30 percent industrial participation, valued approximately at €2bn-€3bn.

Main headlines from this issue

Romania flouts defence directive, credits commercial offsets

Romania is still accepting indirect (commercial) offset projects despite Directive 2009/81/EC. Several defence contractors and service providers have told us of commercial projects with Romanian industry for which they have received offset credits. One contractor said: “Long may it continue.” Romania’s newly elected government removed the president of the Offset Office...

Brazil introduces “informatics law” with multipliers – tax breaks for compliance, penalties for non-compliance

Brazil has introduced an “Informatics Law.” The law provides tax incentives and regional multipliers for investment in R&D in the IT sector. Investments are mandatory for both foreign and local companies with a production unit in Brazil. The legislation is highly complex and published in Portuguese...

Germany to rely on Article 346 TFEU to favour domestic naval shipbuilding

Officials in Germany are finalising a policy to steer defence contracts to local shipyards. The move comes after the Bundeswehr awarded Damen the $6.7bn MKS-180 tender to build four frigates for the German Navy. Domestic industry criticised the decision to use a Dutch shipyard. The plan is to...

Australia to obligors: “We’re watching you!”

Australia’s Department of Defence has warned contractors that it is monitoring how they discharge their commitments. Melissa Price, Minister for Defence Industry, said the DoD will launch an assurance/audit process to check whether companies are leveraging Australian supply chains rather than using their own foreign supply chains.

Australian audit reveals submarine is project high risk

A new report by Australia’s auditor-general highlights technology transfer and local industry participation as key risk factors in the Future Submarine Program. The program has faced extensive delays. The audit report reveals that the DoD secretly considered walking away from the French submarine deal during protracted and at times bitter contract negotiations.

Main headlines from this issue

Swiss Parliament Settles Air 2030 Fighter Quota, Opens Rift between Armasuisse and Grpm

After months of dispute, both chambers of Switzerland’s Federal Council have agreed on the offset policy for the forthcoming CHF6bn ($6.17bn) Air 2030 fighter procurement. Armasuisse and a regional trade association are already arguing about what the policy means.

Turkish companies plan to avoid U.S. sanctions, transfer F-35 industrial participation to Bulgaria

Turkish defence manufacturers are considering moving production out of the country in an attempt to avoid a U.S. block on their participation in the F-35 global supply chain. American sanctions have targeted Turkey, but not specifically Turkish companies, according to...

Canadian Lawyer: “ITB policy is arriving at misleading conclusions”

A Canadian public procurement lawyer and former counsel for Public Services and Procurement Canada, has criticised the country’s Industrial and Technological Benefits (ITB) Policy. Innovation, Science and Economic Development (ISED) Canada’s assessments of offset policy beneficiaries were wrong, she said.

Polish MoD says F-35 benefits are not worth the cost

Poland’s defence ministry has recommended that the country not demand an offset agreement for the F-35 program. The MoD estimates that the move would save up to $1bn, although Polish industry would forfeit the ability to acquire advanced technologies.

Four nations consider gold, barter trade to beat sanctions

Iran, Malaysia, Turkey, and Qatar are considering trading among themselves using a countertrade structure backed by gold. The purpose would be to hedge against the imposition of any future economic sanctions. The initiative is being led by Malaysian Prime Minister Mahathir Mohamad.

Main headlines from this issue

Saudi lawsuit against Textron reveals confidential preparations to discharge offsets for cluster bomb contract

A three-judge panel on the U.S. appellate court has ruled in favour of Textron Systems Corporation in a case that revealed controversial offset details. The court decided that Arabian Support and Services Co. (ASASCO) could not require Textron to pay for offset services.

Saudi Arabia passes new local content regulation

Two new laws amending the Saudi government procurement process in the commercial sector took effect on December 1. The laws impose local content requirements on contractors. Preference will be given for Saudi SMEs and publicly listed companies.

CTO investigates Russia’s offset regime

A legal review of Russia’s offset legislation, commissioned by CTO, reveals that although there are no examples of offset contracts concluded under Russian law in the public domain, state defence contracts may contain contractual commitments, including offset requirements, that go beyond current Russian legislation on government procurements.

Contractors in Australia could face local content audit

Foreign defence contractors working on large projects in Australia are facing the prospect of an audit by the Australian government on their use of local content, according to reports. The audit is in response to criticism from industry for the perceived failure to ensure the involvement of Australian companies in large procurement projects.

Australia begins releasing SICP implementation plans

The Australian Department of Defence has released the first two of its Sovereign Industrial Capability Priority Implementation Plans (SICP). The plans are integral to the country’s Australian Industry Capability (AIC) program.

Main headlines from this issue

Air2030 fighter jet procurement: offset quota on a Swiss roll

Switzerland’s National Council has lowered the offset quota for its Air2030 fighter jet procurement from 100 percent to 60 percent. The final quota may be somewhere in between. The National Council rejected minority proposals for quotas of 20 percent, 50 percent, or no offsets at all. The latest decision also contests the former allocation for 40 percent of offsets in commercial projects which would have satisfied the regional requirements.

Korea: “Bring the lawyers”

South Korea’s approach to its offset policy changes frequently, remains in flux, and tends to confuse. The country’s Defence Acquisition Program Administration (DAPA) now focuses on job creation and defence industry growth—industrial cooperation, not offsets...

Malaysia: “Palm oil barters are not a pr problem for defence companies”

Malaysia’s Technology Depository Agency, the management authority for Industrial Collaboration Programs, is moving away from asking for conventional offsets towards an industrial cooperation policy demanding sustainable business. Also: “Countertrade is more or less like a safety net for us, so we use it when required”...

Australian industry association calls for penalties

The Australian Industry & Defence Network, a defence industry trade association, has called for an urgent review of the Australian Industry Capability (AIC) program. The association is concerned about a lack of local workshare. The AIDN also called for the introduction of enforceable commitments with penalties.

PwC presents India’s forthcoming policy changes

Captain Vishal Kanwar, Director Aerospace and Defence at PwC India, predicted that the new Defence Production Policy (DPP) due to be published in 2020 will permit contractors to discharge offsets through investment in specified projects. The projects will be divided into A, B, and C categories. Each category will qualify for different multipliers.

Main headlines from this issue

Canada’s VP approach has no cap – ITB commitments may exceed 100 percent

Commander Walt Nolan (retd), a Lockheed Martin Canada executive responsible for delivering Value Proposition commitments for the Canadian Surface Combatant and several other major programs, led conference delegates on a charge through Canada’s tortuous VP process. He warned contractors about “the monster” that is Canada’s VP approach...

Poland: “The offset law is not as inflexible as you think”

Defence contractors engaging in offsets in Poland should not take the country’s law literally, GOCA conference attendees were told. Government expectations of offset differ from the law. The divergence is causing confusion. “What you read [in the law] actually is fairly significantly removed from the reality of how offset functions in Poland,” explained...

Turkey: Defence contractors with obligations face double trouble

A number of Turkey’s NATO allies and other European countries have suspended arms sales to Turkey. Contractors are now left with the vexing question of how to respond to their country’s arms embargo. The restrictions may frustrate their contracts to export military equipment for offset obligations. Turkey has threatened to sue for breach of contract. Contractors might be able to declare force majeure...

Czech Republic calls for offsets – minimum quota 30 percent

Czech president Miloš Zeman has called for his country to use offsets on future defence procurements as the country lays out a new acquisition strategy.

“Israel pays 3 percent for defence offsets and nothing for indirects”

Israel’s defence offsets add only 3 percent to the procurement cost, and indirect commercial offsets have no additional cost at all, declared Ziva Egar, the CEO of Israel’s Industrial Cooperation Authority. Offset costs are linked to the ease with which contractors can fulfil obligations within the country, she explained.

Main headlines from this issue

Korea: DAPA’S offset banking credit policy explained

Korea’s Defence Acquisition Program Administration (DAPA) has started signing new offset banking agreements. DAPA will not require contractors using banked credits to make a performance bond or pay penalties for non-performance. The organisation will also favour contractors with banked credits in the bidding process...

Trade Association: “When a customer country demands offset, Germany should do the same”

The German government is firmly opposed to offset, but how does the country’s security and defence industry feel? Dr Hans Christoph Atzpodien, the Federation of German Security and Defence Industries’ CEO, is more positive. He has called for the German government to consider reciprocity for defence procurement. He wants the government to stop regarding offsets as a private industry matter.

Britain to remain captive to the Defence Directive

When, or if, the UK leaves the European Union, the country will remain bound by the EU’s defence directive. The 540-page agreement makes clear that the UK will remain subject to the directive at least during the transition period that will follow withdrawal. When this becomes more widely known, some people will have a full-blown anxiety attack.

BAE accused of evading IP commitment in Latvia

Latvia has accused BAE Systems of failing to fulfil a commitment to carry out repair services locally following Latvia’s acquisition of 123 used armoured vehicles. The allegation was made on the country’s public broadcasting service, LSM. A BAE spokeswoman informed CTO...

Mixed reactions as World Bank launches final draft “offset law”

The World Bank’s website was due to publish the final draft of a model law to ensure fairness, transparency, and accountability in offset deals as we went to press. Chantal Dagnaud, the European Club for Countertrade and Offset president, said: “It’s not a law as such. It’s a name.”