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Volume 2019
Main headlines from this issue
Dutch and Danish EC infringement negotiations get personal
Infringement procedures against Denmark and the Netherlands remain unresolved. The EC alleges that the two countries imposed unjustified offset requirements on procurements in breach of the defence directive. A senior Dutch official has blamed the intransigence of the European Commission’s director-general for the Internal Market. “The last time we spoke... she was very much still on the attack...”
Malaysia unnerved by palm oil embargo, promotes countertrade for civil and defence procurements
Malaysia’s prime minister, Dr Mahathir Mohamad, said China is likely to buy more palm oil from his country in exchange for his government’s decision to resume work on a Beijing-backed rail project. Defence minister Mohamad Sabu said discussions concerning countertrade are extending to Pakistan and Russia for defence equipment. The European Parliament is in the process of banning the use of palm oil in biofuels.
Czech firearms manufacturer establishes U.S. factory to overcome restrictive practice
Czech firearms manufacturer Česká Zbrojovka Group (ČZG) has announced that it will establish a factory in Little Rock, Arkansas. The plant, known as CZ-USA, will compete for U.S. military contracts. The Buy American Act requirements would otherwise prevent CZG from supplying the market.
Russia extends offset footprint from India to South America
Russian Helicopters is opening helicopter service centres in Brazil, Peru, Mexico, and India under offset deals related to the sale of helicopters. India has also approved an additional $1.93bn procurement of 464 Russian-made T-90MS main battle tanks. The tanks will be assembled locally.
Israeli ministries fight over reciprocal procurement
Israel’s finance and transport ministries have released a joint “position paper” outlining their opposition to the application of industrial cooperation quotas in public transportation procurements. They cite the increased costs involved. The Ministry of Economy does not agree that the policy should have exemptions.
Main headlines from this issue
Switzerland: “Tax returns outweigh offset costs”
Dr Thomas Friedli, a professor of Production Management at the University of St. Gallen, has delivered some good news. A study he had conducted found that in Switzerland the tax returns generated by increased economic activity balance out the offset costs. Offsets in the country, he argued, can yield a measurable profit.
ECCO submits model offset law for peer review
The European Club for Countertrade and Offset has completed a “concluding version” of its Model Offset Law and submitted it for peer review by United Nations Commission on International Trade Law (UNCITRAL). The amended document is similar to previous versions but the final four articles (Articles 31-34) have been removed...
Lawyer warns contractors to beware answering Transparency International questionnaire
Transparency International has released the final version of its questionnaire on which the Defence Companies Anti-Corruption Index 2019 will be based. The organisation is sending the questionnaire to 139 leading defence companies in 39 countries. The document contains four offset-related questions. A lawyer warns that in addition to potential competitive harm, making this information public could result in potential legal, contractual or commercial exposure.
Poland: Leonardo signs pre-offset agreement that Airbus declined
Leonardo’s UK subsidiary has entered a $100m offset agreement with the Polish Ministry of National Defence in advance of the anticipated sale of four AW101 naval helicopters. Airbus Helicopters withdrew from the tender to supply helicopters last December, citing unfavourable offset requirements.
Chinese decree changes technology transfer rules
China has passed a decree, No.709, which updates 49 pieces of legislation and includes notable changes to the way technology transfer is conducted within the country. The legislative changes are meant to show China’s willingness to address U.S. concerns regarding forced technology transfers.
Main headlines from this issue
Brazil adjusts policy guidelines: introduces countertrade, raises threshold
Brazil has changed its offset policy, uniting some aspects of the three different guidelines used by the branches of the armed forces. The threshold has been raised from $5m to $50m for cumulative procurements over a twelve-month period. Brazil has introduced ten potential ways to discharge obligations; countertrade options make up three of them...
Turkey: “SSB will reject all law 7161 applications”
Turkey’s defence procurement agency, SSB, has bowed to the inevitable. The SSB now accepts that Law 7161 provides obligors with a way out of their offset commitments. The agency has nonetheless informed CTO that it will reject all attempts by contractors to use the law.
Australia changes thresholds, demands both “schedules” and “plans”
The Australian Department of Defence has released its “Defence Policy for Industrial Participation.” The policy document changes the way thresholds are applied and distinguishes between schedules and plans when contractors submit industrial participation proposals. The new policy introduces a range of thresholds for defence procurements above $A4m:
Poland: PGZ clarifies Wisla offsets, finds no conflict with directive 2009/81/EC
The Polish state-owned holding company Polska Grupa Zbrojeniowa has outlined the offsets expected in the first phase of the Wisła medium-range air defence procurement program. PGZ said it felt obliged to clarify the situation because of inaccurate reporting by the local media. PGZ also criticized reports attacking the preparation for the offset negotiations and claiming a lack of technological capacity in Polish industry for absorbing offsets.
Algeria sets 30 percent quota, Leonardo agrees joint venture
Leonardo and the Algerian Ministry of National Defence have announced the establishment of a joint venture for the local assembly, sale, and support of Leonardo helicopters. Algeria also recently issued an RfP for military radios that included industrial participation of 30 percent of purchase value.
Main headlines from this issue
UAE: Tawazun’s policy is off the record – and that’s official
The Tawazun Economic Council has sent its new policy guidelines to contractors with offset obligations. The policy comes with a stern warning that contractors have described as “paranoid, secretive, and bizarre.” It read: For your attention only, shall be kept confidential in accordance…and may not be distributed, copied or otherwise sent to any agent or advisor…or to any 3rd party without the prior written consent of Tawazun. The document is reviewed below.
Tawazun’s policy enters a new phase
The UAE’s offset program will be more flexible in accepting project types, and has new credit parameters and area priorities, according to the Tawazun Economic Council. The policy, the agency claims, is value-focused, simple, and efficient to implement. Contractors’ views were generally positive, but with reservations about the low level of the multipliers. They also disputed its claim to simplicity…
Rahul Gandhi calls for Modi’s prosecution in wake of offset scandal
Rahul Gandhi, leader of India’s opposition Congress Party, has called for the prosecution of prime minister Narendra Modi, citing his handling of Rafale’s offsets. Meanwhile key evidence in the investigation is said to have been “stolen.”
Poland’s PGZ: “The U.S. doesn’t understand our Offset Act”
A board member of Polish state-owned company Polska Grupa Zbrojeniowa has expressed frustration with the U.S. as offset talks between the two countries drag on. PGZ is the main partner and exclusive offset recipient in the Wisła medium-range air defence procurement program.
Australia and Boeing to locally develop drone for export
Boeing has unveiled a new drone fighter under development in Australia with support from the Australian DoD. The drones will be initially be manufactured in Australia, both for use by the DoD as well as for export to international markets.
Main headlines from this issue
UAE: Tawazun’s new approach - remove mandatory outputs, simplify penalties, allow indirects
The Tawazun Economic Council is discarding a dusty economic mandate that has been the offset policy’s bedrock since 1992. Among the changes is the need for contractors to fulfil their obligations by generating profitable activities with a minimum level of input and output-based credits. Tawazun will also remove or simplify penalties for non-fulfilment, bank guarantees, and milestones...
India signs 21 offset contracts in three years
India’s MoD has announced that it signed 21 defence offset contracts with a cumulative value of approximately $5.67bn over the last three years. Last month a parliamentary standing committee on defence announced that India had signed 42 defence offset contracts since introducing the offset policy in December 2002, and had seen few returns.
Australia walks back 60 percent local content level in submarine deal
The Australian Department of Defence has signed a Strategic Partnering Agreement with Naval Group for the production of twelve “Attack-class” future submarines. Naval Group won the $A50bn ($35bn) tender two years, ago, but the SPA has faced significant delays.
Russian Helicopters identifies potential partners in India for the KA-226T
Russian Helicopters, a subsidiary of Rostec, signed five industrial participation MoUs with Indian firms at Aero India 2019. The parties agreed to explore the production of assemblies and components for the Ka-226T helicopter.
Venezuela offers India oil barter
Venezuela is open to barter payment arrangements with India as a workaround to U.S. sanctions, Venezuelan oil minister Manuel Quevedo said at a press conference in Delhi. Caracas currently buys medicines and other products from India and is looking for alternative payment methods.
Main headlines from this issue
Turkey’s SSB on Law 7161: “This doesn’t apply to us”
Turkey’s Savunma Sanayii Başkanliği (SSB) denies that Law 7161, effective since January 17th, provides obligors with a way out of their offset commitments. “Their denial, from a legal perspective, is not reasonable,” a lawyer told us. “It is not possible to say it does not cover offset agreements”.
Ukraine makes offset mandatory for defence procurement
Ukraine, which has an increasing need for defence materiel, has introduced legislation to make offsets mandatory for defence procurements. Ukraine used to require foreign OEMs to engage in assembly and parts production on an ad hoc basis.
Australian companies warned: Don’t gouge the taxpayer
Australian defence minister Christopher Pyne has warned Australian companies wishing to benefit from industrial participation not to charge unfairly high prices. “Our defence industry doesn’t have a green light for gouging the taxpayer,” he told companies that had failed to win contracts. “We’re not interested in building people’s second beach houses.”
Romanian union leader criticises lack of offsets contracts, blames corruption
Dumitru Costin, leader of Romania’s National Trade Union Bloc, has criticised the lack of offsets applied to Romanian defence procurements. He complained that according to contracts agreed with foreign prime contractors, offset investments worth around €750m have been pledged, but none have so far been executed.
European countries to establish joint Iran barter instrument
Germany, France and the UK (the E3) have established a joint Special Purpose Vehicle to circumvent U.S. sanctions against Iran. The vehicle is a barter mechanism.
Main headlines from this issue
New Turkish law allows obligors to void their offsets
Turkey has approved a law that can help suppliers dodge their offset obligations. The obligors need only prove that input costs have “unexpectedly increased.” Law 7161, effective since January 17th, maintains that all public procurement contracts, including offsets in both the civil and defence sectors...can be terminated if the manufacturing cost of the contract has unexpectedly increased. To terminate the contracts the contractors must...
Transparency International buckles under pressure – ADS leads the way
Defence companies have come out strongly against key sections of a draft Transparency International UK questionnaire. TI-UK distributed the questionnaire last year and has now published responses from defence companies. Most excoriate the NGO. The British defence industry organisation, ADS, held a “very constructive three-and-a-half hour meeting” with TI-UK on January 25th. Although the offsets discussions made up just a small part of the conversation...
CTO announces a new publication - The “CTO Global Offset Database”
CTO announces publication of a unique offset transaction record for the defence sector. The “CTO Global Offset Database” covers ten years to the end of 2017. The information has been compiled from analysis of data provided by SIPRI, and from CTO’s own extensive unique in-house archive. It is confined to commitments under defence contracts.
Israel sees increase in counterpurchases
Counterpurchase obligations levied by Israel on foreign contractors totalled NIS13.5bn ($3.68bn) in 2018, up 56 percent compared to 2017. The Industrial Cooperation Authority says that some 1,065 Israeli companies enjoyed benefits from the country’s industrial cooperation program in 2018, some 243 companies more than in 2017.
Korea: DAPA PUBLISHES PRIORITY OFFSET PROJECT LIST
South Korea’s Defence Acquisition Program Administration has announced a list of priority offset projects for 2019. CTO publishes the list.
Main headlines from this issue
Korea: DAPA clarifies the new offset policy
Korea’s Defence Acquisition Program Administration has clarified a number of issues in the country’s revised offset guidelines. The English translation of the guidelines, published on December 17th, left key policy changes open to misinterpretation. A DAPA official has written to us to clarify them.
“Downsizing India Rapid Reaction Cell is not a downgrade”
The U.S. government has downsized its India Rapid Reaction Cell (IRRC) but concerns about the reduction are unfounded, says Benjamin Schwartz, head of the US-India Business Council’s (USIBC) Defence and Aerospace program. The changes were made for internal reasons, he explained. The downsizing, combined with a move out of the Pentagon, sparked alarm...
“Downsizing India Rapid Reaction Cell is not a downgrade
The U.S. government has downsized its India Rapid Reaction Cell (IRRC) but concerns about the reduction are unfounded, says Benjamin Schwartz, head of the US-India Business Council’s (USIBC) Defence and Aerospace program. The changes were made for internal reasons, he explained. The downsizing, combined with a move out of the Pentagon, sparked alarm...
Greek F-16 offset demand sparks controversy
Greece’s main opposition party has confronted outgoing defence minister Panos Kammenos over an offset amendment in a deal to upgrade the Hellenic Air Force’s F-16 fighter jets. The amendment sparked corruption concerns. Mr Kammenos had previously pledged to end the use of offsets.
India’s Congress bashes Ambani over Rafale offsets
India’s governing BJP Party and opposition Congress Party continue to trade accusations over the choice of Anil Ambani’s Reliance Defence as the Indian Offset Partner for the procurement of 36 Rafale fighter aircraft. The Congress Party’s assault focuses on the rejection of Hindustan Aerospace Ltd (HAL).
Main headlines from this issue
Korea: DAPA’s contemporary offset policy leans heavily on exports
DAPA has unveiled long-promised revisions to its offset policy guidelines. The changes are designed to boost defence exports and create new jobs. Seoul introduced the country’s offset policy in the early 1980s. The revisions change the basis on which the policy has until now been sustained. Amid the fog of DAPA’s English translation we have identified a number of important amendments in the 402-page guidelines....
South Africa: DTI admits “No local content” on massive rail contracts
A South African government official has revealed that the government omitted localisation obligations from most projects for a huge Transnet rail contract. Popo Molefe, the newly appointed chair of Transnet, told a parliamentary committee that the contracts were “unlawful and irregular” from the beginning, and called for action to be taken.
EU tells China: “Forced tech transfer has to stop”
The European Commission, which oversees trade policy in the 28-member EU, has announced that it is significantly broadening and deepening the scope of its WTO action against China. European companies should not be compelled to transfer technology to gain access to the Chinese market, said Nicolas Chapuis, ambassador of the European Union to China.
Indian Supreme Court finds no favouritism in Rafale offsets
India’s Supreme Court has found no irregularities in the procurement process for 36 Rafale fighter jets from Dassault Aviation, and dismissed demands for an inquiry into the country’s decision to buy the planes. The deal has been subject to immense controversy in India concerning allegations of improper Indian Offset Partner choices, as well as high costs.
CONFERENCE DIARY 2019
CONFERENCE DIARY 2019 – eleven events listed
Volume 2018
Main headlines from this issue
Transparency International urges defence contractors to respond to intrusive offset questionnaire
Transparency International UK has released a draft version of a questionnaire for its Defence Companies Anti-Corruption Index 2019. The questionnaire focuses on a number of issues related to defence corruption, and includes four questions on offsets. The questions differ significantly from those asked for the Defence Companies Anti-Corruption Index 2015, the last edition of the publication.
The next issue of CTO will be published on January 7th
As the year draws to a close, all of us at CTO and QB would like to thank you for subscribing to our publications. We wish you a Merry Xmas and well in the New Year. The next issue of CTO will be published on January 7th, closely followed by the January issue of QB. Please check that your renewals are up to date.
Quebec premier criticises lack of local content in train deal
The premier of Quebec, François Legault, has attacked the Canadian federal government’s award of a train tender to Siemens. Mr Legault’s criticism focuses on the lack of local content. “[We] have a federal government which is not going to require Canadian or Quebec content? That’s not right,” he insisted.
China to transfer satellite tech to Ethiopia
Ethiopia is to launch its first satellite, with China providing technology transfer and training. Design, development, and manufacturing will be shared between Ethiopian experts and their Chinese partners, the Ethiopian government declared.
Wanted man extradited for role in India’s helicopter scandal
Dubai has extradited Christian Michel, a UK national at the centre of the Indian AgustaWestland helicopter scandal, to India. Michel was taken from Dubai, where he was held last year, to Delhi where he was remanded in custody. The CBI claimed that one of Mr Michel’s companies was in charge of providing assistance with the offset agreement. He denies any wrongdoing.
Main headlines from this issue
“Australia’s IP programme is not just a compliance exercise”
Australia wants its industrial cooperation programme to make contractors compete rather than just comply, says an Australian official. “We want companies to use their creativity, not just take it as a legalistic compliance. In fact that’s exactly the wrong mindset,” we were told.
South Africa torments OEMs with new BEE sector code for the defence sector
South Africa’s Department of Trade and Industry has revised the country’s broad-based BEE code for the defence sector. The code requires companies to procure at least 60 percent of their defence materials and technologies from local producers. The black ownership sub-contract target is now 30 percent instead of 25 percent. The code also requires foreign contractors to place 75 percent of their contractual obligations under the defence industrial participation (DIP) programme with BBBEE-compliant suppliers.
Dutch government characterises opportunities for IP
The Dutch Ministry of Defence and the Ministry of Economic Affairs have published a Defence Industrial Strategy document. The ministries justify the use of industrial participation in defence procurement and identify key areas where national industrial capacities should be developed and maintained. The 55-page document cites “essential security interests” as a justification for derogating from the injunction on offsets in Directive 2009/81 by applying Article 346 TFEU.
DAPA briefs companies on new offset policy
South Korea’s Defence Acquisition Programme Administration (DAPA) held a seminar last month at the National Defence Convention Centre on “innovative trade” for domestic and foreign defence companies. Officials discussed plans to implement offset credit banking and boost SME export levels. DAPA has launched the Defence Export Promotion Centre (DExPro) to support local defence firms seeking to export their products to foreign markets.
Cuba hopes to benefit from EC sanctions busting
Cuba hopes that a special payment system the EU is creating to avoid U.S. sanctions on Iran will help it to sidestep its own Washington-imposed trade embargo. The EU is building a special purpose vehicle to allow member states to continue to trade with Iran through a counterpurchase arrangement.
Main headlines from this issue
Universal offset law presented to World Bank, Saab asks for something simpler
Chantal Dagnaud, chairwoman of the European Club for Countertrade and Offset (ECCO), has presented a draft law governing compensatory measures in international government procurements. The draft, offered to the World Bank’s legal forum in Washington DC, is intended to add fairness, transparency, and accountability to the process of executing offset deals. “The proposed text is an opportunity to start a process with UNCITRAL and to update its 2004 International Public Procurement model law,” Ms Dagnaud told us.
Netherlands and EC nearing closure over infringement charge - policy to continue
The Netherlands and the EC have been holding discussions to resolve a dispute over infringement proceedings. The EC launched procedures against the Netherlands last year for imposing what it sees as unjustified offset requirements in breach of Directive 2009/81/EC. The exchange of views was described as positive, with a conclusion to the dispute quite near.
“Directive 2009/81 has given us the worst situation that we could imagine”
Dr Enrique Navarro dismissed the notion that offsets had fallen out of favour in Europe following the implementation of Directive 2009/81/EC. Member states are towing the EU line on offsets in public while continuing to approve rules allowing their countries to use them, he told GOCA delegates.
TAIWAN WANTS PRE-MOA OFFSETS
Taiwan’s Ministry of National Defence confirmed that deputy minister Chang Guan-chung is negotiating to establish an early evaluation process for offsets before issuing Letters of Acceptance. Taiwanese officials were speaking at and on the sidelines of a U.S.-Taiwan Defence Industry Conference in Annapolis, Maryland.
Brazil’s unified offset policy sees further delays
Representatives of the Brazilian Air Force have confirmed that a new unified offset policy under development in the country could still be a year or more away from approval. The new policy, known as the National Compensation Policy, or PNAC, aims to create a single set of offset guidelines for all branches of the military as well as civil agencies.