CTO Newsletter

Main headlines from this issue

French report highlights rising offset demands but fewer sales

A French annual report on arms exports has highlighted the rising demand for offsets and industrial cooperation in the local defence industry’s international arms deals. The demand came even as orders for French defence equipment declined in 2019. The report notes that industrial cooperation and technology transfers are “usually not enough” and that other sellers must often look for activities outside the defence industry...

No changes planned to Malaysian policy following leadership shake-up

Malaysia is not planning to revise its Industrial Collaboration Program policy anytime soon, despite a leadership change at the Technology Depository Agency (TDA). The government removed CEO Dato' Zailani Safari in April.

Thales STUDY vindicates Australian industrial cooperation policy

A study prepared by economic analysis firm AlphaBeta Advisers on behalf of Thales Australia has found that the defence company spent AUD$1.3bn ($900m) with Australian suppliers between 2017 and 2019. More than 60 percent went to SMEs. Australia’s Minister for Defence Industry has hailed the study as evidence of the success of the country’s industrial cooperation policies.

Czechia to procure French artillery with mandated industrial cooperation

The Czech MoD has announced that it will buy artillery pieces from Nexter. The purchase will include significant local industry involvement. The deal has not yet been signed... The 50 percent local participation may represent a contractual obligation or merely an aspiration.

Colombia’s offset policy is under review

Colombia’s Ministry of National Defence has informed CTO that it is reviewing the country’s offset policy and intends to make changes. Evaluation is ongoing with various actors and institutions. The focus is expected to shift towards...

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Spain signals new approach: stipulates 70 percent quota, cites Article 346

The Spanish MoD has signalled a new approach to defence procurement. The move is intended to overcome EU legislation on competition laws. The MoD will incorporate Indra Sistemas, Sapa Placencia, Escribano Mechanical & Engineering, and Santa Bárbara Sistemas into a joint venture. The ministry will then require bidders for the Wheeled Combat Vehicle 8x8 program to allocate at least 70 percent work share to the joint venture, which will also be the VCR design authority...

The Brexit Effect: Navantia teams with Northern Irish shipyard for UK tender – offers civil applications

Spanish shipbuilder Navantia has entered into an exclusive teaming agreement with Harland & Wolff, a Northern Ireland shipyard, to support the company’s bid for the UK’s forthcoming Fleet Solid Support (FSS) tender. The companies pledged to inject “significant investment” into ship design and construction across the UK if their bid is successful.

U.S. GAO reports on IP chain pressure for F-35s - Trump hints at bringing overseas production to U.S.

A report by the U.S. Government Accountability Office into the F-35 fighter program has found ongoing problems with the aircraft’s supply chain. Turkey’s removal from the industrial participation program has exacerbated the issue... Trump called for F-35 manufacturing to be brought back to the U.S., noting that having it carried out overseas is an example of “stupidity.”

Turkey: SSB claims no legal basis for removal from F-35 program

Dr İsmail Demir, President of Turkey’s Presidency of Defence Industries (SSB), has questioned the legal basis for removing his country from the F-35 program. “Unilateral decisions related to the partnership have no legal basis, and are not logical or reasonable,” he said.

Main headlines from this issue

Transparency International’s Government Defence Index gives Middle East an “F” for offsets. UAE and Saudi Arabia score zero

Transparency International Defence and Security (TI) has awarded the majority of governments in the Middle Eastern and African regions who participated in its survey an ‘F’ grade on metrics related to offsets. F means fail, big time. Data on European countries is due for release in November/December.

CSIS Contrasts UAE and Saudi defence industry development – “Generals are not immune to the temptation of bribes”

A review by the Centre for Strategic and International Studies notes that offsets have played an “extremely important” role in the development of both the UAE and Saudi Arabia’s domestic defence industries. Retired military officers have often served as front men in the UAE, often representing members of the ruling family...MBS’s localisation policies are “somewhat unaligned with reality”.

GOCA IS GONE - GICA IS BORN

The Global Offset and Countertrade Association (GOCA) has announced that the group will now be called the Global Industrial Cooperation Association (GICA). The reason for the name change, we are told, is to reflect the changing industry and mission of the group. The new name “captures the need to connect more than ever and aligns focus on the changing trends of the industry.” It includes a redesigned logo with the tagline “Transforming Partnerships.”

Austrian court closes Eurofighter investigation — Finance Procurator to appeal

The Vienna District Court for Criminal Matters has closed an investigation into alleged fraud by Airbus and Eurofighter Jagdflugzeug GmbH. The so-called “Eurofighter Affair” relates to allegations that the company paid bribes to win the contract, and that the offsets were poorly implemented. An appeal against the decision is expected. Christina Salzborn, a spokeswoman and judge at the District Court, told CTO....

Australian discussion paper seeks defence industry feedback

The Australian Department of Defence’s Centre for Defence Industry Capability has released a new discussion paper. The paper seeks comment from stakeholders on support programs and is part of a review process initiated by the Minister for Defence Industries, Melissa Price.

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.

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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...

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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.

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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.

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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.