CTO Newsletter

Main headlines from this issue

French fry credits cook up a storm in Canada

A decision by the Canadian government to award Irving Shipbuilding offset credits for a french fry factory has proved controversial. Irving received a CAD $40m ($30.16m) credit under the government’s Industrial and Technological Benefits (ITB) policy in return for an investment in an Alberta-based french fry factory... A separate controversy has arisen following revelations that ISED Canada, the country’s offset authority, alerted Irving that Globe and Mail journalists were asking questions about the ITB credits.

German Bundeswehr: industrial participation is not “an official” part of the tender

Germany is employing a well-worn ruse to overcome restrictions imposed by the EU’s defence directive, a method frequently applied by member states to the disdain of the European Commission. A government official has admitted that Germany requires foreign contractors to form joint ventures with local companies in the Schwerer Transporthubschrauber (STH) heavy-lift helicopter acquisition project, but denies that this is in breach of Directive 2009/81.

EU lodges complaint against Turkey over localisation

The European Union has accused Turkey of “unlawful practices” that breach WTO terms with regard to Turkey’s procurement of pharmaceuticals. Turkish policy requires foreign producers to localise their production of certain pharmaceutical products. EU and Turkish officials have met to discuss the matter.

China sinks under weight of Malaysian palm oil

Malaysia has struck a deal with China that further implements Malaysia’s abstruse barter approach. Primary industries minister Teresa Kok announced that China will import $145m worth of “additional” palm oil, approximately 200,000 tonnes, in exchange for construction services, natural resources, and civilian and defence equipment.

PPP type projects favoured by Dubai, allowed by all emirates

The UAE is trying to attract private-sector investment and increase the number of services delivered using the public-private partnership (PPP) model. The Emirates has no federal PPP law but Dubai recently passed a special law of its own.

Main headlines from this issue

Malaysia drops multipliers and hits OEMs for late “tier two” agreements

Malaysia has released an English translation of the second edition of its policy and guidelines for industrial collaboration programs (ICPs). The 76-page document contains several notable changes including lower multipliers; penalties for delays in signing project agreements; and the introduction of fees to cover management services. Joint ventures with foreign equity may now trigger obligations for procurements.

DAPA: Audit Board demands punishment for F-35 offset “falsehoods”

South Korea’s Board of Audit and Inspection (BAI) has accused the Defence Acquisition Program Administration (DAPA) of submitting false reports. The reports concern the technology transfer negotiations for the country’s F-X fighter project and the delivery of a military satellite as an offset requirement. DAPA officials were found to have broken the law. CTO’s report last October revealed that offset negotiators faced jail...

“Indonesian companies have become agents instead of partners...offset policy is failing”

A research paper commissioned by the Indonesian National Armed Forced Staff and Command College finds that Indonesian companies have become agents of foreign defence suppliers, not their partners. Offsets have failed to create a local defence industry that can supply the nation’s military needs, the paper notes.

BIS annual offset report shows recovery from previous lows – and rising EC offset values

The 23rd annual report to Congress on the impact of offsets in the defence trade shows that industrial participation involving U.S. defence exporters has risen from historic lows. Compiled by the Bureau of Industry and Security, the report collects data from U.S. exporters that have associated offset arrangements. The major takeaway from the report is that in 2017 offsets involving these exporters rose across a number of metrics, including...

Switzerland lowers Air 2030 fighter offset quota to 60 percent

The Swiss Federal Council has decided to reduce the offset quota for the forthcoming CHF6bn ($5.94bn) Air 2030 fighter aircraft procurement from 100 percent to 60 percent. The procurement will take place at the same time as a CHF2bn ($1.98bn) procurement of ground-based air defence systems.

Canadian government “gagged dissent” on offsets for F-35s

Canada has dropped some of the provisions of its Industrial and Technological Benefits (ITB) policy. The provisions require foreign weapons manufacturers to invest an amount equal to the value of the arms contracts they receive back into the Canadian economy. The move follows a U.S. complaint.

Main headlines from this issue

South Korea: DAPA’S offset rules face further “reset”

South Korea is planning another offset “reset.” The update will change multipliers and pre-banking conditions, and affect parts manufacturing and export promotion. The government is also preparing the legal framework for offset swaps between South Korea and other countries. Since the penalty provisions became stricter, contractors noticeably tried to complete their obligations within the implementation periods, said...

OMAN TO PUBLISH NEW GUIDELINES WITH SPOTLIGHT ON CIVIL SECTOR

The Oman Authority for Partnership for Development has prepared a new version of its industrial participation guidelines. The authority’s board has approved the changes, and they now await ministerial sanction for implementation later this year. Policy changes will include the formal incorporation of a civil offset program with a higher threshold than for defence procurements...

Australians learn about French lunch breaks and la rentrée during submarine project

Australia’s $A50bn ($35bn) Attack-class submarine procurement from Naval Group has bumped into French culture. Naval Group staff in Australia as part of the local assembly and technology transfer commitment have been told to learn about the Australian way of life to avoid conflicts between workers from the two countries. Australians, for example, failed to understand the sanctity of the French lunch break.

Swiss trade associations reject offset report’s recommendations

Two Swiss trade associations have released a statement rejecting key parts of a report on offsets commissioned by the country’s Federal Department of Defence, Civil Protection and Sport (DDPS). GRPM and Swissmem stated that the new report suggests the DDPS wants to “throw overboard” the long-standing practice of offsets in the country.

Russia offers Turkey defence and civil aviation projects

Rosoboronexport has announced that it is open to further cooperative projects with Turkey in the defence and civil sectors. Key high-tech areas targeted for cooperation included aerospace, helicopters, and the energy sector.

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