CTO Newsletter

Main headlines from this issue

EC holds lively debate with industry on subcontracts. “They are not working but EC doesn’t really understand,” say delegates

An EC conference in Brussels to discuss the sub-contracting provisions of Directive 2009/81 and cross-border market access for SMEs was described by delegates as “open and frank.” The EC, certain of its dominance, is now likely to report that it has held talks with stakeholders and can continue its policy of squeezing offsets from European trade.

Portuguese MEP demands EC upholds the defence directive – “They completely botched it”

A Portuguese Member of the European Parliament has written an angry letter to José Manuel Barroso, President of the EC, attacking the EC’s approach towards offsets. The letter accuses the EC of ignoring its own guidance…. under Directive 2009/81 and of failing to initiate proceedings against those that misuse Article 346 TFEU.

South African offsets for Malaysia, brokered by ‘MIGHT’

A series of indirect offset projects have been agreed between South African and Malaysian companies, with three MoUs settled and another five under negotiation.

Malaysia kickstarts competition as its civil carrier approaches fleet renewal

Malaysian Airlines has begun evaluating its fleet replacement. The government has signalled that offsets will be an important consideration. A release by the official news agency Bernama lays the groundwork for a forthcoming battle between Airbus and Boeing.

Iran: Ayatollah Khamenei calls for more barters

Iran’s ‘supreme leader’ has called for an “economic jihad” to mobilise his country against the effect of international sanctions over the nuclear program. He said Iran should use barter deals in foreign trade and diversify the origins of its imports.

Main headlines from this issue

“A transformational approach” as Canada’s IRBS become ITBS and bids will be assessed by weighted ‘value propositions’

The government of Canada has adopted substantive recommendations from a report into the country’s defence procurement practices. The government has now committed itself to transforming Industrial and Regional Benefits (IRBs) into Industrial and Technological Benefits (ITBs), though it still wants a regional component.....

France invokes Article 346 as it restricts ‘competition’ to a single French group

France has launched a tender to replace its armoured vehicles but is only accepting local tenders from French companies, citing technical, security, and operational reasons for localisation.

Annual Report to Congress – fewer agreements with fewer countries, but bigger deals

The 18th Annual Report to Congress on the Impact of Offsets in Defence Trade prepared by the U.S. Department of Commerce's Bureau of Industry and Security shows that in 2012 U.S. defence contractors reported entering into 43 new offset agreements with seventeen countries, a decline from 62 agreements with 27 countries in 2011. The total value of those offset agreements though was $10.1bn, almost double that of 2011.

Oman issues decree at last

The announcement of Oman’s new Partnership for Development policy was scheduled for September 2011. Time slipped by. Although details have been conveniently leaked during the intervening years the Royal Decree was finally issued on February 3rd, 2014.

Lionel October: present policy avoids past mistakes by focusing on directs

As testimony to South Africa’s Arms Procurement Commission continues to corroborate the ineptitude and worse in the award of offset credits under the Strategic Defence Procurement Packages, the current DTI Director-General, Lionel October, provided a functional account of present-day policy.....

Main headlines from this issue

Kuwait’s ‘National Offset Company’ to be wound up

Kuwait’s Council of Ministers has decided to transfer authority for the National Offset Company’s offset program from the Ministry of Finance to the Ministry of Commerce and Industry…. All offset contracts will be subsumed into the new agency which will have the status of a government department rather than a limited company.

Kuwait: “Notarised Power of Attorney was untruthful” – Court petition to declare Chairman and Board invalid

Mr Quraishi’s lawyers allege several technical but actionable violations by members of the NOC’s board…. A confidential letter sent to the Minister of Finance by Quraishi’s legal team requested that the Deputy Prime Minister and the Minister of Finance take legal action against Mr Sheetan...

Kuwait: Litigation from former CEOs takes its toll

Othman Al Quraishi has opened two lawsuits against the NOC and our sources indicate he is considering a third. Mr Mutawaa’s case has reached the stage of…. Court records indicate that Mazen Madooh was last month awarded...

Mexican love affair hits the rocks – offset initiative suspended

The Mexican government’s work towards a formal offset policy has been suspended, in effect closing it down...

EC seeks to muzzle CTO

The European Commission has banned the Editor of CTO from attending a conference titled “Defence Market Access for SMEs: from Offsets to Subcontracting” scheduled for February 24th, 2014 in Brussels.

Main headlines from this issue

Avascent says Denmark among worst violators of EU’S offset ban

A paper on the European Defence Industrial Base published by the strategy and management consulting firm Avascent blames France for resisting market liberalization, but spreads its accusations into Scandinavia.

China has complied with WTO requirements but continues to “encourage” reciprocity

The 2013 Report to Congress on China’s WTO Compliance says some of China’s revised measures continue to “encourage” co-operation, and it appears that Chinese government officials at times continue to use the foreign investment approval process to pressure foreign companies.....

South Africa’s Arms Procurement Commission resets the agenda, delays Mbeki’s appearance

As South Africa’s Arms Procurement Commission resumes it hearings the focus shifts to allegations of fraud and corruption and to the controversial industrial offset programme. The commission has announced a revised schedule for witnesses.....

Thales collaborates with Indonesia’s PT LEN Industri

Thales UK has won a contract worth over $165m with the Indonesian Ministry of Defence for ForceSHIELD, Thales’s integrated Advanced Air Defence system. In the early stages of the delivery there will be in-country integration of some of the components.

Greece draws level with South Africa and India as kickbacks are uncovered

Greece will overhaul arms procurement to make the process more transparent, said defence minister Dimitris Avramopoulos after a wide-ranging corruption inquiry led to the arrest of a former defence official and two arms dealers.

Main headlines from this issue

Heads of State silent as EC threatens to limit exclusions to the defence procurement directive

December’s European Council Summit for heads of state or government was a washout for member states alarmed by the European Commission’s uncompromising position on the elimination of defence offsets. Those concerned about the Commission’s determination to further restrict the use of Article 346 TFEU had little to cheer either.....

Policy paper defines Poland’s robust approach to the EC

A policy paper authored by the chief of Poland’s Foreign Industry Cooperation section at the Armaments Policy Department of the Ministry of National Defence takes a hearty stand against further EC tightening of the defence directive.

“Offsets, obscenities, and lies” damage Greek parliamentary debate on submarines

The Greek left-wing opposition party, Syriza, has failed in a bid to have parliament launch an inquiry into a stalled deal for the completion of Hellenic Navy submarines.

Poland changes Public Procurement Law on sub-contracts

Greater protection for subcontractors in public procurement contracts was introduced under new legislation which came into force in Poland on December 24th, 2013.

Events diary for 2014 – see CTO 1

Events diary for 2014 – see CTO 1

Main headlines from this issue

Prepare for ‘Hollandisation’. Poland creates new offset model, Holland follows – EC not amused

As if bewilderment over Poland’s offset policy is not enough, the Netherlands seems eager to impersonate it.....

Poland: The MoD is about to take charge – “Polonisation is psychological warfare”

The battle is over, the Ministry of Economy has lost, and Poland’s offset policy is in chaos. Poland intends to transfer responsibility for offset programmes from the Ministry of Economy to the MoD by January 1st, 2014. But nothing that Poland announces is official, even when it is confirmed, and nothing is ever certain, even when it happens.....

Government Procurement Agreement (GPA) defines offset for the first time

The provisions of the WTO’s Government Procurement Agreement (GPA) have been updated to take into account developments in current government procurement practice. Offset is defined for the very first time.

ECCO and the World Bank establish a ‘Community of Practice’ on offsets

The European Club for Countertrade and Offset (ECCO) and the World Bank have established a “Community of Practice” to initiate discussions for a common global approach to offsets. ECCO has been tasked to manage the initiative.

Lack of evidence makes offset analysis a lost cause

Mark Pyman, Transparency International’s programme director for Defence and Security, said that an almost complete lack of evidence makes analyzing offset’s performance or its value for money impossible. “I am appalled at the almost total lack of evidence as to whether offsets are economically good or bad.”

Main headlines from this issue

“Norway must define its own national security interests”

The relevant subcontracting provisions in the directive will not be implemented anytime soon. Norway will define its own national security interests and the measures necessary to protect those interests within the scope of Article 123.

Another showdown looms as Denmark submits new offset bill to parliament

Denmark is in close dialogue with the EC over interpretations of the defence directive but significant differences remain. Without a resolution a new bill now before parliament would turn the current regulations into guidelines, and programmes would become less transparent.

Belgium: subcontracting requirements leave much to be desired

Not all industries from EU Member States may enjoy equal opportunities and it is not clear that subcontracting requirements produce increased involvement of SME’s in supply chains. Belgium feels that not allowing offset requirements in EU Member States creates competitive disadvantages for EU industry.

How the EC blackmailed the Czech Republic

Czech offsets guidelines were not governed by statute but by a framework document known as a resolution that allows for considerable adaptability in their application. In the Czech government’s opinion, no legislation was needed to implement the defence directive. It just required taking a different approach.....

Switzerland: “the directive is discriminatory”

“We think the directive is discriminatory,” said a lawyer with Armasuisse. “Abolishing indirect offsets is maybe creating more [of a] mess. It is not helping industry.”

Finland’s new approach to Industrial Participation

Finland, like other regional countries, is relying on the argument that it is essential in certain areas to have local industrial support to safeguard defence and security capability. New Finnish legislation does not include any provision on industrial participation.

Main headlines from this issue

Indonesia’s president to launch an offset policy that provides both commercial and defence opportunities

President Susilo Bambang Yudhoyono will preside over a meeting of the Defence Industry Policy Committee (KKIP) at the end of November. The purpose of the meeting is to bring into effect Law 16/2012, the Law on the Defence Industry (LoDI), and to officially dedicate the administration to deal with defence offset.....

Fortress America – Republican introduces bill to toughen up the Buy America Act

Republican Congressman Dan Lipinski, a long-time champion of strengthening the ‘Buy American’ laws, has introduced the ‘Buy American Improvement Act’ to close loopholes in existing laws and ensure jobs go to American workers rather than foreigners.

India: DRDO officials blame Israel Aerospace Industries for holding back on technology transfers

Officials of India's Defence Research and Development Organization are blaming IAI for a lack of progress in a joint venture because of a lack of transparency and the non-transfer of technology.

India’s Avro replacement programme: “That’s another fine mess you’ve got me into”

The Indian Air Force’s Avro replacement programme has deviated from normal procedure. Instead of the Ministry of Defence choosing the Indian Production Agency (IPA), the selection has been made by the OEM.

India’s tortuous FDI process

An inquiry into the result of the increase of India’s FDI limit suggests that the government’s refusal to raise the cap for defence investment might be doing the foreign contractors a favour.

Main headlines from this issue

Turkey: Legislation imminent for mandatory civil offset

A committee of Turkey’s Grand National Assembly is examining legislation for mandatory civil offsets. The GNA is expected to approve the bill in about a month and it will become law two months later, according to an informed government source.

Thailand to open bidding for railway projects paid for with rice, rubber, and tapioca

Despite much scepticism, the government said its plan to barter Thai farm products for Chinese high-speed trains is likely to be finalised before the end of the year. The government still plans to hold a bidding contest for the railway projects, and said that barter is a mechanism open to all countries.

U.S. to expand audits to ensure compliance with Buy America Act

The Office of Inspector General will conduct audits that include examinations of compliance with both the Berry Amendment and the Buy American Act. The BAA requires that ‘substantially all’ of the costs of foreign components not exceed 50 percent of the cost of all components. It is criticised by many foreign suppliers for its equivalence to an offset policy.

South Africa: Further consideration of the impact of changes to the B-BBEE codes

The amendments significantly change the manner in which a firm's B-BBEE status (or level) will be calculated. For example a firm with an \old\" B-BBEE level 4 rating (65 points) will automatically become a \"new\" B-BBEE level 7.

Netherlands tops the EC’s infringement league

The Netherlands, Luxembourg, Poland and Slovenia were all referred to the Court in 2012 with a proposal for financial sanctions because of the late transposition of the directive on defence procurement. A summary of referrals last year puts them into context by disclosing the extent to which there were other alleged infringements.

Main headlines from this issue

Special Report – European Commission struggles to measure the impact of the directive

The European Commission has ordered a study to prepare for its report to the European Parliament. The report will describe the impact on defence markets and industries of Directive 2009/81/EC. Titled “Openness of Member States’ defence markets,” the study has not been published and its contents are not expected to be made public. CTO has secured a copy and here we appraise its 202 pages.

Taiwan: contractors must contend with unwritten rules and resignations

A “unique situation” in Taiwan has thrown up a number of complications that are causing some trouble for obligors on the island, Jim Grzella, president of the service provider Global Partnering Solutions, told the DIOA/GOCA conference. The trouble comes as the MoD focuses on defence industrial cooperation projects to supplement a defence budget shortfall.

South Africa: DTI confirms B-BBEE threshold increase

Nomonde Mesatywa, chief director of the Broad-Based Black Economic Empowerment unit (BBBEE) at the DTI, has confirmed a decision to increase from R20m to R50m ($5m) the threshold of the equity value needed for a company to qualify as a \new entrant.\" The codes now require that enterprises should be 40 percent empowered. Many existing enterprises which had met the requirements of the previous codes will lose their status.

Offset academies to spread across the globe

Discussions are under way with trade organisations in the U.S.A., India, and France to collaborate in rolling out an international offset advanced training programme. There could be collaboration between the British programme, backed by the UK trade organization ADS, and the French programme....

Main headlines from this issue

Brazil announces national offset policy

Brazil will have a national offset policy for civil purchases. On the defence side the country will establish a trading company to be owned and managed by the MoD. The national offset policy, known by the acronym PNAC, is projected to be rolled out in November 2013 with particulars of the defence trading company to be ready one month later.

South Korea: DAPA deals a new deck of offset rules

DAPA has judo-flipped on some of its key offset initiatives. From this month new regulations will steer defence contractors firmly towards..... Participation in commercial items is also in favour.

After thirty years of offset and industrial participation Turkey has become an obligor

Turkish defence companies are going into international markets and facing the same offset requirements as other foreign contractors, especially in the Middle East and North Africa.

Thailand: boiled chickens exchanged for 315 fire trucks, 30 fire boats and twelve years in jail

Two former officials in Thailand have just been sentenced to long jail terms for inflating the price the government paid to buy fire trucks and boats from an Austrian company.....

Thailand prepares weapons shopping list –to be paid for with yet more boiled chickens

Thai Prime Minister Yingluck Shinawatra has ordered the armed forces to prepare their weapons purchase plans for the next decade. Ms Yingluck has also asked each of the armed forces to consider negotiating a barter deal to purchase the weapons.

Main headlines from this issue

Armscor’s bunker mentality – 100 percent penalty has industry in a spin

Executives at Armscor have been gagged all the way to the top and no-one is permitted to speak about the Defence Industrial Participation (DIP) policy. Anyone who has tried seeking clarification on policy issues faces a brick wall. The silence has spawned a waterfall of rumours.

Ukraine’s offset policy introduces a novel twist on quotas

Details of Ukraine’s offset policy have recently become clearer — and include a strange view of quotas. They vary according to the purchasing sector and are set as a percentage of the costs of acquisition under the main contract.

Denmark: “Bring us jobs or we don’t buy from you”

Candidates bidding into the Danish Fighter Replacement Programme will have to bring Danish jobs to the negotiating table, the Defence Ministry said. \All four candidates will be informed of the same: If there won’t be jobs coming to Denmark then we won’t be buying planes from them.\"

India: “Muddled thinking on FDI – and we have trashed the concept of multipliers”

India’s MoD often claims that foreign investors are guided purely by economic considerations and that they are neither influenced by the FDI limit nor by other provisions. Major General Mrinal Suman believes the ministry’s position reflects \ignorance of the dynamics of FDI flow.\"

Thailand revisits countertrade

Thai Prime Minister Yingluck Shinawatra has raised with China the prospect of a bilateral countertrade deal with Thailand supplying agricultural goods against unspecified Chinese technologies.