CTO Newsletter

Main headlines from this issue

Procurement officers suffer from “offset fatigue”

GICA Presentation: For contractors pitching to customers, offset requirements can look like obstacles that must be overcome to complete a transaction. If they can just find the right local suppliers, they’ll be able to check all the boxes and land all the credits. Sometimes the match between the offset demands and the procurement policy doesn’t work...

Damages should be “compensatory, not punitive”

Penalties are painful things that offset practitioners usually try to avoid. A legal discussion at the GICA virtual conference took participants through an unmissable tour of different countries’ approaches towards unfulfilled obligations.

European Parliament criticises Poland and Romania for using Article 346 to buy American instead of supporting PESCO

The European Parliament has published a document analysing defence industry cooperation in the European Union. The analysis takes issue with the “de facto application” of internal market rules. It blames Article 346(1) TFEU, the frequently used offset escape route, for frequently “restraining” the defence equipment market.

Indonesia aims for 40 percent offset quota in defence procurements

Indonesia’s Defence Minister, Prabowo Subianto, has called for defence purchases to be treated as investments in local industry. “We have to find out how to implement trade returns, local content, offsets, transfer of technology, and details of defence investment in every procurement of defence and security from abroad,” he said.

“Future Combat Air Programme” to drive skills development right across the UK

An independent report produced by professional services firm PwC has confirmed the economic impact of the Tempest programme. The programme will affect every region of the UK, supporting an average of 21,000 jobs a year, with 70 percent of the programme’s value generated in the North West, South West and East of England, according to BAE Systems.

Main headlines from this issue

Australia: Primes that don’t meet AIC commitments will face “consequences”

In the annual address to the Defence Connect Budget Lunch, Australia’s Minister for Defence Industry, Melissa Price, laid out a hard line for contractors who fail to meet their Australia Industry Capability (AIC) commitments. “I have and will continue to hold the primes to account on their AIC commitments,” Price declared. “It’s not enough to say you’re going to do something...”

Naval Group runs into more heavy seas in Australia submarine project

It’s been little more than a month since Naval Group signed up for a 60 percent industrial participation commitment for Australia’s submarine programme, and already the project is taking criticism. Rex Patrick, an independent senator for South Australia, launched a blistering attack on the procurement.

Alstom to increase local content in Ukraine to 35 percent for supply of electric locomotives

Alstom, a French multinational rolling stock manufacturer, is ready to increase the level of local content in its contract for the supply of electric locomotives to Ukraine, French Finance and Economy Minister Bruno Le Maire has said.

$3.7BN and growing – The value of India’s defence offsets

India is continuing to increase the value of its defence offsets. The cumulative value of defence offsets in India reached just over $3.7bn on May 11, 2021, an increase of $467.7m since October 8, 2020. The value of obligations approved as discharged also increased significantly.

IAI to establish a Boeing 777 conversion facility in South Korea

Israel Aerospace Industries' Aviation Group has signed a Memorandum of Agreement with the Incheon International Airport and Sharp Technics to build an aircraft conversion site in South Korea. The facility will specialise in converting Boeing 777-ERSF planes from passenger to freighter. “IAI has transferred production of business jet wings, main frame, and parts of the tail to Korean companies...”

Main headlines from this issue

Finland’s HX programme: “We are calculating what the true value to us is” Saab presents final local assembly offer as bidding closes

Saab has presented its best and final offer for the €9bn HX Programme to Finland. The Eurofighter consortium and Lockheed Martin also made their final pitches, stressing the volume of their proposed work packages. Boeing made a short statement and Dassault was silent. Programme Director Lauri Puranen informed CTO that “Most companies think the value of their projects is very high, [but] we are calculating what the true value to us is.”

Malaysia to match local companies to OEMS for rail development

Malaysia is hoping to increase local content in its rail industry by 45 percent by 2030. Launching the Rail Industry Development Programme (RIDP), a project under the Strategic Industries and High Performance SME Improvement Programme, Transport Minister Datuk Seri Dr Wee Ka Siong said that the Malaysian government would match foreign OEMs with local businesses to increase their capacity.

Naval Group plans return to Egypt—and to Egyptian shipyards

France’s Naval Group is back to bidding for projects in Egypt, two years after a rupture in diplomatic relations led Cairo to boycott French defence companies. It now appears that relations are on the mend and deals, including offset deals, are in the offing.

Pratt & Whitney: “We’ve replaced 75 percent of Turkey’s F135 engine parts”

Pratt & Whitney has now qualified three-quarters of parts previously produced by Turkey for the F135 engine. The directed removal of Turkey from the programme will increase engine costs by 3 percent.

680 local companies battle to supply Canada’s shipbuilding programme

More than 680 businesses took part in a recent virtual industry day run by Irving Shipbuilding. The company organised the event to find potential suppliers for the Canadian Surface Combatants. So far the government has signed 45 contracts with Canadian suppliers.

Main headlines from this issue

U.S. congressional panel hears call to stop China’s forced technology transfer

The U.S. has to take a results-oriented approach towards China that holds Beijing to specific goals that include a lowering of its “forced technology transfer and IP theft”, and the opening of its digital markets. Those are the recommendations of Nigel Cory, Associate Director of Trade Policy at the Information Technology and Innovation Foundation. The rules are deliberately “restrictive” and “ambiguous”...

Poland seeks local build with foreign “know how” on Miecznik frigate programme

Poland expects foreign contractors on the country’s “Miecznik” naval programme to build three frigate-class warships in the country. The government will send public procurement notices about the acquisition of the vessels to the Polish defence industry but local companies will receive support from the foreign partner to join the construction of the ships.

Greece: Industry CEO calls on government to implement 30 percent quota for new frigate requirement

The CEO of Intracom Defense, a leading Greek defence electronics and communications company, has called on the Greek government to demand industrial participation for at least 30 percent of purchase contract value for the new frigate requirement. He said the procurement presents golden opportunities for local companies to acquire knowledge in areas including...

Iran struggles to barter oil and gas for Chinese jets

China is reported to be balking at Iran’s request to pay with oil and gas for China’s J-10C lightweight fighter jets. Tehran has expressed an interest in purchasing the aircraft since the lifting of a UN arms embargo in October 2020.

UK and India “should collaborate on aerospace and naval technology”

A report from the UK-India Business Council calls for the two countries to collaborate on technology and development in aerospace platforms and naval vessels. The council said that it had made 34 recommendations to India’s Defence Acquisition Procedure (DAP) 2020, including 22 “related to the important aspect of offsets.”

Main headlines from this issue

UK resets its defence industrial participation policy – with dual use and weighted indirects

The UK government is to introduce a revised industrial participation policy for defence procurements. The MoD will ask companies to set “voluntary targets” for UK content and to articulate, before signing the contract, their plans for opening opportunities for the UK supply chain. The government will then provide “support” to deliver on the plans. A minimum of 10 percent of the tender evaluation weighting must be allocated to...

UK to demand “significant proportion” of local build and assembly for Fleet Solid Support ships

The British government is reopening a competition to build Fleet Solid Support ships. It also expects that the winner will not be an overseas company and will have to carry out much of the work locally.

Taiwan’s offset programme to promote integration of civil and military equipment

Taiwan won’t publish its new offset regulations for another year but it’s already becoming clear that the island plans to emphasise benefits for its defence industry, preferably with dual use. A recently published Quadrennial Defence Review cites the value of offsets in a section discussing supply and maintenance of defence materiel.

India will accept Malaysia’s palm oil as payment for railway project

Ircon International, India’s state-owned rail construction company, is talking to Malaysia about a barter deal. The company would engineer, procure, and construct a railway project on the western side of Malaysia, starting near Kuala Lumpur...70 percent of the payment would take the form of palm oil.

Mozambique: Local content rules will cover commercial sectors

The government of Mozambique is in the process of revising its Local Content Law. The new law aims to increase local participation in projects covering energy, agriculture, tourism, construction, and mining by enforcing a minimum percentage requirement.

Main headlines from this issue

Japan’s former Defence Minister: “A Japanese offset policy is essential”

Gen Nakatani, the former Director General of the Japan Defence Agency, has called on Prime Minister Suga Yoshihide to introduce offset obligations on military purchases. Such agreements are common among countries around the world, he said, and Japan is exceptional in not applying them. He provided examples of the deals that Japan could demand...

Global defence offsets to reach $371bn by 2026 but bring $229bn of benefits

Avascent, a management consulting firm for government-driven industries, predicts the value of global defence offsets to reach almost $400bn over the next five years. However, after taking the ability of local defence industrial bases into account, Avascent believes that only about $229bn will actually be retired...

Lockheed adds $2.4bn of outstanding offsets in 2020, drops $100m in penalty liabilities

Lockheed Martin ended 2020 with outstanding offset agreements worth about $17.5bn. Most of the obligations extend through 2049. The company is also liable for about $1.8bn in offset penalties should it fail to fulfill its obligations.

European Parliament’s Committee on the Internal Market condemns systematic use of Article 346 TFEU

The European Parliament’s Committee on the Internal Market has produced an 8,500-word study of the implementation of Directive 2009/81/EC. The study reveals an ongoing state in which there has been neither motion nor development towards the elimination of offsets by member states.

Transparency International calls for legal offset framework in West Africa

Transparency International has called for countries in West Africa to establish a regulatory legal framework for offsets. The call comes in a report entitled “The Missing Element: Addressing Corruption Through Security Sector Reform in West Africa” published by TI’s Defence and Security unit.

Main headlines from this issue

Spain asks for national content, ideally around 70 percent, rarely gets it

Continental projects are building a true European defence industry, and Spain is at the forefront. Pesco, an EU mechanism to promote strategic autonomy, has 47 projects, with most of the backing coming from Spain, Germany, and France. Spain is participating in 24 of the projects and leads two. The question is how much European support can make up for the lack of demand for industrial participation?

UAE: Lockheed Martin and EDGE to establish joint working groups to identify industrial partnership opportunities

Saudi Arabia demands foreign companies build “major headquarters”

Saudi Arabia is incentivising foreign companies to establish their regional headquarters in the country. The companies will not have to abide by the country’s Saudization rules. The decision will pose a challenge to companies who are currently based in the UAE.

South Africa: B-BBEE Commission clarifies reporting obligations

South Africa’s Broad-Based Black Economic Empowerment (B-BBEE) Commission has issued a clarification to help businesses with their reporting requirements. The reporting obligations are increasingly onerous and often unclear. The policy plays an important role in the DTI’s civil offset prospectus, the National Industrial Participation (NIP) programme.

British tier 3 subcontractor to provide technology transfer and sovereign capability under Canada’s ITB policy

Ultra Group may consider Canadian companies suppliers following a contract to commence work on the S2150-C Hull-Mounted Sonar (HMS) system for the Canadian Surface Combatant (CSC) programme. Ultra is committed to provide technology transfer and sovereign capability.

Main headlines from this issue

Transparency International relegates most defence contractors to band F for “lack of commitment” to tackling corruption associated with offsets

Transparency International Defence and Security reports that nearly three-quarters of the world’s largest defence companies show little to no commitment to tackling corruption. Offsets, the organisation says, represent one of their most opaque practices. Only one contractor, Bechtel Corporation, widely regarded as a construction company, is in its top-ranking Band A under the offset section.

Israel gives Boeing an umbrella, offers China carrots

Noemi Liebermann, the acting head of Israel’s ICA, described first an ideal, long-term, offset relationship, then explained the long and difficult path to creating one. Boeing has performed its obligations so well and is so interested in expanding its “umbrella of investment”... Many of the Chinese companies, though, struggled to find suppliers; they lacked experience working with local companies; and they also often misunderstood their obligations.

U.S. sanctions force Turkish courts to wrestle with force majeure

Covid-19 has forced contractors and buyers around the world to take another look at their contracts. In April last year, Turkey recognised the epidemic as grounds for contractors delaying deliveries. Suppliers could apply for extensions of four to five months to their delivery times. Now, though, contractors in Turkey are facing a new kind of force majeure: the effect of sanctions—and this time, Turkey might not be so forgiving...

India gets suggestions to improve DAP 2020

It’s been little more than four months since India’s Defence Acquisition Procedure 2020 (DAP 2020) came into force and already experts are suggesting improvements. KPMG urges the Indian government to reconsider the “impact of a dwindling offset market on the Indian industry.”

Thailand offers “privileges” to foreign investors

The government of Thailand will allow the country’s Defence Technology Institute to form joint ventures with private companies. “Privileges will help attract foreign investors to establish factories in the new defence industrial estate,”

Main headlines from this issue

UAE consolidates, obligors co-operate, suppliers relocate

How do suppliers meet offset obligations in regions with growing budgets but limited local industry? It’s a perennial problem for big obligors selling to small countries. Speakers at the virtual GICA conference described two solutions available in the United Arab Emirates...“It is worth noting that the offset policy in the UAE has evolved in response to challenges that have become a barrier to progress,”

Malaysia raises local content requirement to beat covid

As countries around the world roll out stimulus plans to cure the economic effects of COVID 19, Malaysia believes that it might have found a superpill. The country is turning to industrial participation as one way to deliver support for the government’s economic recovery plan.

India: “There are no offsets… but you have to engage with Indian industry”

In their discussion of India’s changing IP guidelines at the GICA virtual conference, Mayank Patel, Managing Director of Tri Polus Ltd. and Salil Gupte, President of Boeing India, had some good news for the country’s foreign suppliers: spending is up; foreign ownership is in; and offsets are off. The reality though, as suppliers to India have long known, is more complex...

Morocco looks to U.S. for defence industry cooperation – trade association demands formal offset policy

Morocco has held discussions with the U.S. about co-operation to develop the North African country’s defence industry. The General Confederation of Moroccan Enterprises (CGEM) has appointed a lobbyist to encourage the government to establish a formal commercial offset policy.

Kuwait unchained five obligors from bank guarantees in 2020

The Kuwait Direct Investment Promotion Authority (KDIPA) released the bank guarantees of five offset obligors last year following completion of their projects. Seven bank guarantees were reduced following partial implementation.

Main headlines from this issue

Slovakia: Defence minister launches new policy – first procurement demands 35 percent IP

The Slovak government has approved the purchase of 17 radar systems produced by Israel Aerospace Industries (IAI). The government-to-government contract, worth €148.2m, is subject to a requirement that 35 percent of the cost is invested in the Slovak defence sector. “That was one of the most important conditions,” an informed source told us.

Boeing asks India to send its obligations into space

Surendra Ahuja, the Managing Director of Boeing Defence India, has asked the Indian government to broaden the avenues for meeting offset obligations, including through space programmes. Ahuja called on the MoD to return to the wider scope for discharging obligations available in Defence Procurement Procedure 2016. “This allows for a holistic development of the Indian A&D sector since there are synergies between defence and commercial aviation,” he said.

France offers India Rafale and Panther assembly lines under “Make in India”

France has offered to move the entire assembly line of the Panther medium utility helicopter and 70 percent of the Rafale fighter plane assembly line to India. According to Hindustan Times, the offer, which also includes technology transfer, came from Emmanuel Bonne, diplomatic advisor to French president Emmanuel Macron.

‘Congressional Research Service’ outlines India’s “forced” localisation practices

The Congressional Research Service, a nonpartisan public policy research institute of Congress, has published a report on U.S.-India Trade Relations. The report focuses on what the U.S. sees as Indian trade barriers. The report notes that the U.S. continues to press India to address its “forced” localisation practices, such as in-country data storage, domestic content, and domestic testing requirements.

Oman prepares to implement flurry of offset projects

Oman’s 2021 State Budget has revealed a list of new projects under the country’s Partnership for Development programme. The programme manages Oman’s offsets. The budget also outlines a number of Public Private Privatisation (PPP) initiatives.

Main headlines from this issue

Greece “must learn from Netherlands and use IP to develop local industry”

Greece is “activating” its defence industry. The country has a unique opportunity to strengthen its defence industrial base and “all the relevant actors, political leadership, industry, universities and research centres must seize the moment.” The country should use industrial participation to help local companies join the global supply chains of defence primes...

Saudi Arabia gives defence companies “investment permits in 15 days, allows 100 percent ownership”

Saudi Arabia’s General Authority for Military Industries (GAMI) now issues operating permits to investors in little more than two weeks. It also says that it no longer requires international defence companies to look for local partners. Mohamed Al-Athel, GAMI’s Deputy Governor for Military Acquisition, conceded that the organisation had met with some scepticism from investors.

Indonesia: Placement politics drives clean sweep at KKIP

The Indonesian Defence Minister, Prabowo Subianto, has appointed Lieutenant General TNI (Ret.) Johannes Suryo Prabowo as Secretary of the Defence Industry Policy Committee (KKIP) Executive Team at the MoD. Suryo joins a number of retired generals and other MoD officials. The appointment has raised eyebrows in Jakarta...

Australia releases more SICP implementation plans

The Australian Department of Defence has released three more Sovereign Industrial Capability Priority (SICP) Implementation Plans. The plans focus on testing and certification; surveillance and intelligence, and signal processing.

EVENT DIARY 2021 – see CTO 1

Main headlines from this issue

Israeli minister calls for Thyssenkrupp blacklisting

Israel’s Minister of Economy, Amir Peretz, has called for the government to blacklist Thyssenkrupp Marine Systems. Peretz claims that the company has failed to discharge offset obligations derived from the sale of three submarines and from Israel’s activation of an option to buy four ships. The submarine purchase is politically sensitive and has been the subject of controversy in Israel, with allegations of high-level corruption.

Australia’s policy: “Harder than traditional offsets

David Peckham, a Thales Industry Engagement Manager, has described the Australian Industry Capability (AIC) and Global Supply Chain (GSC) programs as “possibly even harder than traditional offsets.” For contractors confronted by the procedure for the first time, listening to his comments would have been a harrowing experience...

Initial framework contract places Airbus at the heart of Spanish program

Spanish industry has secured the initial framework contract of the Future Combat Air System’s (FCAS) demonstrator phase. Airbus will take a primary role at the heart of Spain’s participation, working directly with European partners and wider industry in support of Spain’s contribution to the program.

Saudi Aramco expands flagship commercial localisation program

The state oil company Saudi Aramco has announced the expansion of its flagship program to increase local content and boost domestic supply chains. The expansion includes plans for new international partnerships and establishing companies through an Industrial Investment Program linked to the development of Aramco's business.

Lockheed Martin releases rosy report on its Australian industrial cooperation

Lockheed Martin Australia has released a review of the company’s economic impact across the Australian economy. The review, conducted by advisory firm AlphaBeta, part of Accenture, found the company’s impact to be significant. Every AUD$1 of direct output generates an additional AUD$1.70 of indirect economic impact.