qb october 2011

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The Offset Guidelines Quarterly Bulletin

October 2011

QB

Every care has been taken to provide an accurate representation of the current offset and/or countertrade guidelines or practises of the countries covered in this publication. Some countries provide English translations that we could not properly rely on. For these we have sought advice from translators, law firms, and the civil servants responsible for implementing these policies. Many countries present texts so complex that they confuse rather than clarify, and others don’t publish their guidelines at all. We have tried to identify the policies of countries that don’t issue guidelines, and explain the practices of those that do. As stated, we have made every reasonable effort to ensure the accuracy and currency of the contents of this publication, but readers should seek further clarification from the implementing authorities of the countries concerned before relying on the information contained herein, and we cannot accept responsibility for any consequences that may arise if you fail to do this.

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1. Algeria p 3 2. Argentina p 5 3. Australia p 6 4. Austria p 13 5. Belgium p 16 6. Bolivia p 21 7. Brazil p 22 8. Brunei p 30 9. Bulgaria p 32 10. Burma p 36 11. Canada p 37 12. Chile p 45 13. China p 48 14. Colombia p 51 15. Costa Rica p 57 16. Croatia p 58 17. Cuba p 61 18. Czech Rep p 62 19. Denmark p 66 20. Ecuador p 72 21. Egypt p 73 22. Estonia p 75 23. Ethiopia p 78 24. Finland p 79 25. France p 86 26. Germany p 87 27. Greece p 88 28. Hungary p 104 29. India p 110 30. Indonesia p 129 31. Iran p 131 32. Ireland p 132 33. Israel p 133 34. Italy p 137 35. Japan p 140 36. Jordan p 141 37. Korea (North)p 142 38. Korea (South)p 143 39. Kuwait p 154 40. Libya p 168 41. Lithuania p 169 42. Luxembourg p 173 43. Malaysia p 174

44. Mauritius p 182 45. Mexico p 183 46. Netherlands p 184 47. New Zealand p 189 48. Nigeria p 197 49. Norway p 198 50. Oman p 204 51. Pakistan p 207 52. Peru p 210 53. Philippines p 216 54. Poland p 221 55. Qatar p 226 56. Romania p 228 57. Russia p 241 58. Saudi Arabia p 242 59. Serbia and Macedonia

and Bosnia p 247 60. Singapore p 248 61. Slovenia p 250 62. South Africa p 256 63. Spain p 270 64. Sri Lanka p 274 65. Sweden p 275 66. Switzerland p 279 67. Syria p 283 68. Taiwan p 284 69. Thailand p 298 70. Tunisia p 299 71. Turkey p 300 72. UAE p 305 73. Ukraine p 309 74. United Kingdom p 310 75. Uruguay p 314 76. USA p 315 77. Uzbekistan p 316 78. Venezuela p 317 79. Vietnam p 318 80. Zimbabwe p 319

81. Country changes in this

edition p 320

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Algeria [04/09]

There is no official policy but Algeria is frequently insisting that industrial participation projects accompany major defence procurements. The consequence is drawn-out negotiations that add years to consultation periods. The contractor is expected to offer to set up a local plant to manufacture and assemble equipment and to provide access to export markets. There are similar expectations on the civil side, where the priority is the diversification of the energy and power sector. The requirement tends to be increasingly focused on direct projects that provide additional capability to the procuring agency. Algeria tends to use a variety of countertrade practises for bilateral government-to-government transactions. Swaps, buy-backs, and barters have all been employed. Financial Regulations: All imports must be routed through a domestic bank so that trade statistics and flows of funds may be monitored in accordance with regulation No. 95-07 of 23 December 1995. The bank may then release foreign exchange. The proceeds must be repatriated within 120 days. Petroleum companies are subject to the same rule, but proceeds may be deposited in a guaranteed account with a foreign correspondent bank of the Bank of Algeria (BoA). All export proceeds from crude and refined hydrocarbons, by-products from gas, and mineral products must be surrendered to the BoA. Exporters of other products must surrender 50 percent of the proceeds to the interbank market. The remaining portion may be retained in a foreign currency account. Exporters may use the funds in these accounts for imports or other payments pertaining to their business, or they may transfer the funds to another foreign currency account. Proceeds from exports of non-hydrocarbons and non-minerals may be surrendered to commercial banks and other authorized participants in the interbank foreign exchange market. Under current regulations export proceeds will be held entirely in Dinar (i.e. hydrocarbons) or else half in Dinar and half in foreign exchange (i.e. non-hydrocarbons products). The 2001 Finance Law of 23 December 2000 provides for a reduced Value Added Tax rate of 7 percent for barter imports. It would otherwise be 17 percent. An Inter-ministerial Order of 14 December 1994 lays down the rules for barter transactions on the borders with Niger and Mali. The list of traders responsible for carrying out barter transactions is fixed annually. There is an established list of goods

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authorised for barter trade comprising equipment, raw materials, semi-finished products, spare parts and tools.

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Argentina [07/11]

The Minister of Defence has informed foreign defence contractors through their governments that defence purchases should be contingent upon sub-contracts being awarded to Argentinean companies. Contractors should liaise with CITEDEF, the Institute of Scientific and Technological Research for Defence. CITEDEF is a federal agency within the MoD. It is responsible for the transfer of technology to production units and for all activities related to meeting the specific needs of national defence for both civilian and military application. There is no formal offset policy but we understand that when there are offset contracts they tend to be for 100 percent of supply contract value. The country is in the process of reviving its domestic defence industry and encourages technology transfers, partnerships, and R&D. Foreign companies can also establish partnerships and use technology transfers to gain access to the Argentine defence market. Civil Sector Requirements: On the civil side Argentina is demanding that corporations operating in the country sell Argentinean products overseas for a value higher than the goods introduced to the local market. The Ministry of Industry has declared the demand a formal policy, but it is not clear which commercial sectors other than the auto industry have to comply. Example: Hyundai has reached an agreement with the Argentine government to compensate its $91m surplus on auto sales to the country by promoting exports of peanuts, wine, bio-diesel and soy flour. Countertrade: The legislation required to permit countertrade activity in the public sector is not in place, though the government has establish bilateral countertrade arrangements with several regional countries on an ad hoc basis. The procedure is usually to use back-to-back letters of credit at 180 days site. Some years ago Argentina had legislation on countertrade, but the Decree that regulates it – Decree 173/1985 – was never invoked and is no longer applicable. Any future Decree would probably be regulated by the Central Bank or the Ministry of Industry.

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Australia

[07/11] The government of Australia does not have a standard offset or industrial participation policy. Instead, it has something that is just as effective, and very creative. Rather than wait for opportunities to be offered the government will actively seek to leverage its buying power to create opportunities for Australian (and New Zealand) firms in international programs. Australia has a policy called “A Smarter and More Agile Defence Industry Base.” The policy is not an Act, nor a regulation, and there are no guidelines. It does however stretch to 112 pages and covers the nature of the global defence industry marketplace, Australia’s role in that market, the government’s views of its objectives, and what it hopes original equipment manufacturers (OEMs) will do when they work with Australian industry and respond to competitive bids. The document does not mention in its industrial participation policy documents its requirements, targets, penalties or credits. But performance is contractual, and the contract specifies the key performance indicators. The policy actually offers a series of questions that have to be answered in a Request for Tender (RfT). Those questions cover the usual range of issues encountered in an offset program: how will the supplier work with local industry; how will it involve local industry in the global supply chain, both generally and for the specific project under discussion; how will the project be managed and funded; what R&D is required; and what is the overall strategy? It might also discuss specific ‘industry requirements.’ The Defence Materiel Organisation (DMO), Australia’s procurement agency, might demand that some specific activities be performed in-country but the OEM must always submit a plan at the outset in the post-contract deed. The plan is evaluated as part of the tender response. While the selection of the equipment will be on a ‘best value’ basis, the OEM’s industrial participation plan will be documented in a deed or a contract. The OEM will sign up to the key performance indicators which they have nominated, and will be held to them. The Australian government feels the need to help industry compete to meet the best schedule, the best price, and the best quality, but it does not oblige the OEM to place work. Even without an enforceable offset policy the government requires contractors to sign up to various contractual obligations either through an Australian Industry Capability (AIC) plan as part of the tender response, or separately through a Global Supply Chain (GSC) deed.

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There are also requirements for Local Industry Activities’ (LIAs) and ‘Industry Requirements’ (IRs). In addition to these Australia also employs Priority Industry Capabilities, or Strategic Industry Capabilities. The government identifies areas of industrial capability which it regards as critical. If those areas relate to the product or technology under purchase they will be included in the RfT. Objective: The objective is to give Australian defence companies the ability to compete internationally, and to help the military capabilities of the Australian defence forces. Access to the global supply chain is very much a focus of the Australian government, which drives that access though contractual arrangements. Australian Industry Capability Programme (AIC) and Strategic Industry Capabilities (SICs): The OEM must sign up to the Australian Industry Capability programme (AIC). A deed, or Heads of Agreement, should create new opportunities for Australian defence companies to contribute to the OEM’s Global Supply Chain (GSC), but any inputs must make business sense. AIC plans must demonstrate how tenderers will maximise opportunities for Australian companies, including market testing their capabilities and competitiveness. AIC plans are assessed during tender evaluations and the contracted AIC plans are later monitored and assessed again. AIC Plan performance will be included as a separate category in the Company ScoreCard system used by Defence to assess a company’s performance. The ScoreCard system operates as a traffic light warning, with a red, amber, or green progress report presented to the OEM. The government also monitors a broader range of capabilities, known as the Strategic Industry Capabilities (SICs) which have the potential to become PICs. The SICs are capabilities which provide Australia with enhanced defence self-reliance, ADF operational capability, or longer term procurement certainty.

Suppliers of foreign-sourced technology will be expected to certify that their products can be supported domestically by the transfer of intellectual property and the establishment of a strong local presence. When adapting existing defence products to meet Australia’s requirements local firms will ultimately have to provide through-life support. Local Industry Activities (LIAs) and Industry Requirements (IRs): Australia looks for ‘Local Industry Activities’ (LIAs) and ‘Industry Requirements’ (IRs).

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Local content is required for LIAs and should include innovation. IRs may be demanded by the government or proposed by the seller and should improve their industries. LIAs may include maintenance, repair, and overhaul (MRO), modifications through life support, activities from the global supply chain deed, and training for SMEs. The Defence Materiel Organisation (DMO) will review the key performance indicators and the scorecards, and monitor events closely. The government may participate financially. Priority Industry Capabilities (PICs): The government’s concern is that Priority Industry Capabilities (PICs) remain in Australia. An overseas-based company can establish a local workforce, infrastructure and intellectual property to develop a capability within Australia in a specific PIC area. The company would then be able to compete with local firms. PICs are defined as those capabilities that confer an essential strategic advantage by being available from within Australia and which, if not available, would significantly undermine defence self reliance and Australian Defence Force (ADF) operational capability. The following areas are PIC priorities: Electronic Warfare High Frequency and Phased Array Radars High end’ System and ‘System of Systems’ Integration Through-life and Real Time Support of Mission and Safety Critical Software Anti-Tampering Capabilities Signature Management In-service Support of Collins Combat System Acoustic Technologies and Systems Ship Dry Docking Facilities and Common User Facilities Selected Ballistic Munitions and Explosives Infantry Weapons and Remote Weapons Stations Combat Clothing and Personal Equipment Airborne Early Warning and Control (AEW&C) aircraft systems Armoured vehicles Composite and exotic materials HF and Phased Array Radars Infantry weapons and remote weapons stations Protection of networks, computers and information including in the field of cyber defence Rotary and fixed wing aircraft Submarines System assurance capabilities (both hardware and software) Targeting and precision navigation Through-life support of guided weapons

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Global Supply Chain (GSC) Program: The Global Supply Chain (GSC) programme was established under the AIC in 2009 to create opportunities for Australian defence industry to bid into global supply chains of the multinational primes. Defence will sign GSC Deeds with multinational primes that promote the identification of appropriate commercial bid opportunities that capable Australian companies can compete for on a best value basis. In exchange for GSC programme funding, achieved via annexes to a GSC Deed, a GSC Prime will use its best endeavours to identify opportunities for qualified Australian companies to bid into its GSC across all product lines. It must assist capable Australian companies to become more globally competitive; provide agreed training and mentoring programmes to suitable SMEs; and undertake Programme Management Reviews with the government. The DMO is the point of contact for Australian defence industry and matches Australian companies to the primes’ (or their top tier suppliers) identified bid opportunities. The DMO, supported by the prime, facilitates the engagement of the Australian companies with overseas agencies. A Deed (or Head of Agreement) sets the foundations of the programme and is non-binding. The sides then add Annexes, a ‘Statement of Work’, a ‘Period of Performance’ agreement, and some mutual KPI’s (key performance indicators) on all parties, including the Defence Materiel Organisation (DMO), the opportunity provider, and participating Australian companies. Threshold: Defence requires that AIC Plans be included in all contracts valued at A$20m ($21.4m) or more, or where a specific industry requirement is sought. Maximising Australian industry participation on a cost effective basis is also a fundamental requirement for procurements less than A$20m. While there is no requirement to provide a formal AIC Plan for these smaller procurements, details of local work is to be summarised in an AIC Schedule. Penalties: The standard liquidated damages terms usually included in contracts that attach to AIC plan obligations have been discontinued because they have never been enforced and just lead to increased margins to be built into project costs. A clause will be included in the Conditions of Tender allowing companies to be excluded from a tender if they have previously failed to meet their AIC Plan obligations.

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The ability of a company to arbitrarily reduce the level and type of work included in a plan is removed. Unscheduled delays for the completion of projects will be dealt with firmly. A list of the companies that have breached their obligations will be published every year in the Defence Annual Report. Multipliers: There are no multipliers because there is no offset policy; it is an Industry Capability Program. Banking: Not applicable. Contributions by DMO: Australia is ready to pay for the through life-support and will ask for cost transparency so that Defence can buy it. Australia is also willing to pay the prime contractor costs under a best endeavours arrangement if the prime is required to fulfil a condition outside its normal business lines. The contractor must disclose the price of the benefit that Australia is demanding. The DMO may then decide to negotiate for it. Such costs must not be hidden within the general procurement. AIC Toolkit: An AIC Toolkit has been produced to assist Defence and industry to understand the AIC Program's requirements in relation to defence procurements. It explains what Defence is seeking from tenderers under this program. The Toolkit will remain web-based to enable amendments to be immediately available to all stakeholders. The 60 page document is at http://www.defence.gov.au/dmo/id/aic/#toolkit Sunset Clauses and Depreciation: The government may apply a sunset clause that extinguishes the company's ability to have an activity recognised after an agreed period of time has elapsed. Unless otherwise agreed, this period will be seven years. In some cases depreciation will also be applied to ensure that the value of the activity remains relevant. This depreciation will take time into account as well as the residual life of the technology or weapon system involved.

http://www.defence.gov.au/dmo/id/aic/#toolkit�

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A rate of depreciation would be agreed upon between the government and the company based on the technology type and duration of the activity. Unless otherwise agreed, a rate of 25 percent will be applied to any activity, to commence three years after approval has been provided to proceed. Assistance to Australian SMEs: In order to assist Australian companies to more ably support Defence and penetrate global supply chains, a number of additional programmes have been developed to specifically assist the defence industry. § The Capability and Technology Demonstrator (CTD) and its Extension programme help companies to bridge the gap between prototypes and operational products. § The Rapid Prototype Development and Evaluation (RPDE) program brings together expertise from different companies to quickly solve capability problems particularly in the network centric warfare area. § The Defence Materials Technology Centre (DMTC) and other Centres of Excellence cooperatively develop state-of-the-art materials for defence applications. § The Defence Industry Innovation Centre (DIIC) under Enterprise Connect helps SMEs become more competitive through assistance in developing business plans and providing access to the latest technologies and research. § The Skilling Australia’s Defence Industry (SADI) program and the Industry Skilling Enhancement Package helps companies train and up-skill their workforces and helps students align their studies with defence industry careers. § The Defence Export Unit (DEU) assists companies that are ready to export to market themselves and matches Australian companies and their capabilities with identified overseas opportunities. State Governments: Most State Governments in Australia run informal local participation style policies for industrial participation. Western Australia still speaks of a countertrade requirement but this is really industrial participation. The State is likely to be involved in IP but in all cases expects to have SME involvement. The US/Australia Free Trade Agreement requires offset agreements to be limited except at the Federal level but States may opt out and keep their programs running.

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The AIC Model

Australia with New Zealand: The Australian Government requires suppliers of defence equipment to provide opportunities in their purchasing activities for the development of Australian industry, and this activity may embrace New Zealand too under a reciprocal agreement between the two countries known as the ANZCERTA Agreement. Industries in Australia and New Zealand are regarded as a single defence industrial base; however, there are some restrictions on the use of New Zealand industry in the AII Program that are designed to protect Australia's strategic objectives. In collaborative projects involving Australia and another country there may be restrictions on the handling of intellectual property that limit its disclosure to third countries. In such cases, New Zealand industry involvement in the project will be subject to observance of all the applicable government-to-government protocols.

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Austria

[07/09] There are no published guidelines. The offset contract is signed between the defence contractor and the Federal Ministry of Economy, Family and Youth (Offset Department) (BMWA). The contract is provided only in German. Offset is required on all defence procurements above the threshold value. An internal ‘key success criteria’ procedure guides the BMWA in its decisions. The BMWA evaluation committee has twelve members; evaluation tends to be a protracted affair. A causality clause in the offset contract clarifies the projects that qualify for credits. Any new business generated by an offset project is measured against the mean average business activity of the previous three years. Any achievement above the average is eligible for credit. Objectives: High local content of the military products that have been purchased. Technology transfer, education, direct investment, job creation, sustainable and long-term business relations, gaining access to new markets and supply chains. Offset credits are awarded for the following sectors: defence, aerospace, automotive, and IT. Direct / Indirect: Although direct projects (directly related to the acquisition) are preferred, the obligor may offer direct or indirect projects. The contractor is not obliged to offer more than 50 percent by way of local content, but a lower offer must compensate with delivery of either indirect or civil projects to make up the difference to 100 percent. Exceptions:- The purchasing agency may elect to ask for a higher percentage of directs for specific acquisitions. When this happens special bidding requirements will be detailed in the RfP. The contractor will have to cooperate with Austrian companies on maximising local content in excess of 50 percent of the offset commitment. The contractor is then relieved of executing further offsets, but any failure to deliver will be penalised. Quota: The minimum offset quota is for 100 percent of contract value.

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Suppliers are asked to declare in writing both the percentage of offset that they offer as well as the liquidated damages they will pay should they default. The outcome is a matter for negotiation. Penalties: Penalties are a matter for negotiation after the penalty is bid for by the obligor as part of the competitive process. They are generally settled at 5 - 10 percent of the unfulfilled part of the obligation. Threshold: 10m Austrian Schillings, equivalent to c. €726,000. Activities: The preferred areas of activity are for aerospace, life sciences, automotives, environmental technologies, and IT. The focus should be on sustainable business whether for the civil or military sector, with high diversification spread over key industries such as: - Life Sciences - Environmental Technologies - Other Industries (e.g. military technology, civil engineering, plastics) High technology projects are wanted as well as R&D. Austria does not specify the meaning of ‘high technology’. The Ministry of Defence buys only high tech equipment from foreign suppliers and demands benefits of comparable quality. These benefits should be for the sectors described above. The regional distribution of benefits is important, particularly when they provide skilled job opportunities. SMEs: In the past, there was a particular requirement to give preference to SME's in the fulfilment of offset obligations. That policy has changed and it is now recognised that there may be different interpretations of an SME based on the number of employees, the European Union definition, or whether a prime has a small subsidiary, etc. The primary concern is for benefits not to be confined only to the larger companies. Evaluation Cost: A charge of up to 0.3% of the offset credit value may be levied if an expert is required and appointed by the MoEA to access the value of the offset project. Obligors may be successful in waiving this if they can maintain that it is inappropriate.

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Multipliers: Multipliers are awarded selectively for special situations. They are chiefly in the range of 3-10. A multiplier model has been devised by a science and technology team at the Ministry of Public Economy. Sometimes the multipliers are liberally elevated beyond 10 by allocating them as ‘accumulated benefits’ according to three different scales. This does not suggest they are readily awarded; the criteria are strictly applied and are not published. The first scale concerns input causality, the second is for output analysis, and the third reflects negotiations. The net effect is that the science and technology team will take into consideration the penalty, the capital employed, the size of the company chosen for the project, the location of the project, and the considered outcome of scales 1 and 2 before awarding a multiplier. The calculation is therefore a rather complicated and subjective equation. The most likely areas of qualification are for R&D, education and internships, and direct investments. Pre-Offsets and Credit Transfers: There is a system in place for companies prepared to pre-offset, but the present administration does not look favourably upon this practice. This displeasure is based on the impression that most primes are now related to one another and will therefore switch credits between them. Pre-performance offset will qualify for credits provided it has been agreed before the Main Contract has been signed. Credits will be valid for five years, but credit transfers or credit trading might not be sanctioned. Contractors should not automatically assume their credits will qualify for a future procurement that is unrelated to the original order. The Minister of Economic Affairs and Labour has ruled that the ministry is not entitled to allow the transfer of offset credits for new contracts. Old banking agreements will continue to be honoured. Fulfilment Period: The obligor must state in its offer the length of time required to fulfil the offset obligations. Although for exceptionally large contracts the government might fix the period, that is exceptional. Usually it is for the obligor to propose a reasonable completion period within a range of 5 - 15 years.

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Belgium [10/11]

Anticipated Policy Changes

A Royal Decree will make substantive changes to the offset guidelines in compliance with the EC Directive. Ministries are discussing a draft but the decree’s release date is not known. Particular attention will be given to sub-contracting.

================================ The Federal Public Service Economy (FPSE), previously the Ministry of Economic Affairs, is responsible for implementing offset contracts. Offset pledges made during the bidding process will be taken into consideration only when asked for in the Request for Proposals (RfP). The Council of Ministers will be asked by the FPSE to approve an offset requirement for an acquisition when that defence acquisition exceeds the thresholds (see below). The Council of Ministers does not have to approve a request for an offset requirement. The Belgian government has tended to waver between favouring and discouraging applying offset, depending on the composition of the coalition. The policy now is to encourage it. When defence procurements cost more than €2.7m the FPSE will be flexible during negotiations. Defence acquisitions costing more than €11m will be dealt with by an Invitation to Tender and the offers of offset benefits submitted by the contractor will thereafter be non-negotiable, although further explanations may be called for. Once the tenderer introduces an offset proposal the tender party is bound by it whether or not it is relevant to winning the contract. There is no upper limit to the value of the offsets that may be offered when the RfP provides for them, though in terms of the evaluation process the offers are capped at 100 percent of foreign content value. Commitments concerning industrial benefits are usually particularised in a clause contained in the purchase contract with the Ministry of Defence. They may otherwise be dealt with by way of a separate agreement (convention) with the FPSE. The Ministry of Economy has set up a Council for Industrial Benefit to make recommendations on policy. The Council is composed of representatives of the Central Economic Council; the Economic & Social Council of the Brussels/Capital region; the Economic & Social Council of Flanders; the Economic & Social Council of Wallonia, and the FPS Economy. Quota and Procedure: Important procurements of the Ministry of Defence are in general executed through one of the following contractual procedures:

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• Invitation to Tender: the offer submitted by the tenderer cannot be

negotiated later. The contracting authority can only ask for further explanations after the submission of the offers;

• Negotiated Procedure: the conditions of the contract can be negotiated.

The Ministry of Economic Affairs does not quantify the percentage of industrial benefit to be offered. It is up to the tenderer to decide what credible economic commitment it can make taking into account the totality of the award criteria for the procurement. However, the quantity of the industrial benefit taken into consideration for the economic evaluation cannot exceed the total value of the procurement. If the tenderer offers an industrial participation programme it is asked to commit itself by identifying the minimum Belgian added value that will be achieved, expressed as a percentage of total contract value. That percentage has to be spelt out according to the following categories: Direct participation; Defined as: ‘Participation by Belgian industry in the supplies and services which are covered by the contract signed with the Ministry of Defence and which are destined for Belgian needs only’. There must be causality. Purchases made by the obligor or its agents from a Belgian company must be of products or services which would otherwise not have been undertaken in Belgium without the economic commitment. The orders shall concern equipment making use of new technologies or be of a highly technological level. The orders must create unambiguously a new or additional business flow in favour of Belgian industry. Semi-direct offset; Defined as: ‘Offset relative to equipment and/or services identical to those covered by the contract signed with the Ministry of Defence or very similar and intended for the same application.’ The technological level of semi-direct offset orders must at least be equivalent or greater than that of the direct participation, but realisation depends on sales to third markets. Indirect offset. Defined as: ‘Offset relative to equipment and/or services other than those covered by the contract signed with the Ministry of Defence.’ It is imperative that the tenderer introduces convincing arguments allowing the FPSE to verify that the technological level will improve, the technology is new, and there will be causality. Orders placed with Belgian industry have to be of a high technological level and must generate new or additional business for the benefit of Belgian companies. Investments cannot be accepted as industrial benefits. Technology transfers do not qualify for credits, but ‘added value’ accruing from export achievement is likely to qualify.

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Criteria for Comparison of the Economic Benefits Offered: The economic offer shall be assessed by the FPSE according to the following criteria:

1. technological level of the industrial benefit proposals; 2. accuracy of the content of the economic offer; 3. agreements concluded with Belgian industry; 4. volume of industrial benefit according to the following order of priority:

direct participation semi-direct offset indirect offset

5. new business flow is given preference over additional business flow; 6. causality of the offset proposals; 7. proposed performance period for the fulfilment of industrial benefit compared

to the delivery period to the Ministry of Defence; 8. credibility of the economic offer and of the tenderer (financial situation,

market situation, ability of the tenderer to execute an industrial benefit programme, etc.)

Threshold: There are four thresholds, according to the type of procedure:-

1. €11m relating to supplies or services awarded after an Invitation to Tender.

2. €2.7m relating to supplies awarded through a restricted invitation to tender or a negotiated procedure with publication in the Official Gazette.

3. €2.2m relating to services awarded through a restricted invitation to tender or a negotiated procedure with publication in the Official Gazette.

4. €1.1m relating to services awarded through public procurement contracts for supplies awarded through a negotiated procedure (non-tender) where the procurement is not published in the Official Gazette.

In practice industrial benefits are not required for contracts of less than €2.5m. Weighting: The Council of Ministers decides whether or not industrial benefits will be requested for each defence acquisition during competitive tenders and will decide the weighting to be allocated to offset by way of award criteria in the evaluation process. The weighting value of an offset pledge will not exceed 15 percent. The presence of the offset pledge and the weight allocated to it will be taken into account during the competitive phase only if two or more competitors are within a range of 10 percent with their bids. When the purchase includes an offset requirement in the RfP the tenderer is invited to introduce an ‘economic offer’ (industrial participation programme) in tandem with its

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bid for the supply contract. That is optional. If the tenderer decides not to offer an offset benefit the bid for the equipment and services will not be judged as irregular. A bid without offset will still be considered by the Ministry of Defence, the bidder will achieve zero points in the qualification criteria, but the bid remains valid. Negative Multipliers at the Bid Stage: Belgium has revised the criteria by which economic benefits are compared at the bid stage by introducing negative multipliers. The FPSE will penalise competitors offering less than 80 percent of contract value by way of offset benefits with a multiplier “of less than half of one.” Offers of 80 percent and more will be rewarded with a multiplier of one. The revision does not make offset benefits a mandatory requirement, but the chances of winning in a competitive field will be diminished if the contractor does not offer offsets or fails to breach the 80 percent mark. A bid absent of an offset pledge remains valid but will achieve zero points in the qualification criteria. Penalty: The Council of Ministers will decide the magnitude of the penalty in case of non-fulfilment. The guidelines require that the penalty will be not less than 10 percent of the value of the non-fulfilled industrial benefit. In practice, that level has also turned out to be the maximum levied. The contract will contain restrictive measures intended to ensure the fulfilment of the industrial benefit commitments. A bank guarantee, due at first request, will cover the penalties in case of non execution of the economic obligations. Progress will be assessed every six months and the guarantee scaled back as pledges are met. Multipliers: Multipliers have been introduced for acquisitions above the €11m threshold. They are awarded to obligors who comply with two specific requirements:

• A multiplier of 2 ‘on the generated turnover’ may be awarded if the obligor offers technology transfer of particular interest to Belgian industry. Belgium will not accept the value of the technology transfer as an industrial benefit for crediting purposes, only the business that results. Agreement on whether an activity will qualify under this condition will be reached as a result of negotiation between the parties.

• A multiplier of 2 will also be awarded to foreign primes which invite trainees to undergo internships at their own manufacturing plants. The multiplier will be based on the cost to the prime, capped at €5,000 per month per trainee. If the trainee subsequently finds employment in Belgium within six months of the internship ending, using the skills learnt, the multiplier is increased to 5.

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There is no limit to the number of internships that a prime can offer.

It is necessary to negotiate the multiplier options at the beginning of the negotiation proceedings. Fulfilment Period: The tenderer shall commit itself to achieve its economic commitment within a well determined and reasonable time period and it will be bound to pay a penalty for the non-executed economic obligation within that period. Industrial benefit will be considered as being fulfilled within this period provided that the orders have been invoiced by the Belgian companies concerned. The time allowed for fulfilment of offset pledges depends on the Ministry of Defence and the time allowed under the purchase contract. Usually, pledges should be closed within two years after supply, but longer is negotiable. Regional distribution: The FPSE asks obligors to present proposals for a balanced distribution of the benefits between the country’s three regions. The FPSE does not distinguish in this respect between direct and indirect offsets. All directs then may be for one region and all indirects for another. This will apply only for important procurements and certainly not those less than €11m in value. The FPSE will not include regional distribution in the evaluation criteria. The FPSE will determine whether any regional distribution proposals that are made are realistic, viable, and in accordance with the proposals in the offer document. Pre-offset activity: The FPSE is entitled to take into consideration offset pledges submitted as soon as the tender requirement is issued and during the tender process, but not beforehand. Therefore pre-offset activity is allowed but may not be introduced for qualification until the tender process has started. Pre-performance offset activities do not qualify for advance credits. No preference will be attached to them in the qualification process. Credit Banking: Belgium’s Audit Agency has determined that the use of credit banking could be interpreted as a distortion of the competitive process. Officially, it is therefore not allowed, but in practice the ministry has developed subtle ways to overcome the ban. A bidder with no previous experience in Belgium would not be in a strong position to ask for credits, but if it performed well its claim for bankable credits would be considered.

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Bolivia [01/10]

Industrial participation occurs occasionally and is entirely reactive. For instance, Bolivia at first postponed the purchase of a presidential plane but decided to buy it because of the vendor’s offer to set up an aircraft maintenance service centre. Although there is no formal countertrade policy Bolivia has signed a number of agreements for Venezuela to provide diesel fuel to Bolivia in exchange for foodstuffs.

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Brazil [04/11]

The offset policy is administered by the MoD under a government decree. The three armed services administer their offset policies separately. The Brazilian Air Force (BAF) is the most experienced branch of the armed services concerning the management of offsets. The BAF administers the policy under a ‘Directive to Strategic Action’ signed in 1991 and amended in 1992. A number of General Directives were issued to the BAF in December 2005 making offset a mandatory requirement for procurements over $5m. The Army has been asking for offsets sporadically since 1988, but appears to be unenthusiastic. The Navy formulated an offset policy in December 2001, but also has limited enthusiasm for it. Brazil’s defence offset policy has been formally in place since December 2002.

Industrial Cooperation / Offset Policy:

o Order 764/MD – MoD Policy Directive on Offsets, Dec 27th 2002

o National Defence Industry Policy (NDIP) – Order nr. 899/MoD, 19 Jul 2005

o Order nº 1.395/GC4 – Commercial, Industrial and Technological Cooperation (“Offset”) Policy and Strategy for the Air Force Command, Updated Dec 13th, 2005. (Air Force Regulation DCA 360-1)

o Order nº 1.396/GC4 – Institutes the Commercial, Industrial and Technological Cooperation (“Offset”) Committee, Dec 13th, 2005.

o Order nº 1.397/GC4 – Guidelines for the Negotiation of Commercial, Industrial and Technological Cooperation (“Offset”) Agreements, Dec 13th, 2005. (Air Force Regulation ICA 360-1)

o Strategic Actions towards NDIP - Normative Order nr. 586/MoD, 24 Apr 2006

o Joint-workgroup on improving national defence industry capabilities between Ministry of Industry & Trade and MoD established by–Joint-Order nr. 1068, 21 Jul 2008

o National Strategy of Defence – Decree nr. 6.703, 18 Dec 2008

The three branches of the military are at liberty to impose offset obligations best suited to their own respective objectives. The relevant service negotiates directly with the prime. The Ministry of Defence has the right to oversee offset policy but will not interfere in negotiations unless any of the three defence forces—air force, navy, army—request it.

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The MoD works through the Defence Industry Military Committee. The offset agreement is between the relevant armed forces and the foreign supplier, with involvement from the Secretariat of Logistics & Mobilisation (SELOM). The BAF’s Sub-directorate for Development and Programmes (SDDP), together with the Navy, Army, and Ministry of Trade, manage the industrial cooperation programmes.

There are no published guidelines, only internal policy documents. The offset agreement must be negotiated and signed at the same time as the purchase contract. Government-to-government agreements are excluded from offset requirements. Air Force: The Supply Contract and the Offset Contract must be signed at the same time. Control of BAF offset agreements is split between the Brazilian Air Force General Staff (EMAER) and the Secretariat for Economy and Finance (SEFA). EMAER is responsible for the strategic aspects of offset, and SEFA with the accomplishment of offset credits.

SEFA acts as a facilitator between the financial institutions, such as the Government Accounting Office (TCU), the Ministry of Finance and the Ministry of Planning. SEFA is also in charge of auditing inside the Brazilian Air Force.

Projects must be discussed at the early stages of programme lifecycles. The presentation of a sound business plan is vital.

The Commission for Monetary and Assessment Projects (CMA) must approve projects first, ensuring that the finance is ready.

An Air Force Cooperation Committee assesses the strategic importance of projects for the Air Force. The committee has been established at a high staff level and has assumed responsibility for defining offset requirements. It is under the jurisdiction of the Industrial Cooperation Division (DCI) of the Sub-Directorate of Development and Programmes (SDDP), which is responsible for overall management of offset programmes. The science and technology department (DCTA) is an internal BAF department which provides relevant support. Technical support is provided by the Institute for Industrial Support (IFI). Co-ordination and implementation is the responsibility of the Compensation Committee of the Ministry of Aeronautics (CE-COMAER), a technically specialised organisation managed by the Technical Council of Aeronautics & Space (CONTAE). The CE-COMAER committee comprises representatives drawn from the R&D Dept., General Support Command, General Personnel Command, Civil Aviation Dept., and

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the Secretariat for Economy & Finances – Aeronautics. The following members of the Public Federal Administration also attend: Dept. of Foreign Commerce (Ministry of Economy, Finance, & Planning), and the Dept. of Commercial Promotion (Ministry of Foreign Relations). Representatives of other entities connected to the aerospace industry may be invited to attend. CE-COMAER assesses offset credits for each project within its areas of interest in the following order of priority: • Aeronautics Institutions; • Brazilian aerospace industry; • Brazilian defence industry; • High technology teaching and research institutions; • High technology for the national economy.

Brazilian Air Force’s Structure for Offsets

Key: EMAER Brazilian Air Force General Staff DCTA The science and technology department IFI The Institute for Industrial Support SEFA Secretariat for Economy and Finance COMGAR General Command for Air Operations COMGEP General Command for Personnel DEPENS Aeronautics Dept. for Teaching DECEA Dept. for Airspace Control COMGAP General Support Command

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Objectives: The focus in the BAF is on the defence and aerospace industry, with a preference for direct benefits, although indirects are acceptable. Eligible activities range from transfer of technology to investment and licensed production. Industrial participation is acceptable, but only if joint projects are defined in advance and milestones are established. Programmes for the BAF must comprise life cycle and associated projects. Offset is understood to involve buy-backs, otherwise it is referred to as industrial participation or industrial cooperation. The BAF will invite other ministries to benefit from high-profile programmes. The other ministries that have asked to share in the benefits include the Ministries of Trade, External Relations, Transport, and Mines & Energy. They want benefits for large national projects such as high-speed rail transportation and hydrocarbon offshore prospecting. Every acquisition should provide technology transfer and result in a partnership with Brazilian companies. Contenders should present signed MoU’s evidencing potential joint ventures when submitting their proposals. This is to satisfy the BAF that recipients are comfortable with the projects they have been offered. The objective is to generate local production, but not necessarily local assembly. Offers of machine work, assembly work, even production, may be turned down. In general terms the goal is to develop and sustain the defence industry and to increase self-sufficiency and capacity in all areas of technology within the civilian and military aerospace sector. Brazil is especially interested in developing a maintenance repair and overhaul (MRO) capability. Also:

• To modernise the aerospace sector and achieve technology transfer and new processes,

• To provide technological industrial and commercial benefits,

• To establish new export opportunities for goods and services,

• To obtain foreign resources to increase the industrial and technological efficiency of the aerospace sector,

• To protect hard currency reserves through import substitution,

• To foster and strengthen the MoD’s interest sectors,

• To increase opportunities for specialised labour.

There is usually a degree of flexibility in the negotiation of each contract. Business Plan: The obligor must present a business plan. This will:

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• Describe current and future benefits, such as workload, strategic partnerships, possible spin offs, etc.

• Assess the costs, schedule, resources, risks, etc.

• Consider the long-term sustainability and workload (including future possibilities) for the industrial cooperation projects.

• Transfer of technology must have a feasible goal, show how it is associated to government/local industry areas of interest.

• Show firm commitments (especially the beneficiary’s).

• Estimate government and beneficiary costs.

Direct / Indirect: Contenders must meet demands for technologies that will benefit the Air Force exclusively. These benefits will take precedence over any technologies offered to other sectors of Brazilian industry. Work for industry is very much a secondary consideration and could be ineligible. Tax Hazard: If local industry claims to be able to produce a particular item, but the foreign contractor prefers to import it, the contractor will be landed with import duties of 60-75 percent. In manufacturing, the local content threshold is 60 percent, but in telecom and other sectors, such as automotive or oil and gas, powerful trades unions monitor the agreement and may actually set the duty threshold. Threshold: $5m, whether by a single or cumulative contracts within one year. Penalties: Penalties are negotiable but generally are up to 5 percent of offset contract value. Justified fulfilment delays are usually dealt with leniently. Non-fulfilment penalties tend to result in a request for increase-based solutions.

There have been occasions where the government has disclosed non-performance to the international community and/or increased the quota to be discharged in addition to the contractual requirement.

There are two kinds of penalty clauses; compensatory and default. With ‘compensatory’ clauses the obligee may insist on fulfilment or opt for payment of the penalty defined in the contract as a fixed amount. However, the obligee is not allowed ‘to profit’ from the situation.

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Default penalties are tied to non-performance of a specific obligation and it is lawful for the penalty to be compound. The government is entitled to impose restrictions on the importation of goods manufactured by a defaulting obligor. Quota: The intention is to achieve 100 percent of foreign content value, though less is possible. At least 10 percent is to be fulfilled as direct offset and at least 60 percent as indirect offset within the defence sector. Multipliers: The MoD’s offset policy does not mention multipliers, but they can be agreed through negotiation with the military branches and the MoD. The following is a general guide to the multipliers available though in practice the range is restricted to 1 – 5. Exceptions are for investments and high technology transfers:- Co-production 3-6 Production under license 4 Subcontracted production 3 Investments in Brazilian aerospace 5 Training aerospace 2 Training at bidders (OJT) 3 Technology transfer 4-10 Purchase of aerospace products 4 Contracting aerospace products 3-5 Donations/leases equipment 3 Costs in development 4 Fulfilment Period: The fulfilment period is negotiable but is typically equal to the commercial contract term. Banking and Pre-Offsets: The Air Force Offset Committee considers approval on a case-by-case basis. The banking of offset credits is allowed under certain conditions: a) A provision for credit banking in the Offset Agreement has to be signed by both parties; b) The credits will have a five-year maximum validity period; c) Transfer is limited to companies within the same holding;

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d) Credits can be used to the maximum extent of 50 percent on an obligation under a new contract. Transfers of credits (swaps) and pre-offsets are generally not accepted, but may be considered on a case-by-case basis. General Guide to Procedure: The following table illustrates the players involved in the IP process when an acquisition is under way.

BAF’s Acquisition and Offset / Industrial Participation Process:

Key: EMAER Brazilian Air Force General Staff Mil. Org. Purchasing authority (BAF, Army, Navy) DCTA The science and technology department IFI The Institute for Industrial Support SEFA Secretariat for Economy and Finance The DCTA is brought in to coordinate and execute projects with the contractor together with the purchasing agency. Technical support is provided by the IFI. The three activities at the bottom of the chart are the responsibility of SEFA which must liaise with the Financial Affairs Secretariat, the Federal Trajectory Secretariat, and with the financial institutions and banks when it is necessary to establish a financing contract. Other important players include the Brazilian Court of Audit (TCU); the Federal Prosecution Office (MPU); and the Office of the Comptroller General. Previously, the management and auditing of industrial participation agreements was the exclusive remit of EMAER. Today it is split between EMAER and SEFA.

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Civil Offsets: The government would like to extend its offset policy to cover significant civil sector acquisitions from foreign suppliers. The policy would include industrial participation and counterpurchase. Serious discussions sometimes take place between various ministries in an effort to find a constructive solution, but no policy is in place. Proposals for modifications of the Federal Procurement Law 8.666 (Public bids and Administrative Contracts) to permit civil offsets were tabled in 2010, but are stuck pending consultation on how to overcome WTO restrictions. A civil offset policy would be applied in particular to acquisitions concerning nuclear energy plants, satellite TV requirements, and for oil rig construction. Offset benefits have in the past been secured for the supply of civil aircraft to the national airline, Varig. The benefits that would be asked for under a civil offset policy would be for technological and industrial participation programmes, specifically concerning the defence, health, IT, telecommunications and R&D sectors. MERCOSUR: Member states – Argentina, Brazil, Paraguay, and Uruguay – are obliged to submit for review to the Common External Tariff (TEC) commitments that may breach the Most Favoured Nation status that allows for free trade between members. There are no restrictions to countertrade relations between members because there are no specific rules governing its implementation, but international transactions intended to bring ‘extensive benefits’ for Mercosur states should ‘take into consideration’ any discriminatory treatment in relation to any of the members. It is possible for a countertrade transaction to be revoked if it results in concessions against the interests of other members. Countertrade: Countertrade is largely confined to Government to Government bilateral deals. The Federal Revenue Service must review and approve countertrade proposals. They are more likely to be approved if they involve high-priority imports such as petroleum or products contributing to energy self-sufficiency or healthcare, scientific instrumentation or exports of manufactured goods. Products obtained from Brazil in countertrade deals include petrochemicals, oil-drilling equipment, armoured cars, foodstuffs, orange juice, sugar, chicken, beef, unrefined soybean oil, cocoa butter, coffee, cocoa, leaf tobacco, semi-processed hides and leather, footwear, machinery, electrical goods, cotton, iron alloys, nickel, and tin.

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Brunei [10/05]

A Defence White Paper and Strategic Plan published July 2004 calls for the development of an offset policy with an emphasis on indirect offsets. Offset guidelines were expected to be published by mid 2005 but remain in the planning stage. The Ministry of Defence will seek a pro-active and flexible Defence Industrial Policy in order to maximise the economic benefit to the country from defence expenditure. Brunei recognizes the limited opportunities available for so-called ‘economic enhancement’ given the limited industrial base. An offset agency has been established within the MoD and a Deputy Permanent Secretary has been appointed to run it. The White Paper says that the MoD is to establish guidelines for the enhancement of defence related economic activities “to regulate suppliers’ obligations and commitments to the country.” Civil programmes and acquisitions will be linked to Royal Brunei Technical Services (RBTS) for dual-use potential. RBTS was formed as a government owned company in 1987 to provide procurement services for the armed forces, police and security services. The role of RBTS is to evaluate the commercial reliability of suppliers. Objectives: Partnerships will be sought for the repair and maintenance of vehicles and small vessels, the movement and storage of bulk cargoes, communications and information technology skills, and the provision of other basic services of value to the Royal Brunei Armed Forces (RBAF). Investment in science and technology, including research and development, is crucial to the future capability of the RBAF. The telecommunications sector also is in need of improvements. Threshold: Expected to be B$6m ($3.7m). Quota: 80 percent of contract value. Penalty: Liquidated damages will be 10 percent of the unfulfilled obligation.

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Period: There will then be eight years to satisfy the commitments. There will be an 18 month grace period from contract award to allow obligors to establish their business in Brunei before the obligations comes into effect. Multipliers: There will be multipliers recognising everything from local content right the way through to technology transfer and training, with incentives for national manpower. Particulars are not yet available.

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Bulgaria [10/11]


Bulgaria intends to amend its offset regulations in February 2012 with the publication of a new ordinance. In the interim, the country will rely on Article 346, as appropriate, and will refrain from asking for indirect (non-defence) projects. The ordinance will make Article 346 a significant instrument to be used at every opportunity.

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An Inter-ministerial Council of Special-Purpose Public Procurements (ICSPOA) will be convened to consider and approve offset projects and agreements. The ICSPOA decides the appropriate ratio of indirect and direct projects, and the amount of the performance guarantee.

The ICSPOA is chaired by the Minister of Economy and Energy (MEE). It comprises the deputy ministers of MEE, Finance, Defence, Foreign Affairs, the Interior, the Executive Director of Invest Bulgaria, and the Deputy Chairman of the State Agency for Information Technology and Communications (SAITC).

The ICSPOA convenes at least once every quarter under the supervision of the Prime Minister and the Chairman of the Bulgarian Investment Agency (itself supervised by the MEE), and reports to the Council of Ministers. It evaluates tenders with indirect offset projects and considers the admissibility of offset service providers.

The opinions of each member of ICSPOA must be attested by signature and dissenting opinions must be explained in writing.

The MoD Armaments Policy Directorate manages direct offsets, negotiates direct projects, and monitors their implementation. The MEE oversees the performance of indirect offsets.

The MEE signs the offset agreement. Evaluation of offset projects is considered jointly by a SPPOA Joint Evaluation Committee together with the MEE.

SAITC joins in the dialogue between governmental institutions and offset beneficiaries.

The Offset Programmes Directorate (OPD) has two sub-committees within the MEE. They administrate the activities of the Inter-ministerial Council. One sub-committee shall examine the technical qualities of tenders, the other consists of two working groups which consider direct and indirect offset proposals respectively.

The OPD is located within the MEE and is therefore responsible for indirect offsets. It provides the Framework Contract for the procurement, and a Framework Agreement for the offsets. These are followed by specific agreements for both, which are in turn followed by semi-annual reporting for offset implementation.

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Invest Bulgaria, a government agency that offers professional assistance to foreign investors planning to establish or expand business operations in Bulgaria, enjoys a consultative function under the jurisdiction of the MEE. Its activities are related to investments in indirect offset programmes.

The Offsets are regulated by virtue of Art. 13 of the Public Procurement Law (adopted 2004, last amended July 2010) which refers to the Ordinance on the award of Special-Purpose Public Procurements. This Ordinance was adopted by the Council of Ministers Decree No233/ 03.09.2004 and last amended by the Council of Ministers Decree No 126/21 June 2010, effective from 29 June 2010.

Offsets are regulated under Public Procurement Ordinance (Decree No. 233) dated 3rd September 2004. The ordinance came into force 1st October 2004. Chapter III of the Ordinance, which covers Procedures for the Assignment of Special Public Procurements, was revised in April 2006. A Supplemental Ordinance became effective 23rd January 2007. Current rules are administered under an ordinance passed June 2010.

Agreement Process:

The Offset Agreement is awarded and signed by the Minister of Economy, Energy and Tourism and by the contractor. A commission is appointed by the contracting authority (e.g. MoD) and includes representatives from the Ministry of Economy, Energy & Tourism and the Ministry of Finance.

A sub-commission will examine the technical and financial parameters of the tenders. It will include, among others, representatives of the Ministry of Economy, Energy & Tourism and the Ministry of Finance.

A sub-commission which shall consist of two working groups will examine the direct and indirect offset proposals.

The ICSPOA then assists the Council of Ministers in approving the proposals and any pre-offset activities.

Offset Management:

The Minister of Economy, Energy & Tourism will be responsible for the performance of the indirect offsets. Control in respect of direct offsets shall be exercised by the contracting authority (e.g. Minister of Defence).

SAITC:

The role of SAITC is to hold a dialogue between governmental institutions and the stakeholders of offset programmes in the development of projects with a high Information Communications Technology (ICT) component.

SAITC also assists ‘Special Public Procurements with an Offset Agreement’ (SPPOA) with the identification of successful ICT projects, and evaluates ministries’ ICT projects that exceed BGN 1m (c$640,000) in value.

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Objectives:

The main goal is to integrate the defence and security industries into the European Defence Technological and Industrial Base (EDTIB), and to establish new capabilities compatible with the defence and security sectors.

Indirect offsets should be associated with activities that will strengthen the defence and security sectors, particularly with regard to production of dual-use articles.

Technology transfer is also a priority. Pre-offsets are welcome. Threshold:

The threshold is €5m, although the Minister of Economy and Energy is entitled to require offsets for contracts above €2.5m.

Quota:

The requirement is for 100 percent of purchase contract value.

Penalties:

The liability for non-performance is 20 percent of offset contract value. This will be applied only when no fulfilment at all has taken place.

There is a 10 percent non-liquidating penalty for partial non-fulfilment, supported by a 5 percent Letter of Credit that has to be established 30 days after contract.

Direct / Indirect:

Contractors are to discharge their offset obligations in the ratio of 30:70 percent for direct / indirect respectively. The ratio is subject to some variation, with a range of 5 percent up or down open to negotiation.

At least 50 percent of indirect offsets are to be fulfilled within the first 5 years.

Direct offsets are defined as all activities that are directly related to the defence equipment supplied, including maintenance and overhaul during the life cycle, repair, integrated logistic support, delivery of spare parts and test equipment, additional technical documentation, training of staff, life cycle maintenance and support, etc.

Indirect offsets consist of all other investment and export activities. This covers defence-related activities as well as dual use (civil) projects.

Multipliers:

No multipliers.

Fulfilment Period:

The longest implementation term permissible under the regulations is ten years after the supply contract is signed. This applies equally to direct and indirect programmes. Bulgaria will look kindly on requests for extensions to the fulfilment period.

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Pre-Offsets and Banking:

Approved pre-offset projects earn credits that can be banked for 7 years. The credits are fully transferable between different contractors. To qualify for pre-offset credits contractors will need to show that projects relate to the defence and security sectors. Indirect defence projects are acceptable; dual use (with civil) might be acceptable, depending on the circumstances. Bulgaria is looking for investments, technology transfer, licensed production, and R&D.

Weighting:

The main criteria for an award of a contract are the technical and financial part of the offers. The offset is not an award criteria.

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Burma

[10/04] The Western arms embargo against Burma has obliged Burma to secure credit or request barter deals for almost all foreign acquisitions. For military supplies, since securing credit lines is almost impossible, the government wants to exchange Burmese teak and timber and other natural resources, especially for aircraft. There is no established policy but the Ukraine’s State Company for Export & Import of Military and Special Products and Services is establishing a factory in Burma to assemble 1,000 armoured personnel carriers. This is the first time that industrial participation has been evident. The importation over ten years of all component parts from the Ukraine is believed to be worth significantly more than $100m, according to regional press reports. Military procurement decisions in Burma are perceived to have been based more on the availability of concessionary finance than on the country’s perceived military requirements. In the civil sector there are occasional compensation-type structures, mainly for agri-commodity production. There used to be several significant bilateral private-sector barter contracts but bureaucratic obstacles are deemed too difficult for many to take place. There are bilateral agreements with Malaysia for the supply of oil against agricultural goods and cash.

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Canada [10/10]

Canada has introduced changes to the guidelines that are scheduled to be implemented in phases throughout 2010. If both sides agree, contractors with existing contracts and outstanding obligations on their books will be allowed to migrate into the new regulations on a case-by-case basis.

Industry Canada is responsible for the administration of the Industrial and Regional Benefits (IRB) policy in collaboration with the Regional Development Agencies. Industry Canada operates under the direction of the Minister of Industry and works in partnership on procurement projects with Public Works and Government Services Canada, which oversees the procurement process, and with the Department of National Defence, which establishes the technical requirements. Procurement strategy is developed jointly by the Department of National Defence (DND), Public Works and Government Services Canada (PWGSC) and Industry Canada (with input from the Regional Agencies) for major defence procurements which have IRB requirements. The Regional Agencies comprise Western, Atlantic, and Quebec. The government requires prime contractors with major IRB obligations to develop a strategic plan for achieving their IRB obligations in Canada. These plans should lead to the development of substantive, market-leading business initiatives that would further position Canada on the world stage. Bidders are advised to prepare early. They should search out Canadian capabilities and possible business partnership opportunities before the RfP is released. The RfP will outline the IRB requirements. IRB evaluation is the responsibility of the Industry Canada team, which includes the Regional Development Agencies. The IRB policy applies equally to Canadian defence contractors that import equipment and services with foreign content in excess of 40 percent of purchase contract value. The basic unit of measure of all IRB proposals is Canadian content value. Canadian content value is defined as that portion of the selling price of a product or service associated with the work performed in Canada. In the IRB proposal the contractor is required to identify the dollar value of Canadian content to be achieved in each transaction and specify the value in terms of a percentage against the total contract value. Objectives: The objective is to ensure that an equivalent amount of high-value economic activity is injected into the Canadian economy and to help ensure that the Canadian economy in all regions benefits from defence procurement. There will be emphasis on innovation and commercialisation-related activities.

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Prime contractors should select their Canadian partners to generate long-term, sustainable business relationships in Canada. Canadian firms are to have access to work on global value chains. In some instances the value of work on foreign assets is to be equivalent to work on the assets purchased by Canada. Bidding Process: When there is an IRB requirement bidders must submit an IRB proposal as part of their overall bid. The IRB proposal is a specific plan that outlines how the bidder plans to engage with Canadian companies over the life of the contract. The IRB proposal responds to several key requirements, such as providing plans for regional and small business participation, along with specifically identifying business activities being proposed. A team led by Industry Canada evaluates each IRB proposal to determine whether it satisfies the requirements of the IRB Policy. In particular, bidders must outline how they will involve Canada's regions and SMEs. In competitive situations the IRB policy does not set pre-specified regional distributions, and the government never forces bidders to work with specific Canadian companies. Once the RfP is released, all informal discussions between bidders and government stop and communications are strictly controlled to ensure transparency and fairness. Regional Distribution of Benefits: Since an Agreement on Internal Trade (AIT) was implemented in 1994 the Federal Government can no longer direct benefits to a region. Obligors must meet distributional requirements by negotiation. The outcome is that agencies compete for business. There is a minimum requirement for 10 percent of the benefits to be directed to the three regions for which the government has a regional development framework: Atlantic, West, and Quebec. Threshold: The IRB policy is applied to selected procurements that are valued at greater than C$2m ($1.98m) and for all deals over C$100m. Industry Canada will invite contractors with IRB obligations exceeding C$1bn to identify a wide range of different activities. There will be collaboration in strategic work plans, referred to as ‘bundling’ programmes. Quota: The Canadian government expects proposals that amount to 100 percent of the bid price measured in Canadian Content Value.

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The current requirement demands that 60 percent of the obligation is identified when the contract is awarded. The new arrangement allows for a phased introduction of the identification of projects over a longer period: Contractors must identify 30 percent of their obligations at the time of contract award, with an additional 30 percent to be within one year; the other 40 percent can be delivered over the remaining contract period. The average length of time to secure 60 percent of projects will therefore increase from one year (the current average eligibility period) to two years (average of one year plus one year post-award). Direct / Indirect: The IRB Policy recognizes direct, indirect (defence), and indirect (commercial) types of business activities. Direct offsets will not be wanted in every case. When direct offset is required, Industry Canada will credit Canadian work done on global platforms similar, but not identical to, those being acquired by Canada through participation in Global Value Chains (GVCs). Direct IRBs are goods, services or investments that relate to the item being procured by Canada under the contract. Indirect (defence) IRBs are goods, services or investments related to the contractor's other product or business lines or other approved investments that meet the established eligibility criteria. Both are measured for their Canadian content value (i.e., Canadian labour, goods and services). Indirect (commercial) activities are also acceptable. Opportunities for Canadian industry to benefit are open to all high technology sectors, not just for defence. They should be long-term, create export markets, and benefit from high tech applications. Multipliers: Multipliers have been introduced for investment in ‘multiparty consortia’. Multipliers will focus on ‘next-generation technologies and services’ and will provide bonus credits for matching Canadian industry investment. Consortium partners must target Canadian industry and post-secondary institutions, such as colleges and universities: These multipliers are indicative and subject to confirmation: For investment by the Original Equipment Manufacturer (OEM) in a multiparty consortium the multiplier is 5.

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For a matching investment by the Canadian partner the multiplier is 5. Prime contractors that invest in long-term, innovation-focused activities within Canadian start-up companies will qualify for multipliers for both input and output. Many of the multipliers will be for R&D activities and market-driven technology development. The maximum net multiplier to the obligor is 10. Although the focus will remain firmly on defence-related activities, indirect (commercial) industrial benefits will be eligible provided they result in high quality transactions for industry, particularly if they lead to global market entry opportunities. Whether direct or indirect, Industry Canada will measure activities for their Canadian content value (i.e. Canadian labour, goods, and services). Emphasis will be placed on innovation and commercialization. Multipliers will be given mainly for high value-added projects. Credit Banking: Industry Canada permits a limited form of banking of Industrial and Regional Benefit (IRB) transactions in advance of an upcoming procurement and in the event of overachievement of IRB credits.

The transfer of bankable credits is subject to a number of conditions: For banking in advance of an upcoming procurement, potential prime contractors will be able to apply IRB transaction credits for up to 15 percent of the total bid price — one half of the minimum advance requirement. For overachievement, the prime contractor will be able to bank excess IRB transactions for up to 10 percent of the total obligation value of the current project, up to a maximum of C$100m ($96m). Those credits may be used for a future IRB project. Industry Canada has adopted a sliding scale for both upfront and overachieved credits to ensure that banked IRB transactions are used within a limited timeframe. The value of banked activities will be subject to diminution on the following schedule:

• 100 percent of initial value for transactions banked less than three years; • 75 percent of initial value for transactions banked between three and four

years; • 50 percent of initial value for transactions banked between three and five

years; • No value for transactions banked beyond five years.

Obligors must identify a specific future potential procurement project to which they wish the credits to be applied. In addition, potential and current prime contractors will be allowed a one-time transfer of a banked IRB transaction to either a current IRB project or another potential procurement. In the event of transferred transactions, the

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sliding scale will continue to apply and will not be reset to the start of a new five-year window. IRB projects limit banked transactions to 50 percent of the total obligation. The IRB Bank will function like a regular bank. Each company that banks transactions will have an account with sub-accounts for specific potential procurements. Companies will have the flexibility to transfer a banked transaction to another potential procurement or to a current IRB obligation. However, companies can transfer a banked transaction only once in the life of the transaction. The IRB transaction may be transferred to another project if a project is delayed or cancelled, but that new project must belong to the same contractor. If a company loses a bid it can return the identified banked transaction to the IRB Bank. However, the time limit of a banked transaction does not reset if a banked transaction re-enters the bank. The Calculation Procedure: All proposed IRB transactions must be valued in terms of the Canadian Content Value (CCV). CCV is that portion of the selling price of a product or service associated with the work actually performed in Canada (it does not include elements of a product that were imported into Canada). CCV is measured in Canadian dollars. In general, CCV is calculated using the cost aggregate method of accounting on the following eligible items: � Wages, salaries, benefits paid to Canadian workers � Parts and materials (of Canadian origin) for plant equipment � Transportation costs within Canada � Facility costs in Canada (including utilities, taxes, insurance, rent, administration, maintenance, and depreciation) � Engineering and professional services in Canada � Travel expenses on Canadian carriers � Profits earned in Canada that are reasonably attributable to the IRB work. Miscellaneous: Causality: Each IRB transaction must be clearly and demonstrably brought about by the bidder or one of the bidder’s eligible parties as a result of the specific project against which the transaction is being claimed. In addition, to be considered eligible, the transaction must not be one that: 1. would have been entered into without those efforts; and 2. likely would have been entered into if the specific project being competed had not existed.

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Incrementality applies to indirect transactions. Within the IRB context, incrementality refers to the maximum amount that will be credited in any given year for the purchase of goods or services from Canadian companies. Incremental sales are based on the total amount that is purchased in a given year from a Canadian company. The measure is whether or not it exceeds the average annual amount spent on those goods and/or services in the three years prior to the date of issue of the Request for Proposal. Eligible Parties are defined as: 1. The prime contractor and all its subsidiaries, divisions and subdivisions, including any separate corporate entity or company; and 2. Any other corporate entities which the IRB Authority may agree to in writing as being capable of providing IRBs which meet the relevant Eligibility Criteria. Fulfilment Period: Timing of the transaction is an important factor in the determination of eligibility of individual transactions. Normally transactions must be implemented after the Request for Proposal release date and should be concluded by the completion date of the project contract. However, the IRB Manager has discretion if a longer period is required. Penalties: Penalties for non-compliance may take the form of Holdbacks and Liquidated Damages. Holdbacks may occur when the contractor fails to complete an obligation by the agreed time. At least 10 percent of the shortfall will be withheld from the progress payments until the obligation has been met as agreed by the IRB manager. Liquidated Damages are effectively cash fines amounting to 10 percent of the IRB commitment. Offering in the contract to pay even more than 10 percent will result in a higher evaluation. The use of performance guarantee provisions for failing to achieve IRB commitments are intended more for contractors that: 1. ignore the requirements of the IRB plan; 2. are deficient in the IRB requirements by a significant amount; or 3. attempt to hide deficiencies. NB: Discussions are taking place about introducing penalties for not identifying 30 percent of IRB transactions within the first year.

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Strategic Aerospace and Defence Technology List: Industry Canada is to enlarge the technology list to allow contractors to focus on local niche capabilities and the country’s needs in all aerospace and defence sectors. Industry Canada will also support firms investing in R&D and activities related to commercialisation by escalating IRB credit opportunities to include a broader range of business and technology development activities.

1. Advanced Manufacturing And Emerging Materials EG: Airframe assemblies; Automated flexible lean and high precision manufacturing equipment; Diagnostic maintenance and repair equipment.

2. Avionics And Mission Systems EG: Cockpit and Mission Systems Integration, Modular Avionics Systems; Navigation and Landing Systems; Communication, Control and Data Management Systems; Human Factors Engineering.

3. Communication And Control EG: Secure voice/video transmissions; Command and Control.

4. Propulsion And Power Management EG: Propulsion systems and gas turbine technologies; Electrical power generation and control.

5. Security And Protection EG: Ballistic protection; Mine-clearing and bomb disposal; Surveillance and detection.

6. Sensors EG: Technologies relating to air, land and maritime sensors and their interfaces.

7. Simulation, Training And Synthetic Environment EG: Simulation & Training Technologies in the air; land and maritime environments in either constructive, virtual or live simulation.

8. Space EG: Technologies pertaining to satellite communication and navigation, earth observation, scientific instruments and space exploration. Also included are the related ground systems and applications.

9. Unmanned Vehicle Systems EG: Technologies that include system software, sensors, onboard intelligence, threat simulation, system integration, robotics and platforms for all environment (air, sub-space, land, sea, and sub-sea).

http://www.ic.gc.ca/eic/site/ad-ad.nsf/eng/ad03902.html#advanced�

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http://www.ic.gc.ca/eic/site/ad-ad.nsf/eng/ad03902.html#sensors�

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44

Swaps: Industry Canada is willing to entertain swaps or abatements with other countries to reduce the offset burden, provided that the contractors of both countries have first tried hard to satisfy their respective obligations.

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Chile [10/07]

The authority in charge of overseeing offset fulfilment in Chile is CORFO, the Chilean Corporation for Economic Development. A Pro-Industry Committee is responsible for negotiating, evaluating and following up offers of industrial compensation. The committee uses a technical team to manage negotiations with primes. The members are comprised of two Undersecretaries from the Ministry of Defence and one from each of the Navy; Air Force; and Ministry of Economy. The Navy is the dominant military branch and contractors that want to promote defence goods will need to work with that branch. The policy assumes that:

Proposals must comprise projects that benefit both parties; The offset must not result in an increase in the price of the product. Once an IC offer is agreed is must be assumed the contractor has an obligation

to fulfil even when it uses third parties. A project intended as part of an offset offer must show both causality and additionality, for instance, by placing Chilean products in new markets, or by achieving innovative technology transfer for a project already in existence. There is no prohibition on indirects, though some industries are off limits. The Pro-Industry Committee will ensure that offset credits are not given for activities that would have been performed anyhow. The supplying company shall prove that its direct or indirect engagement is relevant to the materialization of the project. Objectives: Chile wants activities that fall into traditional categories, such as co-production, technology transfer, production licenses, and new export markets for Chilean products. Access to new markets is probably the most important requirement. In particular for: • Information and communication technology; • Biotechnology in the fruit and forestry industries; the development of a wine and aquiculture industry; • Defence electronics; • Metal mechanics for the mining and defence sectors. Obligors will be asked to specify each economic activity they are offering and to indicate separately the benefits and causality that will result. They should also declare how much employment that the projects realize for qualified personnel. Environmental and financial sustainability will be taken into account.

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The government encourages the flow-down of benefits to the regions and would like to see capital investment, joint ventures, incremental sales, know-how, certification, and incremental purchases of raw materials. Project Evaluation: Projects that form part of an offset program shall be valued according to: - Transactions involving capital. - Funding of projects. - Direct investment in a new company of joint venture. - Transactions involving sales: - Medium term sales contracts. - Opening of new markets. - Supplier or developer subcontracts. - Transactions related to know-how: - Human resources training. - Transference of technology (production or management). - Certification. - Production License. The following will not be eligible as transactions:- - One-time sales. - Raw material purchases. Threshold: $1m. Quota: At least 100 percent of purchase contract value.

Penalties: There is no provision for delayed or non-performance in the guidelines and it is open to negotiation between the parties. Multipliers: Multipliers are awarded to stimulate priority activities and regional development. They are divided into two categories: multipliers of persistence - which are used to value the delivery of contributions (one of the most important factors is the contribution to the commercialization of the beneficiary); and multipliers of performance - which places an emphasis on results. This covers technology transfer, licensed production or a patent delivered ‘free of charge.’ Projects resulting in higher sales and enhanced profitability, or that impact on social programs, will receive higher credits.

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The actual multipliers are a matter for negotiation. Fulfilment Period: At least 30 percent of the obligation must be fulfilled by the middle of the contractual period. Misc: A ‘Declaration’ with Chile adopted at the Summit of Heads of State & Government of Latin America and the Caribbean and the European Union in Rio de Janeiro on 28 June 1999 was ratified by Chile on 16th June 2002 and became effective December 2002. Within its 1,500 pages there is a paragraph (known as Art. 140) that stipulates:

Prohibition of offsets and national preferences: Each Party shall ensure that its entities do not, in the qualification and selection of suppliers, goods or services, in the evaluation of bids or in the award of contracts, consider, seek or impose offsets, nor conditions regarding national preferences such as margins allowing price preference.

NB: Because the text fails to specify defence offsets, the Declaration has been widely interpreted as referring to all offsets including those applied to defence purchases. That is wrong. According to EU and WEAG sources the EU has no mandate to cover defence issues, and the Directive must be ‘assumed’ to cover civil offsets only. Countertrade: There are reports that multinationals are finding that government officials in Chile are willing to consider countertrade transactions on a case-by-case basis. Chile has limited experience with countertrade. Companies interested in arranging such deals need the approval of the Directorate General of International Economic Relations (Direccion General de Relaciones Economicas Internacionales).

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China

[10/09] China does not have an official offset or industrial participation policy, but has dallied with IP in a number of different sectors with varied success. In particular, technology transfers have long proved popular with Chinese procurement agencies. A recent government procurement law favouring local companies may effectively ‘encourage’ foreign bidders to set up joint ventures in order to meet local content requirements. The Commission of Science, Technology and Industry for National Defence (COSTIND) has published guidelines for private businesses to research and develop weapons and military equipment. The rules will revolutionize the way the Chinese defence sector develops, but also has consequences for the civil sector. Private businesses may now invest in military infrastructure construction and conduct research for national defence projects and weaponry production. They will also be allowed to participate in the regrouping of military firms and co-operate with them to develop technology for military and civilian use. The Chinese national defence authorities said that they were considering similar regulations for foreign funded companies. The guidelines do not stipulate that foreign contractors must make use of these opportunities, but the presumption is there. There is cooperation with foreign countries in defence-related science and technology for major cooperative projects. For example, collaboration with Brazil played an important role in the launch of satellites. China’s first experiments with offset took place in the mid-eighties when the State Council asked the Huaneng International Power Development Corporation to include offset obligations in their purchase agreements. This resulted in requirements of 50 percent of the contract value based on a list of eligible products and trading companies, and no multipliers. Within a few years however, it became clear that the goal of increasing exports had not been achieved, and offsets for the energy sector were soon abandoned. Direct offsets have been imposed on purchases of civil aircrafts with more success. Boeing, for example, has transferred production of a range of components, including wings, rudders and fuselage panels to China as part of its purchase agreements. Boeing 737s contain Chinese parts (tail assemblies) because Air China negotiated offset production as a condition of purchase. The ratio of Chinese-made parts in Boeing and Airbus aircraft is expected to rise under co-operation agreements signed with both parties. Airbus has signed contracts with several companies affiliated to the China Aviation Industry Corporation to produce and assemble parts for A320 planes. According to trade reports, contracts for Boeing aircraft purchases have included offsets worth around 30 percent of the contract value. Membership of WTO may now inhibit China from demanding civil offset obligations from new bidders.

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Civil Sector and Defence Sector Countertrade: The government encourages countertrade operations to finance projects inside the country and to help stop foreign-exchange outflows resulting from the purchase of machinery and equipment from abroad. Private-sector countertrade deals are also undertaken. The government creates obstacles by insisting that exchanged products be in plentiful supply in China and not compete with traditional Chinese exports. Non-traditional exports are difficult to place in world markets. Back in May 1st 2005, for instance, the government placed severe restrictions on countertrade shipments concerning iron ore for steel products, allowing just 118 of the 500 steel mills and traders in the country to continue the practice. The Chinese authorities seek to transform its steel sector from a traditional supplier of low-end products to high-end steel goods. China has indicated, in general, that it is ready to agree to flexible payment terms “including countertrade, barter and deferred payments” in return for supplying armaments. However, this is a reactive rather than a pro-active approach. For foreign companies interested in using China for sourcing products or commodities, but not wishing to commit capital to a full-fledged joint venture, countertrade arrangements can be an option. 'Red clause' letter-of-credit arrangements are used by some firms to finance the underlying transaction by allowing the Chinese supplier to piggyback on the good credit standing of the foreign buyer. Usually, the "red clause" letter of credit provides short or medium-term financing of two to three years for machinery imported by the Chinese partner in the arrangement. The loan generally comes from a foreign bank but is guaranteed by one of the big state-owned commercial banks. Typically, the Chinese producer in such a case lacks the capital to make high-quality products without upgrading its equipment and processes. The ideal use for 'red clause' financing is for high-quality equipment that is owned by the foreign customer and sold to the Chinese side in the arrangement. Clearing Programs: China has stopped requiring Russia, from whom it purchases most of its defence materiel, from using clearing arrangements as a settlement mechanism for defence procurements. The countries are using conventional payment terms instead. China remains active in ‘clearing programmes’ in the fields of power plants and military products. The Government Procurement Law (GPL): The Government Procurement Law came into effect at the beginning of 2003. Intended to simplify government procurement and increase transparency, the GPL retains previous obligations on the government to purchase locally-made goods where

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possible. Foreign goods are defined as those with less than 50 percent local value-added content. Military purchases are excluded from the GPL.

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Colombia [07/11]

Colombia’s offset guidelines are summarized in a National Ministry of Defence Communiqué dated 5th July 2007. They were modified by the National Council for Social and Economic Policy (CONPES) in June 2008. The agency responsible for implementing offset policy is the Department of Planning and Budgets, a department within the NMoD. Industrial and Social Cooperation Agreements (ISCA’s) will be requested in commercial transactions as well as those carried out by means of Government to Government (G2G) agreements. The policy is designed to be flexible and allows room for negotiation. With G2G agreements compensation will be requested directly from manufacturing companies or providers of the goods and services indicated. Industrial and Social Cooperation can be provided by primary contractors as well as their subcontractors. Prime contractors and/or subcontractors may fulfil offset obligations, but responsibility remains with the prime. Project Approval Process:

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Framework Agreement: A framework agreement identifies the areas of eligible activities, the non-fulfilment penalties, and specifies a ten year fulfilment period with a two-year preparation period. Once signed, a complementary agreement is agreed for the projects that will go forward. Contractors must include a signed draft of the ISCA Framework Agreement when submitting bids or their bid will be rejected. The Framework Agreement must be signed at the same time as the procurement contract. Objectives: Colombia’s offset policy has three principle objectives:- 1) Self sufficiency in the life cycle of the equipment; 2) Acquiring industrial benefits to strengthen the electronic and ‘new materials’ sectors, specifically through technology transfer, increased capabilities, business generation, and R&D. Some projects have been identified together with the Ministries of Commerce, Industry, and Tourism. This extends also to projects for the GSED, which is the group of eighteen companies concerned with social and rehabilitation projects for the military; 3) General social projects, such as a medical programme to treat tropical diseases. In general, offset projects should focus on MRO, technology transfer, co-production, and sub-contracting either in military applications or for high tech areas in the commercial sector.

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Direct / Indirect: Projects may be direct or indirect. Direct offset is related to the good or services acquired, as well as co-production, sub-contracting, and technology transfer. Indirect offset is not related to the goods or services acquired and can take place in investments in any sector of the country’s economy, including the defence sector. Indirect offsets should encourage the production and commercialization of domestic goods and services, training and technology transfer, or any other support that contributes to the country’s development and productivity. Threshold: As a general rule, Industrial and Social Cooperation will be requested when the acquisition of goods and services is for a minimum of $1m., or whenever deemed advisable by the National Ministry of Defence. For acquisitions of military goods that have a consumable character (like ammunition) the Ministry of National Defence will ask for offset in amounts above $5m, or whenever it considers is reasonable to do so. Quota: 100 percent of purchase contract value. The 100 percent requirement may be lowered for companies with a track record, such as a history of local investment and of sub-contracting for specific activities. Negotiation may reduce the requirement to up to 87 percent. In general defence contractor are asked to provide a mix of 60 percent aircraft oriented projects and 40 percent social oriented programs. Fulfilment Period: There is a 10 year fulfilment period with a two-year preparation period. All projects must start by year four.

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Credit Banking: Permitted for a maximum 50 percent of the amount of the contract. Credits can be used for the implementation of new projects that will impact the social or civil sector. Multipliers: The multiplier range is 0.2 to 5, with 0.2 to 0.9 for counterpurchase. Projects qualify for multipliers within a particular range and obligors will negotiate case-by-case within that range. For example, for tangible investments the range is 3 – 5. Some contractors may agree at 3.1, others at 4.9. There are no particular multipliers for direct or indirect offsets. As a general rule the value of an Industrial and Social Cooperation Project will be equivalent to the business it generates between the parties. When the project generates benefits for both parties there will be no multipliers. The final value of Cooperation Projects that generate business in Colombia will be the equivalent of that of the business as a whole. No multipliers will be applied to the investments and to the transfer of technology and know-how involved in these Cooperation Projects when no causality is forthcoming. Multipliers will be applied only for causality.

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Penalties: The penalty for projects that are under-performed from the fourth year is 4.5 percent of contract value. This rises to 5 percent for the years 5 to 10. Paying the penalty does not relieve the contractor of the offset commitment.

Orgaanization C

Chart

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Costa Rica [04/07]

Countertrade is limited, but Costa Rica's Coffee Institute has established a barter account at the Central Bank. It is designed to facilitate coffee exports to countries that do not have the hard currency to pay. There is no offset policy.

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Croatia

[04/07] Croatia, which seceded in 1993 from the former Yugoslav Federation, has a history of offset related activities. Croatia’s Minister of Defence and its Minister of Economy signed into law an offset regulation in September 2004 under Article 21 of the Law on Production, Repair and Traffic with Ammunition and Military Equipment. The Ministry of Economy, Work, and Industry (MOE) is the authority responsible for implementing offset. An Offset Committee has been established consisting of members drawn from the Ministries of Defence, MOE, and Finance and with a representative from the Croatian Chamber of Commerce and the Agency for Monitoring Production of Exports and Imports of Ammunition and Military Equipment. A representative of the President may also be included as well as representatives of state administration bodies. The Head of the Committee shall be the representative of the MOE, (Deputy Minister for Industry) and his deputy shall be the representative of the Ministry of Defence (Deputy Minister for Material Resources). The Ministry of Economy plays the leading role in the application of the offset policy, but the MoD has to approve everything. The agreements are signed with the MoE, though with the consent of the MoD. They are inclined to ask for total non-disclosure about the program. Objectives: There is particular interest in the following direct activities:-

C-4 related IT including radio, satellite and telecom; Fire control systems including electro-optical and radar systems; Shipbuilding, submarine, and sonar systems; FDI; Guided missiles; Combat vehicles; Ammunition, weapons, explosives, and military equipment.

There is particular interest in the following indirect activities:-

- development of domestic industry by applying state-of-the-art technology - transfer of new technologies and organization of work - cooperation in the area of development and research - opening of new markets for export of goods and services of domestic industry - training and education of professional staff - opening of new work places.

The indirects (non-defence related) concern projects to re-build areas devastated by war and to help recreate jobs.

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Threshold: €2m. Contracts exceeding this value can be concluded without an offset contract only with the consent of the Minister of Defence and the Minister of Economy. The costs of repairs and the acquisition of spare parts for purchases made before September 2004 are not eligible for offset obligations. Period: Maximum of 10 years. Quota: At least 100 percent of contract value. Direct offsets must comprise at least 25 percent of the obligation with the remainder either direct or indirect. For indirect offsets the multiplier will depend on the industrial programme offered and whether it complies with priority areas of interest. Those areas have yet to be clarified. Penalties: The penalty for non-fulfilment amounts to 10 percent of the value of non-fulfilled obligations. Direct/Indirect Offsets: Direct offsets are obligations directly connected with the items purchased and apply to their development, production, training and maintenance. Direct offsets by law may not be for less than one quarter of the value of offset agreement. Obligations unconnected to the purchase contract are indirect offsets. Multipliers:

Multiplier Table:

The multipliers range from 0.5 to 2. • Research & Development 1 to 2 • Technology transfer (including defence related) 1 to 2 • Exports to new markets 0.5 to 1 • Training and education 0.5 to 1 • New jobs 0.5 to 2 • Other non-priority sectors 0.5

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Credit Banking: Offset credit banking and transfer may be allowed.

Minister of Economy

Minister of Defence

APPROVAL

MoD – M3

Request for proposal (offset obligation note)

Bidders

Proposal preparation (offset proposal included)

Bidders

Proposal submission

MoD – M3

Forwarding offset proposal

Offset committee

Proposal analysis & report

NBidders

Negotiation or rejection of the offer

Minister of Economy

Signing the offset agreement

Yes

OFFSET PROCEDURE

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Cuba [01/06]

Cuba has a history of employing countertrade and creative trade finance techniques to provide necessary imports, both agricultural and technical, chiefly in exchange for sugar. These initiatives faded after Cuba defaulted on a significant amount of debt to both France and Spain despite providing guarantees. The usual method employed by France and Spain was to extend trade credits for such agricultural commodities as wheat and flour and for machinery. The majority of the French trade credits, for instance, provided guarantees for French commodity producers and traders to supply under barter terms. Those French companies marketed Cuban raw sugar, using a portion of the proceeds to purchase agricultural commodities for the following year. However, sugar deliveries could not be relied upon. There is now a revival of Cuban countertrade activities, but they are mainly with regional countries such as Venezuela, and they are largely energy related. The US Department of State’s Bureau of Intelligence has issued a Background Note stating that in October 2000 Venezuela’s Hugo Chavez laid the groundwork for a quasi-barter exchange of Venezuelan oil for Cuban goods and services that has since become a lifeline for the Cuban economy. Cuba receives about 100,000 barrels per day of crude and products from Venezuela in exchange for medical attention and advice on illiteracy eradication and physical education. Between 30,000 and 50,000 technical staff are understood to have been sent, including doctors, sport coaches, teachers, and arts instructors. An accord dated April 28, 2005 between Chavez and Fidel Castro embraces 49 economic agreements with Havana covering areas as diverse as oil, nickel, agriculture, furniture, shoes, textiles, toys, lingerie, tyres, construction materials, electricity, transportation, health and education. Cuba has subsequently extended its product range and offers, for example, generic pharmaceuticals, pre-fabricated housing, and dismantled sugar mill equipment.

These initiatives are being extended to other countries in South and Latin America.

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Czech Republic [04/11]

The Czech government approved offset guidelines under a brief framework document in January 2005 known as Resolution No. 9. Modest changes were adopted by Resolution No. 499, dated June 28, 2010 and by Provision No. 19/2010 of the Minister of Industry and Trade. Czech guidelines are applied with a degree of adaptability. In general the approach is to write into the requirements for the tender any changes to what is in the guidelines. An interdepartmental Offset Committee has 15 members. The Chairman of the Offset Committee is appointed by the Minister of Trade and Industry (MTI). The Committee is tasked to coordinate activities connected with the preparation, discussion, enforcement, evaluation and control of programs. MTI is the administrative authority. The National Armaments Directorate, within the Ministry of Defence, signs off and is party to negotiations for military equipment. The MoD and the contractor set the legal relationship and the MoD approves the actual value of the offset transaction and overall performance. The Offset Commission approves the transactions and provides statements for the annual report. The MTI administrates. Objectives: The focus is on projects that are large in scale to ensure they have a more significant impact on the economy. It is no longer necessary to link direct foreign investment in the employment regions to offsets. The Czech Republic wants participation in international supply chains; new business opportunities; technology transfer; and the launching of long-term industrial cooperation programmes. The approach is not to accept transactions such as assembly, but to require more sophisticated technologies. Credits will be awarded for local participation resulting in new exports. Close attention will be paid to the causality achieved, in particular for indirect proposals. The level of local content in exports will be taken into consideration. A priority is to involve local companies in international supply chains, though this is not stated officially. Quota: Offsets shall not exceed 100 percent of supply contract value.

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Threshold: The threshold is Kc1bn (€40m). When foreign sub-contractors supply Czech primes the threshold is Kc500m.

Pre-offsets: Pre-offset transactions have to be generally linked to future programs. Companies cannot submit pre-offset applications without such a linkage. Pre-offset activities can be carried out by all potential offset applicants and will be recognised as offset fulfilment if the tenderer for a public contract is chosen to be the contractor. If the tenderer is not awarded the public contract the offset credits can, within a period of ten years after the contract award is announced, be used for another contract or possibly transferred to other contractors. The same applies for credits exceeding the required size of the offset programme. After the ten-year period, the credits will no longer be valid or transferable. Direct offset: Direct offset is related directly to the subject of the public contract and includes projects focused on direct participation of Czech business entities involved in carrying out the contract. Activities in the direct offsets category are further defined as those which are related to the original purchase of foreign equipment, material or services made by the Czech Republic.

At least 20 percent of the value of the contract must be discharged as direct offset. Direct offsets include:

– offering opportunities for production of parts and components and for exporting them;

– transfer of technology allowing the beneficiary to gain the capability to produce or to manage production of parts and components, and their maintenance;

– assistance in setting up companies producing industrial equipment and tools. Indirect offset: Indirect offsets are those other than direct offset, i.e. involving domestic entities in projects related to activities of the tenderer, or possibly in activities with sub-contractors or other business entities ‘mediated’ by the tenderer. The indirect offsets category also comprises those activities that have no direct relation to production of the original purchased equipment. Among these are: a) exports of products or services - all new or additional exports of products and

services of Czech origin (traditional exports shall not qualify as offset activities); b) technology or know-how transfers; c) research and development cooperation;

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d) new investment; e) setting up joint ventures; f) assistance in creating new jobs; g) assistance to small and medium-sized enterprises. Fulfilment Period: The offset programme is to be implemented within a period of five to ten years beginning the day the contract is signed, unless the Committee should decide otherwise with regard to the size of the contract. Penalties: Liquidated damages for non-performance of the offset obligation will be in the 5-10 percent range, depending on negotiations during the contractual stage. The guidelines allow the MTI leeway in demanding unspecified additional guarantees. The contractual arrangements must include one or more sanction mechanisms. Milestones are applied for big projects, with separate penalties per milestone, usually at the second, third, fourth, sixth, seventh and the final year of fulfilment. Negotiations on such issues are always possible. Multipliers: Multipliers are generally not used at all although the MTI is authorised to make exceptions, particularly with regard to R&D. Weighting: Offset carries no weight as a criterion for the qualification process for public tenders and no multipliers will count. Credit Banking: The question of credit banking has yet to be addressed though the Offset Committee may be open to discussing this with obligors, particularly with regard to pre-offset activities. See ‘Pre-offsets’ (above). Evaluation of Transactions: The method for measuring the foreign value of the direct foreign investment of a transaction qualifying as a direct offset is to apply the “A” mechanism formula:

Z = X-Y where Y = (P+Q+R)

Z = actual value of the transaction X = income from the sale of goods and services

Y = value calculated by adding all incurred costs of the Czech partner for the procurement of materiel, represented by P

Q = costs of the Czech partner for services related to the transaction

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R = costs for energy related to the offset transaction The “B” mechanism is used for measuring the value of the support for export type transactions. The formula is:

N = L-M where:

N = value of the transaction L = summary of export revenues of the Czech partner related to the transaction

M = summary of all purchases from abroad that are related to the transaction and are by the Czech partner

Government Matrix:

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Denmark [04/08]

The Danish Enterprise and Construction Authority (DECA), a department of the Danish Ministry of Economic and Business Affairs, is responsible for implementing industrial cooperation contracts with foreign suppliers of defence equipment to the Danish Armed Forces. An Advisory Board for Industrial Cooperation Contracts, chaired by DECA, monitors the work of DECA on industrial cooperation contracts. It is consulted on matters of principle and evaluates projects involving multipliers above 3. Members of this Advisory Board are representatives from the Ministry of Defence, Defence Command Denmark, the Confederation of Danish Industries (FAD) and the Central Organization of Industrial Employees in Denmark. FAD offers foreign defence equipment suppliers assistance in identifying opportunities for cooperation and in arranging meetings, conferences etc. with relevant Danish companies. The Defence & Aerospace Industries Association (DAIA), a member of FAD, is often concerned with the implementation of industrial participation projects. The DAIA conducts itself robustly and will ensure that pledges are made and properly discharged. The foreign defence equipment supplier must sign an industrial cooperation contract with DECA at least 30 days before entering into a contract with the Danish Armed Forces. Objectives: Obligors may discharge their industrial co-operation obligations with: 1) Defence-related products, technologies, or services; 2) Products, technologies and services securing infrastructure and other public security tasks related to defence materiel technologies; and 3) Products, technologies, or services for use in civil aerospace and space related to defence materiel technology. In summary, projects will be approved when they are defence-related, either directly or indirectly. This includes projects in civil aerospace and homeland security, as well as dual use projects with a military or security application. Denmark requires long-term business relationships between Danish defence industries and foreign aerospace and defence manufacturers. Market access and cash investments are important. Industrial cooperation can take on various forms. Examples of this co-operation are: Direct procurement of Danish defence products; Sub-systems and components;

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Collaborative or joint ventures; Strategic alliances; Sub-contracting arrangements. The technological level of any project proposed in an industrial cooperation contract must be at least equivalent to the same level as the defence equipment purchased.

Industrial co-operation within the framework of the industrial cooperation contract is subject to the following conditions:

• Products to be purchased under the Agreement must be of Danish origin.

• If incorporation of named specific materials, parts or components of non-Danish origin is dictated in a purchase order to a Danish firm, the value of those materials, parts or components shall be deducted in total from the value of the purchase order.

• Items to be manufactured or processed in Denmark may - except as stipulated above - contain materials, parts or components of non-Danish origin to a maximum of 40 percent of their unit price.

• If the value of the non-Danish content of an item is higher than 40 percent of the total price of that item, then - for industrial co-operation purposes - the order value of that purchase shall be reduced by the amount it is exceeded.

DECA will consider the transfer of technology for offset credit purposes. Such credits will be negotiated and evaluated on a case by case basis. The amount of credit will depend on the extent to which the Danish company is able to exploit the technology derived from the transfer. Technology transfer will only be credited where a transfer is at no cost to the Danish company. Credit will be given as a proportion of the verified investment in the technology. The value of contracts that are claimed for credit will be based on the value of the Danish content of the product, i.e. value added to the product through the manufacturing processes carried out in Denmark. Other transactions such as, but not limited to, investments, technology transfer and the discharging of accrued industrial cooperation obligations by Danish companies in other countries, may also qualify for credits provided there has been pre-approval by DECA. To ensure that only new or additional business will be claimed the Agency will create ‘a base line’ where the following information shall be supplied: 1) The obligor declares by its signature to this Agreement that it has not purchased civil/commercial Danish industrial products within the last three years preceding the signature of the Agreement. Or

2) The obligor will submit for agreement within six months from the date of this Agreement a statement of the average annual value of Danish industrial products purchased during the years X to Y (hereinafter called ‘traditional business level’).

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Purchases will be recognised as industrial co-operation only to the extent that their annual amount exceeds the traditional business level.

Or

3) The obligor declares by its signature to this Agreement that it purchases Danish industrial products for an annual amount of …...... which was not caused by previous Agreements (hereinafter called ‘traditional business level’).

Purchases of assisting companies, re article 2, will be recognised under this Agreement only to extent that their annual amount exceeds the traditional business level.

Threshold: For procurements exceeding DKK 100m (c$21m) the foreign supplier must sign an “ICC 1” (industrial co-operation contract N° 1). Special industrial cooperation procedures apply for the first 30 percent of the defence contract value (see ‘Quota’). For procurements between DKK 25-100m the foreign supplier must sign an ICC 2. This omits the special procedures under the 30 percent rule. For procurements between DKK 5-25m the foreign supplier must sign an ICC 3. This obliges contractors to comply with industrial cooperation requirements if subsequent purchases exceed DKK 25m over 5 consecutive years. If the foreign supplier already has an ICC, and the foreign supplier is about to sign a new or an additional contract with the Danish Armed Forces, the foreign supplier must sign an Addendum. The Addendum is an appendix to the existing ICC. If, however, the Addendum exceeds DKK 100m the foreign supplier must sign a new ICC1. If the foreign supplier has a surplus from a former completed ICC, it may be possible to enter into a Credit Banking Agreement with the DECA. However, certain specific criteria need to be fulfilled. Companies with more than one existing contract with DECA can be connected through a single umbrella agreement. Quota: The foreign contractor must undertake to purchase products and/or services from Danish companies for an amount corresponding to the Danish procurement of defence equipment from abroad. These contracts may only involve trade in defence equipment or services. Suppliers are required to conclude contracts with Danish defence-related enterprises for at least 30 percent of the contract value no later than 4 years after the signing of the contract with the Danish Armed Forces.

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Reward Process: A foreign supplier that concludes contracts with Danish companies for more than 30 percent of the 100 percent obligation within 4 years will achieve a reward in the form of a reduction in the total obligation corresponding to the amount of over-fulfilment. For instance, if the supplier has concluded contracts with Danish enterprises for 40 percent within 4 years, the total obligation will be reduced from 100 percent to 90 percent. If the figure is 50 percent, the total obligation will be reduced to 80 percent etc. Therefore the signing of contracts for 65 percent of a total obligation within 4 years amounts to a 100 percent discharge of the obligation. Multipliers awarded for industrial co-operation that results in “extraordinary added value” for Danish companies cannot be used in combination with the reward.

Source: Systematic Group, Denmark Penalties: A foreign supplier which has not concluded contracts with Danish companies for at least 30 percent after 4 years shall pay to the DECA the amount needed to fulfil that 30 percent. The obligation is to be covered by an irrevocable "on demand" bank guarantee. If drawn down the bank guarantee liquidates all obligations up to the first 30 percent, but does not release the foreign supplier from the obligation to fulfil the remaining 70 percent of the industrial co-operation contract.

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In extraordinary circumstance an extension of the 4 year deadline may be approved. The bank guarantee may be avoided if foreign suppliers gain offset credits by placing orders with Danish industries in a prequalification phase two years prior to the award of the contract with the Danish Armed Forces. If the guarantee is not provided or the foreign contractor violates the industrial co-operation contract DECA will prevent the foreign supplier from obtaining new contracts from the Danish Armed Forces until the obligation is fulfilled. A defaulting contractor will be blacklisted and publicly named. Multipliers: In general a foreign supplier's industrial cooperation obligation will be credited with the value of the contracts it has entered into with Danish companies. Certain industrial contracts such as R&D, investment, training, technology transfer, and other transactions may qualify for multipliers. However, multipliers above 10 will not be approved. The objective of the use of multipliers is to encourage business transactions which substantially upgrade the technological level of Danish companies, and enhance their opportunities to grow. Multipliers may be included in satisfying any portion of the industrial cooperation contract. They cannot be used in combination with the reward for the over-fulfilment of the 30 percent requirement. Multipliers cannot be used under a Credit Banking Agreement when the terms of an existing industrial cooperation contract are fulfilled. All projects with multipliers need the approval of DECA. A multiplier up to 10 may be achievable for technology transfer or know-how. The multiplier related to transfer of machinery or equipment is dependent on the uniqueness of the transfer and its availability on the market. Usually a multiplier above 5 will not be approved in connection with the transfer of machinery or equipment. Market access and marketing assistance may qualify, but causality must be established. Credit Banking: A foreign supplier may ask for a Credit Banking Agreement with the DECA when an existing industrial co-operation contract is completed or in preparation for a future contract.

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The facility is to encourage contractors and their supplier community to engage in new or continued co-operation with Danish companies. Credit Banking Agreements are valid for 5 years. If the credit has not been fully utilised within this period the remaining amount will no longer apply and will be cancelled. Banked credits cannot be applied to fulfil the first 30 percent of the industrial co-operation contract, and the use of multipliers will not be accepted in the Banking Agreement. In the prequalification phase for a specific contract with the Danish Armed Forces any qualifying transaction in the 2 years run-up before signing a contract may be accepted in a Credit Banking Agreement for all bidders of the procurement. This includes the multipliers. Fulfilment Period: The fulfilment period should be consistent with the delivery period of the original procurement contract. NORDAC - NORDIC FRAMEWORK AGREEMENT: Agreement between Denmark, Finland, Norway, and Sweden: An agreement concerning support for Industrial Co-operation in the Defence Materiel Area came into force between these countries on 24th November 2002. The document takes into account inter-dependence within the field of defence materiel and the consequential effect of mergers in the industry. It seeks to create a political and legal framework necessary to facilitate industrial operations in order to promote more competitive and robust Nordic defence industries and of supporting these industries as home market suppliers. Recognition is to be given to closer industrial co-operation in the defence materiel area, supported by a ‘more flexible approach’ to applying national industrial compensation requirements. A Governmental Consultation Group has been established to ensure the efficient operation of the Agreement. The following has been agreed with regard to Industrial Compensation:

• The Parties shall seek measures to replace the present compensation requirements in order to achieve a long-term balance in defence-related supplies between the Parties.

• Each Party shall refrain from requiring industrial compensation from another Party to the Agreement.

• Each Party shall keep account of supplies from the other Parties, and the accounts should be gathered into an Annual Compensation Account.

• An Evaluation Report on the compensation balance shall be drawn up every five years.

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Ecuador

[04/07]

There are no formal offset or countertrade policies. However, the state energy corporation Petroecuador has demonstrated a willingness to engage in reciprocal trade. This is predicted to be extended to cover the gas, electricity, and petrochemical industries, for which technical support is wanted.

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Egypt [04/10]

Egypt is receptive to proposals from foreign suppliers of defence equipment who are willing to be paid under the country’s barter policy. The voluntary acceptance of barter payment terms is certain to give that supplier a competitive edge. The policy allows for the payment of 50 percent of the contract price in US dollars, but the other 50 percent must be settled with Egyptian pounds paid into an escrow account. Those funds are used to export Egyptian goods and commodities, with the deals processed through Egyptian trading groups which facilitate trade in return for a negotiated commission. The attraction for the Armaments Authority is that it has a separate budget for barter-type projects in Egyptian pounds, which it can use when it has depleted its national (hard currency) budget. In most years this barter budget is significantly under-utilised. Foreign defence contractors that are prepared to offer the Armaments Authority a combination of barter with co-production would be providing a highly attractive commercial proposal. Defence contractors that decline to participate under the barter opportunity may find their contractual possibilities slow-tracked if there is limited foreign exchange available at the time. There is no particular threshold above which the barter system operates. It can be used for contracts for only $1m. Each contract is considered on its own merits. The Ministry of Foreign Trade and Industry (MFTI) can introduce suppliers to several specialist barter companies who can fulfil the trading on the supplier’s behalf. They are understood typically to charge a disagio in excess of 10 percent. Contractors report that they can usually negotiate this down. Mainstream domestic banks have the appropriate experience to put in place the various account structures and financial instruments to mitigate risk and cost to the defence contractor. The rules are laid down by the MFTI. The role of the Armaments Authority of the MoD is to close the contract and make the payments while the MFTI sets the policy requirements for barters. The banks will oversee the whole transaction to ensure that defence contractors receive their payments at the due time. The countertrade rules were published 1992 and provide an annexe with a menu of commodities that are not permitted to be dealt with in barter agreements either as imports or exports. However, at this time there are no restrictions and exporters can use any Egyptian goods or commodities. A Form EX must be submitted by the exporter confirming compliance together with an undertaking that the imports have arrived before the exports have left Egypt, with credits and debits to an escrow account.

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Defence Co-Production: In addition to the barter policy, the Armaments Authority is keen to encourage the co-production of defence equipment in Egypt, and has stated that this is an important aspect of its forward industrial strategy. There are several authorities to negotiate with on the defence side. The Armaments Authority, the Ministry of Military Production, and the Arab Organisation for Industrialisation (AOI) have all expressed an interest in co-production, with the latter having under its ambit a number of production facilities that are likely to benefit. Any joint venture would involve Egyptian assembly and manufacturing in collaboration with the AOI, which consists of nine companies: five wholly-owned by Egypt and four joint ventures. The Egyptian plants manufacture missiles, rockets, aircraft engine parts, armoured personnel carriers, electronics, radar, communications gear, and assembles aircraft. In terms of offset, mostly indirect solutions are suitable. There are some defence-related production projects but the most important objective is to provide more jobs.

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Estonia [04/10]

A Directive published by the Ministry of Defence on 25th July 2006 sets out the general philosophy of Estonia’s offset policy, which in practice embraces a significant measure of countertrade. An Offset Committee has been formed by the Defence Minister to coordinate and promote the country’s defence industry. Described as ‘permanent’, it is tasked to evaluate and to approve offset plans and their implementation. The Offset Committee is chaired by the Secretary General of the MoD, with other members drawn from the defence forces and the Ministry of Economy and Communications. Enterprise Estonia, a business development agency under the administration of the Ministry of Economic Affairs and Communications, offers expertise and advice on Estonian companies, R&D and investment projects; as well as performing surveillance and auditing of offset transactions. Enterprise Estonia makes proposals to the Offset Commission concerning offset credit calculations and offset obligation fulfilments. Offsets — or countertrade proposals — account for about 5 percent of the allocation criteria in the procurement process. Objectives: Estonia does not have a domestic defence industry and the objective will be to encourage long-term economic activity for Estonian industry, better maintenance capability for the procured equipment, and to gain entry to new export markets. The policy therefore will not distinguish between direct and indirect offset. Marketing assistance could be part of an offset package. What is wanted is counterpurchase. Estonia’s priority is to develop its exports. Third party involvement is acceptable but the question of additionality has not been addressed and there are no restrictions, as yet, on export destinations. Transactions involving raw materials, agriculture, fisheries and mining etc. will not qualify for credits. Threshold: Kroon 150m (€9.6m) Quota: At least 100 percent of contract price.

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The minimum value of a single offset contract shall be Kroons 8m (€0.5m - but €0.2m for R&D projects). Multipliers: Multipliers will be awarded as follows: R&D 5 Export of strategic goods. No distinction is made between direct or indirect. 3.5 High tech goods or services 3 Other industries: machinery, apparatus, chemicals, wood products (counterpurchase) 2 Otherwise the multiplier is 1, although the export of some products may receive 0.2 or 0.5, as agreed by negotiation. Penalties: The guidelines recommend penalties for non-fulfilment at 0.10 percent per day though each contract is a matter for negotiation. Contracts generally maximise the penalty at 120 percent of any under-performance and require any remaining obligation to be completed within the next 18 months period or any other mutually agreed period. Fulfilment Period: Equal to the delivery period in the Purchase Contract, but can be extended upon application.

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Ethiopia [04/09]

The government is receptive to civil offset initiatives that provide employment opportunities. Countertrade practices are unregulated though the Ministry of Trade and Industry negotiates bilateral barters on behalf of the government. The practice is not looked upon favourably and barters will be considered on a case-by-case basis only for commodities which are not traditional exports. Private sector countertrade agreements with foreign companies have to be approved by the Ministry of Trade and Industry, which delegates administration to the National Bank of Ethiopia.

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Finland [10/11]


With the implementation of Directive 2009/81 EC industrial participation practice is changing. The Ministry of Employment and Economy is presently reviewing the guidelines and the following revisions are expected to be adopted:- There will be no threshold and industrial participation will be considered to be a case by case basis. The quota will be retained at 100 percent of purchase contract value. Multipliers will remain available but this issue is under consideration and probably the opportunity to use them will be curtailed. There will still be three authorities involved in the offset process: the purchasing agents of the respective armed forces; the MoD; and the Ministry of Employment & Economy and its Committee on Industrial Participation.

================================

The provision of industrial benefits as a condition of winning a defence supply contract is not a statutory requirement, but it is a likely outcome. Parliament tends to approve major defence procurement projects only when there is an industrial participation agreement with the seller. Negotiating and signing industrial participation agreements is the remit of the Ministry of Defence (MoD) which drafts agreements on the basis of a standard agreement provided by the Finnish Committee on Industrial Participation (FCIP). However, responsibility for negotiating direct offset has moved downward from the MoD to the purchasing agents of the army, navy and air force. These agencies will take a more active role by planning, defining, and negotiating areas and targets for direct IP. The MoD takes more of a back seat. The RfP will indicate the overall IP obligation and will probably define the most desirable areas for direct IP. It will indicate the impact of IP in the evaluation criteria for the purchase contract and provide a draft IP Agreement and draft Procurement Contract. The FCIP, an agency within the Ministry of Employment & Economy, is responsible for the administration of IP obligations. It provides advice to the MoD on proposals and agreements and is concerned with the execution of agreements and decisions for pre-offset arrangements. The FCIP also maintains a set of draft agreements. The FCIP comprises as Chairman the Former Permanent Secretary of the MoD; Director General, Secretary, and Deputy DG of the Ministry of Employment &

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The primary purpose of industrial participation in large procurement projects is to guarantee the maintenance and integration expertise for the materiel in question. The policy is also intended to help the domestic defence industry to participate in procurement projects as well as encourage the transfer of new technologies to the industrial and research community. Finland has increased its focus on defence-related projects and reduced its emphasis on exports of commercial items. Direct industrial participation is seen as a tool to create and enhance support capabilities and to strengthen the defence technology industrial base. Domestic production and competence are particularly important in system integration, situational awareness expertise, command and control, as Nuclear, Biological and Chemical defence, and land forces mobility. Acceptable projects include: 1. Finnish defence industry participation in manufacturing parts, assembly, testing etc. of the purchased equipment/systems. Obtaining maintenance capability and further development of the equipment/system (Direct IP); 2. Other defence-related activities or technology transfers to the Finnish defence industry (Indirect IP); 3. Internationalisation and increased exports for SMEs. It is important to secure employment by channelling work to ailing industries; to develop business relations with European defence industries; and to prepare for participation in European development projects. Directs: More attention is to be given in the negotiation phase to optimizing direct participation. Domestic firms are to be consulted at the earliest opportunity. Contractor’s agreements with domestic sub-contractors should reach a conditionally binding status before signing the IP Agreement. Sub-contracts will be assessed to their full value (not only Finnish content). There are no absolute quotas for direct industrial participation or for defence-related projects. It is for the respective materiel commands to indicate their quota preference for direct participation. The Ministry of Defence, with lower level purchasing agents participating in negotiations, will be involved in drafting the offset agreement and might express its own preferences for offsets for the defence sector (not necessarily direct obligations).

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Finland’s direct IP policy is designed to function as a tool for life cycle management with the following goals: 1. The full participation of Finnish industry; 2. Enhanced exports of Finnish defence equipment; 3. Increased exports by SMEs; 4. New exports of high tech equipment. Indirects: Indirect IP projects must be related to other functions of the defence forces. They do not have to be specified with the same accuracy as direct projects. A list of agreed, planned, and potential projects is enough. In addition to direct industrial participation, a transaction can qualify for credits provided that:

1) The contractor is instrumental in creating the transaction, (meaning that the transaction was unlikely to have taken place without the efforts of the contractor),

2) The transaction significantly benefits Finnish economic interests and is at least of similar high technical standard to the defence procurement, and

3) The transaction pertains to one of the objectives listed above. Eligible indirect transactions are:

• Exports to new markets • Marketing support for SMEs • Transfer of important know-how • Creation of new defence-related R&D or technology

The eligible sectors for indirects are:

• Defence-related industries; • High tech engineering industries; • IT industry; • Biotechnology and other advanced sectors.

Invalid transactions: Products outside the eligible sectors, low quality technology transfer; projects resulting in traditional Finnish exports, or the continuation of established business relations are ineligible for credits. Transactions with an offset value of less than €10,000 are also ineligible. Threshold: Industrial participation is usually required when a defence purchase contract exceeds €10m.

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Government-to-Government contracts are usually excluded from IP requirements, as are sole source procurements less than €10m in cost. Contracts for defence products where there is no possibility for direct participation may be excluded. This applies also to a domestic main contractor with numerous small foreign suppliers. Quota: The RfP will stipulate an overall requirement of 100 percent of purchase value for major procurements from foreign suppliers. In some circumstances the MoD may waive the industrial participation requirement. Credit criteria: Orders for participation in the manufacturing of parts and the assembly of the purchased equipment are assessed to their full value.

Other commercial transactions are normally accepted at the full value of the Finnish content of the contract. Finnish content of the contract includes Finnish material, labour, added value and other elements of Finnish origin.

In cases where the Committee finds it justified the value can be less than the full value of the Finnish content.

When a contract value either does not exist or is not representative, the crediting will be assessed by the Committee on the basis of resulting benefits to Finnish economic interests.

When a Finnish partner abroad is involved and no Finnish content exists, crediting can exceptionally be considered and will be assessed by the Committee upon the result of the actual business.

Documentation, drawings and tools are credited if provided free of charge.

Multipliers: The focus is towards direct and defence-related projects, and negative multipliers have been introduced to control projects in non-priority sectors. Eligible indirect offsets are focused on high tech projects. The Committee can apply and approve multipliers for the following indirect industrial participation transactions: Exports of Finnish defence material Finnish content x 1-3 Exports by an independent Finnish SME Finnish content x 1-3 Indirect projects to big Finnish companies 0.3 – 1 {Exports to Finnish civil industry is allowed, but discouraged}

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Technology transfer, marketing assistance and other eligible transactions not specifically mentioned above are evaluated by the Committee on a case-by-case basis, and no predetermined multipliers are used. Sophisticated technology transfer will be rewarded. Because evaluation is difficult, a fixed value will be established beforehand and will be equivalent to having a multiplier. Marketing assistance is considered as preparatory work for future industrial participation projects, and will normally not be credited. Marketing assistance costs qualify only when such assistance is specifically quantified and approved in advance by the Committee. On occasions of importance the obligor and the Committee can agree the value in advance. Bonus multipliers are awarded for defence projects involving SMEs. Obligors are entitled to combine multipliers when a project qualifies for the above as well as for an SME, and the smaller the SME the higher the multiplier will be. But, if a Finnish company is utilised to export defence materiel and it is an SME, a multiplier of 2 for the defence sector and 2 for the SME sector would not equal 4, it would be 3 because integers are rounded down a unit. The maximum achievable multiplier is 5. Multipliers for exports by SMEs and/or the defence industry:- Small company 3 3.5 4 4.5 5 2.5 3 3.5 4 4.5 Medium company 2 2.5 3 3.5 4 1.5 2 2.5 3 3.5 Large company 1 1.5 2 2.5 3 Fulfilment period: Usually as long as it takes to deliver the equipment purchased plus 1 to 2 years. Penalties: Usually 3-5 percent of the value of the underperformed obligation. Banking of credits: Pre-offset credits are available and excess credits are bankable and transferable, but there are limited rights to excess credits after fulfilment. Credits must be used within five years and there is limited transferability to another company. Pre-offsets can be agreed after the RfP stage.

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How IP Applications are Processed:

Source: Ministry of Employment & Economy

NORDAC - NORDIC FRAMEWORK AGREEMENT: Agreement between Denmark, Finland, Norway, and Sweden: An agreement concerning support for Industrial Co-operation in the Defence Materiel Area came into force between these countries on 24th November 2002. The document takes into account inter-dependence within the field of defence materiel and the consequential effect of mergers in the industry. It seeks to create a political and legal framework necessary to facilitate industrial operations in order to promote more competitive and robust Nordic defence industries and of supporting these industries as home market suppliers. Recognition is to be given to closer industrial co-operation in the defence materiel area, supported by a ‘more flexible approach’ to applying national industrial compensation requirements. A Governmental Consultation Group has been established to ensure the efficient operation of the Agreement. The following has been agreed with regard to Industrial Compensation:





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France [01/06]

Although France remains a nation without a formal countertrade & offset policy, it maintains a small countertrade & offset bureau within the Ministry of Economic Affairs & Finance, and another within the Ministry of Defence (Delegation General pour l’armament – DGA). The bureau at the Ministry of Economic Affairs & Finance enjoys a typically technical function assisting exporters find solutions to their foreign obligations, largely at the political level. The role of the Ministry of Defence is also to assist French contractors with overseas obligations. France is largely self-sufficient in military supply but major acquisitions from overseas suppliers have occasionally been subject to offset requirements. The procurement by France of E2C-Hawkeyes from Grumman (USA) obliged Grumman to fulfil a mix of 100 percent direct and indirect offsets. The direct offsets for the Hawkeye order were described at the time as “structurally limited” because the number of aircraft ordered was small, and it was therefore difficult for French industry to benefit from “intelligent offset.” There were some multipliers awarded for a limited number of projects. The subsequent procurement of C-130s from Lockheed similarly required offsets.

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Germany [07/09]

A department at the Federal Ministry of Defence, Directorate General of Armaments, is responsible for offset issues. Separately, a ‘special team’ in Division C of the German Federal Office of Defence Technology and Procurements (BWB) negotiates bilateral workshare agreements. The MoD regards offset is an obstacle to fair competition and believes it may result in higher procurement costs. There are no offset regulations. Although the MoD does not request offset from foreign suppliers, in co-operative programmes it reserves the right to ask for direct offset (ie: workshare).

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Greece

[10/11] Greece introduced a new procurement law for the award of commercial contracts in the fields of defence and security in July 2011 in compliance with Directive 2009/81/EC. Defence Procurement Law 3978 makes no mention of offset requirements. Although the MoD has declared that it does not foresee offset requirements anymore, we are advised that there are exclusions: Exclusions to the application of the Law: � When National Security reasons are invoked in accordance with article 346 of the E.U Lisbon Treaty; � Co-operative Programs for the research and development phase of a project; � Government to Government Sales (e.g. FMS, NAMSA surplus supplies). Greece’s industrial participation and offset requirements remain regulated under a Ministerial Decision dated 6th December 2006. This will apply when the above exclusions are relevant. In this regulation industrial participation and offset are different. The provisions are legally enforceable when offset and IP is wanted. If both offset and IP is asked for this would appear to be in breach of the EDA Code of Conduct on Offsets, which restricts such benefits to a cap of 100 percent of purchase contract value. This issue has not been addressed. All Greek defence procurements will be reviewed and approved by a Parliamentary Committee and a Court of Audit will monitor all phases of the procurement, not just the contract award. Law on Expired Offset Contracts:

Parliament passed legislation late September 2010 to address conflicts between the MoD and obligors over expired offset contracts with outstanding penalties for unfulfilled obligations. Contractors will have a six-month grace period from September 2010 to switch to new agreements under revised terms. The new contract will waive the previous penalty provisions and any government claims against the obligors. The implementation period of these new contracts cannot extend beyond December 31, 2014.

Active offset contracts, too, can be regulated under the new provisions if the obligor submits a written request to the MoD to switch over.

The government will select projects from a list of offset benefit programmes prepared by the defence industry associations. The list will be provided to the General

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Directorate for Defence Investments and Armaments (GDDIA) for evaluation and finalization after what is described as a ‘public consultation.’

The value of each project should be equal at least to one quarter of the unfulfilled credit obligation carried over by the obligor. There will be a 10 percent uplift added to the value of the unfulfilled obligation. Therefore an unfulfilled obligation of $5m will become $5.5m with the uplift, and each project would be for a nominal value of $1.375m. No multipliers will be allowed.

The revised contracts would address in greater detail than before how the implementation will take place, with proper schedules and complete transparency of the projects to be completed.

The Court of Accounts will review all new contracts prior to signature. The Defence Parliamentary Committee will receive copies of the proposed contracts and will be briefed on they’re effectiveness.

The new law does not address the question of penalties in the new contract, but the MoD has indicated that a 10 percent non-fulfilment penalty will be applied.

Current Regulations: No flexibility is given in the offer evaluation stage to any official of the Ministry of National Defence or any other body, and no deviation from the law is permitted. Paragraph 16 of Article 27 of the Defence Procurement Law of 7th February 2007 stipulates that for procurements of defence materiel that exceed the threshold offset benefits must be offered to the General Directorate of Defence Armament and Investment. The offset agreement must be concluded together with the Supply Contract. The Hellenic Ministry of Defence (HMOD) distinguishes between Greek Industrial Participation (GIP) and Greek Added Value (GAV), both of which are requirements under the Main Supply Contract. Greece demands offsets under a separate Offset Benefits Contract. The HMOD retains the right to ask for ‘Greek Industrial Participation’ (GIP) in a percentage to be specified in each RfP, with at least 35 percent Greek Added Value (GAV). The HMOD also demands offsets of 100 percent of supply contract value. Contractors firstly will need to fulfil a GIP or GAV, and then they will have to complete an offset requirement. A Presidential Decree for the creation of a Defence Material Manufacturers Registry was enacted on January 10th, 2008. The creation of the Registry aims to increase the participation of the domestic defence industry in the Hellenic Armed Forces armament procurement programmes. More specifically, its main goal is to verify and record in detail the capabilities of Hellenic defence companies as well as the future

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development of the domestic defence industry. The inclusion of a company in the Registry is a prerequisite for its participation in the armaments acquisition programmes. Contracts must be in the Greek language though copies may be prepared in English. Objectives: The focus of the offset policy is on establishing long-term work for the domestic defence industry and to establish long-term relationships with foreign contractors. GIP and GAV: {GIP = Greek Industrial Participation; GAV = Greek Added Value} The principles are set out in Article 30 of the Procurement of Defence Materiel Law dated 7th February 2006. GAV applies to Greek companies taking part in the procurement, and GIP applies to foreign contractors. GAV represents the causality achieved by the Greek defence industry during the production, assembly and modification stages of a project. GIP is defined as the percentage of participation of the Greek defence industry in the manufacture of a system by way of sub-contract. The requirement will be expressed as a percentage of the total value of the main Supply Contract. GAV is therefore a component of the GIP that concerns the involvement of Greek industry in the manufacture of the defence system under purchase. It is expressed as a percentage of the total value of the Main Supply Contract. GAV and GIP are requirements under the Main Contract. The percentage of benefits wanted will be specified in the RfP. The GIP rate is determined based on the sum of the values of material/subcontracting work assigned and performed by Greek companies as measured with a Greek GAV rate. Contractors have to give a specific work package to the defence industry and each work package will be calculated as to how much GAV is achieved. The calculation will take into consideration direct and indirect labour, materiel, the profitability of the company, viability and size, and revenues. The GAV formula (see below) is calculated to measure a number of factors, including the proportions of local and imported direct and indirect costs, and how they would affect the value of raw materials domestic production, labour costs and employment, and potential taxation. A ‘cost divider’ equal to the product’s selling price minus retentions and divided by the beneficiary company’s turnover is applied to the formula.

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C = credit value C1 = value of the programme C2 = technology C3 = training value C4 = equipment value K = multiplier NB: C1 is present in all five programmes, but differs in each case. For the development of new products, C1 is the value of the investment. In the next two programmes it refers to the workload, and in the final two programmes, it describes the value of the equipment or the value of the programme that the obligor fulfils. Quota: a) The minimum GAV that will be required is 35 percent of the foreign content component. b) The offset requirement is for at least 100 percent of foreign content value. Depending on the type and value of the procurement, the quota may be increased. When this happens the quota will be specified in the Call for Tender or in the respective approval notice of the procurement by the Financing Authority (FA). Threshold: The threshold above which offset benefits are required is €10m. When the foreign exchange component of the contract does not exceed €10m the General Directorate of Defence Armament and Investment (GDDAI) and the Financing Authority (FA) may decide to demand benefits anyway. They are entitled to change the threshold and the quota percentages. When a Greek defence contractor bids for a supply contract and the foreign content exceeds the threshold, the foreign contractor must submit an offset proposal. Penalties – GIP (or DIP) and GAV: An obligor that misses the GIP target will face a progressive fine of up to 0.4 percent of the Supply Contract Value (SCV) multiplied by the rate of deviation between the contractual GIP and the actual GIP achieved.

Manufacture of Products by Local Industry 40%

C= (C1 * K1) + (C2+C3+C4) * K2

K1= 2,6,10 K2= 1,3,5

Absorption of Local Defense Products 20% C = C1* K K= 6,10

Grant of Infrastructure, Equipment and Services to HMOD

20% C = C1* K K= 4,8

Programmes for the Support of the Social Role of the HMOD 10% C = C1* K K= 8

93

GIP is tightly related to GAV. Missing the GAV’s required 35 percent or claiming a higher GAV than entitled may result in huge penalties. Those penalties will be withheld from SCV payments. However, a deviation of up to 10 percent is not penalized. For example, if a contractor misses a commitment on a work package where there is a requirement of 20 percent GIP the contractor will also have missed the GAV requirement. This could somersault into a 10 percent penalty on contract value. When the contractor has fulfilled its GAV/GIP obligations there will still be the offset requirement. A DIP – or ‘Domestic Industrial Participation’ package - consists of selected sub-contracting programmes that the supplier has agreed with domestic companies. DIP is defined as the net domestic value of the contracts as a percentage of the total value of the main Supply Contract.

5© Anastasopoulos 2007

DIP Calculation

DIP is calculated according to the formula:

Vi : Value of the project/material/work/service (i) to be manufactured / performed by the Domestic Industry with a GAV equal or greater than 35%.

GAVi : It is the Greek Added Value achieved by the Domestic Industry for (i) project/material/work/service.

FOV : is the total Value of the Financial Offer.

∑ i i

= V x GAV

DIP (%) x 100FOV

94

21© Anastasopoulos 2007

Liquidated Damages

● In case of non-achievement of the DIP percentage committed in the Main Supply Contract, Liquidated Damages will be imposed to the Supplier.

● The Deviation (D) from the contractually committed DIP is calculated as a percentage of the ∆ between committed and achieved DIP against the committed one. (Eg: Committed DIP: 30%, succeeded DIP 24%, ∆ = 6 and D =6/30 x100% = 20%).

● The liquidated damages are calculated as follows: Liquidated Damage = D x 0,4% x Main Supply Contract Value

These examples were used at an Athens presentation by Anthony Anastasopoulos, Vice chairman of the Board, Space Consulting SA.

GIP / GAV Example (compiled by EFA Group)

Assume a $ 100,000,000 contract with a required GIP of 36%. Three projects are identified, each with their corresponding GAV (as declared by local industrial partner): Project 1, Value $ 40,000,000, GAV 35% Project 2, Value $ 40,000,000, GAV 38% Project 3, Value $ 20,000,000, GAV 35% The corresponding overall GIP= ($40M x 0.35 + $40M x 0.38 + $20M x 0.35) = 36.2% $100M Potential Penalties (for GAV / GIP not met on time) If Project 1 only reaches 32% GAV, penalty = (0.35x40M) x (0.35-0.32) x2= 840,000 If Project 2 only reaches 28% GAV, penalty = (0.38x40M) x (0.38-0.28) x3= 4,560,000 If Project 3 only reaches 18% GAV, penalty = (0.35x20M) x (0.35-0.18) x4= 4,760,000 GIP becomes = 27.6%, with its penalty = 100M x (36-27.6 / 36) x0.4= 9,333,333 TOTAL (GIP and GAV) PENALTY = $ 19,493,333

95

Penalties - Offset: Offsets face liquidated damages for 10 percent of the unfulfilled portion of the obligation. The HMOD demands a bank guarantee to cover payment. Late implementation of a specific offset programme also leads to penalties. The HMOD demands 1.5 percent of the unfulfilled value of the programme per month of delay. Collected penalties are for the benefit of the armed forces’ pension fund. A performance guarantee must be established but shall be reduced as the offset is executed. The penalty clause in the offset contract will make clear that if implementation does not take place within the agreed timeframe the contractor shall forfeit 10 percent of contract value, or the letter of guarantee may be cashed. Otherwise the forfeit will be paid by way of a credit to the purchase cost. Penalties – General: A contractor in breach of the law will void the contract and the MoD may impose such consequences as it deems fit. Service Providers: The law allows for such services but caps remuneration at 3 percent. Fulfilment Period: The offset contract should be fulfilled within the period allowed for the supply contract. Grace periods have to be negotiated when the offset contract is dealt with. The grace period will qualify only if 80 percent of the offsets have been achieved by the due date for completion. At least 60 percent of the total offset obligation is to be met by half-way through the performance period. A grace period will be granted only if 80 percent of the offset obligation is achieved at a milestone. Details of offset programmes which are not clearly stated or finalized in time will be allowed to be included in the offset contract only in special circumstances. They may not exceed 50 percent of the total offset requirement and the time frame for their completion shall be specified in the contract and may not exceed twelve (12) months. Banking:

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98

If two or more suppliers present bids resulting in a tie under the calculation formula, the tender is awarded to the supplier with the lowest price proposal. Offset Multipliers: The MoD shall apply different multipliers for each transaction; they are predetermined and not negotiable. The foreign contractor must hold at least 51 percent of the equity in a Greek company and retain this holding for at least five years from the commencement of business activity. The credit coefficient, or multiplier, for this is 10. The provision of technical services to the HMoND qualifies for a multiplier of 8 provided that the implementation of the project provides a high and substantial participation of the domestic defence industry. The minimum percentage of the domestic participation must be 50 percent, otherwise the multiplier shall be 4. A 40 percent offset contract is to be agreed for either sole source or licensed production, or for sub-contracting. The relationship the contractor has with the Greek company will determine the multiplier. A sole source relationship, for instance, will have a multiplier of 10; licensed production is 6; or without a license it is 2. For other items a single source contract will qualify for 5, exploitation licences are 3, and for projects without exploitation licences it is 1. There is a similar type of programme covering the purchase of Greek industrial products, with the same range of multipliers. This covers another 20 percent of the offset commitment. 60 percent (of the 20 percent) will cover the development of new products or creating value for Greek industry. Absorption of products of the domestic defence industry by the obligor qualifies for a multiplier of 6, though when there is a single source supplier it is 10. Grants for the Armed Forces programme, where a Greek beneficiary is involved in a project to supply the Greek armed forces, accounts for 20 percent of the offset requirement. The multipliers shall not exceed 8. Non-defence-related offset programmes are acceptable but require ‘social benefits’ for the Hellenic Armed Forces. Indirect benefits may not exceed 10 percent of the offset requirement. The multiplier is 8. Marketing assistance qualifies as offset and will attract a multiplier of 6.

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K2 = the credit coefficient for the remaining items. The value of K2 is five (5) in case of a single source, three (3) for providing an exploitation license and one (1) when not providing the license. NB: no credit shall be provided for the infrastructure, training/technical support, and provided know-how until the contractor starts to execute the benefit; afterwards it will be credited in proportion to the value executed. When the percentage of domestic content is lower than 50 percent the C1 shall be equal to the value of the order times the rate of the domestic content, times 2, divided by 100. Absorption of products of the domestic defence industry:- The sum to be credited shall be calculated on the basis of the following formula: C=C1*K Where C= the total sum to be credited; C1=the value of the products/services to be absorbed; K = the credit coefficient. Its value shall be six (6); however, for a unique or exclusive manufacturer (single or sole source), it shall be ten (10). In special cases the supplier may arrange for acquisition of domestic Greek defence products by a third party. The coefficient shall be six (6). Provision of materials and workmanship to the Ministry of National Defence:- The amount to be credited shall be calculated on the basis of the following formula: C=C1*K Where C= the total sum that is being credited; C1= the current nominal value of the infrastructure and/or services provided; K=the credit coefficient. The value of K shall be eight (8) on condition that in the implementation of the programme a high and substantial participation of the domestic defence industry shall secure at least 50 percent by way of domestic content. If the domestic defence industry does not participate, then the rate of the credit coefficient shall be four (4). For reinforcing the social role of the Ministry of National Defence:- These programmes shall be dealt with on a case-by-case basis. The programmes shall be credited by including them in one of the aforementioned types of programmes. If they cannot be included in any of the categories mentioned above then the credit coefficients shall be determined on a case-by-case basis. The coefficients in question should not exceed eight (8).

101

Example of credit when there is manufacturing of products by the Domestic Defence Industry: Crediting formula: C=(C1 x K1) +(C2+ C3+) x K2, where C : Total Crediting value C1 : Nominal value of awarded contract C2 : Nominal value of transferred technology C3 : Nominal value of training / technical support C4 : Nominal value of Supplier’s participation to infrastructure C¹ Depending on domestic participation (DP) DP>50 percent C¹ = Contract value DP<50 percent C¹ = Contract value x (2 x DP) K1, K2 Depending on the license: Single/Sole Export Licensee No Export Licensee Source K1 10 6 2 K2 5 3 1

Example of the offset evaluation formula: The formula is PEM= MP+MT+MD, where PEM = Proposal Evaluation Marks, maximum marks 100 MP = Marks resulting from evaluation of offsets percentage offered, max marks = 40

where: OP = Offered Percentage MT = Marks resulting from MOP = Maximum offered percentage evaluation of offset types offered, max marks 40, where AP = Approved percentage MAP : Maximum approved percentage MD = Marks resulting from evaluation of the duration, max marks = 20 Proposal offering min Duration = 20 marks Other proposals are marked proportionally Criterion is not evaluated if the duration exceeds the duration mentioned in the Main Supply Contract

Out of the 100 evaluation marks, 60 are evaluated based on the statement made by the supplier.

The remaining 40 are based on the evaluation / approval of the programmes offered. Approved Percentage is based neither on the offered mix of programmes type nor on the satisfaction of priorities set by the MoD.

The implementation duration period is worth 20 marks.

OPMP= ×40MOP

APMT= ×40MAP

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Clarification of Social Role Programmes: Social Role Programmes are dealt with on a case-by-case basis when they offer benefits to the HMoND. They concern the funding of projects ‘of a wider social benefit.’ The coefficient shall not exceed 8. The OB programme requires 70 percent of the obligation to apply to programmes directly related to the defence industry and focuses on sub-contracting. Programmes for *Product Development (see below) will account for 10 percent of the OBs; programmes for **Product Manufacturing for 40 percent; programmes for Absorption of Products for 20 percent. Programmes for the Grant of Materials and Services to the HMoND apply to 20 percent of the obligation, and Social Role programmes to 10 percent. The OB contract will hold the obligor to a non-fulfilment penalty of 10 percent on any shortfall. A sliding scale will reduce credit values over the default period. Excess credits are valid for two years. *Product Development might include: a. The assignment of work to a Hellenic defence industry company for research and development of new products or for the redesign of existing products for the enhancement of operational performance. b. Participation in the establishment of a new company in Greece. The company must have an acceptable business plan and the supplier must own at least 50 percent of the new for at least five years from launch. ** Product Manufacturing includes the assignment of work for manufacturing or maintenance in accordance with existing capabilities. If the appropriate capability does not exist, the supplier may transfer the necessary technology, training and technical support and contribute in the development of infrastructure. Domestic Part Percentage Programmes and their Multipliers: Domestic Part Percentage (DPP) has been introduced as a type of Offset Benefit programme where the capability for manufacturing a product does not exist in Greek industry.

a. The DPP must be greater than the sum of values of know-how, technical support and training. b. The DPP must be at least equal to 50 percent of the total value of the order placed in the domestic company. c. No credit is granted for infrastructure, know-how, technical support or training until the beginning of the production.

103

d. Credit for infrastructure, know-how support or training is granted proportionally to the order. If for any reason the value of the order is reduced, the credit granted for infrastructure, know-how support or training will be reduced by the same percentage. The priority for this type of programme is the establishment of long lasting cooperation between the foreign suppliers and Hellenic industry. For this reason the maximum Credit Coefficient of 10 is nominated for single source contracts. The period for which the domestic company will be under a single source contract will be important in deciding at what level to award the coefficient. A Credit Coefficient of 5 will be awarded for the transfer of technology, training and infrastructure. If the Hellenic company is granted a license to sell the product there will be a Credit Coefficient of 6. It will be 3 for the transfer of technology, training and infrastructure. If the potential to sell the product is low or does not exist at all, the grant of a license will not taken into account. In all other cases the Credit Coefficients are 2 or 1.

104

Hungary

[10/11] Anticipated Policy Changes Hungary has yet to announce changes to its offset guidelines that will comply with Directive 2009/81/EC but has indicated that the government will decide on a case-by-case basis whether to apply Article 346 and demand offset. The Ministry for National Development and Economy, as before, will be responsible for producing the new offset guidelines and for their administration. The requirement to realise investment in Hungary amounting to at least 30 percent of the agreed offset value will no longer be mentioned. The current threshold is expected to be retained. Indirect opportunities will have to be removed or severely restricted. Multipliers are unlikely to see major changes, but to comply with the Directive’s diktat on direct offsets revisions will have to be made to the fields of application. The new guidelines will focus on the technologies that Hungary wants to develop in the defence and security sectors.

================================

The Ministry for National Development and Economy (MNDE) is responsible for administration of the offset guidelines and applies an adaptable approach to meet the aims of the country’s economic policy. The guidelines are informative only and should not be regarded as statutory provisions or any other legal instrument of public administration. The latest revisions to the offset guidelines were formally approved in December 2009. The Investment and Offset Section within the MNDE is responsible for the management of offset agreements. It is necessary for both the purchase agreement and the offset agreement to be signed. The failure to sign one shall void the other. NB: Only the Hungarian added value portion of export fulfilment will count towards offset credits. Obligors are free to choose their offset partners and their projects. Objectives: The principle objective is to support the modernization of the national defence and security industries. Obligors are required to make long-term investments that result in value-added activities.

105

The realisation of a knowledge-based economy with technology development is vital. Priorities include regional logistics and service centres, and support for the aerospace sector. These should be supported by competence centres. Long term industrial collaboration is wanted for: Aerospace, defence & security industry; information and communication technology (ICT), electronics; biotechnology and life sciences; renewable and recycling energies, environmental industry; material technologies, nanotechnology logistic centres and networks. Dual-use technology is welcome. Domestic competition: Domestic companies may enter the bidding process, and do so on the same terms as foreign competitors. They must commit to the same offset pledges on the basis of import value provided the foreign exchange consideration paid to foreign suppliers in exchange for imported goods used for the manufacturing of the product exceeds 1bn HUF. Manufacturers shall be considered as domestic bidders if they are registered in Hungary. Foreign Bidders: The basis for an offset commitment in the case of foreign bidders is the entire foreign exchange value paid according to the Delivery Supply Agreement. Direct / Indirect: Direct offset refers to defence and/or defence related activities, including security. Indirect offsets covering high tech remains an important category and relates to all other activities. Although indirect (commercial) offset is allowed, the MNDE will be selective. Threshold: Imports of military equipment exceeding 1b HUF (c.$5m) in value require offset obligations in the amount of the value of the contract. For frameworks contracts concerning pre-performance the threshold may be lower. Quota:

106

Fixed at 100 percent of import content value. This is a gross figure, including multipliers. Therefore an obligor with an agreed multiplier of 5 would have an obligation for 20 percent of foreign content value. Investment Requirement: When submitting the offset offer the bidder must comply with a legislative requirement to realise investment in Hungary amounting to at least 30 percent of the agreed offset value. This may be accomplished in three ways:

a. By making a ‘traditional’ investment which can be for the full 30 percent, where ‘traditional’ amounts to an increase in capital, the delivery of tangible and intangible assets, or the transfer of technology and know-how. The eligible areas of activity include direct and indirect (commercial) ventures and comprise:- Aerospace Industry; Defence and Security Industry; Information and Communication Technologies; Electronics; Biotechnology and Life Sciences; Renewable Energies; Environmental Industry; Material Sciences; Nanotechnology; Logistic Centres and Network Development.

b. By the combination of ‘traditional’ investment of 20 percent with another 10 percent investment forming part of either the project-based offset or of the direct offset fulfilment.

c. By realization of 100 percent direct offset with 30 percent of investment

fulfilment included. Therefore investments contributing to or increasing the registered capital of a limited liability company or a joint stock company registered in Hungary shall be considered as part of offset fulfilment, provided that the contribution shall not be withdrawn within the term of the Offset Agreement, including the event of winding-up and liquidation. Pre-Offsets: Pre-offset activities qualify for credits. Case-by-case agreement on the value and future realisation of credits for activities that do not lead to a successful bid should be reached in advance. Fulfilment Period: Offset agreements are generally valid for a term of 12 months after the Supply Contract has finished. The Offset Agreement may allocate interim deadlines for assessment of performance. Third Party Fulfilment:

107

Third party discharge of offset obligations is permissible provided the third party is registered overseas, approved by the MNDE, listed in the Offset Agreement, and has an established track record of participation in offset fulfillment on behalf of the obligor. A business association registered in Hungary can also be considered as a designated company if at least 75 percent is owned by the obligor and the shares were obtained following the execution of the Offset Agreement. The designated company has to declare it is accepting this status. If this designated company fails to fulfil any offset obligations within two years of obtaining its status it will forfeit that status. The MNDE is entitled to control the activities and the participation of the designated companies in offset fulfilment. Only fulfilments started following the offset agreement entering into force shall qualify for crediting. Penalties: Liquidated damages for non-performance are a compulsory provision in all contracts. In general there will be a time frame, and half way through the contract there should be 50 percent of the obligations fulfilled. The company awarded the contract shall guarantee the fulfilment of obligations by providing a performance bond established through a bank registered in Hungary and accepted by the MNDE. The rate shall be set forth according to the terms of the tender. The rate presently applied is 6 percent. The performance bond shall be submitted to the MNDE by the deadline set by the ministry but not later than the 60th day following the signature of the Offset Agreement and shall remain valid until all obligations have been discharged to the satisfaction of the ministry. Failure to establish the Performance Bond by the deadline will render the Offset Agreement null and void. The amount available for drawing down under the performance bond shall be reduced in proportion to the fulfilment of offset obligations. The initial amount of the Performance Bond shall be based on the offset value. Multipliers: 1 for direct offset 10-15 for the execution of projects listed in Annex ‘A’, where Annex ‘A’ comprises any type of project submitted by the obligor for approval. The multiplier will depend on the level of R&D, vocational training, technology transfer, SME support, and the development of a logistics network.

108

5 for priority investments 5 for priority products resulting from the above investments. Multipliers for investments will vary according to the technological level involved. The areas qualifying for a multiplier of 5 by way of investment, referred to as List ‘B’: • Aerospace Industry; • Defence and Security Industry; • Information and Communication Technologies (ICT), • Electronics; • Biotechnology and Life Sciences; • Renewable Energies; • Environmental Industry; • Material Sciences, Nanotechnology; • Logistic Centres and its Network Development The areas qualifying for a multiplier of 5 as preferred products and services, referred to as List ‘C’, are:

• products and services generated by new projects and investments performed during the execution of the Offset Agreement;

• Products and services of the domestic defence and security industry. Credits for Marketing Assistance: Note that ‘marketing assistance’ is limited to not more than 20 percent of the obligation. Credit values for marketing assistance for sales realized in 2009-2010: • 10% of the Hungarian added value if the domestic added value is 25% or below; • 20% of the Hungarian added value if the domestic added value is higher than

25%; • 100% of the Hungarian added value if the delivery was realized by a domestic

SME. Credit values for marketing assistance for sales realized in 2011-2012: • 5% of the Hungarian added value if the domestic added value is 25% or below; • 15% of the Hungarian added value if the domestic added value is higher than

25%; • 100% of the Hungarian added value if the delivery was realized by a domestic

SME. For sales realized in 2013 and afterwards: • 3% of the Hungarian added value if the domestic added value is to 25% or below;

109

• 10% of the Hungarian added value if the domestic added value is higher than 25%;

• 100% of the Hungarian added value if the delivery was realized by a domestic SME.

Snapshot:

Source: Ministry of National Development & Economy

110

India

[01/11]

India’s offset policy is implemented by the MoD. There have been several amendments to the offset regulations since they were first published in 2005 and it may be helpful to review how they have evolved:

The offset clauses in the Defence Procurement Procedure policy document published 2005, known as DPP 2005, established broad guidelines for implementing offsets in defence acquisitions. They became effective 1st July 2005.

DPP 2005 did not cater to all capital acquisitions, only the “Buy” half of what is known as “Buy and Make”.

An appendix was published in May 2006, then in September 2006 the MoD published DPP 2006, a document of 253 pages which introduced the so-called “Make” aspect of policy. This addresses issues concerning the involvement of Indian industry in development and production of defence equipment in the country. DPP 2006 was established to provide comprehensive policy guidelines for all capital acquisitions for the Armed Forces, and introduced a number of important new definitions.

The ‘Make’ procedure was meant to enable Indian industries to develop high technology systems and to upgrade weapons required by the armed forces. The policy provided for the sharing of development costs with the vendors following a transparent selection process. Its purpose was to pave the way for increased participation of Indian industry in the defence sector.

DPP 2006 became effective September 1st, 2006. Contracts under earlier regulations remain valid.

Further modifications to policy were settled in April 2007 by the Defence Offset Facilitating Agency (DOFA). The government would allow dual-use technology within the defence sector. Acceptable software applications qualified for offset credits from April 2007.

The government introduced the banking of offset credits with publication of the Defence Procurement Procedure 2008 (DPP 2008) policy document on 1st August 2008. This document omitted earlier explanations of DOFA’s role.

A 2009 amendment to the DPP 2008 became effective on November 1, 2009. This introduces a provision allowing the Request for Proposal (RfP) to be issued to Indian companies under a new category called ‘Buy and Make (Indian)’. See below for further details.

In March 2010 the Dept. of Telecommunications introduced specific requirements for the supply of both hardware and software (see below).

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With effect from January 1, 2011 DPP 2011, a document of 291 pages, expanded the scope for offset fulfilment to include most aspects of civil aerospace, marking the first official intrusion into the civil sector. Internal security projects and training now also qualify for offset, and a wide range of weapons and counterterrorism services are included in the list of eligible products under ‘internal security.’ There are measures to promote indigenisation of the private shipbuilding industry for defence contracts. Scope: DPP 2011 covers all Capital Acquisitions (except medical equipment) undertaken by the Ministry of Defence. The offset provisions apply to all Capital Acquisitions categorized as ‘Buy (Global)’, i.e. outright purchase from a foreign/Indian vendor, or ‘Buy and Make with Transfer of Technology’, i.e. purchase from a foreign vendor followed by Licensed Production, where the estimated cost of the acquisition proposal is above the threshold. General:

Projects under evaluation in accordance with the provisions of DPP 2008 will remain governed by those provisions except for those cases in which the RfP was issued after January 1, 2011. None of the parties shall withdraw from or terminate the offset contracts. It is the responsibility of the contractor to provide any technical or financial assistance to the selected partner, as may be required, at its own cost. Those costs may not form of the part of the offset offer. Whenever technology transfer (TOT) proposals are asked for a Technical Oversight Committee (TOC) will be set up comprising three members: one Service Officer, one DRDO scientist and one representative of DPSU preferably not involved with the acquisition. Offset conditions as specified in the RfP are binding. Once the offset contract has been signed no changes will be allowed regarding offset components or value. In exceptional cases the MoD may permit changes in the offset partner, on being convinced that the change is desirable to enable the vendor to fulfil offset obligations. FDI and Joint Ventures:

An enabling clause in DPP 2009 permits the vendor to change its offset partner if the switch would help the vendor to fulfil its offset obligation and the MoD is convinced the change is desirable. However, no change would be allowed in respect of the offset components or its value after the offset contract has been signed.

Foreign Direct Investment (FDI) qualifies for offset credits.

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The contractor is free to select the offset partner provided that partner is suited to the defence and/or aerospace/internal security areas. Private industry will need an industrial license only if stipulated under the licensing requirements for the defence industry issued by the Department of Industrial Policy and Promotion.

There may be FDI in any Indian company engaged in defence/ aerospace R&D activities as certified by the Defence Offset Facilitation Authority (DOFA). There are proposals to raise the FDI equity cap of 26 percent 49 percent, even so investments over 26 percent would not be open to all proposals and would be decided case-by-case.

Any private sector defence company may qualify for offset credits when there is export activity, MRO, foreign direct investment, etc., provided an industrial license is first granted for the project.

When certifying foreign investment, DOFA shall not consider civil infrastructure and such technologies that are otherwise easily available in the open market.

NB: A foreign contractor’s Indian offset partner shall also comply with the guidelines/licensing requirements for the defence industry issued by the Department of Industrial Policy and Promotion.

Practice Note:

The FDI rules are very restrictive. A licensee can produce only the licensed products and in the sanctioned quantities. These will be fixed after considering existing capacities of similar and allied products. The licensee can neither diversify its capabilities nor enhance production without sanction. The production license must be strictly kept to.

Buy & Make - Definitions:

Buy and Make (Indian):

Acquisitions classified under the Buy and Make (Indian) provision became effective on November 1, 2009:-

This allows the Request for Proposal (RfP) to be issued to Indian companies. Those companies must have the financial and technical ability to absorb technology and undertake indigenous manufacture.

Projects selected by the Defence Acquisition Council under this category will allow Indian firms, both public and private, to play a lead role in negotiating and obtaining technology and co-production arrangements with the foreign Original Equipment Manufacturers (OEMs). The RfP will be issued to the Indian firms and not to the foreign OEM.

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The Indian firms will be required to submit project proposals indicating a detailed roadmap for development and production of the items over their lifecycle. They will also need to spell out the proposed production arrangement with the foreign OEM and the technology transfer content.

The product manufactured and supplied by the Indian company must have 50 percent indigenous content. This should result in development and production through the transfer of technology from the foreign OEM, instead of through indigenous R&D.

‘Buy’, Buy (Indian)’, and ‘Buy (Global):

Acquisitions classified as ‘Buy’ are an outright purchase of equipment. Based on the source of procurement, this category would then be classified as ‘Buy (Indian)’ or ‘Buy (Global).’

‘Indian’ would mean Indian vendors only and ‘Global’ would mean foreign as well as Indian vendors.

‘Buy Indian’ must have a minimum domestic content level of 30 percent if the systems are to be integrated by an Indian vendor.

Acquisitions classified as ‘Buy & Make’ involve purchases from a foreign vendor followed by licensed production.

Acquisitions classified as ‘Make’ would include high technology and complex systems to be designed, developed and produced indigenously.

DPP 2011 has broadened the scope of potential beneficiaries by requiring that the recipient of technology transfer for maintenance infrastructure under the Buy (Global) category has to be incorporated under Companies Act 1956 and may include Defence Public Sector Units (DPSU).

Procurement Categories:

Procurement through ‘indigenous development’ would be divided into the following categories:-

(a) Strategic, Complex and Security Sensitive Systems.

These projects would be undertaken by the Defence Research and Development

Organisation (DRDO). Development of the systems would use DRDO funds for execution, and the projects would be managed through the Defence R&D Board.

(b) Low Technology Mature Systems.

These projects would be categorised as “Buy Indian” and must have minimum 50 per cent indigenous content.

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(c) High Technology Complex Systems.

Projects under this category would be identified as ‘Make.’ The projects would be undertaken by RURs/Indian Industry /Defence Public Sector Units (DPSUs) / Ordnance Factory Boards (OFB) / Consortia on a level playing field. This procedure would also be adopted for all upgrades categorised as ‘Make.’

Source: Deloitte / Confederation of Indian Industry

Government Agencies:

The MoD has set up a separate organisation, the Defence Offset Facilitation Authority (DOFA), for facilitating and coordinating issues related to offsets (see below).

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There is an army of government agencies, each with a role to play:-

The MoD provides for the Services Capital Acquisition Plan (SCAP) Categorisation Committee to recommend the inclusion of an offset clause amounting to 30 percent of the indicative cost in the RfP where the indicative cost of the contract is Rs 300 crore or more. [A crore is Rp 10m.]

The SCAP Categorisation Higher Committee may advocate changes in the offset amount when making its recommendations to the Defence Acquisition Council (DAC).

The DAC is headed by the Defence Minister and includes all Ministers of State for Defence, the Chiefs of the three Services, and all Secretaries in the MoD.

The Defence Offset Group (DOG) operates as an agency of the DAC.

The SCAP committee will appoint the lead Defence Public Sector Unit (DPSU) / Ordnance Factory Board (OFB) which will assist the MoD in monitoring the implementation of the offset contracts during the post contractual period.

The DPSU / OFB nominated by the DAC will monitor the execution of the various offset contracts. A periodic report containing all necessary information will be submitted to the monitoring section of the MoD. Any slippage in the execution of offset contracts would be brought to the notice of the MoD, which would take appropriate action.

DOFA:

The MoD has set up a separate organisation, the Defence Offset Facilitation Authority (DOFA), to facilitate and coordinate issues related to offsets. DOFA will, amongst other duties, monitor the suitability of candidates that implement offsets and assist foreign companies in finding suitable Indian defence partners.

DOFA is headed by a Joint Secretary of the Department of Defence Production. Its council comprises executives from Service Headquarters, Hindustan Aeronautics Ltd., Bharat Electronics Ltd., Bharat Dynamics Ltd., the Ordnance Factories Board, and representatives from the lobbying agencies of the Indian private sector such as ASSOCHAM and the Federation of Indian Chambers of Commerce and Industries (FICCI).

A representative of DOFA will be co-opted onto the Contract Negotiation Committee (CNC) whenever an acquisition involves an offset contract.

Practice Note:

DOFA no longer has an advisory role on policies and procedures. It has already surrendered much of its influence and many of its powers. It has no role in the banking of offset credits.

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DOFA is now involved in the contract formation phase and in offset contract extensions, but not for the main procurement contract, and it no longer monitors offset obligations.

It helps foreign contractors find suitable partners and to clarify certain issues. DOFA is not, however, the agency that assists in evaluating the offset proposal. Neither DPP 2008 nor DPP 2011 explains in detail what DOFA’s role is.

Procedure - Single Stage Two Bid System:

The solicitation of offers will be conducted as a ‘Single Stage –Two Bid System’ [not applicable when the tender is under the Buy and Make (Indian) provision].

An RfP would be issued soliciting technical and commercial offers together, but in two separate sealed envelopes. This system is to safeguard against the possibility of the vendor increasing his commercial offer consequent to development of a single vendor situation after evaluation.

The vendor will give a written undertaking at this stage to meet the offset obligations laid down in the RfP, as part of the technical offer. This undertaking will be binding and failure to discharge it at any stage of the acquisition process will disqualify the vendor from any further participation and his offer will be treated as null and void.

The vendor will under no circumstances delay the execution of the main contract on the plea of failure of Indian Industry in executing various offset contracts.

The Acquisition Wing will ask those vendors whose equipment has been short-listed to submit detailed offset offers in a sealed envelope within six weeks. These offers shall be evaluated by the Contract Negotiation Committee (CNC) prior to the opening of the commercial offers already submitted by the vendors. The commercial offers only of those vendors whose offset offers are found to be in order will be opened.

The lowest bidder (known as the ‘L1 vendor’) has to finalise all contracts concerning offset. The main contract shall come into force at the moment the vendor has concluded all the offset contracts with the nominated industries up to the value specified in the RfP. The offset contracts should be concluded not later than 60 days from entering into the main contract. The vendor will under no circumstances delay the execution of the main contract on the plea of failure of Indian industry in executing offset contracts. Commercial offers must be firm and fixed and should be valid for at least 18 months from the date of submission of offer.

Solicitation of Offers: To maintain commercial confidentiality of the commercial bid the vendor is required only to give a written undertaking to the effect that it will meet the offset obligation

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laid down in the RfP. The technical and commercial offset offers would have to be submitted by the vendors by a date to be specified in the RfP, which would be no earlier than three months from the date of submission of the initial technical and commercial offers. These offset offers would have to be submitted together in two separate sealed covers to the Technical Manager.

The Make Classification:

As stated above, acquisitions classified as ‘Make’ would include high technology and complex systems to be designed, developed and produced indigenously. Contractors should provide the names and details of the foreign technology provider.

The benefits arising from the ‘Make’ categorization need to be carefully evaluated. The offer to Indian industry must clearly mention that the Intellectual Property Rights of the products are owned by the Indian industry. When projects are funded by the MoD, the Intellectual Property Rights would belong to the ministry.

Processing Technical Offset Offers, and Monitoring:

The technical offset offer is presented with the bid at the time of the RfP. The Evaluation Committee organises a Technical Evaluation Committee which then evaluates the offset offers. A member from the Defence Production Department substitutes for DOFA on the Committee. This is to allay the concerns of contractors about commercial confidentiality. An offset monitoring cell has been formed to assist the Acquisition Wing and is looked after by a Director level officer within the Department of Defence Production, which is one of the four major wings of the MoD. The technical offset offer should contain details of the products, services and investment proposals indicating relative percentages, proposed Indian partners for offset investment and other relevant information. Details of banked offset credits as discharged offset obligations should also be indicated. The commercial values of the offset proposals are not to be indicated in this technical offset offer. The offset offer will be examined in two stages by the Acquisition Wing. In the first stage, the first part of the offset offer will be examined to ensure that the offset offer fulfils the mandatory requirements and thereby qualifies the vendor for opening of its commercial offset bid. The commercial offset offers then would be opened along with the main commercial offer. The Contract Negotiating Committee (CNC) would verify that the Commercial Offset Offers meet the stipulated offset obligations. The lowest bidder (L1) may amend the commercial offset offer at this stage subject to meeting the offset obligations as stipulated in the RfP.

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Industrial Licenses:

The mandatory requirement of an industrial license for a domestic firm to participate in the offsets programme has been relaxed. Objectives and Permissible Ventures:

NB: A list of qualifying defence products appears at the end of this chapter.

The principle objective is the indigenous manufacture of defence and aerospace systems in the country. Activities such as co-development, co-production, joint venture and perhaps technology for maintenance and upgrades are wanted. Another target is the export of defence related products developed indigenously in India.

Foreign and Indian firms are encouraged to establish long term relationships. India has limited access to global markets and intends to address this situation by opening avenues for the Indian defence industry to forge global partnerships.

Obligors can meet their offset obligations by any combination of the following methods:

a) Direct purchase of, or executing export orders for, eligible products and components manufactured by, or services provided by, Indian industries, i.e. Defence Public Sector Undertakings, the Ordnance Factory Board and private Indian industry. b) Direct foreign investment in Indian industries for industrial infrastructure for services, co-development, joint ventures and co-production of eligible products and components. c) For the purpose of discharge of offsets, ‘services’ will mean maintenance, overhaul, upgrading, life extension, engineering, design, testing of eligible products and related software or quality assurance services. Training may include training services and training equipment (e.g. simulators) but exclude civil infrastructure. d) Direct foreign investment in Indian organisations engaged in R & D as certified by the Defence Offset Facilitation Agency (DOFA). While certifying, DOFA shall not consider civil infrastructure and such technologies that are otherwise easily available in the open market. When technology transfer (TOT) is asked for the MoD will require licensed production for the relevant defence/ aerospace sector. It should cover all aspects of design, manufacturing know-how and detailed technical information which will enable the Production Agency to manufacture, assemble, integrate, test, install and commission, use, repair, overhaul, support and maintain the license product from SKD/CKD/IM Kit. The vendor should submit an undertaking that it would provide and support complete technology transfer for phased manufacture to the buyer or his authorized Indian organization for the system and its sub-systems, modules,

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assemblies and detailed parts or components. Support will be provided for a minimum period of 20 years after the last unit is produced under the present proposal. Technology transfer:

Technology transfer does not qualify for offset credits.

Technology transfer may be negotiated either with the purchase package or later on, but the availability of technology would be a pre-condition for winning a contract.

Qualification Stage:

All offset offers which satisfy the minimum eligibility conditions will be placed on par and no preference will be given for any extra amount offered.

Evaluation Procedure:

The technical offset offer would contain details of the products, services and investment proposals indicating relative percentages, proposed Indian partners for offset investment and other relevant information. Details of banked offset credits as discharged offset obligations will also be indicated (see Pre-Performance and Credit Banking, below).

The commercial values of the offset proposals are not to be indicated in this technical offset offer.

The commercial offset offer should contain all the financial details and the absolute amount of the offset, with a breakdown of the values in the phases, together with a list of the Indian partners.

At the time that a contractor submits its offset proposal it must identify the Indian offset partners, have signed various MoUs with them, and entered into commercial negotiations with them. Contractors who wait for the RfP to be issued will be too late to get their offset proposal ready. The offset contract itself will be signed together with the main supply contract.

Threshold:

An offset clause would apply to all defence procurements where the indicative cost is above Rs 300 crore (c.$66m) and which are categorized as ‘Buy (Global)’ and ‘Buy and Make with Transfer of Technology’ (purchase from a foreign vendor followed by licensed production.)

[NB: A crore is Rs 10m.]

NB: These provisions do not apply to procurements made under a Fast Track Procedure.

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Quota:

The quota is for not less than 30 percent of the estimated cost of the acquisition in ‘Buy (Global)’ category acquisitions, and 30 percent of the foreign exchange component in ‘Buy and Make’ category acquisitions.

To ensure that the offset obligation is not circumvented by joint ventures (of Indian and foreign firms) when an Indian firm is bidding, the foreign firm concerned will have to discharge the offset obligation in accordance with the RfP requirement.

Offset percentages above 30 percent may be required for different classes or for individual cases depending on the factors involved.

These provisions will also apply with appropriate modifications to ‘Buy’ and to ‘Buy and Make with technology transfer’ components for warship construction where the value of individual contract is Rs 300 crore or more.

The Defence Acquisition Council (DAC) may prescribe varying offset percentages above 30 percent or waive off the requirement for offset obligations in very special cases. Such directions may be made applicable for different classes of cases or for individual cases depending upon the factors involved. Their decision will form part of the RfP and subsequently of the contract. The Services Capital Acquisition Plan Categorization Higher Committee (SCAPCHC) may recommend Capital Acquisition Projects of the ‘Buy’ or ‘Buy and Make with TOT’ categories qualify of offsets above the standard 30 percent offset clause or the waiver of offsets in very special cases. The DOFA may also advise on areas where offsets will be preferred. The DAC will take the final decision. The technical offer should include a compliance statement covering the quota. Failure to discharge this undertaking at any stage will result in disqualification of the vendor from further participation in the evaluation process and the offer will be treated as null and void.

Exception: For the `Buy (Global)’ category procurements, where offset is applicable, if an Indian firm, including a Joint Venture between an Indian Company and its foreign partner, is bidding for the proposal and is offering an indigenously developed product, offset would not be applicable. For this exclusion to apply indigenous content in the product has to be a minimum of 50 percent. If it is less than 50 percent the Indian firm or the Joint Venture has to ensure that the offset obligations are fulfilled on the foreign exchange component of the contracted value. NB: None of the offset provisions apply to procurements made under a Fast Track Procedure.

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Eligibility:

Offset obligations may be discharged only with reference to ‘eligible’ products and eligible services.

The implication is that this comprises more than just a suggestion list. Projects developed under DPP 2011 will need to be built around these specific product areas. DPP 2011 makes clear in Clause 1.2, of the ‘Procedure for Implementing Offsets’ Provisions’ that “Offset obligations may be discharged only with reference to ‘eligible’ products and eligible services.” Clause 2.1 (a) further notes that a “list of products eligible for discharge of offsets is given at Annexure VI to this Appendix.” (The list appears below.) ‘Option Clause’ Cases:

Offset will not be applicable in ‘Option Clause’ cases, where the same was not envisaged in the original contract. This allows the buyer to place a separate order with the seller on or before a given date limited to 50 percent of the main equipment, spares, and services, etc. under same cost, terms and conditions set out in the original contract. Direct / Indirect:

All forms of offset are limited to the approved defence, civil aerospace and internal industry areas. They would cover activities such as co-development, co-production, joint ventures and technology transfer. Semi directs are acceptable and cover anything concerning these sectors.

Indirect (civil) offsets are not allowed.

Multipliers:

Multipliers are not awarded.

Fulfilment Period:

The offset obligation is to be performed within the period of the main contract. However, the obligor may request a review of this if it can justify its reasons for doing so. Vendors may not delay the execution of the supply contract if the Indian defence industry fails to complete its offset contracts.

Penalty:

The vendor must furnish an irrevocable bank guarantee equivalent to the total amount of the offset contract. This is a mandatory requirement before the main contract becomes operative. As and when the obligations under the offset contract are fulfilled the corresponding amount will be released from the bank guarantee.

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An obligor that fails to fulfil its obligation in a particular year will pay a penalty equivalent to 5 percent of the underperformance. The unfulfilled portion will be carried forward to the following year (ie: 5 percent of 30 percent). It may be recovered from the bank guarantee, or deducted from the amount payable under the main contract.

Therefore non-performance over a ten year contract period could, in theory, land the obligor with compound penalties amounting to 27.5 percent if absolutely no offset performance takes place.

Failure to implement the offset obligation in full may result in disqualification from participation in future contracts. The provision in the main contract regarding arbitration will apply to the offset contract also.

Pre-Performance and Credit Banking:

Foreign vendors could consider the creation of offset programmes in anticipation of future obligations. Offset credits so acquired can be banked and discharged against future contracts. Banked offset credits would not be transferable except between the main contractor and his sub-contractors within the same acquisition programme. The main contractor would be required to submit a list of such sub-contractors at the time of signing the contract. A committee that will look after implementation and offset credit banking is headed by an Assistant Secretary in the Department of Defence Production. Credit banking proposals have to be submitted to the Committee and to the Joint Secretary for Exports.

Foreign contractors are allowed to accumulate credits in two ways: through prior investment in the Indian defence sector, and by generating excess credits from ongoing offset projects. Offset credits so acquired can be banked and discharged against future contracts.

A foreign contractor would be able to discharge banked offset credits for RfPs which are issued within the two financial years of the date of approval of the banked offset credits. The cut off date would be 1st April and 1st October of the financial year. As an illustration, offset credits which have been banked on or after 1st April 2009 would be valid for discharge against RfPs issued up to 30th September 2011. Similarly, offset credits banked on or after 1st October 2009 would be valid for discharge against RFPs issued up to 31st March 2012.

A foreign contractor that is able to create more offsets than his obligations under a particular contract may bank the surplus offset credits and they would remain valid for the period of two financial years after conclusion of the contract. The surplus

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offset credits would be valid for discharge against new RFPs which floated within this period.

The foreign contractor shall submit reports on its implementation of banked offset credits to the Offset Monitoring Cell every six months. Details of the banked credits would be transferred to the respective Acquisition Managers after the RFP is issued.

Where products contain imported components only domestic added value will qualify for credits.

Practice Note re Credit Banking:

• Provided approval has to be given for credits to be used, the credits will be granted even if the acquisition is delayed.

• Contractors can allocate credits against as many RfPs as they like. • Credit holders can become sub-vendors to whomever wins a contract, and the

credits would qualify. This significantly enhances the position of the credit holder, who can deal with the main contractor from a stronger position. The relationship must be disclosed from the beginning.

Interpretation - Credit Banking:

The validity period for credits may in practice be longer than the 2-2.5 years mentioned in the guidelines. Once the RfP is published the foreign contractor can enter into a contract for anything up to five years because the cut-off is added to the life of the RfP.

Shipbuilding:

The shipbuilding policy is divided into two sections: DPSUs will have contracts on a nominated basis; private shipyards will enter a competitive bidding process with the government reserving the right to decide the winner. The acquisition process concerning ships is covered by the offset regulations. Appointment of Agents and Authorised Representatives:

Vendors may appoint an authorised representative provided no commission is offered or paid.

The authorised representative should be salaried or on a fixed retainer. He may represent the vendor at all stages, act for it regarding offsets, and receive correspondence on the contractor’s behalf. This eliminates much of the bureaucratic process, especially on offset matters. Success fees must not be paid.

Agents are not allowed.

Special Situation for Telecommunication Contracts:

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The Dept. of Telecommunications has declared it mandatory for equipment vendors to transfer technology to Indian manufacturers within three years of selling equipment to any operator. This is applicable for both hardware and software.

The condition will be strictly enforced. If there is non-compliance there will be financial penalties and criminal proceedings would also be started against the vendor. Particulars of the penalties have not been announced.

The Dept. of Trade is implementing the policy and said that it has asked service providers to ensure that their networks are entirely operated and maintained by Indian engineers, with minimal or nil dependence on foreign engineers.

DPP 2011 LIST OF QUALIFYING DEFENCE PRODUCTS

1. List of Defence Products Eligible for Discharge of Offset Obligations

• Small arms, mortars, cannons, guns, howitzers, anti tank weapons and their ammunition including fuses.

• Bombs, torpedoes, rockets, missiles, other explosive devices and charges, related equipment and accessories specially designed for military use, equipment specially designed for handling, control, operation, jamming and detection.

• Energetic materials, explosives, propellants and pyrotechnics.

• Tracked and wheeled armoured vehicles, vehicles with ballistic protection designed for military applications, armoured or protective equipment.

• Vessels of war, special naval system, equipment and accessories.

• Aircraft, unmanned airborne vehicles, aero engines and air craft equipment, related equipment specially designed or modified for military use, parachutes and related equipment.

• Electronics and communication equipment specially designed for military use such as electronic counter measure and counter countermeasure equipment surveillance and monitoring, data processing and signalling, guidance and navigation equipment, imaging equipment and night vision devices, sensors.

• Specialized equipment for military training or for simulating military scenarios, specially designed simulators for use of armaments and trainers.

• Forgings, castings and other unfinished products which are specially designed for products for military applications and troop comfort equipment.

• Miscellaneous equipment and materials designed for military applications, specially designed environmental test facilities and equipment for the certification, qualification, testing or production of the above products.

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• Software specially designed or modified for the development, production or use of above items. This includes software specially designed for modelling, simulation or evaluation of military weapon systems, modelling or simulating military operation scenarios and Command, Communications, Control, Computer and Intelligence (C4I) applications.

• High velocity kinetic energy weapon systems and related equipment.

• Direct energy weapon systems, related or countermeasure equipment, super conductive equipment and specially designed for components and accessories.

2. Civil Aerospace Products Eligible for Offset Fulfilment (as amended July 2011):

• Design, development, manufacture, upgrade of all types of fixed wing and rotary wing aircraft or their airframes, aero engines, avionics, instruments and related components.

• Composites, forgings and castings for their products.

• Training aids and simulators, associated equipment, software and computer based training modules.

• Guidance and navigation equipment.

• Test facilities and equipment required for testing, certification, qualification and calibration of the above products.

• Software specially designed, developed, or modified for the above products.

3. Products for Internal Security Eligible for Offset Fulfilment:

• Arms and their ammunition including all types of close quarter weapons. • Protective Equipment for Security personnel including body armour and helmets. • Vehicles for internal security purposes including armoured vehicles, bulletproof vehicles and mine-protected vehicles. • Riot control equipment and protective as well as riot control vehicles. • Specialized equipment for surveillance including hand held devices and unmanned aerial vehicles. • Equipment and devices for night fighting capability including night vision devices. • Navigational and communications equipment including for secure communications. • Specialized counter terrorism equipment and gear, assault platforms, detection devices, breaching gear, etc. • Training aids including simulators and simulation equipment.

Procur

rement Timmelines:

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Acti

ivity Timel

ines:

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Countertrade Policy Implemented by State Trading Corporations (STCs) for

Civil Sector Procurements

Countertrade is not mandatory and depends upon the decision of the purchasing committee of the relevant ministry. The government instructs the STC to implement and monitor the countertrade requirement. The STC is referred to as a nodal agency and it is the commercial arm of the government.

The quota percentages are usually applied haphazardly. In some cases they may amount to just 30 percent of import content value, in other cases 70 percent, and sometimes 100 percent. About 20 to 25 percent of the obligation is sometimes requested by way of direct investment to benefit domestic industry.

Counterpurchase obligors usually have to provide bank or corporate guarantees covering 3 percent of the counterpurchase value.

The STCs use the expressions ‘offset’ and ‘countertrade’, but apply to them the same meaning. While countertrade has historically been used to encourage trade in both soft and hard commodities under bilateral trade agreements, and for selective government acquisitions in the civil sector, bilateral countertrade agreements are encouraged, though mainly for exchanges of agricultural and food stocks.

The principal nodal agency designated for implementing countertrade agreements is the State Trading Corporation of India Ltd. There are also MMTC and PEC, which are designated by the Ministry of Commerce to monitor countertrade performance whenever it is chooses to do so. At present only the State Trading Corporation of India Ltd is active.

Transactions are routed through major government owned corporations (also known as nodal agencies). The Indian Oil Corporation handles petroleum crude; the Minerals and Metal Trading Corporation deals in minerals and metals; the Steel Authority of India handles steel; NAFED handles palm oil; and the Council for Leather Exports specialises in leather products. These nodal agencies allocate countertrade opportunities to Indian exporters and importers.

The State Trading Corporation of India Ltd is currently the only active agency.

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Indonesia [10/11]

There is no formal offset policy at this time but Indonesia is preparing guidelines. Defence and civil contractors bidding for large contracts should be aware that offsets are increasingly becoming an imperative in the competitive process, though it is up to them to come up with acceptable proposals. The policy meanwhile remains basically one of instinct. There is meanwhile significant progress with bilateral defence cooperation agreements that provide for industrial participation and collaboration through joint ventures. Presidential Regulation 41/2010 requires the armed forces to be mindful of the importance of an indigenous capability in the manufacture of weapons, placing emphasis on the need for technology transfer and institutes of learning. The regulation requires relevant government agencies to ensure there is diversity for domestic industry in both the commercial and military sectors. It calls on the private sector to play its part. A Defence Industrial Policy Committee (Komite Kebijakan Industri Pertahanan – or KKIP) was established in August 2010 as an initial step to address offset policy issues and introduce reforms related to defence procurement and modernisation of the defence sector. The KKIP appointed to an Offset Working Group in January 2011 senior military officers representing the armed forces and the TNI. The Working Group is now known as the Defence Facilities Agency (DFA). The DFA is preparing the offset guidelines, supported by the KKIP.

Other ministries involved in the process include the Ministry of State Owned Enterprise, the Ministry of Trade & Industry, and those responsible for science and technology and finance.

There are five different agencies concerned with procurement in the defence sector. They are the three individual armed services, the police, and the Military Joint Headquarters of the Armed Forces of Indonesia (TNI). The TNI is by law subordinate to the MoD but for political reasons the ‘subordination’ is not wholeheartedly imposed. The DPR (Upper House) funds all five agencies separately. With five different agencies, each with its own budget, there are five different ways of dealing with procurement. There is a legal requirement for the appointment of a local agent when export credits are involved. The agent is concerned with the provision of guarantees. FMS sales on a government-to-government basis do not require this.

Civil Procurement:

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On the civil side, Indonesia relies on countertrade guidelines enacted in 1982. They have not been revised. There have been very few countertrade contracts in recent years, and only for projects by PLN, the state-owned power company. The foreign contractor must undertake to commence the counterpurchase of agricultural or industrial commodities selected from an approved menu and deliver them to countries agreed with the Ministry of Trade and Industry within six months of award of contract. There should be evidence of additionality.

Bulog, the state-owned logistics agency, is responsible for the delivery of commodities to be supplied under the counterpurchase programme. Previously foreign contractors needed to establish a dollar escrow account with the Central Bank. It is unclear whether this is still required. Government officials have indicated they are willing to waive the requirement for certificates of export (PEBs) as evidence of export activity, and for bank guarantees. The countertrade policy is administered by the Department of Trade and Industry.

The 1982 countertrade guidelines:- Threshold: Rp500m ($550,000). Quota: The obligor is to counterpurchase for 100 percent of purchase contract value. Penalties: 50 percent by way of liquidated damages on under-fulfilled counterpurchases. A performance bond to be established. Documentary Evidence: Counterpurchase activity to be evidenced with certificates of export (PEBs) and Bills of Lading. Assignees: Obligors may use government-approved trading companies to carry out the export obligation.

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Iran [07/10]

This appraisal of Iranian policy is an extract from a wide-ranging commercial briefing by the Economist Intelligence Unit.

The National Iranian Oil Company (NIOC) often enters into “buy-back” contracts with foreign contractors. These contracts allow foreign companies to develop fields to the point of production and then hand them over to the Iranian authorities. The foreign company is then paid out of the proceeds of the sales from the field’s output. Iran introduced measures at the beginning of 2007 granting greater flexibility, including longer terms, but very few contracts have been signed on this basis.

Under the regulation addressing “Conditions of Non-Oil Buy-Back Contracts”, which the Council of Ministers ratified in January 2001, buy-back contracts were extended to non-oil goods.

The government ratified the Foreign Investment Promotion and Protection Act (FIPPA) in October 2002. The FIPPA formally provides the first legal framework for foreign investment under contracts such as build-operate-transfer (BOT), buy-back (under which foreign oil companies operate) and civil partnerships. The legislation states that foreign investment will be guaranteed compensation in the event of nationalisation.

The bureaucracy surrounding investment approval remains extensive, with ministers required to endorse proposals. The review process may turn out to be particularly cumbersome under the Ahmadinejad administration: political appointees have now replaced many of the experienced technocrats in the state agencies that handle the FIPPA investment applications, and these appointees generally view foreign investment with suspicion.

International oil companies (IOCs) argue that they alone bear the risks of a buy-back contract, whereas the NIOC receives risk-free profits. The IOCs thus prefer long-term production over shorter-term periods. In response, the government unveiled a new buyback-contract programme in February 2007, which significantly extended contract terms to as long as 20 years.

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Ireland

[10/07] The 2001 invitation to bid for the supply of military helicopters caught the Department of Defence off guard when Sikorsky offered helicopters with a tempting industrial participation package worth more than $72m by way of investment in FLS Aerospace, a company in financial difficulty. In spite of intense domestic media pressure to pursue an offset approach, the government held firm and declared that offset will play no part in the bidding process. However, offers made by the seller after selection would be considered. The Irish Republic determined in 2007 that commercial links with major aerospace companies must be improved. It asked for technology transfer and for research and development projects between Irish companies and foreign institutions.

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Israel

[10/10]

Israel’s Parliamentary Constitution and Law Committee approved amendments March 14th 2007 to the Mandatory Industrial Cooperation regulation. The amendments brought into force changes recommended by the Industrial Cooperation Authority (ICA), which implements policy on behalf of the Ministry of Industry Trade & Labour. The regulations apply to the majority of government corporations and public agencies and require them to request industrial cooperation when their purchases of foreign goods or services exceed the threshold value. International pharmaceutical companies and manufacturers of medical equipment are required to enter into industrial cooperation agreements when supplying Israel’s Ministry of Health, including hospitals, the military, and private sector healthcare insurance companies. Overseas companies may contact the ICA regarding any subject related directly or indirectly to their Industrial Cooperation undertaking or fulfilment activity. Assistance will be provided to potential and existing obligors in identifying and locating suitable Israeli manufacturers and partners for joint ventures, outsourcing, R&D, and other modes of cooperation and strategic partnerships with Israeli industry. All ICA support, assistance and services are provided on a complimentary basis. The ICA will:-

• Provide information about Israeli industry.

• Conduct surveys related to Israeli industry.

• Co-ordinate visits by representatives of Israeli industry to foreign companies.

• Co-ordinate visits by representatives of foreign companies to Israel in order to survey local industry.

• Organise conferences between foreign companies and Israeli industry.

Objectives: Long-term cooperation leading to the competitive production of Israeli products. The goal is to develop new markets for high quality goods and to create a framework for bilateral or multilateral industrial and trade cooperation between the foreign company or its subsidiaries, and Israeli industry. Emphasis is placed upon regional job creation. R&D grants for industry are important considerations.

• The encouragement of international co-operation in industrial R&D

• The encouragement of technological entrepreneurship

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• The development of future technologies by means of increasing the academic-industrial interaction and cooperation.

The Meaning of ‘Industrial Cooperation’: Industrial cooperation shall be by means of local sub-contracting, investment, R&D, technology transfer, work placed in Israel, the purchase of Israeli-made goods or services, or otherwise as agreed with the ICA. Israeli-made goods are products in which the Israeli content exceeds 35 percent. Defence-Related and Civil Procurements: The regulations distinguish between defence related purchases and civil purchases. See ‘Quotas’ (below). Threshold: Industrial cooperation will be required for government acquisitions above $5m. Follow-on acquisitions whose value exceeds $500,000 within five years of the date of the original contract will also be covered. Subcontracting Requirement: Unless otherwise agreed with the ICA, a minimum of 20 percent local sub-contracting related to the project/product purchased from a foreign company is required for fulfilling the obligor’s Industrial Cooperation Undertaking. Quota: The regulations distinguish between defence & security purchases and acquisitions for the civil sector.

1. Defence and security purchases require an undertaking of at least 50 percent of foreign content value.

2. Civil procurements from countries that are signatories to the Government Procurements Agreement (GPA) of the WTO will be subject to an Industrial Cooperation requirement of 20 percent of foreign content value. [The GPA covers commercial procurements from the US, European Union, Japan, S. Korea, and Switzerland; altogether some 36 of the WTO’s 140 members].

3. Civil purchases from non-GPA countries are subject to Industrial Cooperation requirements of 35 percent of foreign content value.

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Multipliers: Multipliers will encourage Industrial Cooperation programmes involving industries in the Galilee and the Negev. These are areas targeted for employment and regeneration. The incentive will be offered to both defence and to civil contractors. A multiplier not exceeding 1.5 is obtainable for projects and investments in these locations if they are for the following categories: Clean technologies; water technologies/water industries; investments; R&D funding. The precise multiplier level will be determined by negotiation between the parties on a case-by-case basis. Penalties: There are no penalty provisions for non-compliance. Companies that fail to fulfil their undertakings will be blacklisted. Government agencies issuing civil sector tenders that fail to comply with the requirement to ask for industrial cooperation in their tender documents will have their tenders suspended until there is compliance. Fulfilment Period: To be negotiated case-by-case but in general an undertaking should be implemented within the validity period of the supply contract. The ICA may extend the fulfilment period if there are complexities involved. Pre-performance Offset - the Umbrella Industrial Co-operation Agreement (UICA) – and Credit Banking: An Umbrella Industrial Cooperation Agreement (UICA) is an agreement between the ICA and a foreign supplier to the Government of Israel which covers Industrial Cooperation Undertakings as well as fulfilments. It is related to sales during a defined period of time. The validity period of the UICAs is for negotiation between the parties. Not all UICAs are structured the same way. The purpose is to encourage significant pre-performance activity through the accumulation of credits. Credits may be banked for a period to be negotiated, and may be used to cover obligations accrued within the validity period of the UICA. This type of agreement may be advantageous to both parties because:

Negotiations regarding Industrial Cooperation Undertakings occur only once. Since all the procurements by the Government of Israel are covered by the UICA, any subsequent negotiation concerning each purchase is unnecessary.

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The supplier’s surplus industrial cooperation activities in Israel are maintained in its account and will serve to cover obligations resulting from its future sales in Israel. The supplier’s corporate divisions, as well as its subsidiaries, may also (to an

agreed extent) take part in the fulfilment of the obligations stemming from the UICA.

The agreement is brought to the attention of potential Israeli buyers, Government purchasing departments, agencies etc.

Procedure: The bidder is required to include, as an integral part of its bid, a signed Industrial Cooperation Undertaking that includes an Industrial Cooperation Fulfilment Programme with Israeli industry. An Industrial Cooperation Undertaking form will be attached to the Fulfilment Programme form, to be submitted to each bidder by the government entity as part of the tender or RFP documents. The entity issuing the tender, in agreement with the ICA, may to a certain point alter the undertaking form. The undertaking must be signed and executed by the manufacturer of the goods offered and will become an integral part of the proposal. Government entities are obliged by the "Mandatory Industrial Cooperation Regulations" to obtain the ICA's approval regarding the foreign company's Industrial Cooperation Undertaking along with the Fulfilment Programme prior to signing any supply contract exceeding the threshold of $5m. The ICA will grant its approval after reviewing the undertaking document and ensuring its full compliance with the Regulations. The responsibility for obtaining a formal Industrial Cooperation Undertaking signed by the foreign company lies with the relevant government purchasing department. Once the undertaking is signed, the responsibility for communicating with the company and monitoring its fulfilment will be ICA's. The ICA will receive the company's periodical progress reports and keep the relevant departments updated concerning any developments related to the fulfilment of the company's undertaking. BOT Linkage to Industrial Participation: Major civil works, for instance for the Tel Aviv Light Railway project, are scheduled to be carried out on a Build-Operate-Transfer (BOT) basis. The government will provide grants for up to 80 or perhaps 90 percent of project cost and successful bidders will have to undertake to engage with domestic industry for 30 percent of the value of the grant. Complementary and additional information regarding Israel’s policy and legislation related to Industrial Cooperation as well as all relevant forms, are available on the ICA’s web site: www.ica.gov.il

http://www.ica.gov.il/�

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Italy

[01/08]

The Italian MoD does not rely on guidelines for its offset policy, rather an internal directive issued in 2002 which lays out policy in general terms. Each contract is negotiated individually with regard to industrial benefits and there is no predetermined benchmark. Policy is structured and administered by the Offset Branch of the 3rd Dept. of the Secretary General of Defence (SGD). Italy has four General Directorates for Defence: Air, Naval, and Ground Armaments, and Telecommunications / Space Systems. Each directorate will co-ordinate its acquisitions with the offset branch of the 3rd Department. The General Directorates answer to the National Armaments Director (NAD). Offset is not mandatory and sometimes is not asked for. If offset is wanted there will be a general clause in the RfP to say so. For government-to-government contracts the supplier must negotiate directly with the offset branch of the 3rd Dept. on the terms of any offset commitment. The majority of programmes are bilateral or multilateral and often have no offset requirement. It is when the MoD requires off-the-shelf procurements outside of the bilateral or multilateral MoU that offset is requested. Objectives: The objective is to secure defence-related industrial participation programs. They may be either direct or indirect. It is important for the obligor to engage with national defence-related industries in key technology sectors of the acquisition programme, and to create export opportunities for defence or dual use equipment produced in Italy. The principal aspiration is to enable Italian industry to participate in foreign markets. Italy has been moving towards workshare in international programs and offset may not be so prominent in future unless Italy has to buy off-the-shelf. Although technology transfer is important, only technology ready for immediate installation will be acceptable for credits. Non-defence benefits are not acceptable. Procurement Process: Apart from government-to-government acquisitions there are Scheduled acquisitions, and Un-scheduled acquisitions.

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With scheduled the MoD will consult with domestic industry to identify any potential industrial participation benefits that may be wanted and determine the IP contractual clause to be appended to the Supply Contract. With un-scheduled the supplier will be presented with a detailed industrial participation clause in the Supply Contract if benefits are wanted. Threshold: In general the threshold is €5m, but this should be regarded as an indicator rather than an established marker. There may be acquisitions for which no form of reciprocity is required. Sometimes offsets for procurements below €5m may be asked for. This occurs when the vendor’s country has landed Italian industry with obligations. In this situation the MoD demands reciprocity to allow Italian industry to balance its obligation. Quota: Italy does not expect to achieve 100 percent every time offset is wanted. Usually the MoD will ask for whenever the supplier’s country demands when Italian defence manufacturers supply the vendor’s country. Apart from the settling of scores, negotiations will likely be in the 50 to 70 percent range. There have been contracts at only the 15 to 20 percent level. The principal requirement is to penetrate closed defence markets, such as those in the US. Penalties: Offset contracts include liquidated damages clauses but these do not exceed 10 percent of acquisition cost and are judged to be rather meaningless. So long as there is an opportunity for the Italian defence sector to participate in the global market the obligor will avoid trouble. In practice the MoD will rely on the contractor’s goodwill to discharge the commitment. Multipliers: Italy does not generally award multipliers, but they have been agreed in exceptional circumstances where there are high levels of technology transfer. Multipliers up to a maximum of three are available, but again they depend on the kind of technology on offer, its value and most significantly whether it is already in use in Italy. Technology that is needed right now, rather than in the future, will be looked upon favourably because the MoD can more readily evaluate it. 1x – when the technology is already in use by Italian industry 2x – when the technology is partially known 3x – when the technology is totally unknown NB: Although the MoD restricts the maximum multiplier to three, the beneficiary may offer more by way of a side deal.

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Credit Banking: Credit banking is permissible but the terms have to be negotiated. If the same obligor has more than one program running in tandem the MoD might allow the credits to be transferred over. Credits for over-performance would depend on how useful were the excess benefits. Pre-Performance: Pre-offset activity may be identified and agreed at the contractual phase. Pre-performance credits can be negotiated, but the MoD will need convincing. Fulfilment Period: The fulfilment period is negotiable to two or three years after the supply contract.

Countertrade Countertrade is not widely used. Some specialist trading companies still exist, and the Foreign Trade Institute (Istituto Nazionale per il Commercio Estero--ICE) can advise on the feasibility of setting up a countertrade deal in Italy. Countertrade operations can obtain export-credit insurance cover from SACE, the Export Credit Insurance Agency (Servizi Assicurativi del Commercio Estero). Soft loans are available to finance countertrade. No particular rules apply to countertrade, except that the underlying value of goods transactions must be reported to comply with rules on reporting large foreign-exchange transactions.

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Japan [04/10]

No guidelines. Licenses and co-design programmes leading to indigenous systems under industrial participation programmes are the preferred method of purchase. Defence as well as civil aerospace purchases are often conditional upon an industrial participation programme involving domestic licensed production with assembly. Japan has acquired production competence for a wide range of aircraft components via years of industrial offsets. Quotas, multipliers, and penalties do not arise in the conventional sense. Each contract is dealt with on a case-by-case basis. The MoD decides the type of military equipment to be purchased and may consult with the National Institute for Defence Studies, which it sponsors. The Japanese Defence Agency will front for the Japanese company or companies that will prosecute the industrial participation programme for defence procurements. On the civil side discussions involve the relevant ministry.

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Jordan

[04/08]

Jordan has not compiled offset guidelines. The agency with responsibility for offset is the King Abdullah II Design & Development Bureau – KADDB, which reports directly to the Royal Palace. Consultations on defence cooperation projects usually involve the Department of Industry as well as the KADDB. There is considerable red tape that is likely to hamper the preparation of formal guidelines for some time. The objective is job creation and creating new industries, with technology transfer and training an important element of any deal. Buy-back has been required in some recent contracts. Foreign defence suppliers maintain that it has become essential to sell to Jordan with an offer of parts production at a Jordanian facility or at least some kit assembly. Although they are not necessarily offset-related, there are currently fifteen joint ventures in the defence sector, mostly with international partners in S. Africa, Russia, UK, Australia, and the UAE.

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Korea (North) [10/10]

An informal countertrade policy has evolved to overcome domestic shortages. The government is pro-actively seeking essential commodities in exchange for supplies of coal and other minerals.

As a result of U.S. efforts to promote additional financial sanctions against North Korea, mining companies are experiencing difficulty in collecting money from exports. The companies serve as North Korea’s main channel for earning foreign currency. Foreign banks are no longer relaying the remittance of the export earnings because the path for receiving transfers is blocked. The situation is similar for other mineral export companies owned by North Korea.

North Korea is therefore asking for barters or cash transactions as it exports minerals, and at times even demands advance payment.

The supply of goods has also become a staple solution for debt reduction.

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Korea (South)

[10/11]

The management authority for offsets is the Defence Acquisition Program Administration (DAPA). DAPA’s Acquisition Planning Bureau sets defence R&D policy, mid-term acquisition plans, and offset policy. The Acquisition Planning Bureau is responsible for compiling the offset guidelines. Contractors negotiate with one team in DAPA regarding its obligations regardless of the procurement arm of the armed forces. The offset guidelines apply to all related organizations including DAPA, the Army/Navy/Air Force, Agency for Defense Development ("ADD"), Defense Agency for Technology and Quality ("DTaQ"), Korea Institute for Defence Analysis ("KIDA"), and the Korea Defence Industry Association ("KDIA"). The guidelines also apply to the Ministry of Knowledge Economy ("MKE"), Small and Medium Business Administration ("SMBA") and Korea Trade-Investment Promotion Agency ("KOTRA") as well as the beneficiary, known as the Korean Industrial Participant ("KIP").

Offset Departments within DAPA:

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A new planning body, the Defence Industry Development Council (DIDC), is tasked with orchestrating offset projects, boosting exports of military equipment, and speeding up the regulatory process. The DIDC is jointly administered by the MoD and the Ministry of Economy. The DIDC’s main objective is to encourage new areas in R&D and greater use of private funds. Objectives:

The offset priorities for each acquisition will be specified in the RfP. Priority is given to acquiring state-of-the art technology and exporting manufactured parts and components of the equipment acquired. The trend is for increased participation in weapons system production within the supply chain of international companies. Industrial participation is wanted particularly for naval systems and tank production. The government is encouraging SMEs to enter into the defence manufacturing sector. In some areas it is considered a priority for foreign contractors to buy back from the partner. Eligible offset transactions and priorities are: 1) To acquire state-of-the-art technologies for weapon systems and for military equipment; 2) The manufacture and export of components and parts of the weapon system and/or equipment; 3) To acquire depot maintenance technology and equipment for military applications;

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4) To receive technology, equipment, and tools for upgrading weapon systems; 5) To export for both military and civil use supplies including Defence Industrial Products ("DIP") that are produced in Korea; 6) To secure opportunities for joint participation in major R&D projects; 7) To provide R&D personnel with technical training related to the development of defence science & technology; 8) Indirect (commercial) items that are on the qualification list for export.

Selection of Beneficiary:

DAPA shall select a single Korean Industrial Participant (KIP) and send the contractor’s proposal to the selected KIP for offset negotiations. If the contractor makes a new offset proposal which is not mentioned as a DAPA offset requirement, DAPA shall select an additional KIP for the new proposal. Once selected the KIP cannot be changed unless the following happens: 1) The selected KIP cannot implement the offset program as it is bankrupt or insolvent; 2) The selected KIP renounces its participation; 3) The selected KIP refuses to sign the MoU or Technical Assistance Agreement with the contractor; 4) The selected KIP’s capability is inconsistent with its application; 5) The selected KIP has been engaged in previous illegal conduct. However, the contractor may select the KIP when:

• It results in exports of military supplies including Defence Industrial Products (DIP) which are produced in Korea;

• The contractor exports recommended indirect (commercial) items;

• The foreign contractor invests in setting up a new corporation alone or with a

Korean partner in compliance with the Foreign Investment Promotion Act. This should provide for defence related R&D and facilities for the production, manufacture, and export of weapon systems or related components, including for both civil and military uses.

Business Plan: The obligor’s business plan should provide the following:

• An overview of management style and philosophy • An overview of manufacturing and marketing strategy • An organization chart

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• A plan of managerial activities in relation to offset obligations • An industry value chain analysis • Details of technology and its level required for production • Maximum value and average expected annual production • Supply chain description of raw materials, sources of supply including both

Korean and international enterprises • Outsourcing plan to Korean enterprises • R&D Investment plan, • Business Plan timetable

Procedure: The contractor shall submit to DAPA two copies of a draft offset MoA in both Korean and English which includes:

1) The estimated amount, period and conditions of the Main Contract; 2) The total offset value, percentage and period of offset implementation; 3) A synopsis of the offset proposal; 4) Annual increments of the obligation; 5) An analysis of how the obligor will meet the requirements; 6) A detailed direct offset implementation plan; 7) A detailed indirect offset implementation plan; 8) Documentary evidence to back the contractor’s proposal, including any documents demanded by DAPA; 9) Particulars of the rights related to ownership of the technology to be transferred; 10) The Offset Foreign Investment Business Plan when proposing an offset Foreign Investment; 11) The offset Performance Bond; 12) Two copies of diagrams or drawings indicating the technology transfer. In general the Offset MoA shall be part of the Main Contract and must be signed before the conclusion of the Main Contract. However, it may be signed after the conclusion of the Main Contract when:-

a. The RfP and the Main Contract include a condition that 10 percent of the value of the offset obligation or advance payment shall be withheld until the signing of an Offset MOA;

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b. It is difficult to identify a contractor before accepting an LOA in an FMS project;

c. An Offset MoA is signed with the condition that details can be decided later. DAPA will ask the Agency for Defence Development (ADD) to evaluate technologies related to weapon systems development and R&D, and the Defence Agency for Technology and Quality (DTaQ) to evaluate offset proposals related to manufacturing parts and maintenance. DAPA may ask the Foreign Investment Promotion Division and KOTRA to participate in negotiations on Offset Foreign Investment. An MoU is usually signed at the same time or prior to the Purchase Contract and the Letter of Agreement (LoA). This is followed by a separate offset Memorandum of Agreement (MoA) with DAPA. Afterwards, a Technical Assistance Agreement is raised for sub-contracts. DAPA will negotiate with the contractors regarding the terms and conditions of the offset MoA and the proposed offset performance plan. All sides with an interest in the offsets will participate in the negotiations. Once the weapons systems have been selected and the main contract signed, the contractors should submit the Technical Assistance Agreement (TAA) and/or the subcontracts signed with offset beneficiaries. This step outlines the method of offset implementation, economic transfer details, and identifies manufactured parts and technology transfer. The TAA and subcontract should include a detailed offset implementation plan. Offset implementation shall commence from the effective date of the Offset MoA unless DAPA approves prior implementation. The scope of the offset agreement could influence the selection of the weapon systems.

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KOTRA:

The foreign direct investment requirement under South Korea’s Offset Foreign Investment (OFI) program is handled by KOTRA, the Korean Trade and Investment Promotion Agency. KOTRA will participate in offset negotiations whenever OFI is required. Investments used to be restricted to the export of ‘competitive products’. This restriction was relaxed on 1st January 2011; OFI now qualifies for ‘non-competitive products’ too. The Defence Products Trade Assistance Centre, a KOTRA agency, has been delegated to deal with the export of indigenously produced military equipment. The centre will provide assistance to the defence industry regarding government-to-government contracts, offset programs and industrial cooperation plans in weapon sales overseas.

KOTRA encourages development of foreign armaments in South Korea under offset programs and technology cooperation partnerships.

DAPA officials are on secondment to KOTRA to assist with the programme.

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Offset Foreign Investment: Offset Foreign Investment in new or existing South Korean defence companies qualifies for offset credits. The full amount of the OFI should arrive within two years of the effective date of the MoA, but the two-year period may be extended by up to one year by mutual agreement. The maximum amount of the OFI to be regarded as offset value for crediting shall not exceed 40 percent of the total agreed value of the offset program, or 20 percent when there is a single source contractor. The multiplier for OFI is 1. An investment that pre-dates the offset RfP shall not qualify for credits. The investment may be via a new corporation or through a non profit organisation (NPO), such as an institution. Increasing the existing share capital of a defence SME will not qualify for offset purposes. Investments that are solely for civilian industry also are ineligible. The Korean Investment Promotion Act does not specify the percentage of equity to be held by a joint venture partner. In practice it could be as little as 1 percent. There is no restriction or regulation on this save that the investment should be for a defence-related industry, though commercial business can qualify when defence materiel is included. The categories that qualify for offset credits comprise: Technology transfers, co-production, subcontracting, purchasing of military supplies, purchase of commercial supplies, direct investment in Korea’s defence industry. Indirect Offsets: Exports of Korean non-defence products (indirects) qualify as offsets if they are valued at less than 50 percent of the total commitment. Indirect offsets concerning Korean SMEs will be handled by SMBA, the small and medium business organisation, and by DAPA, which produces a list of acceptable indirect offset items (see below). Evaluation Criteria:

The following points are allocated to assess priorities in the qualification process. Offsets are categorized under five categories:

Category A B C D E

Type National Priority Desirability Acceptable Additional

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Priority Status Requirement Status

Weighted

Value 6 4 3 2 1

NB: When the Contractor agrees to transfer state-of-the-art technology of particular benefit to DAPA's R&D projects, DAPA may allocate 10 points.

Technology transfer will be assessed in terms of importance, monetary value, and the time it takes to implement. The following formula will be used:-

Σ(Offset Value × Weighted Value) ÷ Weighted Performance Period {Main Contract(Estimated) Amount × Offset Percentage} × Desired weighted Value(Category

"C": 3)

The weighted performance period shall be 1 point when the offset implementation period is shorter than or equal to that of the Main Contract. When the offset implementation period is longer than that of the Main Contract it will be calculated by the following formula. The implementation period related to the Offset Foreign Investment will be excluded.

Weighted Performance

Period = Offset Implementation Period(month)

Main Contract Period(month)

Threshold: The threshold is $10m although DAPA may determine it to be lower on a case-by-case basis. Purchase values are cumulative, with subsequent acquisitions ‘during the same period’ counting towards the threshold.

Quota: The total value of the offset program shall be 50 percent or more of the estimated Main Contract amount except for projects under a Government-to-Government contract or for purchases of equipment from a single source contractor, when the quota may be adjusted to 30 percent or more. When the requirement is for 50 percent than 30 percent is to be fulfilled as direct and 20 percent as indirect (non-defence) offset. For offset programs where the quota is more than 50 percent, not less than 60 percent shall be discharged in the categories indicated in paragraphs 6.a.1) through 6.a.10) of the guidelines, which are all defence-related categories and do not cover the export of

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indirect (commercial) items. However, the quota may be increased at the discretion of DAPA, depending on the type of projects offered. The balance may be discharged through exports of recommended commercial items for indirect offsets and with Offset Foreign Investment. When the obligation is not for more than 50 percent, then 80 percent of the obligation shall be discharged in the categories indicated in paragraphs 6.a.1) through 6.a.10) of the guidelines. These are all defence-related categories and do not cover the export of indirect (commercial) items. Multipliers:

The guidelines do not specifically mention multipliers. In practice a multiplier of 2 will apply to exports of defence goods. The multiplier rises to 3 when exports made by an SME are shipped to the obligor. A multiplier of 5 is allocated for the export of new defence equipment, and 2 for receiving technologies that have a good performance record with other countries. Third Party Discharge: The eligible party is limited to the contractor in the Main Contract. However, service providers may fulfil obligations on behalf of the contractor when the contractor guarantees their performance and receives DAPA's prior written approval. Fulfilment Period: The fulfilment period shall be the same as the delivery period under the Main Contract. However, when there is Offset Foreign Investment the implementation period may be decided separately. Pre-Performance: Pre-performance offset does not qualify for offset credits. Penalties:

The non-performance penalty is 10 percent of the value of the unfulfilled offset obligation. When a performance bond is replaced with a stand-by L/C, bank guarantee, or corporate guarantee, it shall be valid until 90 days after the completion date. If the implementation period is extended within the first 12 months of the agreement DAPA may require an incremental 20 percent to the offset value. Any subsequent extension within the next 12 months will attract a further incremental 10 percent.

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DAPA may bar from future programmes contractors that cause delay or refuse to agree an offset MoA, sub-contracting or Technical Assistance Agreement, or for failing to implement offset obligations without proper reason. Credit Banking: If the offset value exceeds the offset obligation because the Main Contract amount decreases during the implementation of the Offset MOA or up-to-date technology is offered at the request of DAPA, the foreign contractor may accumulate the excess amount subject to DAPA’s prior approval. Any surplus resulting from the implementation of a direct offset project may be banked. Accumulated credits may be used for follow-on projects of the same contractor provided they are used within 5 years. Proprietary Rights: The Government of Korea shall have the proprietary rights and/or the rights to use any technologies transferred by the contractor. These rights shall permanently belong to the Republic of Korea without expiration unless otherwise agreed. Recommended Commercial Items for Indirect Offset:

Agricultural Equipment (23) Apparel, Luggage, Personal Care (31) Building, Construction Machinery (21) Chemicals and Gas Materials (68) Distribution Systems (77) Domestic Appliances (17) Electrical, Lighting Components (75) Electronic Components (63) Entertainment, Education (1) Environmental Service (1) Fuels and Lubricants Materials (3) Furniture, Furnishings (23) IT, Telecommunications (45) Industrial Manufacturing Service (2) Manufacturing Components (55) Manufacturing Machinery (275) Mineral, Textile, Inedible Plant (29) Mining, Oil, Gas Equipment (25) Office Equipment (14) Plastic and Rubber Materials (21) Printing, Audio, Visual Equipment (16) Security, Safety Equipment (72) Tools, General Machinery (41) Transport Vehicles (106) Building, Construction Compo. (59) Cleaning Equipment (30) Drugs, Pharmaceutics (20) Engineering, Research Service (10) Food Beverage, Tobacco (2) Handling, Storage Equipment (26) Laboratory Equipment (23) Medical Equipment (69)

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Miscellaneous (18) Power Generation Machinery (35) Sports, Recreational Equipment (2)

NB: Brackets indicate number of qualifying products under each category.

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Kuwait

[07/11]

Kuwait’s offset programme has been in force since 1992, dealing with both military and civil procurements. The Council of Ministers decision No. 863 of 2005 transferred responsibility for implementing the offset policy to the National Offset Company (NOC), which signed a management contract to manage the Kuwait Offset Programme on behalf of the Ministry of Finance. The NOC started operating on 2nd September 2006, officially announced the launch of its operations on 1st November 2007, with the new guidelines (No. 9-2007) entering into force on 9th September, 2007.

The NOC’s Board of Directors comprises the Chairman, Vice-Chairman, and three other members. The General Manager’s office oversees the Consultants Unit, the Legal Unit, and both the Obligor Committee and the temporary Transition & Change Management Committee.

The NOC carries out its offset management mandate through the Projects Division’s three departments: Leads Generation; Projects Appraisal; and Contracts & Projects Management. The Obligor Committee reviews all projects concept papers and business plans submitted for approval. The final approval of Business Plans lies within the mandate of the NOC Board of Directors.

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The NOC assists obligors by accelerating the process of issuing licenses and government approvals for offset projects. It identifies potential third party offset performers, and promotes financial services and the use of offset funds. A Planning Department addresses strategic planning (business plans and follow-up), market intelligence, and marketing activities. Foreign contractors that are short-listed after the bidding process are required to sign MoA with the NOC and present offset project proposals prior to signing the Supply Contract. The Kuwait Foreign Investment Bureau (KFIB) together with other concerned ministries and government agencies cooperate in the development of offset programmes. Acceptable third parties may be brought in to fulfil obligations on behalf of the obligor, but the obligor will always remain responsible for fulfilment of the obligation. Relationship: The prime contractor needs to be actively engaged with the NOC throughout the process. The NOC intends to preserve the continuity of long-term partnerships between Kuwaiti and foreign investors. The foreign partner will be responsible for management in the joint venture and is required to employ and train local manpower, appoint an external auditor, and submit monthly reports highlighting work progress. Process and Procedures: Foreign companies may satisfy their offset obligations by proposing direct and indirect projects and by selecting a local partner, which may or may not be involved in the project. Kuwaiti companies may also submit projects for consideration by the NOC. The contractor shall present a business plan with five year projections. This should include estimates of manpower requirements, financial statements, details of training programmes, and particulars of any market research that the contractor has carried out. The business plan should be finalised within four months of signing the MoA. The Concept Paper Stage comprises a short document, about 3 or 4 pages, to be prepared prior to signature on the Supply Contract. The Memorandum of Agreement is signed by the contractor and the NOC prior to or at the same time as the Supply Contract. The Business Plan Preparation Stage provides offset project details. The Business Plan should be finalised within four months of signing the Supply Contract, though an

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extension is negotiable. Contractors should provide implementation details covering 5 years. Evaluation of the Business Plan should take about two months. There is a six month grace period for project execution. Extensions of up to one year may be negotiable. Evaluated by NOC within 2 months from the date of receipt; may require additional information. Steps in the Process: The prime contractor submits a concept paper which the NOC approves, rejects, or amends. Once approved, the contractor submits a feasibility study. The NOC and the foreign obligor set the standards, conditions and criteria for local private companies hoping to partner in the project. The foreign obligor may also use a local company to formulate those conditions. The project idea is then advertised to the private sector to find companies interested in a partnership. Companies that match the conditions and criteria sign a non-disclosure agreement (NDA) and receive the feasibility study; local companies that do not match are excluded. The NOC sends the final list of qualifying firms to the obligor, which chooses a local company to develop a partnership. Once the selection has been made, the NOC notifies the local company and works with them to establish the partnership according to the NOC’s requirements, including completing the required legal steps and receiving licenses from relevant government agencies. The NOC will require the local partner to compensate the prime for the cost of the feasibility study, plus an additional 15 percent to cover its efforts and expenses. Once a partnership is established, the NOC signs a contract with the partnership.

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How Long the Process Takes:

New Objectives and Scope: Obligors are encouraged to propose large projects that transfer technologies to support the goals of Kuwait’s Economic Development Plan. The objective is to transfer the management skills and technologies of foreign multinationals to Kuwaiti companies, particularly with regard to infrastructural projects. This is to be carried out through long-term private-sector partnerships.

Private-sector Kuwaiti companies will be discouraged from giving projects to obligors. There will therefore be no matchmaking. Obligors should focus on the list of projects provided by the NOC.

Foreign ownership of joint ventures may be up to 49 percent of the equity. Obligors should submit a five year business plan in compliance with Kuwait’s laws on joint venture partnerships.

The policy will be applied whether the procurement is for the defence or civil sectors.

Actual implementation of projects will be by public tender, but offset projects are wanted to support the initial phases.

The Economic Development Plan’s focus is on infrastructure, housing, health care, education, etc., and includes many major projects, such as:

• A new business hub (Silk City) with estimated an cost of $77bn;

• A major container harbour and a 25km causeway;

• A railway and metro system;

• Around KD25bn of oil sector investments to raise production capacity and modernize current facilities.

Concept Paper Developmentand Approval

Obligor Initial Contact

Supply Tender Award

Memorandum of Agreement

Supply Contract Signing

Business Plan

Development

4 Months

Business Plan Review

Up to 2

Months

GracePeriod

Up to 6

Months

No Time Limit

Submission of Business

Plan

Start of Implementation

Calculation of MEOOV

Maximum 12 Months

Offset Program Report

Maximum 12 Months

1st Annual Progress Report

12 Months

Concept Paper Developmentand Approval

Obligor Initial Contact

Supply Tender Award

Memorandum of Agreement

Supply Contract Signing

Business Plan

Development

4 Months

Business Plan Review

Up to 2

Months

GracePeriod

Up to 6

Months

No Time Limit

Submission of Business

Plan

Start of Implementation

Calculation of MEOOV

Maximum 12 Months

Offset Program Report

Maximum 12 Months

1st Annual Progress Report

12 Months

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Approval Criteria: The NOC will approve offset project proposals according to the level of satisfaction of the following criteria:

a. If the offset project leads to the transfer, integration and adaptation of appropriate technologies to Kuwait. The value of the transferred technology should be assessed by:

o Determining whether the transferred technology exists or is utilized in other countries and what is the cost of transferring it to Kuwait;

o Determining the risks that the transferred technology might become obsolete over a very short period and be replaced by other technologies;

o Determining the monetary value of the transferred technology through direct assistance from specialized local or international firms. NOC, jointly with the obligor or foreign contractor, will select the specialized firm.

b. If the offset project creates and adds high-skilled job opportunities for Kuwaiti nationals in accordance with the relevant Kuwaiti laws and regulations. The number, type and diversity of job opportunities are issues that must be addressed and evaluated by NOC.

c. If the offset project contributes to the development of an efficient and productive national labour force through specialized professional training. The NOC will examine the training or local manpower development proposals and assess their degree of satisfaction for this criterion.

d. If the offset project enhances and encourage business cooperation between international companies and the Kuwaiti private sector.

e. If the offset project has an economic value added benefit to Kuwait.

f. If the offset project supports the Government of Kuwait’s efforts to attract foreign investment for the Kuwait economy.

g. If the offset project succeeds in expanding the export of locally produced/manufactured products or reduce the dependence on import of foreign products.

NB: Items a, b and c above are mandatory requirements. It is sufficient to meet any one of them in order to obtain approval for the offset project proposal with varying multiplier values. However, the other items (d, e, f and g) will be evaluated by the NOC to enable it to determine the offset multiplier value. Thresholds:

For defence acquisitions - KD 3m ($10.4m).

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For civil contracts - KD 10m ($35m).

The award of any individual supply contract or a series of contracts that within one Kuwaiti financial year cumulatively reach the respective thresholds, will qualify for an offset commitment. Civil contracts qualifying for offset commitments exclude all upstream and downstream oil and gas government contracts. Subcontracts signed with Kuwaiti Companies are deductible from the supply contracts that are subject to offset. Quota: 35 percent of Supply Contract value. Allowable Deductions: The following is deductible from the offset quota required under the Supply Contract: Subcontracts signed with Kuwaiti Companies. Expenses incurred in securing the bank guarantee. Expenses incurred in assessment of the technology transfer to the Offset Business Venture (beneficiary). Off-contract purchases of national goods and services. Penalties: A bank guarantee must be established for 6 percent of supply contract value. The guarantee must be submitted by the obligor within a period of 30 days from the date of signing the Supply Contract, or upon the commencement of actual implementation of the contract. It must be valid for one year and renewable until the fulfilment of the offset obligation. If the NOC cashes the bank guarantee, it shall release the obligor from its obligation. If the obligor fails to submit the bank guarantee within the specified timeframe or refuses to implement the obligation in accordance with the requirements specified in the Memorandum of Agreement, a penalty shall be imposed in an amount not exceeding 6 percent of the value of the Supply Contract qualifying for an offset obligation. This penalty value will be deducted from any payments that are due under the Supply Contract. The NOC shall also recommend the exclusion of the foreign contractor from future Supply Contracts. Banking and Pre-Performance: Pre-approved offset projects will qualify for offset credits if commenced prior to award of the Supply Contract. Credit banking is limited to three years.

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Obligors will be allowed to earn credits from their current projects and utilize these credits in future obligations that they may have within the next three years. The value of future offset credits that may be banked will be capped at 100 percent of the current obligation. Pre-emptive offset credits can be transferred, assigned or sold to third parties to be utilized to cover respective offset obligations, subject to the pre-approval of the NOC. The transfer or sale of offset credits to a third party can be made within a maximum period of 3 years from the date of earning such credits. Direct / Indirect: Direct offsets are encouraged. They are defined as any project that benefits the purchasing agency. Direct offset projects are those in which the foreign contractor assists the state agency through a mechanism such as supply arrangements, technology licenses or co-production. The overall effect of a direct offset project is to reduce the cost of purchase, operation and/or maintenance through participation of the seller in supplying the product. Direct offset projects could include: • Grant projects; • Privatization projects; • Defence-related projects, including training, maintenance and test labs; • Projects of dual defence/civil uses. An indirect offset project is one in which the foreign contractor agrees to assist the state agency in its development of the private sector with foreign vendor participation in projects to produce products either for export or import substitution, or investment plans unrelated to the principal Supply Contract. • Example 1: Direct Offset Projects

o Establishment of laboratories, services or maintenance facilities within the operational domain of the Kuwaiti Government entity party to the Supply Contract.

o Short and long-term training programmes of national manpower on high technology equipment or software.

o Development of specialized software or systems for special application

o Establishment of a business entity with or without participation of the Kuwait Government as owner or co-owner, to provide services or goods to the buyer and/or other sectors.

• Example 2: Indirect Offset Projects

o Grants or donations to approved and licensed organizations in Kuwait providing educational, health care or public services.

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o Establishment of business entities in Kuwait to provide goods or services.

o Establishment of specialized training centres to train Kuwaitis.

o Establishment of energy related industries.

o Invest in business ventures to promote the use of alternate energy.

o Invest in business ventures to manage and optimize the use of fuel energy or water resources.

o Procurement of national goods and services.

o Establishment of P.P.P. Projects with local participation.

Criteria for Approving Offset Projects:

a. Does the offset project realize certain technology or technologies? What type? How technical? Can they be integrated, applied and operated? What is the benefit to Kuwait's economy or its sectors from this technology? How much does it cost to transfer and own this technology if possible?

b. Does the offset project promote the employment of national labour? How much? What types of skills? For how long?

c. Does the offset project provide specialized training to local manpower? What kind of training? For how long? How many trainees? Who are the instructors? What kind of skills to be realized after training? Where will they be used?

Funds: Obligors used to be encouraged to participate in funds and earn offset credits if the funds were approved by the NOC. This may still be acceptable under certain circumstances, but funds are no longer as favoured as before. Multipliers: Direct offsets shall attract the highest multipliers. They will mainly involve projects for the provision of training and maintenance directly related to the supply contract. Offset funds should achieve at least two of the primary objectives of the offset program to be granted a multiplier of 3.5. This multiplier value could be increased to 5.5 after the NOC reviews and assesses the annual achievements of the fund and confirms that it achieves all three primary economic objectives of the offset programme.

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Multipliers can be cumulative. The maximum multiplier value that an offset project can achieve is 5.5. This is granted when the project accomplishes all three principle objectives of a direct offset programme, namely technology transfer, job creation for Kuwaiti professionals, and the training of Kuwaitis. In specifying the value of offset credits that shall be granted to obligors in return for their purchases of national goods and services, a multiplier of 1 (one) shall be given. The main criteria:

d. Does the offset project realize certain technology or technologies? What type? How technical? Can they be integrated, applied and operated? What is the benefit to Kuwait's economy or its sectors from this technology? How much does it cost to transfer and own this technology if possible?

e. Does the offset project promote the employment of national labour? How much? What types of skills? For how long?

f. Does the offset project provide specialized training to local manpower? What kind of training? For how long? How many trainees? Who are the instructors? What kind of skills to be realized after training? Where will they be used?

Computations:

I. The Offset Obligation Value relating to civil contracts (non-defence) will be

calculated as follows:

OOV = 0.35 * (MVC - MVLGS) – OC

Where: OOV: is Offset Obligation Value, MVC: is Monitory Value of the Supply Contract

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MVLGS: is the monetary value of subcontracts signed with Kuwaiti companies (with the possibility of deducting the share of the Kuwaiti company in a joint Kuwaiti-Foreign venture, but up to a maximum of 30 percent). OC: is Offset Credits earned by the offset obligor.

II. The Offset Obligation Value that relates to defence contracts will be calculated as follows:

OOV = (0.35 * MVC) - OC

The value of the offset obligation is a reference figure. It is not an absolute monetary commitment and will be determined at a later stage when and after the Offset Obligor submits its proposed Offset Project(s) for approval by the NOC.

III. The multiplier value will determine the absolute Monetary Equivalent of the Offset Obligation (MEOOV), which is calculated as:

MEOOV(i) = OPI(i) * OPM(i)

Where: MEOOV(i): is the Monetary equivalent Offset Obligation value of the Project (i,) OPI(i): is the monetary investment in Project i and OPM(i): is the Offset Project multiplier for Project i. IV. The Offset Obligation is fulfilled when the sum of all MEOOV(i) is equal to

OOV.

i.e. If OOV = MEOOV = ∑=

n

i 1

(MEOOV(i))

Where n is total number of Offset Projects. If MEOOV is less than OOV, the obligor must select additional offset project(s) to satisfy its obligation. If, on the other hand, MEOOV is more than OOV, the obligor will receive future Offset Credits for the excess amount. The value of such future offset credits shall be equivalent to:

Future Offset Credits = MEOOV(i) - OOV

V. Monetary Equivalent Offset Obligation Value of Offset Funds:

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Based on the value of monetary investment by the obligor and the multiplier value that is granted to the fund, the Monetary Equivalent of the Offset Obligation (MEOOV) is calculated as follows:

MEOOV(f) = OFI(f) * OFM(f) Where: MEOOV(f): is the monetary equivalent Offset Obligation value of Fund (f), OFI(f): is the monetary investment in Fund (f) and OFM(f): is the Offset Project multiplier for Fund (f) The Offset Obligation is fulfilled through an investment in an offset fund if:

MEOOV(f) = OOV

VI. Offset Credits From Investments in Offset Funds:

When investing in NOC approved Offset Fund(s), an Offset Obligor shall be entitled to Offset Credits that may be equal to or exceed the Offset Obligor’s current Offset Obligation. Accordingly:

If: MEOOV(f) = OPI(f) * OPM(f) = OOV Then the investment in the offset fund is considered to be exactly sufficient to cover the obligor’s current obligation.

If: MEOOV(f) = OPI(f) * OPM(f) > OOV Then the investment in the offset fund is considered to be in excess of what is required to cover the obligor’s current obligation and the obligor shall be entitled to future offset credits. The value of such future offset credits shall be equivalent to:

Future Offset Credits = MEOOV(f) - OOV VII. Offset Credits Realised from Charges Incurred by Obligors for Issuing Bank

Guarantees:

When submitting an offset bank guarantee an obligor may earn credits in return for any resulting monetary charges incurred. For each Kuwaiti Dinar paid in charges by the obligor to secure the bank guarantee its Offset Obligation Value (OOV) will be reduced by an equivalent amount, without consideration to the multiplier value. Hence:

OCFG =KFG Where:

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OCFG is: Offset credits earned in return for charges incurred to secure the bank guarantee. KFG is: The monetary charges incurred to secure the bank guarantee realized for the

Offset Projects. VIII. Total Post-Contract Offset credits (OCpostC) are therefore calculated as

Follows:

OCpostC = MEOOV(i) + OCFG + OCLGS + OCother

Where: MEOOV(i): is the Monetary equivalent Offset Obligation value of the Project (i ) OCFG: is Offset credits earned in return for charges incurred to secure the bank guarantee. OCLGS: is Offset Credits earned from the purchase of national goods and services. OCother : is Offset Credits earned from expenditures incurred by obligors to provide additional studies, including the verification of the technology, details business plans and other requirements. IX. Pre-contract Offset Credits are calculated for every Offset Project as follows:

OCpreC = OPI * OPM

Where: OPI: is the Offset Project investment value; OPM: is the Offset Project Multiplier. Fulfilment Period: Fulfilment of the obligation should start no later than one year from the date the contract is signed. A six months grace period will be allowed from the approval date of the business plan, so that applications for licenses and permits can be properly obtained (see Procedure, above). Any delays to the proposed Offset Schedule accumulated up to this point, for which the offset obligor is responsible, will be deducted from the grace period. Offset Project Structures and Business Ventures: When implementing the offset obligation the foreign contractor can choose one or more offset projects:

a. From NOC’s compiled list of potential pre-qualified projects (this may include direct and/or indirect offset projects);

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b. From the direct or indirect projects that it proposes and is approved by NOC. The obligor can select one or more of the following project structures:

a. Establish an Offset Business Venture (“OBV”) with Kuwaiti businesses, entrepreneurs and/or Kuwaiti private citizens as equity partners;

b. Establish an OBV in which the obligor’s equity share is more than 49 percent in accordance with the Foreign Investment Law No. 8/2001, (and following amendments) regulating direct foreign capital investment in the State of Kuwait;

c. Expand and develop existing business ventures;

d. Make in-kind contribution(s) or grant(s) to existing offset projects approved by the NOC as offset beneficiaries;

e. Participate in existing NOC approved and established funds or develop and create new offset funds under Kuwaiti law to finance the implementation of general and/or offset projects (see Funds – above)

Acquisition of Pre-existing Offset Projects: In some cases offset obligors may ask to fulfil their obligations through the acquisition of existing offset projects initiated and completed by other obligors. The NOC will reject any offset project proposal whose prime objective is to acquire the equity or share capital of the existing offset project. However, if the proposal aims at expanding the capital base and scope of the existing offset project and the proposal satisfies the offset programme approval criteria stated above, the NOC may accept the offset project proposal. Offshore Offset Projects: Generally, priority is given to offset project proposals if implemented in Kuwait. However, the NOC may approve offshore offset project proposals if they meet the objectives of the offset programme and, more specifically, the criteria stated above (Approval Criteria). In such cases the NOC may elect to subject offshore offset projects to all rules and regulations governing the fulfilment of offset obligations.

BOT Policy:

Kuwait has approved the formation of three committees to establish public shareholding companies, part of the country’s multi-billion-dinar development plan.

The first committee will be responsible for establishing an electricity public shareholding company in Al-Zour by the Build-Operate-Transfer (BOT) system. The committee will be chaired by the Minister of Electricity and Water.

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The second committee would be responsible for establishing warehousing and border crossings companies using BOT. It will be chaired by the Minister of Commerce and Industry.

The third committee will be establishing companies for health insurance hospitals in line with BOT practises. This committee will be chaired by the Minister of Health.

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Libya

[10/11] Provisional offset guidelines were prepared in 2004. Benefits were asked for on a selective basis for both major defence and civil procurements. The transitional administration has not shown its hand on this and the policy is presumed to be derelict.

There are indications that an informal countertrade policy is emerging, particularly for the energy sector. Multinational oil and gas companies have signed agreements with the Transitional National Council to exchange crude oil for refined fuel cargoes.

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Lithuania [01/11]

Offsets are regulated in binding laws in the form of Acts of Parliament. The Lithuanian Commission on Compensation Matters approved Guidelines for Industrial Cooperation agreements (offsets) in a document dated April 26, 2004. These guidelines regulate the mandatory application of offsets when purchasing arms, ammunition, explosives, or ‘other military purpose goods’ and outlines the necessities governing offset requirements. Defence transactions are regulated by two further Resolutions. The 1st is known as Order No.4-355 of the Minister of Economy, dated 22 September 2003. The 2nd is known as The Rules of Compensation (Order No.4-355 of the Minister of Economy) dated 22 September 2003. The foreign contractor must agree a Compensation Agreement with the Ministry of Economy. The fulfilment plan must be included as a part of the Compensation Agreement. Purchase contracts shall only come into effect after signing the Compensation Agreement. The Ministry of Economy is responsible for the establishment, implementation and follow-up of these agreements. The Ministry of Economy has established an advisory institution, the ‘Commission on Compensation Matters when Purchasing Arms, Ammunition, Explosives or Other Military Purpose Goods’, otherwise known as the Commission on Offset Matters. This Commission assesses the compensation requirements and submits its recommendations to the Ministry of Economy having examined proposals presented by foreign suppliers. Members of the Commission are representatives drawn from the Ministry of Economy, the Ministry of National Defence, the Lithuanian Development Agency, the Lithuanian Confederation of Industrialists, and the Association of Lithuanian Chambers of Commerce, Industry and Crafts. The Lithuanian Development Agency will assist foreign suppliers in identifying and assessing opportunities for compensation and in arranging meetings with Lithuanian enterprises. Industrial cooperation can take various forms. For example, direct procurement of Lithuanian defence products, subsystems and components; strategic alliances; establishment of joint ventures, and subcontractor arrangements with local manufacturers. Credit values will be determined by the value of Lithuanian content in the product, i.e. the value-added benefit through manufacturing processes carried out in Lithuania. When incremental exports arise then the value of the compensation will correspond to the value of the exports. The value of compensation operations must be expressed in LTL. When the values of operations are presented in other currencies they will be converted to LTL on the basis of the official Exchange rates of the Bank of Lithuania.

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The winning bidder can be eliminated and replaced by the runner-up if the winner does not accept the required offset arrangements. Objectives The objective is to strengthen the potential of Lithuanian defence industry enterprises, establish long-term cooperation relationships between foreign and Lithuanian companies, attract expertise and advanced technologies, and to establish new export markets. Priority will be given to projects related to Lithuanian defence-related companies, especially those operating in hi-tech or innovative spheres. The following compensation fields shall be given priority: manufacturing of arms, ammunition, and other military purpose goods as well as manufacturing of double-purpose goods in Lithuania; development of state-of-the-art technologies (lasers, biotechnology, information technology, radio electronics, manufacturing of medical equipment) and cooperation in research and development projects. Compensation in the area of manufacturing non-military goods will be allowed only when a Lithuanian company manufacturing these products has a direct relationship with the defence sector; when it results in the start-up of new businesses or essential expansion of existing businesses; or when their modernisation or renovation is brought about by the Compensation Agreement. Other types of offset, such as investment, co-production, participation in R&D projects, have to be assessed separately in every case. Compensation will not be allowed in the following areas: Textiles and clothing (except for military purposes), transportations, manufacturing of agricultural and food products, construction industry and manufacturing of furniture. {NB: These are not the selection criteria for the procurement}. Quota: At least 100 percent of purchase contract value. The foreign supplier must undertake to purchase products and/or services from Lithuanian companies in an amount corresponding to the value of the contract. Threshold: 5 million Litas ($2m). For major procurements - over 100 million Litas - the foreign supplier must present a preliminary compensation plan, including signed conditional contracts with Lithuanian enterprises covering at least 30 percent of the value of the contract undertaken with the Lithuanian Armed Forces. This plan must be presented to the

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Ministry of Economy at least one month before signing the procurement contract with the Ministry of Defence or the Arms Fund of the Republic of Lithuania. Credit Qualifications: The Ministry of Economy will consider technology transfer and know-how for credit purposes. Negotiation and evaluation is on a case by case basis. To qualify for offset credits the transfers will be valued on the extent to which Lithuanian enterprises are able to exploit the technology. Technology transfer shall only be credited when ownership is transferred to the Lithuanian entity and will be assessed according to its market value or as a proportion of the proven investment in the technology. Similarly, other compensation projects covering such items as investment, general manufacturing, participation in research & development, shall in every case be assessed separately taking account of the contribution of the compensation operation to the development of the economic activity carried out by the Lithuanian entity. Multipliers: In every case in point (see Credit Qualifications) the Ministry of Economy shall specify what multiplier shall apply, but multipliers may not exceed 5 for any one project. Multipliers applied to banked credits shall be reduced by 50 percent. Fulfilment Period: The fulfilment period should be consistent with the delivery of arms or military equipment under the purchase contract. In any event this should not exceed 10 years. At least 50 percent of the compensation obligations must be fulfilled within the first 5 years. Banking of credits: When the foreign supplier has fulfilled the terms of the Compensation Agreement the Ministry of Economy may consider a banked credits agreement for future obligations to encourage cooperation with the Lithuanian defence industry. Foreign companies that have not yet concluded any Compensation Agreements but are actively addressing Lithuanian defence sales can also negotiate specific terms for banked credits. Banked credits will be valid for 2 years from the date of contract. Banked credits may not be transferred to a third party and cannot exceed 30 percent of any new Compensation Agreement obligations that may be required.

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Penalties: If the foreign supplier fails to properly fulfil its obligations the supplier may be excluded from participating in new programmes for the Lithuanian Armed Forces until these obligations are fulfilled. If there is a failure to fulfil obligations established in the fulfilment plan or its separate stages, the Ministry of Economy can withdraw multipliers or reduce their value in terms of the non-fulfilled part of obligations. The MoD has the authority to introduce sanctions on offset performance to cover subsequent procurement of the same item. Abatements: Pre-performance offsets may qualify for abatement provided:

a) the value does not exceed 30 percent of the obligation designated in the offset contract;

b) the project(s) is completed within two years of contract.

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Luxembourg [10/09]

The Grand Duchy of Luxembourg requires offset on an occasional basis for larger defence procurements. These are usually to support NATO requirements. The Ministry of Economy and Foreign Trade has established an offset division. Requirements are detailed in the RfP. Objectives: To establish long term relationships between local and foreign companies. Threshold: No threshold has been set. Decisions are made on a case-by-case basis. Quota: By negotiation but less than 100 percent. Direct / Indirect: Obligors may submit proposals entirely for indirect (commercial) projects. Penalties: Penalty clauses for failure to fulfil an obligation are negotiated individually. Fulfilment Period: The fulfilment period is relaxed but in general should be within two years of delivery under the Supply Contract. Multipliers: The range is 1 to 10 with the highest for technology transfer and the lower ranges for buy-backs. There is no pre-determined table and everything is up for negotiation.

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Malaysia [10/11]

Malaysia refers to its policy broadly as ‘countertrade’, sometimes requiring contractors to discharge obligations with offsets, counterpurchase, and buy-backs. Offset has become more prominent in terms of creating value for the country by way of industrial participation. Counterpurchase entails the procurement of Malaysian commodities and manufactured products by the obligor or its third party representative. The policy is to implement offset and countertrade programs on all government procurement of supplies, services and works that exceed the threshold, in both the defence and civil sectors. It is intended that offset will become a mandatory requirement for government agencies undertaking strategic and high value purchases. All new proposals or activities must reflect incremental added value to the main procurement contract. Bidders are invited to formally set out offset program proposals when the tender documents are submitted. Obligors are required to sign both the main contract and the offset agreement simultaneously. Organisations: Malaysian Offset Executive Committee (MOEC) The MOEC has been formed at the Ministry of Finance (MOF) as a platform to oversee, provide strategic directions and approvals, and to integrate offset programs. The MOEC also serves as a think-tank to align offset program with national initiatives to support national technologies and the economic development agenda. Membership consists of: (i) Chairman - Secretary General/Deputy Secretary General of MOF (Management) (ii) Members - Deputy Secretary General of Ministry of Science, Technology and Innovation - Ministry of Home Affairs - Economic Planning Unit (EPU) - Maritime Enforcement Affairs Div., - Ministry of Defence (MINDEF) - Science Advisor to Prime Minister - MOF - Ministry of International Trade and Industry (MITI) - Other relevant ministries (as when required) (iii) Secretariat - Under Secretary of Government Procurement Division, MOF and Technology Depository Agency (TDA) Offset Committee (OC)

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The OC shall be formed upon initiation of an offset program as a result of a government procurement program by the MOF. The role and responsibilities of the OC are as follows: (i) Maintain communication with Procurement Division of the procuring ministry; (ii) Provide strategic guidance and approve the projects under the offset program; (iii) Evaluate and approve offset requirements/proposals for specific procurements; (iv) Evaluate and approve lists of offset recipients submitted by the secretariat; (v) Ensure that all relevant activities in the offset program are monitored and audited by the secretariat on a regular basis; (vi) Monitor and review the progress reports on offset program activities; (vii) Evaluate and approve requests for the banking of credits. (viii) Monitor all statements of account for credits submitted by the Offset Management Unit (OMU) and award credits or penalties where justified; (ix) Evaluate and approve all requests for transfer of offset credits; (x) Evaluate and approve recommendations for the discharge of an obligation; and (xi) Prepare and submit status/progress reports of the offset program on a quarterly basis to the MOF. The OC shall consist of: (i) Chairman - Secretary General of the procuring Ministry. (ii) Members - Representative from MOF. - Under Secretary of Procurement Division of the procuring Ministry/Agency. - Representative from MIGHT as TDA. (iii) Secretariat - Under Secretary of OMU or equivalent of the procuring Ministry. The OC when the need arises may call in representatives from other agencies, including the Economic Planning Unit, Ministry of Plantation Industry and Commodity, Ministry of Higher Education, Ministry of International Trade and Industry (MITI), Malaysian Industrial Development Authority (MIDA). Offset Management Unit (OMU) The OMU will provide the secretarial support to the OC. The OMU secretariat has the following responsibilities: (i) In consultation with TDA, initiate the Malaysian Offset Management Framework; (ii) Provide liaison between relevant government authorities, offset providers and recipients; (iii) Evaluate and negotiate the offset program proposals; (iv) Submit recommendations on proposals to the OC for approval; (v) Negotiate and conclude the terms and conditions of the offset agreements; (vi) Secure bank guarantees for Performance Bond; (vii) Advise offset providers and recipients on the fulfilment of their obligations; (viii) Administer and audit the performance of all offset activities; (ix) Prepare and submit status/progress reports to the OC; (x) Maintain statements of account for offset credits under obligation and credits awarded to the offset provider;

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(xi) Process all credit claims and submit to OC for credit allocation and subsequent discharge of obligation; and (xii) Provide guidelines on offset to prospective offset providers and recipients. Technology Depository Agency The TDA provides the preferred technology list. It shall be consulted by the OMU in developing the offset program. The responsibility of the TDA is to: (i) Ensure national procurements are effectively used to satisfy the country’s technology needs and assist in economic growth; (ii) Recommend the best approach, practice and procedures to acquire, exploit, receive and house the required technologies; (iii) Observe offset activities attached to national procurements and maintain sufficient data with regards to offset; (iv) Assess and monitor the technological capabilities and capacity of Malaysian companies (beneficiaries) in collaboration with the OMUs of various ministries and agencies: (a) maintain a database of the required technology to support the offset strategy with regard to technology acquisition and development; (b) Identify, consolidate and maintain database of current available technology in the country; (c) Prepare the Offset Requirement Document (ORD) for the offset program; (d) Evaluate the offset program proposal submitted by the offset provider(s); (e) Conduct the pre audit for the potential offset recipients and providers; (f) In collaboration with the OMUs and MOF, negotiate and finalised the offset program and transform it to the contractual agreement; (g) In collaboration with OMU, establish an agreed offset program management team; (h) In collaboration with OMU, monitor the progress of offset program implementation; and (i) In collaboration with OMU, conduct the post audit of the offset program. MIGHT The Malaysian Industry Government Group for High Technology (MIGHT) has assumed a high profile role in addressing the technological development needs of non-military programmes. All ministries work closely with MIGHT, which acts as a Technology Depository Agency (TDA) and provides details of the preferred technologies required. MIGHT manages the non-defence offset requirements for MINDEF and all non-defence offset programs. The TDA works closely with the Economics Planning Unit (EPU), MoF, and procurement divisions of various ministries and agencies. The TDA will act as a central technology planning body. An audit model has been established by MIGHT to evaluate competencies and rank SMEs in terms of their suitability as beneficiaries of technology transfers. A

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management team within the Ministry of Finance will quantify and measure the results of an offset program at the end of the value chain. Ministry of Finance (MOF) All procurement decisions by the ministries will be submitted to the MOF for final approval. Objectives: The government is committed to enhance the nation’s industrial, technological and overall economic capability. The objectives of the offset program are as follows:

- Foster strategic international partnerships that can develop and strengthen the expertise, capabilities, marketing, and export potential of Malaysia's industries;

- Maximize the usage of local content leading to indigenization;

- Establish a sustainable Malaysian industrial, economic and technological base,

with strategic capabilities and participation in the global supply chain;

- Encourage transfer of technology and know-how;

- Collaborate in strategic research, development and commercialisation projects; and

- To facilitate investments in strategic human resource development initiatives

that contribute to employment creation and enhancement of local expertise and capacity.

Foreign contractors may be required to participate in joint ventures when bidding for major civil purchases.

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On the defence side Malaysia prefers to focus on dual use technologies that can generate exports. Dual-use capabilities should not be confined to the defence sector but involve opportunities elsewhere. MINDEF favours partnerships with foreign defence contractors leading to participation in the international supply chain, particularly for SMEs. Technology transfer is an important requirement and is no longer synonymous with training for the armed forces and second line maintenance for defence industries. When the technology is transferred to fulfil work in relation to the equipment procured only the value of the work resulting from the transfer will be considered for credit. More weight shall be given to direct offset proposals and activities that generate direct and tangible economic outputs. However, direct offsets are not given more weight in the bidding process. Reporting: The OMU/TDA will monitor the performance of the offset providers holding the offset obligations. The offset providers are also required to submit a status report on the progress of offset program on quarterly or half yearly basis, as appropriate. Direct Offset: These comprise activities directly related to the main procurement contract.

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Technology transfer and competency development will form an integral part of direct offset, which includes knowledge-based activities such as design of systems and sub-systems of the procured supplies, services and works. Indirect Offset: These are programmes that are not directly linked to main procurement contract, which can be any activities agreed to by the government. Technology transfer and competency development shall form an integral part of indirect offset. Threshold: A single procurement to the contract value of M$50m ($16m) or more shall, as a general rule, attract offset obligations. Quota: One hundred percent of the main procurement contract value. Fulfilment Period: Offset obligations must normally be fulfilled within the delivery dates of the main procurement contract. Obligors can negotiate with the Offset Committee for extensions. Penalties: Five percent of the main procurement contract, with a bank guarantee. The payment for compensation shall be claimed against the bank guarantee in the form of liquidated damages for unfulfilled offset obligations. Multipliers: As a general rule multipliers will not be applicable. Multipliers will only be considered in exceptional circumstances such as when the program acquired can lead to high-end technology acquisition or maximization of FDI. In practice multipliers up to 5 have been awarded where the project has been shown to be of substantial value. Multipliers may be awarded for Foreign Direct Investment (FDI). Credits and Credit Banking: Offsets credits are awarded on the basis of output and banking is allowed.

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Obligors that exceed their contractual offset commitments may qualify for bankable credits. Banked credit may be transferred to any other party that has an offset obligation, subject to a limit of 50 percent of the new obligation. Contractors planning to utilize the banked credits should state their intention in advance of the tender submission. Credit accounts are valid for 5 years from the date of inception. In special circumstances this period can be extended subject to the approval of the Offset Committee. Obligors will not be allowed to accumulate credits while they have other offset obligations outstanding with Malaysia. Crediting Procedure: Offsets credits are based on a valuation of the work generated. Local content must be used as much as possible. Consideration for offset credits will depend on the extent to which Malaysian companies, universities, and R&D-based organizations are able to use the intellectual property rights derived from the research for their own purposes. All proposals concerning counterpurchase must reflect incremental or new business in order to be considered for credits. Offset projects must result directly from the purchase contract and causality must be evident. Projects must be economically and operationally sustainable after the discharge period. Technology transfer must be provided to the beneficiary without charge. Counterpurchase: Counterpurchase is not always required. Contractors will be asked to buy specified goods (often stated as a percentage of the contract value) over a set period. These will be commodities and/or manufactured goods approved by the government. Destination controls may be imposed. There must be evidence of additionality. Whilst palm oil and rubber products feature occasionally, cocoa, wood-based products, electronic items, and other manufactured products are taking greater prominence, with a larger emphasis on manufactured products with technical input. The Ministry of Plantation Industry and Commodities Malaysia (MOPICO) and the Ministry of International Trade and Industry (MITI) respectively provide the list of commodities and manufactured products and stipulate the terms and conditions of the countertrade requirements.

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Mauritius There are no guidelines but the Prime Minister of Mauritius said that he wants industrial participation for some civil sector purchases, especially for those in the aerospace sector. The requirement is for concepts that will bring capital and technology and will enable those participating in the programme to build on a skilled workforce ready to face up to global competition.

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Mexico

[07/11]

The government has produced a road map for the development of the country’s aerospace industry. The plan recommends the establishment of an offset policy to provide benefits for both the defence and civil sectors. The road map was prepared by a work group in ProMéxico, the Mexican government’s trade and investment agency. There are meanwhile no formal offset or countertrade guidelines although the government is receptive to pro-active initiatives from foreign defence contractors. The Secretariat of the Ministry of National Defence (SEDENA) recognises the value that offset projects can bring, and offsets may be the deciding factor in the competitive process.

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Netherlands

[07/10]

Policy is administered by the Ministry of Economic Affairs’ Commissariat for Military Production (CMP), an agency of the Directorate-General for Enterprise and Innovation. The Ministry of Economic Affairs (MEA) cooperates closely with the MoD. Within the MoD the Director General of the Defence Materiel Organisation formulates policy regarding materiel-related requirements.

The MoD’s Request for Proposal (RfP) will set out the offset requirement and will invite companies, by separate notification, to submit their offset proposals. The offset agreement must be settled before the purchase contract is finalised with the MoD.

Competing contractors are required to indicate clearly how likely they are to place orders with Dutch industries and to identify any other proposed offset activities. The proposals will be included in the attachments to the offset agreement, specified in five levels of priority (see the colour chart in the Multipliers section).

A distinction is made between direct and indirect offset activities.

Claims for credits will be evaluated for approval or rejection primarily on the basis of information supplied by the Dutch supplier or contractor. The usual way this verification takes place is by means of a questionnaire that is sent to the Dutch company involved, providing the MEA with the necessary administrative data:-

I. Obligor submits claim; II. MEA checks and verifies relevant information has been received; III. MEA emails a questionnaire to the Dutch beneficiary / supplier, and notifies the obligor what forms were sent; IV. If the Dutch company fails to respond within two weeks an email gives it one more week to do so; V. The obligor is also informed of the lapse and advised to press the Dutch company to respond; VII. Either the Dutch company responds in time and the obligor is awarded the credits, or it misses the deadline and there are tears.

Obligors are asked to submit status reports typically once or twice a year, both with regard to progress as well as further potential opportunities.

The CMP is checked internally on an annual basis by auditors from the MEA and the findings are reported to Parliament, though confidential information is not released for publication.

Objectives: There is a strong focus on R&D projects for the defence sector. The MEA would also like to see more involvement by obligors in MRO activities. Offsets can support both the military and civil sectors. The principal objective is the involvement of defence-related industries and R&D institutions in the development and production of defence equipment.

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It is important for obligors to engage the competitive involvement of Dutch industry and research institutions in the development, production, and procurement of materiel and services on the international defence market. Technology areas of particular interest: C4I; Sensor Systems; Integrated Platform Design; Development & Manufacturing; Electronics & Electromechanical Technology; Smart Materials; Simulators, Trainers & Synthetic Environments. SMEs: The offset policy pays special attention to small and medium-sized enterprises (SMEs). Obligors should ensure that SMEs (companies employing less than 100 people) are contracted with regard to at least 20 percent of the offset requirement. The MEA has identified a number of defence sector SMEs which in particular would like to supply the N. American market but have been unable to do so by their own initiative. To encourage this, bonus credits worth €2m per company, up to a maximum of €10m, will be given to obligors that make this happen. Direct / Indirect: The offset agreement contains provisions allowing direct, indirect (defence-related), and indirect (civil) offsets. Direct offsets specify which and to what extent Dutch companies are directly involved in the development and/or production of the type of defence equipment purchased by the MoD from the foreign supplier. Typically with direct offsets the activities comprise co-development, software engineering, integration, production of subsystems and components, support, maintenance & repair, development of training materials and documentation, etc. Indirect offsets identify development and/or production of goods or services and other activities that do not bear a direct relationship to the procured equipment. For indirect offset foreign suppliers’ orders must comply with a number of requirements. Activities should verifiably be:

- new to Dutch industry or produce an increase to existing business levels;

- of Dutch origin;

- unique, in the causal sense in that they would not have been placed if there had not been an offset obligation;

- of an equivalent technological level to defence equipment bought by the MoD.

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Quota: The foreign supplier is obliged to offer offsets for 100 percent of purchase contract value. The obligor should identify prior to contract at least 30–40 percent of the projects chosen to satisfy the obligation. There is no formal requirement, but obligors should fulfil at least 10 percent of the offset obligation through activities in defence-related industries and with R&D institutions working on the development and production of defence equipment.

As noted above (see SMEs), obligors should ensure that SMEs (companies employing less than 100 people) are contracted with regard to at least 20 percent of the offset requirement. An obligor that fulfils at least 70 percent of its obligation with defence-related activities within two-thirds of the agreed fulfilment period may have the remainder of the obligation waived. Any multipliers in the offset agreement would be discounted.

Threshold: There is a mandatory offset requirement for defence procurements from foreign suppliers where the cost is more than €5m. Multipliers: Multipliers may be awarded at the discretion of the MEA and pre-approval is mandatory in all cases. Multipliers will be higher for defence-related work than for commercial work.

For involvement of the domestic defence industry early in the development phase and by selecting Dutch defence industries as single source or preferred suppliers for particular assemblies or sub-assemblies resulting in export activity, the multiplier range is 1-5.

As stated under Quota (above), an obligor that fulfils at least 70 percent of the obligation net of multipliers with direct offsets within two-thirds of the agreed fulfilment period may have the remainder of the obligation waived.

A higher multiplier can be awarded for defence-related R&D programmes with Dutch knowledge institutes. The multiplier will depend upon uniqueness and attractiveness of the technology. The range is 1-10.

A higher multiplier can be awarded for technology transfer to Dutch knowledge institutes or industries. The multiplier will depend upon uniqueness and attractiveness of the technology. It needs to be demonstrated that the technology is currently unavailable and will open up new markets. Typically, a business plan from the Dutch parties involved is part of the evaluation process and is needed to pre-qualify the proposal. The range is 1-10.

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The MEA has launched a programme for the introduction by foreign suppliers of high tech companies to the North American market. Offset credits are awarded based upon a statement of work that is agreed to between the foreign and the Dutch company and is related to effort and outputs. Other market introduction activities, where a foreign supplier is demonstrably instrumental to the introduction or to the sale, can be eligible for offset credits.

Foreign companies are invited to invest money in Venture Capital funds. In this way the company supports hi-tech start-ups in the Netherlands, thereby receiving dividends from the funds and offset credits. Depending on the level of risk involved, multipliers are awarded in a range of 10 to 30 times the amount invested by the foreign company.

For technologically innovative proposals outside the defence related industry a multiplier can be granted subject to the attractiveness of the proposal in terms of new technology, R&D, launching customer etc.

Project-Based Solutions: When a foreign supplier agrees a predefined percentage of military compensation programmes with the Dutch defence industry and when it is reached within the agreed timeframe, the foreign supplier will receive a waiver for the remaining obligation. Penalties: There is no penalty clause, but there is a performance review. The performance review requires that if after the first milestone the obligor has failed to comply with at least 50 percent of the offset commitment it will be increased by 15 percent of the unfulfilled part, and if the obligor has failed to comply in full by the

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termination date the unfulfilled part of the offset commitment is increased by 30 percent. Fulfilment Period: The period can vary and has to be agreed upon during negotiations. Typically this period is related to the value of the obligation as well as the delivery schedule of the procurement contract, but it shall not exceed 10 years (for the largest programmes) from the date on which the offset agreement becomes effective. The average period of performance is 5-7 years. Credit Banking: Offset credit banking is available selectively for defence activities. Offset credits will be allowed for Venture Capital Fund (VCF) investment. Credits would in general be restricted to a three year validity period. Waivers / Abatements: There is to be more active pursuit on both a bilateral and multilateral basis of mutual waivers/swaps/abatements between countries. Complex and multifaceted triangular agreements will also be addressed if they result in achieving an open market. Multilateral offset MoUs covering waivers are looked upon favourably. A ‘Best Practice’ agreement was signed 2008 between the Netherlands, the UK, and Denmark to encourage abatements between the three countries. Regional Development Agencies and Assistance: In 2005 the MEA started a project with four Regional Development Agencies to support regional companies and foreign contractors in generating offset related business. The points of contact for each Regional Development Agency are available from the MEA, which may be contacted at: Phone +31.70.379.6270 E-mail: [email protected] The Netherlands Defence Manufacturers Association (NIID) can assist foreign suppliers in identifying possibilities for offset within the defence-related industry. Some major firms and the majority of SMEs are affiliated to this organisation. Phone: +31.70.364.4807 E-mail: [email protected]



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New Zealand [10/10]

The MoD’s Acquisition Division is responsible for the implementation of government procurement policy on local ‘industry involvement’ in defence contracts. The MoD encourages overseas bidders to look for the involvement of local companies, but on a sound commercial basis. The Acquisition Division is headed by the Deputy Secretary of Defence (Acquisition). It is not mandatory for procurement agencies to require offset proposals in tenders with overseas suppliers for government contracts. However, the informal and voluntary policy recognises that commercially viable proposals may offer worthwhile and economically sound benefits for New Zealand. Commercially viable offsets that are freely offered therefore may be accepted. The MoD makes clear that it has a legitimate need to obtain information on the origin and local content of the goods and services offered by a foreign contractor. Each tenderer will be required to provide details of any proposed local industry programme. This does not, though, allow the MoD to use its purchasing as a direct lever for industry or regional development, for example, through domestic price preference or mandatory offsets. The policy may be implemented by individual departments and other purchasing agencies exercising the option of seeking or considering offset proposals when calling for or evaluating bids for public sector contracts by overseas suppliers. The only requirement of government is that the Ministry of Economic Development (Regulatory and Competition Policy Branch) should monitor proposed offset arrangements to ensure consistency with general policy. Industry development is not a primary objective of New Zealand government procurement policy, but there is some emphasis on maximizing opportunities for New Zealand industry e.g. through the Industry Capability Network (ICN) {see below}. The government is alert to the practice of some foreign contractors building a premium into the total tender price in order to cover offset costs that may be incurred. It warns purchasing agencies to be vigilant. Contractors may be asked to make any such premium transparent by identifying it clearly in the proposals. The services of the New Zealand Industrial Supplies Office (NZISO) are available to all interested parties to provide advice and liaison to promote offset opportunities. Purchasing agencies should encourage overseas bidders interested in developing offset proposals to consult the NZISO. They should advise the Ministry of Economic Development (MED) of any offset proposals being considered. The NZII Programme is the term used by Defence to describe that part of a procurement programme that entails manufacturing work in New Zealand or Australia, or by the undertaking of defence offsets in New Zealand. Where New Zealand and/or Australian industry participate in the manufacture of goods and/or the supply of services to Defence, the value of the local involvement is

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known as New Zealand Industrial Participation (NZIP). NZIP is often referred to as "content" or "local content". Industry Capability Network (ICN): New Zealand’s Defence Industry Committee will be asked to confirm annually that the MoD and its agent, the ICN, have appropriately promoted domestic suppliers’ capabilities to prospective overseas prime contractors. The role of the ICN is to maintain an industry capability register linked electronically to a similar register maintained by the Australian State/Territory ICNs. The ICN provides project owners, managers and purchasers with a free sourcing service to identify New Zealand and Australian manufacturers and service providers capable of supplying products and services that would otherwise be imported. The ICN has an advisory and information role only. It does not get involved in supplier selection or purchasing negotiations. Objectives: The preference is for activities that are directly related to defence technology and capability. Consideration will however be given to the offer of appropriate technologies in the civil sector that have the potential to develop capabilities of direct benefit to defence in the longer term. The government recognises that offsets may have particular benefits for government purchasers with interests in developing a goods or services supply base relevant to their agency needs. They may, for instance: • raise the levels and range of technology in New Zealand; • encourage internationally competitive manufacture and services; • improve industrial design and quality assurance; • open up new markets; • provide servicing or backup advantages; and • have logistical benefits. Typical offset arrangements include: • Joint manufacture of assemblies or sub-assemblies of the specific equipment

under tender for internal use or for export; • Collaboration in design, development and production; • Training of specialist staff, provision of manuals/computer software etc; • Technology transfer; and • Joint research and development. Proposals should take into consideration the following factors: a. Commercial Sustainability: Offsets are intended to lead to sustainable activities.

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b. Price: It must be recognised that defence offsets are not to result in any price increase above that which would have resulted had an offset requirement not been imposed. c. Technology: To be acceptable as defence offsets proposals they must be of a level of technological sophistication at least equivalent to that of the goods and/or services to be purchased. d. New Work: Offsets shall represent new opportunities for New Zealand industry. That is, they shall not be continuations of existing practice established prior to the award of the applicable contract. This provision does not apply to activities, which, at the time of their establishment were declared to be for future offset purposes. Evaluation Criteria: Offsets - in the sense of measures used to encourage local development by requiring domestic content - will in general not be imposed, sought or considered as a factor in the qualification, selection, evaluation or award of the contract. However, the New Zealand Industrial Involvement Programme (NZII) may be used as a discriminator when all other factors are equal. There may also be valid strategic reasons for giving additional weighting to NZ industry, for example, local maintenance facilities may have value in life cycle equipment management. Voluntary Aspect of Offsets: Any programme involving local industry is voluntary, must be commercially sustainable and not increase the price of the project.

However, tenderers are encouraged to examine opportunities with local industries that have the potential to reduce the cost of the procurement or the through life cost of the ownership of the equipment purchased.

Threshold: Defence operates two procurement programmes for the purchase of equipment and services:-

1) The Fixed Asset Acquisition Programme (FAAP). FAAP is administered by each of the three services under general NZDF guidance and covers projects estimated to cost less than NZ$7m ($5m). In addition, the services individually seek supplies of goods and services in general support of their activities.

2) The Capital Equipment Programme (CEP). The New Zealand MoD implements an ‘industry involvement’ policy for

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military equipment purchased under the Capital Equipment Programme (CEP) and valued at more than NZ$7m ($5m).

NZII programmes may be offered for supplies to defence under the FAAP or the CEP. However, because of the cost to the supplier of developing NZII programmes, and the high level of local involvement in FAAP supplies, Defence believes that NZII is most likely to be economical for projects under the CEP, i.e. for projects managed by the MoD. There is an assumption that NZII programmes are associated with CEP (major) projects. Quota: Agencies are not required to demand offset proposals in tenders by overseas suppliers for government contracts. However, benefits will generally be sought at a level of 30 percent of the imported content value of the contract. The level of NZIP (viz: where New Zealand and/or Australian industry participate in the manufacture of goods and/or the supply of services) will be established in the contract. Where the level of NZIP exceeds 30 percent of contract value defence may, at its discretion, waive all or part of the obligation to provide offsets. Where the level of NZIP is less than 30 percent the MoD may request that the supplier supplement the NZIP with additional offsets. Payment milestones will be allocated to the successful achievement and delivery of the local industry programme. Penalties: By negotiation. Period: The time for the discharge of offsets will be contained within the contract or Deed of Agreement and unless specified must be acquitted within 5 years. Multipliers: The multiplying factor will be agreed and apportioned at time of the issue of the RfP or some such other time as agreed between defence and the prospective supplier. Job creation is not a prime requirement. The preference is for NZIP and defence offsets in terms of their benefit to defence. There are three qualifying categories (levels). Each category carries a rating (multiplier). The process of categorisation will be applied equally to NZIP and defence offsets.

1) Level Three Activity.

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A level three activity is one which is directly associated with the equipment being procured and which provides unique capability for the manufacture or through-life support of that equipment. A level three activity qualifies for a multiplier of 3.

2) Level Two Activity.

A level two activity is not associated with the equipment being purchased, but provides unique capability for the through-life support of other existing defence equipment. Level two activities qualify for a multiplier of 2.

3) Level One Activity.

A level one activity is any other activity of defence relevance. Level one activity qualifies for a multiplier of 1. Pre-Offsets: There may be occasions when a supplier wishes to place offset opportunities in New Zealand in advance of a tender being issued. Under such circumstances Defence is prepared to consider recording a credit in favour of the supplier against future contract obligations. The offsets must be related to a forthcoming acquisition by defence. Speculative bids may be made against acquisitions which have not yet been confirmed. In this event, should the acquisition not proceed or be awarded to someone else the credit will be transferable to other projects. Offsets placed in advance of contract award may be subject to an agreed multiplier at the time of placement. Offset credits will cease to be redeemable five years following the date of placement. Special Relationship - New Zealand and Australia and Singapore: Under the Closer Economic Partnership (CEP) Agreement, New Zealand and Singapore have agreed not to impose, seek or consider offsets in relation to government procurement from New Zealand or Singapore suppliers. The Acquisition Division is responsible for the implementation of government procurement policy on local industry involvement in defence contracts and encourages overseas bidders to look for the involvement of local (New Zealand, Australia, Singapore, Chile and Brunei) companies on a sound commercial basis and to the benefit of the Division's customer. The CEP Agreement defines offsets as "measures used to encourage local development or improve the balance of payments accounts by requiring domestic content, licensing of technology, investment, countertrade or similar requirements".

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New Zealand and Australia have agreed Under Article 11 of the Closer Economic Relations (CER) Trade Agreement not to require offsets in relation to Australian and New Zealand content in government purchases. The New Zealand Government's purchasing policy aims to give full and fair opportunity for local industry to compete. The policy also has regard to the mutual commitments New Zealand and Australia have made under the Australia and New Zealand Closer Economic Relations Treaty (ANZCERTA) and the Government Procurement Agreement (GPA) - to give each other's domestic suppliers equal treatment in government purchasing. Accordingly, the government's direction to departments to accord full and fair opportunity to local industry applies to both New Zealand and Australian goods and services. To facilitate the implementation of this policy, tenderers should indicate in their tender the level of New Zealand and/or Australian content of their offer. In accordance with the mutual commitments under ANZCERTA, New Zealand does not seek defence offsets in relation to the Australian content of purchases, and exports between New Zealand and Australia do not qualify as defence offsets. While New Zealand defence offsets will not normally be satisfied by activities undertaken by Australian industry, defence may accept Australian activities as defence offsets in certain cases. These occur when;

• the defence offset activity provides benefit to defence,

• the activity is undertaken with an Australian company working on the procurement project under consideration, and is project related, and

• Defence have agreed to the participation, and to the proposed defence offset programme, prior to the commencement of the activity.

Further Information: Each element of a defence offsets programme which is undertaken in New Zealand will be valued on its actual New Zealand content. Where the defence offset is derived off-shore, its value will be the cost a New Zealand company or organisation would be required to pay for that offset activity had it been provided commercially. The following details are typical activities that are acceptable as defence offsets. The list is not intended to be limiting and other activities will be considered. For this reason, this guide does not develop tight definitions of defence offset activities. Rather, it outlines the activities which may best meet the NZII objectives. To qualify for defence offsets, Research and Development (R&D) is limited to; a. Applied Research - work undertaken for the advancement of knowledge with a specific, practical, Defence-oriented application in view, or b. Experimental Development - systematic work for the purpose of creating new or improved existing materials, systems, devices, products, processes or services.

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R&D activities could include: industrial or mathematical modelling; industrial or mathematical design or design development; operational research; computer software development or product development. Proposals must include: a. how the proposed activity meets the definition of R&D; b. whether activity is Applied Research or Experimental Development; c. where the ultimate ownership of intellectual property would reside; d. whether local commercialisation of the R&D is proposed; and if so e. the nature of the commercialisation together with any royalties paid or waived; f. the value of the New Zealand content in the R&D contract. The forms of technology transfer which are acceptable as Defence Offsets include, but are not limited to: a. patents, licenses, software, technical data packs, process instructions and continuing access to relevant off-shore expertise and data; b. equipment and resources which are not available in New Zealand on normal commercial terms. The technology provided will be valued on the basis of its commercial worth to the New Zealand organisation receiving it. That is, the value will be the price the information would be worth on the open market. To confirm this value, defence may seek an independent valuation of the technology from other international suppliers of equivalent technology. Proposals for technology transfer must indicate how they meet the requirements of the guidelines. Joint Ventures: A Joint Venture is the participation by the Supplier in association with New Zealand Industry, in an activity intended to promote or develop a New Zealand capability, or to employ a New Zealand capability in activities, which it would otherwise not have undertaken. To be eligible as a defence offset the Joint Venture activity must be of defence relevance, should comply with the requirements expressed in the guidelines, and should be reflected in an appropriate commercial entity or commercial arrangement. It is expected that the New Zealand participants would be involved in conceptual design, development and manufacture in the collaborative arrangement. Each participant would normally be the design authority for that portion of the development which they perform and ownership of the design rights for each party's development would be vested exclusively in these parties. Proposals must indicate fully the nature of the proposed venture including partners (local and off-shore), share and risk, whether future manufacture is intended in New

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Zealand and how the proposal meets the guidelines. The proposal must also provide data to assist the determination of the value of this element. Training: This is the transfer of skills and/or knowledge, relevant to the technology content of the procurement but which is in excess of that normally supplied to the user and is not available locally. Training involving basic vocational education or training in normal commercial activities, such as staff rotation, manufacturing or product familiarisation and support is specifically excluded, as is training of local companies in areas associated with the manufacture of the products being supplied for the project. To be approved, activities should fulfil all of the following: a. be initiated or substantially supported by an off-shore supplier; b. assist in the dissemination of scarce skills related to advanced technology; c. be of sufficiently advanced standing to be able to embrace contemporary technology and sound business practices. Exports and Export Marketing: Defence Offsets are available for the export of New Zealand-made products or services of defence relevance. To be considered as a defence offset such exports must be facilitated by the off-shore company and must be to new business for the exporter. Overseas marketing of appropriate New Zealand products and/or services by the off-shore supplier, or by a third party at the off-shore supplier's instigation, is acceptable as defence offsets. Such activity must afford new opportunities for local products or services of an acceptable level of technology and defence relevance. Mutuality: The government of New Zealand encourages overseas bidders to look for the involvement of Australian, Singaporean, Chilean and Bruneian companies on a sound commercial basis and to the benefit of the buyer.

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Nigeria

[07/11] There are no guidelines. There have been irregular requests for direct offset comprising co-production, assembly, and parts production of the military equipment purchased. The management agency for these initiatives is the Defence Industrial Corporation of Nigeria (DICON). There have also been requests for technology transfer at a fairly basic level. DICON encourages local production and domestic procurement of military items such as small arms and ammunition; technology is wanted to upgrade these facilities. On the civil side Nigeria’s Federal Government insists that foreign oil firms use local resources in their operations. Local content must guarantee employment to Nigerian workers in the oil industry. The government considers countertrade arrangements and buy-back schemes as strategies for conserving foreign exchange earnings. Therefore it encourages companies to undertake industrial projects by sourcing machinery and equipment from overseas suppliers through such arrangements on a medium and long-term basis. However, countertrade arrangements and buy-back schemes are not permitted for the importation of consumer goods.

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Norway

[10/11] Anticipated Policy Changes Norway is yet to decide finally how to comply with Directive 2009/81/EC but new regulations are expected to be announced in January 2012. Article 346 will offer possibilities for industrial cooperation programs but neither industrial cooperation nor offsets will be mentioned in the new law. The quota will probably remain unchanged at 100 percent of purchase contract value. Multipliers are expected to remain unchanged in the 0.1 – 5 range, except for technology transfer, which will become 1 - 3 instead of 1 - 2.5.

================================ Norway has introduced regulations (they are no longer guidelines) that require suppliers of major defence procurements to provide contracts to Norwegian industry to a larger degree than before. The scope of acceptable industrial co-operation activities has been broadened to include defence and security-related projects, as well as important dual-use activities. The Norwegian Ministry of Defence has overall responsibility for establishing and implementing IC arrangements. The Norwegian Defence Research Establishment (FFI) plays an advisory and supporting role with regard to Industrial Cooperation Agreements (ICAs). The Norwegian Defence Materiel Agency (NDMA) is responsible for following up ICAs on behalf of the MoD after they have been signed. It evaluates claims and issues approvals. The acquisition authority must not sign a contract with a supplier until an Industrial Co-operation Agreement between MoD and the supplier has been finally negotiated. Other advisory bodies are HQ Defence Command Norway, Ministry of Trade and Industry, the Norwegian Industrial and Regional Development Fund (SND), The Confederation of Norwegian Business and Industry (NHO)/Norwegian Defence Industry Group (NFL) and Federation of Norwegian Manufacturing Industries (TBL). These advisory bodies and the relevant firms have continuously provided the ministry with evaluations and suggestions. The Joint Procurement Division (JPD) has assumed responsibility for all materiel investment projects. The JPD monitors progress after industrial co-operation agreements have been signed. For acquisitions where considerable upgrades and maintenance of equipment are expected, the bidder must commit to implement industrial cooperation for all potential

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future contracts when signing the main contract. This is accomplished by establishing a long term ICA when signing the main contract. Objectives: Direct offset, foreign investment, the building up of a domestic defence-related industry, or acquiring technology transfer where there is no incentive for further involvement by the foreign partner, are unlikely to qualify for credits. Industrial cooperation in Norway is mostly concerned with making products on a system or subsystem level and with forming international agreements between companies or governments to acquire technology co-operation, rather than with technology transfer. Agreements between governments should involve planned acquisitions in the obligor’s home country, where Norwegian companies should be allowed to compete on equal terms with domestic industry. Industrial co-operation projects are primarily sought for the following sectors:

1. Information and communication technology; 2. System integration and architecture; 3. Missile technology and autonomous weapon and sensor systems; 4. Underwater technology and sensors; 5. Simulation technology; 6. Weapon and missile propulsion technology, ammunition and military explosives; 7. Material technology; 8. Maritime technology.

Category I Strategic projects: This category consists of projects that are considered to be of strategic importance to both the Norwegian Armed Forces/national security and Norwegian industry. At least 50 percent of the commitment will be required for this category. Category II Non-strategic defence or security-related projects: Category II is for defence-related projects that comprise military materiel and services, as well as related technology mainly used by the armed forces. Security-related projects comprise protection against threats to society or other vital security interests. Category III Dual use projects: Category III includes projects relevant to both the civilian and military sectors, but where the military application demands certain additional requirements. Also, projects comprising development of expertise and technology in the civilian sector in areas that may become important to the armed forces in the future. The maximum commitment for this category is 25 percent.

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Credit Banking: Obligors may transfer excess credits in categories I and II to a banking agreement, if approved by the MoD. For particularly important strategic projects, the obligor may request continued crediting after the obligation has been fulfilled. Banked credits may be transferred to other business units within the same industrial group (with minimum 50 percent obligor ownership). Transfer to third parties will be approved only in special cases. The maximum credit transfer permissible is 40 percent of a particular ICA commitment. The validity period for banked credits is to be specified in the banking agreement, but the maximum is five years. The MoD might approve swapping arrangements in special cases. Life Cycle Requirement: For acquisitions where upgrades, updates and maintenance of the equipment are expected, the supplier must commit to implement industrial co-operation in relation to all potential future contracts related to the equipment when entering into the main contract. This is done by establishing a long term Industrial Co-operation Agreement when entering into the main contract. Evaluation Criteria: Although cost, performance, and time of delivery are the essential criteria in the evaluation of offers, the MoD will put considerable emphasis on the contractor’s proposed industrial co-operation plan in the overall evaluation. The past performance of an obligor is an important consideration. There is no formal evaluation formula. Threshold: Industrial Co-operation Agreements are mandatory for all foreign acquisitions that involve contract values of NOK 50m ($9.3m) or more. A supplier which has several contracts with the armed forces, each below the threshold, will acquire an IC obligation if they together exceed the threshold within a rolling five-year period. In relation to acquisitions of which the contract value is NOK 500m or more, the MoD will, in co-operation with the Armed Forces, the industry and other affected parties, develop a plan for industrial co-operation at an early stage, which may be included in the invitation to offer. In relation to acquisitions of which the contract value is less than NOK 500m, an industrial co-operation plan could be developed if the acquisition is such that it seems likely that Norwegian industry will be able to provide substantial parts of the delivery in co-operation with foreign suppliers. In addition, it should be possible to establish

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strategic co-operation agreements between the Norwegian industry and the foreign supplier so that the acquisition provides an important contribution to maintenance or development of the competences of the Norwegian industry in areas of importance to the Armed Forces. Quota: 100 percent of foreign content value. Penalties: Penalties may be negotiated, but the minimum penalty will always be 10 percent. There is no specific maximum. An obligor would need to have a first-rate track record to agree terms at the minimum level. All penalties for non-fulfilment are mandatory and non-liquidating. The penalty at a milestone may be delayed until the end of the fulfilment period provided a bank guarantee is issued. The guarantee will be cashed if milestones are not met. Failure to fulfil obligations submitted under the evaluation process and not completed by the expiry period of the contract will be considered a breach of commitment and lead to the exclusion of the supplier from future purchase contracts until such time as the obligation is fulfilled. Existing approved credits may be revoked. Fulfilment Period and Milestones: The fulfilment period is open to negotiation but the number of milestones is less flexible. However, the time line of the milestones, as well as the requirement at each milestone, is open to negotiation:

Between 3 and 5 years - minimum of 1 milestone Between 5 and 8 years - minimum of 2 milestones Between 8 and 10 years - minimum of 3 milestones More than 10 years - minimum of 4 milestones

Multipliers: The maximum multiplier available for technology transfer is 2.5. The government has created a new category for technology cooperation, which has a multiplier of up to 5. This will be obtainable when a foreign partner cooperates on nearly equal terms in developing next generation products. If the Norwegian partner is classified as a medium sized or small business (SME), a multiplier of 1.3 or 1.5 is applied in addition to the following: The maximum cumulative multiplier would be 6.

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Part 1: a) Technology co-operation 1.0 – 5.0 b) Marketing assistance 0.1 – 2.0 c) Research and development co-operation 1.0 – 5.0 d) Procurement of products 1.0 e) Transfer of technology 1.0 – 2.5 f) Investments 1.0 – 5.0

Part 2: The SME multiplier would depend on the size of the Norwegian partner: – Large enterprise 1.0 – Medium sized enterprise 1.3 to 1.5 ( < 250 employees and <= 50 M€ earnings or <= 43 M€ balance ) – Small enterprise 1.5 ( < 50 employees and <= 10 M€ earnings or <= 10 M€ balance ) NB: The final multiplier is obtained by multiplying the two components.

The practice of raising the fulfilment value of a project from 80 percent to 100 percent when local content is more than 80 percent, remains in place. When local content is less than 20 percent, the project will not qualify for credit. Pre-Offset: Pre-offset refers to implementing offset activities before any procurement contract is signed. Pre-offset activity must be agreed in advance. NORDAC - NORDIC FRAMEWORK AGREEMENT: Agreement between Denmark, Finland, Norway, and Sweden: An agreement concerning support for Industrial Co-operation in the Defence Materiel Area came into force between these countries on 24th November 2002. The document takes into account inter-dependence within the field of defence materiel and the consequential effect of mergers in the industry. It seeks to create a political and legal framework necessary to facilitate industrial operations in order to promote more competitive and robust Nordic defence industries and of supporting these industries as home market suppliers. Recognition is to be given to closer industrial co-operation in the defence materiel area, supported by a ‘more flexible approach’ to applying national industrial compensation requirements.

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A Governmental Consultation Group has been established to ensure the efficient operation of the Agreement. The following has been agreed with regard to Industrial Compensation:





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Oman

[07/11]

Oman is soon to announce changes to its ‘Partnership for Development’ (PDF) guidelines. Details are provided below but are subject to change until officially announced.

Oman may require that companies involved in defence-related transactions participate in its PDF program. A PDF office was established by the MoD in 2000 to evaluate and manage programs. Responsibility was transferred to the Ministry of Commerce & Industry in 2009.

Contractors are asked to provide a feasibility study and business plan. Projects must be approved and implementation commenced within five years of the initial obligation being incurred, though negotiation is possible. Third parties may discharge obligations. Contractors with obligations are encouraged to collaborative with each other to achieve major projects. The Ministry of Commerce & Industry has established a "One-Stop-Shop" for assisting domestic and foreign investors in obtaining all required clearances. Objectives: The PDF program is intended to maximise benefits between the MoD and defence contractors by encouraging indirect foreign investment and joint ventures with domestic companies. The U.S./Oman Free Trade Agreement allows U.S. firms (with some exceptions) to establish and fully own a business in Oman without a local partner.

Oman is looking at the development of infrastructure, capital assets, and SMEs. There is an SME Directorate General in the Ministry of Commerce and Industry.

Direct offset is also wanted. In practice this is restricted to MRO activities. The most important objective is for sustainable industries and the transfer of skills. Projects should be for products and services not previously produced in Oman. They should not require additional funds from the government. Financial investments in PDF funds are an alternative means of achieving offset credits. Threshold: Defence goods and services that cost more than OMR 5m (c. US$13m). Cumulative acquisitions totalling more than this threshold within 12 months will also qualify.

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Quota: Usually the quota will be for not less than 50 percent of the main Supply Contract value. About half should be discharged as direct offsets (MRO), or with a significant proportion of indirects supporting the MoD’s operational requirements. The new guidelines may amend this to 30-50 percent, depending on the procurement. Funding of PDF Programme: The Secretariat is financed by a fee of 0.25 per cent of the obligation value, levied on the obligor. The fee is usually payable immediately upon award of the Main Contract. Multipliers: Oman is soon to announce significantly higher multipliers. Multipliers of 1-5 will be achievable on exports if contractors meet their business plan, and could reach an aggregate that is considerably more. Meanwhile several multipliers may apply to a single project but the cumulative total may not exceed 5. Another category – Wholesale & Retail – has been added, with a multiplier of 1.25.

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Penalties: At present liquidated damages are for 10 percent of any shortfall within the fulfilment period. New guidelines soon to be introduced are expected to allow the Ministry of Commerce and Industry to reduce the liquidated damages to 5 percent. Delinquent obligors at the first milestone will be warned that the ministry will call in the performance bond if the business plan is not properly progressing. A final warning will be issued at the second milestone. The performance bond will be cashed only at the termination of the offset contract period. A flexible approach is usually applied and damages are not usually imposed unless as a means of last resort.

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Pakistan [01/11]

There are no formal guidelines. The Defence Export Production Organization (DEPO) is making serious efforts to work with foreign partners to take advantage of offset opportunities in the defence sector. Pakistan has entered into partnership and outsourcing programmes with several countries, in particular with China. There are 29 companies under DEPO influence and there are many private production companies in the defence sector. The government seeks an informal offset relationship with defence manufacturers whenever the country acquires military hardware. It is for the supplier to take the initiative in generating proposals, preferably with projects that will offer employment or cater for the design of ordnance systems. Local production programmes through joint ventures are particularly important. There is a preference for compensation trade (buy-backs), which is referred to as ‘buy-back offset’. Technology transfer needs to be present but Pakistan is amenable to plans submitted by the obligor, particularly when they cover upgrading, renewals, and maintenance. Foreign contractors are recommended to execute compensation agreements directly with the beneficiary, not with the government, to avoid the stifling level of government bureaucracy. Countertrade The Trading Corp. Of Pakistan (TCP), an agency of the Ministry of Commerce, has undergone substantial changes in its role as a representative of the government in international trading. Its mainstay is conventional commodity trading, but it now also has adopted the role of a facilitator of commodity exchanges.

Rules for Private Commodity Exchange Arrangements with Foreign Parties.

(i) It is permissible for private parties in Pakistan to enter into a Commodity Exchange Arrangement (CEA) with foreign parties (including undertakings controlled by foreign governments and public sector agencies but excluding foreign governments). The Ministry of Commerce will prescribe, from time to time, a negative list of commodities which cannot be exported under this scheme.

(ii) Applications for conducting transactions through Private Commodity Exchange Arrangements may be submitted to the Exchange Policy Department (Policy Division, Central Directorate, Karachi) through banks authorised to deal in foreign exchange, for approval, along with copies of Export/Import Registration Certificates, the past performance showing the value of exports made by the applicant in each year during the preceding three financial years duly certified by their bankers, and the

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recommendation of the bank whether in view of its past dealings, the party may be given permission to conduct business through private Commodity Exchange Arrangements. Exporters having less than three continuous years export performance would not be eligible. A copy of the agreement entered into between the party in Pakistan and the counter-party in the concerned country abroad will also be required to be submitted. In the case of both exports and imports by the party in Pakistan, the normal laws, regulations, rules governing such export/import will continue to be applicable. The approvals will be given by the State Bank in.

(iii) The party permitted to undertake business transactions under such an arrangement will be exempt from the existing requirement of drawing the documents of title to export cargo to the order of an Authorised Dealer in cases of export, and it can also receive the import documents from the counter-party direct. Authorised Dealers shall also be required to certify Form “E” in the modified form. The parties will ensure that imports at least equal to the value of exports are made by them within the period prescribed from time to time for repatriation of export proceeds, failing which the value of exports should be repatriated in convertible foreign currency within the prescribed period.

(iv) The party will nominate an Authorised Dealer to maintain a proforma account in its name for the purpose of accounting the trade transactions. Separate proforma accounts will be maintained in respect of each Commodity Exchange Arrangement. The concerned Authorised Dealer will be required to submit a monthly statement in duplicate in the prescribed form (Appendix V- 23 D) in respect of each CEA showing:-

a) the value of goods exported, along with the copies of invoice and duplicate ‘E’ Forms; b) the value of goods imported from abroad, along with copies of the invoices, non-negotiable copies of bills of lading and photocopies of Exchange Control copy of Customs Bills of Entry evidencing import of the goods into the country;

c) the opening and closing balances.

When forwarding the above statements to the State Bank of Pakistan, the Authorised Dealer will code the items exported/imported.

(v) No forward exchange facility either for export or import transactions shall be admissible. Export under the scheme is not eligible for the purpose of the Export Refinance Scheme.

(vi) The withholding tax leviable on the export as per the Notifications issued by the Central Board of Revenue from time to time will be recovered by the Authorised Dealers at the time of passing the entry in the account in respect of exports from Pakistan.

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The Pakistan Export Finance Guarantee Agency:

The Pakistan Export Finance Guarantee Agency (PEFGA), set up in July 2001, began operating in October 2001. It aims to provide a range of trade-finance guarantees and credit facilities to exporters, focusing on small and medium-sized exporters. The PEFGA was established with the help of the Asian Development Bank, two nationalised banks and 11 private commercial banks. It offers various schemes including a pre-shipment export-finance-guarantee scheme, guarantees for an exporter's entire turnover, pre-shipment finance and working capital guarantees for countertrade or barter exports and a post-shipment insurance facility.

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Peru [10/10]

Offset guidelines were launched August 2010. They apply to all types of defence acquisitions from foreign sources, including Government to Government contracts.

Authority for the policy is provided by Directive No. 08-2010 MINDEF / SG / VRD.

The guidelines are implemented by the MoD and monitored by the MoD Directorate General of Defence Material Resources. The Minister of Defence can delegate functions to the Deputy Minister for Resources for Defence when deemed necessary, and to the Director General Materials Resources Defence.

When projects are of a military nature, Committee members shall be appointed by order of the Minister for Resources for Defence, and the committee will be chaired by the Director General Materials Resources Defence.

When projects are non-military, an Evaluation Committee will be appointed under the Deputy Minister for Resources for Defence and the General Director of Material Resources.

The policy is designed to be flexible, allowing for basic issues such as multipliers and non-fulfilment penalties to be negotiable.

Objectives:

Access to new technologies for both the private and public sectors.

Indirect offsets should comprise investment for the railway, hydroelectric, and energy sectors as well as for education, health, and the environment.

The Framework Agreement:

The Framework Agreement will be signed prior to the signing of the contract to supply goods or services and will take effect upon the signing of the Supply Contract. It shall contain at least: • A general description of the offsets and how they will be developed; • Their value expressed as a percentage; • Details of the areas of interest or eligible activities; • The deadline for implementation; • A note of the offset quota to be fulfilled and whether the projects will be direct or indirect; • The eligibility criteria; • Details of compliance guarantees; • A schedule of implementation; • The penalties for noncompliance. The Framework Agreement should be signed not later than 30 days after the granting of the bid. Then:- • The Directorate General of Material Resources for Defence will raise the draft Framework Agreement for endorsement by the Vice Minister of Resources for

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Defence; • The Vice Minister of Resources for Defence shall submit the draft Framework Agreement to the Minister of Defence for signature with the foreign supplier. The Specific Agreement:

The Specific Agreement for offsets shall be signed between the same parties as the Framework Agreement. Specific Agreements must include the following details: • The activities to be developed; • Specific obligations by the parties; • The schedules of compliance; • The multipliers or the assessment criteria for each activity; • How to prove compliance and release the corresponding credits; • The success indicators. There will be a specific agreement for each approved project. Proposal Timeline:

Proposals for offsets for up to 30 percent of the obligation are to be submitted for approval within six months of signing the Framework Agreement. The obligor has two years following the signing of the framework agreement to submit proposals for the remaining 70 percent.

Evaluation Criteria:

A committee composed of not more than 4 members will be formed to assess direct and indirect offset projects. When projects are of a military nature the members shall be presided over by the General Director of Material Resources for Defence. When projects are non military (indirect) representatives from the defence sector shall be appointed by the Deputy Minister of Resources for Defence. The General Director of Material Resources for Defence will preside. Private-sector representatives will be co-opted. A ‘Final Evaluation Committee’ for offset projects will consist of a representative of the appropriate armed forces, legal counsel, and the General Director of Material Resources for Defence, who will preside. A ‘Committee of Negotiation and Approval’ shall be formed. Its composition will depend on whether it is considering direct or indirect projects. There will be no more than 6 members.

For military projects the committee will be chaired by the Deputy Minister of Resources for Defence.

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FLOWCHART for the EVALUATION, NEGOTIATION, APPROVAL and COMPLETION of INDIRECT COMPENSATION PROJECTS:

Quota:

100 percent of purchase contract value;

Threshold:

The threshold is 5,600 UIT. The UIT is a benchmark figure established to maintain taxes, deductions, etc. at constant proportions to income. The equivalent value in USD is c$7m

(NB: For consumables the threshold is $14m).

The MoD is authorised to waive offsets in exceptional circumstances.

Direct / Indirect:

Benefits associated with the defence sector are ‘direct’; benefits for non-defence projects in the state-owned and private-sector are ‘indirect’.

The target is for 40 percent of benefits by way of direct offsets and 60 percent as indirects, though the ratios are flexible.

Multipliers:

To be determined by negotiation within a range of 0.5 to 5.0, with incremental levels of 0.5.

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(See ‘Cash Contributions’ below).

Penalties:

By negotiation, with blacklisting when there are none.

When a contractor can demonstrate its integrity in discharging obligations the penalty may be negligible, with blacklisting as an alternative should there be non-performance.

Credit banking:

Credit banking is permissible. The duration is negotiable with the Offset Project Approval Negotiation Committee for both pre-performance and over-achievement.

Cash Contributions:

Offsets in the form of “cash contributions” will only be acceptable when the MoD uses consultancy services from a third party/company to help with a specific offset agreement. The contractor shall pay the consultant company within 30 days of receiving the first contractual payment from the MoD.

Cash Contribution Ranges: Obligation (USD)

For acquisitions between $6.72m and $10m 40,000

For acquisitions between $10m and $80m 0.4 percent of the CV

For acquisitions above $80m 0.3 percent of the CV

There will a multiplier of 5 for cash contributions.

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Philippines

[07/08] The Philippines relies for its countertrade and offset guidelines on Executive Order No. 120, a lengthy Presidential Order established August 19th, 1993. The administration and management authority is the Philippines International Trading Corporation (PITC). PITC operates as an independent agency. The Chairman is an appointee of the President and holds a cabinet-level position. Countertrade (see ‘terminology’ below) became mandatory for acquisitions for the Armed Forces of the Philippines (AFP) in 2002. In late 2006 a Directive issued by the Secretary for National Defence effectively swept aside the powers of PITC to impose mandatory countertrade on procurements by the AFP and the national police, varying it to a “best efforts” basis. This technically breached Executive Order 120, which states that countertrade is mandatory at the 50 percent level. Circular N°. 7, dated 21st December 2007, titled “Amended Guidelines in the Implementation of Countertrade for Dept. of National Defence [DND] Procurement Contracts” regularised the anomaly created by the previous circular, N° 19 of 2006. ‘Best efforts’ is now properly mandated. Circular N°. 7 makes clear that it is the policy of the DND to use countertrade on a case-by-case basis as a supplemental tool for the import of foreign capital equipment, products, goods, and services that cost more than $1m. The DND and the Armed Forces of the Philippines shall adopt countertrade as a supplemental tool ‘as much as they can’. The “best efforts” approach has at all times applied to other civil sector procurement agencies for the importation of capital equipment, machinery, products, goods, and services. PITC also negotiates and administers bilateral barters with regional governments. These are usually commodity exchanges conducted by the National Food Authority. Under these bilateral agreements the Central Banks of both countries act as clearing agents. There also have been “Debt for Goods” arrangements with several creditor countries of the Philippines. PITC’s countertrade role has been overtaken by other concerns, for instance, as importer and supplier of affordable pharmaceuticals to the health sector. Countertrade now represents a minority interest of the agency. Terminology used in the Philippines: Countertrade in the Philippines is a general term for an international transaction premised on some form of reciprocity, including offset. Offset is a commitment on the primary supplier to introduce industrial and commercial activities for the benefit of the buyer. In practice military procurements tend to require a mix of counterpurchase and technology transfer.

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Counterpurchase covers a basket of agricultural, manufactured, and semi-manufactured goods. The foreign supplier commits to purchase Philippines’s goods or services to be exported to the supplier’s country or to a third country. Compensation structures are where the foreign supplier is paid with the resulting products or goods manufactured with the machinery or equipment supplied. A Trade for Debt Swap is a loan or credit accommodation obtained by a government agency or corporation from a foreign government or creditor that has remained outstanding and unpaid, and is arranged to be settled in full or part by the sale of products, goods, or services provided by a third party. Offset is where the foreign supplier commits to introduce investments or technology transfer, or to assist in establishing new industries or improving existing industries to generate or to save foreign exchange or increase employment. This may, or may not, be related to the items procured. Build-Operate-Transfer (BOT) and its variations is sometimes applied to major infrastructure contracts. This term refers to an arrangement whereby a project company or consortium (of local and foreign companies) is established to finance, construct and operate the project for a definite period of time. A combination of local and foreign funds ensures project financing at the end of the contract period. Thresholds: The threshold applied to all government-owned and controlled corporations is $1m. Quota: In general the countertrade obligation of foreign suppliers should not be less than 50 percent of the value of their supply contract with the government, though procurements by the AFP are subject to the following minimum commitments: Value of Supply Contract Countertrade Commitment $1 – 20m 100 percent of Supply Contract Value Over $20m - $40m 90 -do- Over $40m - $60m 80 -do- Over $60m - $80m 70 -do- Over $80m - $100m 60 -do- Over $100m 80 -do- Penalties: Performance guarantees and penalties for non-performance shall be incorporated in the countertrade agreement to be signed between the supplier and PITC. The bank guarantee must be submitted within 30 days of contract. Penalties range from 5 percent to 100 percent of the unfulfilled obligation.

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Fulfilment Period: The obligor is usually allowed two to three years within which to fulfil the obligation. Monitoring Fees: The following monitoring and accreditation fees are payable to PITC upon fulfilment of the obligation: � For capital goods imports: 1.5 percent of the value of the countertrade obligation; � For commodities: 0.25 percent of the value of the countertrade obligation. Multipliers: Offset multipliers are based on investment value. There may be incremental multipliers but they may not exceed 6 in total. Foreign investments may be in the form of cash, assets, or property other than bonds or debt instruments. They must originate from abroad. Equity investments may not be withdrawn, transferred, or assigned within five years from the date of investment. Basic multipliers: a) Pioneer industries 4 b) Non pioneer industries 2 Incremental multipliers:

a) Export winners listed in the Investment Priority Plan Basic multiplier + 2

b) In less developed areas of the Philippines Basic multiplier + 2

c) In areas outside Manila (other than Less Developed Areas) Basic multiplier + 1

For Technology transfer: Multipliers are based on the costs of transfer arrangements. Basic multiplier 3 Incremental multipliers:



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For Research & Development: The R&D must be associated with scientific or technological activity falling within the Philippines Science & Technology Agenda for National Development. The results must become the property of the Philippine beneficiary and if commercially viable will be exploited under ‘normal commercial terms’. Basic multiplier 3 No incremental multipliers. Upgrading of Training and Skills: Basic multiplier 3 No incremental multipliers. Donations & Grants: For government or private institutions registered in the Philippines, covering eligible areas of scientific, technological, research, social and environmental development programmes or projects. Basic multiplier 2 Incremental multipliers:




Environmental Projects: Projects relating to the preservation, rehabilitation, or development of the Philippines’ ecological balance and the rational use of resources for sustainable development. Basic multiplier 3 No incremental multipliers. Credit Banking: PITC’s approval should be obtained beforehand. Only offset (not counterpurchase) credits can be banked and applied towards future obligations. They will be valid for three years from the date of approval.

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Banked credits may be assigned or transferred once, but they must be used within the three year period. Only the foreign party that performed or facilitated the offset activity can bank credits for future use. Pre-Performance : Pre-offset activity is allowed.

Flow chart showing the integration of countertrade in the procurement process:

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Poland

[10/11] Anticipated Policy Changes The current offset regulations will no longer be applied as before but Poland has yet to declare its hand. The emerging offset regulations are expected to continue to require a domestic build program, perhaps by implication. Selling significantly into Poland will demand serious engagement through joint ventures, acquisitions, licensing, and investments. It is envisaged that:

• The $5m threshold will be abolished. Everything will require offset, even much smaller deals.

• The 100 percent quota will become 80 percent.

• Multipliers will vanish.

• Poland will no longer accept indirect offsets, only direct. The definition of “direct” will narrow. In the emerging offset regulations obligors will need to focus specifically on the systems they are selling, and demonstrate their relevance to Poland. Non-defence projects with a defence company will no longer qualify for credits.

• Proposals will no longer need to pass through all of the government committees. The Ministry of Economy will lead discussions on benefits to the rest of the sectors, but vendors will need to work with the MoD to build weapon systems and provide servicing in-country.

• Pre-offsets will be eliminated.

• Obligations may no longer be exchanged. Either contractors perform what they have committed to perform or they will take penalties — and the penalties will be horrendous. Negotiations in the event of non-fulfilment may be possible but will be tough.

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Poland’s offset policies were first codified under an Act dated 10th September 1999. A Cabinet Decree dated 1st August 2000 re-defined the multipliers, and a Regulation of the Council of Ministers dated 2nd July 2002 re-classified them. An amendment to the original Act of 1999 is dated 8th December 2006. This was authorised by the President on 22 December, and took effect 13th January 2007 with entirely new regulations.

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The Council of Ministers (Cabinet) approved new multipliers May 2007, putting into place the final legislative process. The previous regulations shall be applied to offset agreements concluded before 13th January 2007. There are 11 offset agreements falling into that category. Details of offset agreements are to be made public with regard to their value, subject, obligor, beneficiary, and the terms of performance of individual offset commitments resulting from the offset agreement. Negotiations are conducted by the Ministry of Economy (MoE). Their Offset Committee shall within 45 days from submission of particulars inform the awarding entity (usually the Ministry of National Defence) of the guidelines governing the offset requirement. Those guidelines shall specify in particular the criteria used to evaluate the offset offer, the expected time for evaluating the offset offer and for negotiating the offset agreement, and the proposed weight of the offset offer in the evaluation process. The Offset Committee is Chaired by the Chairman of the Council of Ministers and is composed of members representing the Ministries of Economic Affairs, Public Finance, Foreign Affairs, Internal Affairs, the Environment, Labour, Transport, Telecommunications, Health, Agriculture and Rural Development, National Defence, Internal Security Agency, Office of Public Procurement, Science, Treasury. The foreign contractor shall submit its offset offer to the MoE coterminous with the supply contract. The supply contract may not be signed off in advance of the offset agreement. The offset offer must be presented in writing in the Polish language. The contractor shall submit a semi-annual progress report, presented no later than the 31st July each year, with the annual report presented not later than 31st March. Exemption to the Offset Law: Parliament has exempted the requirement for offsets in contracts for the supply of military equipment for Polish forces serving overseas. Objectives: The offset agreement shall ensure participation of foreign suppliers in the restructure and development of the economy. In particular for:

1. the defence industry; 2. the opening of new export markets; 3. technology transfer; 4. R&D; 5. development of a knowledge-based economy through institutions of higher

education and R&D facilities; 6. employment creation - especially in regions with high unemployment.

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Threshold: €5m - including aggregated orders to this value over a three year period. It is not permitted to divide the delivery contract, to underrate its value, or to postpone the date of concluding the delivery contract to avoid this requirement. Multipliers: The multiplier range is 0.5 to 5.0. For direct offsets they are 1.0-2.0; for indirect they are 0.5-1.5., but there are exceptions for projects of particular value, where they may be 2.0-5.0. Annex 3 (see below), which allows for the largest multipliers, applies to specific cases justified by the interests of the economy or for security and defence of the state. These areas are defined in accordance with the National Development Strategy for 2007-2015 and the Polish Defence Industry Consolidation and Support Program Projects for 2006-2010. Retaining jobs in the defence sector is particularly important; areas under threat of unemployment are earmarked for attention. SMEs and companies involved in R&D and research will benefit. The multipliers awarded under Annexes 1 and 2 (direct and indirect offsets, respectively) have been simplified. Detailed descriptions of an obligor’s commitments are no longer necessary. When the supply of equipment or services by the beneficiary of an offset project exceeds 80 percent of value by way of foreign content, it may be disqualified from qualifying for offset credits. If the foreign content is lower than 20 percent then 100 percent of its value will count towards the commitment. When the supply is equal or more than 20 percent but less than 80 percent of value by way of foreign content, then the value shall be determined by deducting the value of the foreign input. However, when an offset commitment requires for technical reasons the use of foreign materials or components exceeding 80 percent in value, the Minister of Economy may, at his discretion, approve it for crediting purposes.

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Pre-Performance Offset: Pre-performance credits are available by negotiation for projects that start within 36 months of the award of the supply contract, but only to the main prime contractor and not to third parties. Pre-offset activity attracts a lower multiplier. Quota: Minimum 100 percent of purchase contract value.

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The total value of direct offset commitments shall not be less than half of the offset commitment. Direct / Indirect: Licensed Polish defence contractors in the private sector may qualify for receiving direct offset activities when they manufacture weapons or other products for military or police purposes. Indirect offsets may be executed by any other company registered in Poland provided the activities are compatible with the Offset Law. Period: The MoE shall define the period for performance of the offset agreement. The period cannot exceed ten years. Penalties: Regulations concerning liabilities to penalties in the original offset law have been removed so that any penalties are now determined by negotiations with the obligor. However, for any entirely unperformed obligation the penalty is 100 percent. The contractor may be asked to provide a performance bond securing the performance of the offset commitments in the form of a bank guarantee. This should be in place no later than the day of execution of the offset agreement.

Source: Lockheed Martin Aeronautics Company

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Qatar

[04/07]

Qatar has no formal offset policy and has not seen major arms purchases. It does, however, see offset benefits as a key discriminator in the procurement process and the country is asking for benefits for both civil and defence acquisitions, including oil and gas concessions. Staple guidelines covering quotas, thresholds, multipliers, or penalties for non-fulfilment, are not provided. In practise quota levels in the region of 15-20 percent of contract value have been called for. All requirements are dealt with during the negotiating phase, but on an ad hoc basis. An informal policy was developed and is implemented by the Foundation for Education, Science and Community Development, at Education City. On the civil side, winning concessions for oil and gas require significant investments in the country. An up-front demonstration of commitment should be in evidence prior to the award of contract. Pre-performance offset is regarded as critical to a company’s success in securing an order. It has become a condition, but there is no guarantee of the outcome. Nor is there any credit facility at this time. The Science & Technology Park and a proposed science park at Education City are both suitable areas for investment. They are to have medical schools, engineering schools, and educational facilities in other disciplines. BOT: Qatar has launched the Tatweer Infrastructure Company to drive the growth of Qatar as well as other countries in the Gulf region through the use of Build-Operate-Transfer projects and similar methods. The intention is to generate revenues from an off-take purchaser who compensates the project company for delivery of output, or for provision of a project service. The financiers will provide non-recourse or limited recourse financing and will, therefore, bear any residual risk together with the project company and its shareholders. To minimize such risk, the financiers will insist on passing the project company risk to the other project participants.

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Tatweer’s principle areas of interest are in power and energy, industrial infrastructure, transportation infrastructure and real estate.

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Romania [10/10]

The ‘Agency for the Compensation of Acquisitions of Special Technique’ took over responsibility for offsets in January 2005. It reports to the Prime Minister’s Office. The agency is tasked with monitoring and supervising the fulfilment of offset obligations and sets the rules and procedures regarding the performance of the offset transactions and any related documentation. Romania introduced new offset guidelines 19th April, 2006 and subsequently initiated some changes affecting penalty provisions, fulfilment periods, and multipliers. The rules regarding pre-offsets were amended in 2010. The obligor is to submit an Eligible Transaction Request (ETR) to the Offset Agency prior to the performance of each project. The Offset Agency will then calculate how beneficial those projects will be for the Romanian economy. The Prime Minister has appointed a Secretary of State to oversee the agency. Major decisions are made in the PM’s office. Purchase contracts will be signed with whichever government agency is making the purchase but the Offset Agency assumes responsibility for overseeing all new offset projects. It will identify acquisitions suitable for offset programmes, and will assign the appropriate multipliers, if any. The agreement between the obligor and the Offset Agency will characterize the nature of direct and indirect offsets, and those definitions will be integrated into a business plan. The offset agreement must be signed by the obligor with the Offset Agency within 60 days of the purchase contract. Foreign contractors have 60 days to sign the offset agreement once the purchase contract has been agreed. The obligor must satisfy the Offset Agency that a proper agreement exists to support a Romanian beneficiary and that causality will result from the project. Legal Framework:

Emergency Government Ordinance No. 189/2002, regarding the offset operations related to procurement contracts for defence, public order and national security needs

Published in the Official Gazette 942 / 23.12.2002

Law No. 354/2003 for approval of the Emergency Government Ordinance No. 189/2002 with its modifications and completions


Law No. 146/2004 for modification of the Emergency Government Ordinance No. 189/2002

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Government Ordinance No. 30/2005 for modification and completion of the Emergency Government Ordinance No. 189/2002


Law No. 19/2006 for approval of the Government Ordinance No. 30/2005 for modification and completion of the Emergency Government Ordinance No. 189/2002 with its modifications and completions


Government Decision No. 1814/2005 regarding the organization and functioning of the Agency


Government Decision No. 459/2006 regarding the procedural norms for applying the law


Government Decision No. 955/2006 of July 26, 2006

Government Emergency Ordinance #7/2010, March 2010 (re pre-offsets)

Objectives: To retain jobs within the defence industry and to see Romanian defence capacities improved within the Romarm group of defence industries. Romarm is a state-owned holding company comprising 15 firms and a research institute. Technology transfer, mostly for military application, and the export of Romanian products. Long term defence infrastructure development is required. On the indirect side Romania has an interest in ecology. Other priority sectors include shipbuilding and automotives. Threshold: €3m Quota: At least 80 percent of contract value, but it is negotiable.

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Direct / Indirect: While both direct and indirect projects are acceptable, direct offsets must account for at least 25 percent of the total value of the obligation. Indirect offsets, however, must result in causality worth not less than 20 percent of the obligation value. Direct offsets comprise any defence, national security, or aerospace projects. Indirect offsets will typically be required in areas known as “high tech,” “very high tech,” and “other.” “High tech,” for instance, will comprise the shipbuilding, aerospace, and automotive sectors. “Very high tech” covers IT services and electronics. Penalties: Delays in fulfilling offset obligations will incur a penalty of 0.01 percent per day on the unsatisfied portion. All liability to the daily penalty will be capped at such time as the offset agreement reaches the termination date. In most cases, this would be two years after delivery of the equipment specified in the procurement contract. The penalty for missing an annual milestone is capped at 10 percent of offset contract value. A liquidated damages penalty of 10 percent for failure to complete the project by the designated date of determination also applies. The liquidated damages portion must be backed by a performance bond. The maximum penalty that a delinquent obligor may face is therefore 20 percent. The penalty accumulates from the 1st of January of the year following the commencement period and becomes payable not earlier than the January 1st after the second year delivery milestone. A performance bond for 10 percent of the offset obligation must be in place within 45 days of the offset contract. The bond amount required drops in line with performance but remains at not less than 10 percent of the outstanding offset obligation at any one time. The bond would be exercised at the end of the agreement. A contractor who fails to meet deadlines is deemed to be in default and may face blacklisting for a period of five years. Fulfilment Period: The fulfilment period will correspond to the duration of the purchase contract. An extension may be granted for up to 2 years for special projects, up to a maximum of ten years in total. Pre-Offsets and Credit Banking: Obligors may accumulate offset credits. They will be calculated in Romanian currency and may be held in the obligor’s account for two years.

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The multipliers for pre-offsets will be determined by the Agency for Compensation according to the importance and complexity of the projects. Pre-performance multipliers will apply for activities in new priority areas whose development is deemed particularly important, such as investment, the purchase of products manufactured in Romania, and marketing assistance.

The multipliers for pre-offsets are:-

I. Investment a) acquisition of shares in the privatization process of a trader 0.5 to 3.0 b) acquisition of shares or cash contribution to capital of a trader 0.5 to 3.0 c) contribution in kind to the capital of a Romanian company from 0.5 to 3.0 d) acquisition of tangible assets, but when the following conditions are fulfilled: (I) the acquired company is from Romanian persons; (Ii) the investment value exceeds the Romanian currency equivalent of €5m; (Iii) investment is to be made from external sources and be maintained for a period at least five years 0.5 to 3.0 II. Buying products made in Romania a) Purchase of goods and services made in aerospace sector 0.5 to 1.4 b) Purchase of goods and services & work done in other areas not included in part a) above. 0.5 to 1.3 III. Marketing Assistance - Conducting training courses for training of employees of Romanian economic companies and providing technical assistance from 0.5 to 1.5

Subject to complex circumstances, outlined below, obligors can transfer credits between three categories known as A, B, and C. The category designates under which Annex the project falls and denotes the range of the multipliers available to that type of project. Categories A, B, and C then are attached to Annexes (or Lists) 1, 2, and 3 respectively (see paragraph on Multipliers). Conditions for moving credits between categories:- Pre-offset credits achieved in category A may be transferred to other projects in Category A and to Category B. But pre-offset credits achieved in category B cannot be transferred to category A. Pre-offset credits are bankable for 7 years. They are transferable to other parties. To ensure that an obligor shall have a minimum 50 percent involvement in a new commitment, pre-offset credits are only transferable for up to half the value of a new indirect offset contract.

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For directs, obligors may transfer 100 percent of the value of the obligation. When fulfilling an offset obligation undertaken under the supply contract though, the obligor is restricted to a transfer of pre-offset credits worth not more than 30 percent of the obligation. Unsuccessful contenders then may well be left holding some unusable credits. Excess credits (as distinct to pre-offset credits) obtained by applying a multiplier of more than 1 may be transferred between categories. Excess credits from activities under category C may be transferred to category A but will be diminished in value by 30 percent. Excess credits transferred from category B to category A may only be performed within specified limits. Additional Cost: The Offset Agency is required by law to be self financing. Obligors must contribute towards the Offset Agency’s upkeep by paying in instalments over the lifetime of the contract a fee understood to be 1 percent of the offset commitment on contracts above $100m, and 2 percent on smaller contracts. Multipliers: Pre-offsets and post-contract offsets are eligible for multipliers. The multipliers range from 0.5 to 5.0. (See Pre-Offsets, above). The category designates under which Annex the project falls and denotes the range of the multipliers available to that type of project. Categories A and B offer a restricted range that is far from tempting. Meaningful multipliers are in Category C, which covers matters of particular interest to the national economy in both direct and indirect sectors. Offset multipliers for Category C are more than 2. Only one multiplier may be awarded.

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Russia [10/11]

An amendment to the Federal Law on Placement (law No. 79-ФЗ) of orders for delivering goods, carrying out works, and rendering services for federal and municipal needs, was carried on 21 April 2011. Article 55.3. makes provision for suppliers to provide the Russian Federation with additional ‘technological and economic advantages’. Although there are no prescribed offset or countertrade policies Russia is receptive to industrial participation for major defence procurements. The procurement of foreign military equipment may therefore result in a requirement for domestic-build programs with technology transfer. Russia has been active with countries such as China and Vietnam in clearing account programmes, either to settle historic debt to Russia or to settle for new purchases. With China these are in the fields of power plants and for other major civil requirements; with Vietnam they involve agricultural items and defence acquisitions. These debts are sometimes transferable and have therefore acquired a discounted value, though the rules for satisfying them with goods are complex. The clearing account technique employed between Russia and China usually requires that 50 percent of the procurement cost be settled under conventional terms and 50 percent retained in a blocked evidence account held by Bank of China in the name of Vneshconobank (Russia’s “Bank of Foreign and Economic Affairs”). The blocked funds are released by way of payment upon production of Bills of Lading evidencing exports from China. The clearing account is effectively a blocked account rather than an escrow account. Oboronimpex (Defence Import Export) is only one of several approved Russian clearing entities created, in part, to manage these clearing arrangements. These bodies do have other defence-related interests. Oboronimpex is 50 percent owned by Rosoboronexport and 25 percent owned by Vnesheconombank, a specialized state financial institution and one of the oldest Russian banks. Armed with clearing dollars that have to be liquidated, the agency will typically approach a trader or a similar offtaker, such as Cargill, with experience in trading the goods available for export. The offtaker will pay Oboronimpex and is reimbursed for a matched amount from the blocked fund account. The clearing entity in this triangular arrangement levies a disagio on Oboronimpex for its service.

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Saudi Arabia [10/11]

The guidelines reflect a general framework or guiding principle rather than inflexible rules, and it is difficult to determine or to predict the extent to which they may be applied each time. Offset obligations may apply to government contracts in the defence or non-defence sectors. Offsets for civil procurements are less frequently demanded and decisions would be made by the Council of Ministers based on the ability of the economy to absorb projects, preferably under 50/50 joint ventures. Joint ventures are encouraged with 50 percent ownership by the foreign partners. The investment may take the form of cash or capital equipment. Saudi Arabia has three offset oversight organisations, two of which supervise the Saudi offset program.

1. The Ministerial Committee established 1983 consists of the Ministers of Finance, Industry, Planning and Commerce, and two state ministers who are senior members of the cabinet. This steering committee establishes the program’s major policy objectives.

2. The Economic Offset Committee was established in 1984 and facilitates joint

ventures. The committee is chaired by a member of the royal family and its members also consist of representatives of the ministries of Finance, Industry, Planning and Commerce, individuals representing the private sector, and the Managing Director of the Saudi Basic Industries Corporation (SABIC). This committee facilitates joint ventures with foreign partners and signs the offset agreements.

3. The Economic Offset Secretariat, established in 1985, carries out the day-to-

day business of the Offset Committee. Its duty is to liaise with Saudi government agencies to streamline license procedures, and to support existing offset obligors in the areas of marketing, manpower and training.

Objectives: The objective is to expand the industrial base, increase participation by the private sector, and to secure technology transfer and investment opportunities for Saudi nationals. There is a much higher emphasis now on employment of Saudi nationals. The focus is on creating professional jobs. Work in the educational and health sectors will qualify. Desired offset projects are for:- Manufacturing and service projects that support the supply contracts;

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IT, electronics, communications, renewable energy, water desalination systems, environment, health & pharmaceuticals, spare parts manufacturing, high value added downstream petrochemicals, training and higher education. Approval Criteria: The approval criterion includes the profitability of the projects as well as the effect on import substitution, job creation, training, and added value. An offset commitment may be discharged either through a new project, or by expanding existing ventures or their capabilities. Quota: The minimum quota is for 40 percent of supply contract value. Direct and Indirect: At least fifty percent of the obligation is to be discharged as direct offset activities related to the acquisition. The purchasing agency will link the supply contract to this requirement. In defence contracts the projects could comprise the manufacture of the military products related to the acquisition, MRO activities, or they could be products and sales that are produced by Saudi companies for the obligor’s international supply chain. The balance may be indirects. These are any non-defence projects that are approved by the Offset Committee. Priority sectors for indirects include healthcare, training, higher education, engineering skills, capabilities for the pharmaceuticals sector, IT, electronics, communications, spare parts manufacture, desalinisation, renewable energy. Projects concerning basic petrochemicals will no longer qualify for credits. Threshold: SR 400m ($107m). The MoD is bound by a regulation requiring it to implement an offset program for all military procurement above the threshold, but the Council of Ministers may override the MoD. The threshold also applies to commercial procurements. Commercial offsets for non-military purchases will be subject to the decision of the Council of Ministers on a case-by-case basis. Fulfilment Period:

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The implementation period will be dependent on the value of the offset obligation. Direct offset commitments must be completed within the supply contract period. The offset commitment in total should be satisfied in full no later than ten years from the date of signing the supply contract.

• Indirect obligations of less than $53m will receive five years; • Obligations of $53m-$267m must be completed in seven years; • Projects above that figure have ten years.

Development Funds: The Saudi Offset Limited Partnership (SOLP) is an approved fund managed by DevCorp International that focuses on investments in Saudi Arabia that earn offset credits for contractors to the Saudi government. Other Project Development Agencies are: �Economic Offset Secretariat (EOS) / Consultants. �British Offset Office. �Thales. �Volunteer Contractors are: Technologies; Dynamics; McDonnell Douglas. Multipliers: Employment of Saudi nationals beyond the Ministry of Labour set requirements - 1-3 SME’s, depending upon the project type and number of Saudis it employs - 1-3 Training of Saudi manpower - 3 In-kind donations - 1-2 Cash donations - 4 Research & Development - 1-4 Credits obtained through multipliers cannot exceed 25 percent of the total offset commitment. Investment in training, education, R&D and other non-revenue achieving activities, will qualify for higher multipliers. Penalties: The offset contract does not contain penalty clauses. Foreign defence contractors have expressed concern about the absence of a draft offset agreement as this leaves ill-defined the level of potential liability.

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The Saudi Government is reluctant to press for liquidated damages when contractors are in default of their contractual offset obligations. When delays and defaults are serious they will usually seek an acceptable settlement. The incentive to proceed to satisfy offset obligations is driven by the continuing interest to be a supplier to the Kingdom. Credit Banking: Banked credits may be traded between parties without limitation. There are no time limits. Umbrella Agreements: Prime contractors may negotiate umbrella agreements with the Ministry of Defence & Aviation (MODA). They cover all future supply contracts with MODA that exceed S.R. 400m and reduce obligations from 40 percent to 35 percent of supply contract value.

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Serbia and Macedonia and Bosnia [07/08]

In Serbia and Macedonia military procurement is not expected to be significant and countertrade is still the rule in some cases. No official offset policy is in place. Serbia, Macedonia and Bosnia historically participated in McDonnell Douglas and Boeing countertrades and have a history of debt conversion schemes. Macedonia began to request more formalised countertrade in 2000. In 2008 the Ministry of Defence indicated that investment in a domestic production facility could decide the competition for the supply of armoured patrol vehicles. Macedonia has an offset/countertrade requirement for 100 percent of supply contract value for this acquisition. Abrupt political changes disrupt policy formation and deals are a matter of connections, whether conducted through structured trade finance (STF), countertrade or offset. Macedonia also uses pre-finance countertrade. The states are, however, looking at countertrade guidelines and STF vehicles.

Source: BNI Group, Inc.

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Singapore [04/11]

There is no formal industrial participation policy and no guidelines. However, foreign defence contractors are encouraged to join with domestic companies for local support activities and system integration. Concepts such as penalties, quotas, and multipliers are sometimes employed but are negotiable on a case-by-case basis. Non-performance penalties at the 4 to 5 percent level have occasionally been demanded. Industrial participation is often specified on a project basis and this tends to be equivalent to a quota in the 25 percent range. A sophisticated level of technology transfer is required. The expression ‘offset’ is not acceptable. Industrial participation is not an eligible consideration during the competitive bidding process. Sometimes defence procurement is made via national defence companies established covertly. There are credible reports that these companies sometimes demand local assembly. The Singapore government will tell the foreign defence contractor clearly what is wanted by way of industrial participation and will identify that in the tender documents. The contractor will be asked to identify the respective values of any technology transfer, R&D, or any other benefit that may be asked for. The government will negotiate a value for the programme from the very beginning. The Future Systems Directorate will take the lead in exploring and experimenting with how technology can be harnessed to develop superior and innovative concepts. The administrating authority is the Defence Science and Technology Agency [DSTA], a division of MINDEF. Benefits are for members of the Singapore Technology Engineering Group of Companies.

Pioneer Status Tax Incentive Scheme for Countertrade Activities The government launched the Countertrade Pioneer Status Scheme in 1986 to promote Singapore as a base for countertrade activities, though none of these activities are undertaken by the government of Singapore. The scheme offers qualifying companies full exemption from tax on profits arising from countertrade activities for an initial period of five years. This may be extended by negotiation. Profits are fully exempted from corporate income tax for a period of 5-10 years. The current rate of corporate income tax is 20 percent. Dividends: In Singapore there are no withholding taxes levied on dividends. Instead dividends are taxed at 20 percent with a tax credit being given for any corporate tax

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levied on the profits out of which dividends are paid. Where there is a shortfall between the tax credit and the 20 percent charge levied on dividends, the shortfall must be made up by the company paying the dividend and not by the shareholder receiving it. In the case of Pioneer Status companies the shortfall is exempt from any further taxation. To qualify for the incentive countertrading firms must set up a permanent establishment in Singapore and must engage only in countertrade activities. They should have established international trading links and should have at least one leg of each countertrade transaction—whether financial or physical movement of goods—routed through Singapore. Firms with at least 30 percent Singaporean ownership may seek approval from IE Singapore for double tax deductions for the following expenses incurred in overseas marketing programmes: The cost of brochures for overseas marketing activities and market surveys, participation in trade fairs, setting up of overseas trade offices, market-development activities, advertising in approved export-promotion publications, feasibility studies, product certification and export packaging.

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Slovenia [10/11]

Anticipated Policy Changes Slovenia is preparing new guidelines. The focus will be on direct offset and dual-use technologies. The main text contains no direct reference to Article 346 but it is mentioned in the preamble. The threshold will be increased significantly from the current level of €400,000. Banking and pre-offset credit is not covered. The government will lower the current multiplier range of 1-7, removing incentives to take on certain types of projects and discouraging sub-contracting.

================================ Slovenia issued guidelines for implementing ‘countertrade’ in March 2000. A year later an inter-departmental Offset Working Group was set up to administer the policy. The implementing and management authority is the MoD. The Offset Working Group is a ‘higher lever authority’ that approves agreements and evaluates projects. The Ministry of Economic Affairs administers the guidelines. Implementation is the responsibility of the Offset Commission, which also addresses crediting and issues concerning performance guarantees. The Offset Commission meets every three months. The legal framework for Slovenian offset procedures comprises:

• The Law on basic Equipping of the Slovenian Armed Forces for the years 1994-2003

• The Public Procurement Act • The Slovenian Offset Guidelines.

Offsets are an obligatory part of a procurement contract. The “Public Procurement Act” offers the government the right to handle defence procurement processes confidentially. This means that the MoD may invite only pre-selected companies to submit their proposals and offset programmes. The MoD is obliged to require offset when acquisitions exceed the threshold. A frequent criticism is that Working Groups are convened many times. With each sitting they tend to require obligors to submit additional documentation. Obligors are facing big delays in approvals as decisions can be delayed for many years. The Offset Working Group is an inter-ministerial body. Its members are appointed by the Government upon on the recommendation of the respective ministries. It also includes a representative of the Chamber of Commerce of Slovenia. The Working Group is made up of permanent and non-permanent members. Representatives of the Ministry of Economic Relations and Development, the

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Ministry for Economic Affairs, the Ministry of Finance, the Ministry of Defence and a representative of the Chamber of Commerce of Slovenia are permanent members. Representatives of the procurers/end-users who submit applications for approval of accomplishment of offset obligations to the Working Group are non-permanent members. No more than one non-permanent representative of procurers/end-users is present at Working Group meetings. The Working Group carries out the following tasks:

evaluation and acknowledgement of offset programmes determination of coefficient values for individual goods and services evaluation and acknowledgement of exported goods and services which will be

counted as offsets determination of the basis upon which the value of offsets whose value is not

clearly determined in authentic documents approval of applications for the accomplishment of offset obligations discussion and approval of implementation reports of offset programmes decisions on all exceptions to Directive provisions arbitration in disputes between executors of the implementation of offset

programmes in the event that a solution to the dispute is not specifically defined in the contract

decisions on the realization of Directives for the implementation of offsets in cases that are not directly defined in the Directives

reports to the Government on the implementation of offset programmes The Working Group carries out evaluation and confirmation of the applications submitted every three months and reports on the implementation of offset programmes once a year. It must report on its work and the implementation of offset programmes to the Government at least once a year. Slovenia has released domestic defence suppliers from liability as obligors when import content exceeds the $550,000 offset threshold. Instead, the liability now falls to the foreign supplier. Bidders are asked to submit offset proposals to the MoD Basic Acquisition and Equipping Agency (BAEA). The MoD submits the offset programme and a recommendation for multipliers to the Offset Commission. If any additional clarification or completion of additional details is needed, the MoD contacts the offset obligor. Approved proposals are forwarded to the Inter-Ministerial Commission for Basic Procurement provided that the procurement is financed from sources defined in the Law on Basic Equipping of Slovenian Armed Forces for Years 1994-2003. Negotiations regarding the sales contract take place at the same time as the preparation and the finalization of the offset proposal. The offset programme is attached to the procurement contract. The obligor should prepare its offset programme together with a commitment to implement it. Details may be re-addressed later on. In general there will be a flexible approach by the authorities and it will be left to the discretion of the management of

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Slovenian companies to make decisions with regard to the project on offer. These need not necessarily be in the defence sector. Support is needed for military education and health systems, which can extend to development of industry generally. The guidelines maintain that the cost of fulfilling an offset obligation should not increase the contract price, and the programme should reflect benefits to the vendor and to the domestic economy. Before signing an offset programme, the buyer/end-user must obtain approval for the programme from the Offset Working Group. The buyer/end-user must report once a year on the implementation of the offset programme to the Offset Working Group. NB: The guidelines tend to be applied arbitrarily. The requirements detailed below depict practice rather than what is in them. The department in the Ministry of Economic Affairs responsible for administering the guidelines works on a part-time basis. Communication with those in charge is not easy. Objectives: The objective of offset policy and offset programmes is to provide assurance to business companies in the Republic of Slovenia of:

increased export of goods and the opening of new markets long-term economic ties high technology and knowledge transfer investment in research and development long-term capital investment economically efficient investment of public resources

Creating new employment opportunities is a priority. There are work opportunities in the opto-electics arena and for the purchase of rolling stock for the railways. NB: In practice most credits are generated from export-related activities. Threshold: Obligations will apply to acquisitions worth more than €400,000. Obligations for more than €20m require a minimum of five executed offset projects. No beneficiary can receive more than €10m of economic benefits within a period of 3 years. Quota: The guidelines specify that the amount of the obligation will generally be 100 percent of contract value.

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20 percent of programmes must be identified in advance. Evaluation: Offset programmes are not considered in the selection criteria but they are a condition for tender participation. Multipliers: The guidelines allow for a flexible approach and recommend that in general multipliers up to 7 should be awarded. In practice the average multiplier for direct offset is 2.4 and for indirect 1.2. Exports of military equipment = 1-5 Indirect offsets (civil) = 1-3 Technology transfer = 1-7 Direct foreign investment = 1-7 For projects where the added value is less than 50 percent the multiplier may be less than 1. The trend is to restrict rewards to the lower end of the ranges and in could be less than 1. However, there have been some cases where more generous multipliers have been essential to complete projects, and deals have been agreed at fixed credit values rather than using multipliers. Education and training, and technology transfer — if supplied “free of charge” — are more likely to earn a multiple of 7. Foreign Direct Investment in the defence industry will earn top of the range. Fulfilment Period: 1-5 years from contract date. Penalties: The question of non-fulfilment penalties is not developed clearly in the guidelines. Offset agreements require a bank guarantee. The amount of guarantee is for negotiation; it tends to start at 10 percent but sometimes settles at 5 percent. Annual offset fulfilment milestones must be backed by a bank guaranty. Pre-performance: The export of goods and services carried out up to 3 years before the signing of the contract can be considered if they would not have occurred otherwise. Banking:

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Offset credits may be banked for up to three years. They are not transferable and may be used only for future obligations. Practice Note: The requirement may comprise a mixture of offset and countertrade. Sometimes some of the obligation can be discharged by facilitating exports of Slovenian produce to any destination. In general the proportion of direct and indirect offsets is negotiable. The benefits should be spread around, and the size of each indirect project typically is very small. The policy has been has been the subject of serious criticism:-

• The legal system doesn’t always function properly; • There are no specific industrial priorities and problematic evaluation of the

benefits by ministry officials can lead to the rejection of sound proposals; • Obligations are sometimes imposed on foreign sub-suppliers to domestic

companies, making things very complicated.

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South Africa [04/10]

The Armaments Corporation of South Africa (ARMSCOR) manages Defence Industrial Participation (DIP) programmes on the defence side, and the Department of Trade and Industry (DTI) manages National Industrial Participation (NIP) programmes in the commercial or non-defence sectors.

The National Industrial Participation Programme (NIPP) is applicable to commercial sales to government and seeks to leverage economic benefits and support the development of industry by effectively utilising government procurement. The Industrial Participation (IP) programme is mandatory when the value of the acquisition is above the threshold.

There is no legislation or Act of Parliament regulating the programme other than a Cabinet directive issued in 1997.

There is a complex mix of non-discretionary requirements that obligors have to accept. These comprise the NIP and DIP programmes as well as the Black Economic Empowerment (BEE) requirement and the Competitive Supplier Development Programme (CSDP). Details are provided below.

The Competitive Supplier Development Programme (CSDP):

The Competitive Supplier Development Programme (CSDP) is a Department of Public Enterprises initiative intended to capture local supplier benefits on expenditures in the civil and commercial sectors’ infrastructure programmes. CSDP is managed by ‘State Owned Enterprises’ (SOE’s).

State-owned utilities such as Eskom, Transnet, and PBMR have signed up to the scheme, replacing the NIP requirements with this programme. However, CSDP is not yet applicable to other government agencies such as those responsible for South African Airways, Metrorail, PetroSA, or the police, which are still subject to the NIP programme.

Where the CSDP is applied it is integral to the bidding process, counting as 25 percent towards Eskom tenders, though Transnet demands a different percentage. The targets are also different.

The government has announced that under a new plan NIPP and CSDP will be merged into a single programme. Although the NIPP and the CSDP will be combined, the integration of the two offset programmes might not automatically translate to the same 30 percent target under the current NIP policy being transposed on to the CSDP projects, which until now has not included any firm localisation targets.

The present NIPP process is conducted post-tender – offset requirements are negotiated after a tender has been awarded. The NIPP will be strengthened to make it

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a pre-tender process in relation to strategic tenders, with domestic production and supplier development requirements built up-front.

The CSDP is about added national value, not just about localising aspects of the products. There are no clear prescribed obligations as it is different for each state-owned enterprise, nor is there a clear accounting methodology. One objective is to increase capacity, capability and competitiveness of the local supply base. Another aim is to contribute to economic growth, skills development, employment creation, and broad-based BEE.

There is no mechanism in place at this time to allow obligors who have performed on the NIP side to migrate to the CSDP programme. Nor is there a formal policy in place yet for transferring over credits properly earned.

Changes would have to be made to the current Preferential Procurement Policy Framework Act to achieve the following objectives:

• Align discretionary points with broad-based black economic-empowerment (BBBEE) codes and local procurement.

• Eliminate "import fronting", whereby small BEE firms are used to supply fully imported goods and services.

• The designation of "fleets" and other "critical industries" for domestic production.

• Allow price matching by domestic producers.

CSDP Areas where there will be Opportunities for the Fleet Procurement Model:

Aerospace purchases by South African Airways and the Department of Defence;

Locomotives, coaches and carriages for Transnet and the Passenger Rail Agency of South Africa;

Components for the coal-fired power stations being built by Eskom;

Systems for the future nuclear build programme;

Set-top boxes for digital migration; and the purchases of antiretroviral pharmaceuticals.

The Action Plan Identifies the Following Areas for Specific Focus:

Aerospace, metals fabrication, capital and transport equipment sectors; green and energy saving industries; agro-processing; automotives, components, medium and heavy commercial vehicles; downstream mineral beneficiation; plastics, pharmaceuticals and chemicals; clothing, textiles, footwear and leather; bio-fuels; forestry, paper and pulp, furniture; cultural industries and tourism; business process outsourcing; nuclear; and advanced materials.

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The main Action Plan objective began April 1, 2010, and should complete March 31, 2013.

Black Economic Empowerment (BEE):

Black Economic Empowerment (BEE) is a significant requirement and obligors must treat it seriously. The intention is to leverage procurements to benefit black South Africans.

For the next two years - 2010 and 2011 - the BEE requirement in the DIP programme is established at 25.1 percent of the value of the offset obligation. After two years, the black shareholding will rise to 35.1 percent. Two years later, the level will be 50.1 percent. These requirements do not apply to earlier defence contracts.

State-owned enterprises such as Denel are recognised as BEEs for the purposes of DIP. The DTI has issued so-called BEE Codes of Good Practice, which became effective in February 2007. Armscor, too, has a dedicated BEE division that supports inquiries for this type of activity.

Contractors have to fulfil seven categories of activities. The vendor will be rated on BEE implementation at 10-20 percent as part of the tender score. In theory, imported products are exempt, but some contractors say that that is not their experience. The government is expected to require that ten out of 100 points in any government tender should be attributed to the BEE score for larger procurements and for smaller procurements of up to ZAR 20m the figure will be 20 points. The law proposing this is in process.

The BEE policy adopts a scorecard approach developed mainly by the DTI, but the scorecard is valid for only twelve months. Obligors must get their BEE scorecards approved.

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BEE Scorecard:

How B-BBEE scoring works…The 7 Pillars

Customer Recognition Level

100 pts

Ownership

ManagementControl

EmploymentEquity

SkillsDevelopment

PreferentialProcurement

EnterpriseDevelopment

Socio-EconomicDevelopment

BEE Elements Score Weighting

20 pts

10 pts

15 pts

15 pts

20 pts

15 pts

5 pts

Qualification BEE CompanyStatus

≥ 100 pts Level 1 135%

85-100 pts Level 2 125%

75-85 pts Level 3 110%

65-75 pts Level 4 100%

55-65 pts Level 5 80%

45-55 pts Level 6 60%

40-45 pts Level 7 50%

30-40 pts Level 8 10%

<30 pts Level 9 0%

1

2

3

4

5

6

7

Source: Curveball Consulting

Contractors are expected to:

Have black partners for at least 25 percent of equity,

Have a 40-50 percent black management force,

Have a labour force that is, over time, up to 80 percent black,

Allocate 3 percent of the payroll for ‘skills development’,

Spend 3 percent of net profits (after tax) on SME business development,

Spend 1 percent of net profits (after tax) on ‘social development’. NIP Policy:

National Industrial Participation (NIP) projects, which used to be unrelated to the tender, must now match the policy of S. Africa’s Competitive Supplier Development Programme (CSDP) (see above). The aim is to reduce the number of conflicting programmes and to allow for the development of an industry related to the procurement. This approach will apply particularly strongly to larger procurements.

Technology transfer will become more prominent. Direct NIP is recent development that allows for offsets directly associated with the procurement and its associated industry, such as components, spares or services which are contained within the purchase contract and which are to be supplied through arrangements with local companies.

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Indirect NIP refers to activities where the offset is carried out in industries not related to that of the procurement.

A fast-track approval and implementation process is to be introduced.

Offers of Direct NIP are not a requirement of the evaluation process.

Tender documents will specify whether a project qualifies for Direct NIP, and will identify the projects the DTI would like the supplier to do. When this occurs Direct Nip will be mandatory. A supplier that has been through the approval process can come forward with projects linked to the tender, but this has to be done in a specific way.

NB: Local governments and national governments procure independently and use different systems.

Contractors should undertake the following process:

1. Make contact with the Dept. of Trade & Industry (DTI)

2. Submit a business concept for consideration and approval by the DTI

3. Upon approval of business concept, submit detailed business plan outlining the business concept

4. Sign the IP Agreement with DTI

5. Implement the business plan

6. Submit bi-annual progress reports on approved business plan

The contractor should submit an IP Business Concept/Proposal prior to the award of the tender/contract. Business proposals must reflect new or incremental economic activity. Causality and additionality are important considerations and contractors should demonstrate how this will occur.

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IP Obligations discharged through SPAs are subject to the provision that accrued IP credits in the SPA equal or exceed the obligation, and that SPA projects are export biased.

Additionality & Causality:

The principle of additionality means that all industrial participation proposals must reflect incremental or new business. One of the following must be present in order for a proposal to qualify for credits:

• Investment must be in a new facility or for the expansion of the existing facility.

Investment in an existing facility must demonstrate beyond doubt the added benefit accruing from such investment besides the mere increase in output.

• Export proposals must be for the new products or new markets (new country or new customers).

Causality means that the IP proposals must result directly from the purchase contract.

The IP proposal would not have been initiated had it not been a condition of the purchase contract and a possible component in the adjudication process. The exception is the Strategic Partnership Agreement (SPA).

Furthermore, causality means that each IP project submitted was caused by the seller as a result of an IP obligation or the seller’s direct involvement therein; or that the involvement of the seller in the IP project had influenced such a project to happen within a shorter time period than would have been the case.

Threshold:

The NIP threshold is $10m. This threshold can be reached as follows:

• Any single contract exceeding $10m; or

• Multiple contracts for the same products or services each exceeding $3m awarded to one seller over a 2 year period which in total exceeds $10m; or

• A contract with a renewable option clause, where should the option be exercised the total value will exceed $10m.

Quota:

The Contractor shall commit to participate in the National Industrial Participation Programme (NIPP) to the value of not less than 30 percent of the imported content.

263

The NIP obligation will contain requirements regarding FDI of at least 70 percent and those investments are to create export programmes where the exports generated are for 60 percent or more in project value terms. Over and above that there may be a requirement for ‘procurement exports’, which amounts to a counterpurchase requirement for commodities and manufactured goods.

Objectives:

The origination of new or additional business activities through one or more of the following:

Investment, export opportunities, job creation, increased local sales, Small, Micro, & Medium Enterprises (SMME) and Black Economic Empowerment (BEE) promotion,

R & D and technology transfer.

IP business proposals must reflect new/additional business and may include, but are not limited to, the following models / arrangements:

1. Investments including but not limited to joint ventures, sub-contracting works and licensee production

2. Export promotion of South African value added. Supply partnerships with South African industry to improve competitiveness and establish long-term relations

3. R&D collaboration with South African partner.

The programme aims to contribute towards the achievement of one or more of the following national economic objectives:

a) sustainable economic growth

b) establishment of new trading partners

c) Small Medium Micro Enterprise development

d) exports of "value added" goods

e) economic advantages for disadvantaged communities

f) Human Resource development

g) technology transfer

h) job creation

i) R & D collaboration & services

j) foreign investment

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k) promotion of Black Economic Empowerment (BEE)

Penalty:

The performance guarantee shall be for 5 percent of the Industrial Participation obligation.

The Seller/Contractor shall within 30 days of the commencement date or signature of the Main/Purchase Agreement, whichever comes first, furnish the DTI with an acceptable performance guarantee. The submission of a performance guarantee is mandatory.

The milestones set out under ‘Fulfilment Period’ will also be used to assess liquidated damages due to the DTI.

Banking:

Surplus credits accruing from the Causal Agreement may be saved and used for discharging future obligations subject to the following conditions:

o valid for four years after the fulfilment period

o only 50 percent of the new obligation can be satisfied with banked credits.

The trading of banked credits is not allowed.

Fulfilment Period & Milestones:

A period of seven years has been identified as the time frame in which to discharge the obligation. However, proposals should have a lifespan beyond the seven-year fulfilment period. The maximum fulfilment period is 10 years (including milestones within this period).

The Contractor shall:

a) discharge at least 30 percent of the aggregate value of the NIP obligation within 3 years of the effective date,

b) discharge of at least 70 percent of the aggregate value of the NIP obligation within 5 years of the effective date,

c) discharge the balance of the aggregate value of the NIP obligation within 7 years of the effective date.

Multipliers and credit values:

All IP Proposals must reflect incremental or new business in order to be considered for IP credits. Existing business or completed projects will not be considered for IP credits.

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Normally, one dollar equals one credit.

However, where there are multipliers, IP credits are determined by the applicable factor in the multiplier. The obligation is calculated in US dollars or the equivalent thereof.

Any entity where the majority or the entire equity (or its equivalent) is beneficially owned by one or more Historically Disadvantaged Individuals (HDI) qualifies for ownership credits.

Credits will only be awarded upon successful performance. The following are the methods used to award credits:

Investment, JV, Sub-Contracting Works, Licensee Production

*LC = Local Content

R&D Collaboration with South African Partners:

A. All direct costs incurred, x 2

OR

B. All revenues generated after commercialisation, x 2

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Example (Source DTI):

A parastatal purchases goods to the value of $100m. The imported content of these goods amounts to $80m. The seller of such goods would therefore incur an Industrial Participation obligation to the value of $24m (30 percent).

The seller would be obliged to submit and implement business projects which would generate IP credits equalling or exceeding the Industrial Participation obligation of $24m.

An acceptable performance guarantee to the value of $1,2m (5 percent) would be required prior to the contract being awarded.

The seller would have seven years to discharge the obligation from the effective date of the IP Agreement.

Defence Industrial Participation (DIP) Policy:

The DIP program is for defence acquisitions. The program is managed by Armscor. The obligations placed upon the supplier are far heavier than for civil acquisitions.

From 2010 DIP will not automatically be applied to commercial off-the-shelf acquisitions (COTS). Armscor will decide how to apply DIP for COTS on a case-by-case basis.

The DIP obligation is the responsibility of the prime contractor until such time as an acceptable DIP agreement has been concluded with either the supplier or its subcontractors. The vendor has the option either to ask Armscor to conclude the DIP agreements with the sub-contractor directly, or with the local prime itself.

Objectives:

In addition to those of the NIP, the objectives are to address specific defence industry goals such as:

Job creation, establishing a sustainable defence industrial base with support capabilities, the promotion of defence exports, and the maintenance of skilled indigenous manufacturing capabilities.

Threshold:

There are two DIP thresholds:

a) The procurement of capital equipment and services for the defence sector where the foreign content value is more than $2m but less than $10m;

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b) Where the procurement vale us more than $10m.

When the supplier is a South African company the $2m DIP threshold will be applied only for single and/or related foreign subcontracts and/or for the same or similar goods or services.

Quota:

a) Defence purchases exceeding US$2m but less than $10m require a DIP obligation of 50 percent of supply contract value.

b) For defence contracts with a value above $10m the requirement for NIP comes into play in addition to the DIP requirements. There will be a DIP obligation of at least 50 percent of contract value and a NIP obligation of at least 30 percent. Therefore the total amount of the IP commitment will be for at least 80 percent of the foreign content portion of supply contract value. There will be two separate agreements. Armscor will manage the DIP commitment, and the DTI will manage the NIP portion.

DIP Performance: Dual use activity is allowed for DIP as long as it involves a defence company and, even when it concerns commercial items, at least maintains defence capabilities.

The focus with direct offset is on technology transfer. For indirects for the defence sector the focus is on the business case, ie: the exports that will result. In either case there must be long term capability and sustainability.

Penalty: The penalty covers 5 percent on DIP and 5 percent on NIP. The obligor may either issue two separate bank guarantees or issue one guarantee for the combined percentage value, which is 10 percent of contract value.

Period & Milestones:

The standard period allowed for discharging obligations is 7 years, although there are exceptions. Additional work will allow another four years to fulfil. For defence acquisitions the milestones are annual.

Multipliers:

There are no multipliers for DIP – a 1 for 1 programme.

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SNAPSHOT:

Illustration:

Foreign content value Obligation is equal to:

≥ USD2m < USD10m = 50% DIP Obligation

≥ USD10m = 50% DIP Obligation plus 30% NIP Obligation

Total = 80% IP Obligation

DEFENCE INDUSTRIAL PARTICIPATION (DIP)

NATIONAL INDUSTRIAL PARTICIPATION (NIP)

- All defence purchases

- Imported content > USD2m

- Defence strategic objectives

- Defence-related industry

- 50% obligation

- 7 years discharge

- 5% penalty

- All government purchases, including defence

- Imported content > USD10m

- National objectives

- Mainly civilian (non-defence) companies

- 30% obligation

- 7 years discharge

- 5% penalty

INDUSTRIAL PARTICIPATION

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DEFENCE INDUSTRIAL PARTICIPATION PROCESS

ARMSCOR ACQUISITION PROGRAMME

IP OBLIGATION

Acq Value ≥ $10m: 30% NIP

Acq Value ≥ $2m: 50% DIP

NIP Agreement dti Process

DIP AgreementOEMA/cor

Bus Plans

Direct DIP-Local Ind Part. (LIP)

-Techn Transfer (TT)

-Investment

-Loan Int Benefit (LIB)

Indirect DIP-Export Sales

-Techn Transfer (TT)

-Investment

-Loan Int Benefit (LIB)

-DIP Contracts with SA Ind

-TTAPS

-Invest/LIB

SA Industry:Execution &

Delivery,

DIP Claims to Armscor

Consideration of Claims

Discharge approved claims against the obligation

Colour Key:

Foreign OEM

Armscor

SA Industry

dti

CAUSAL

ADDITIONAL

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Spain [10/11]

Spain has stated clearly that Article 346 TFUE applies to defence equipment and dual-use equipment for both military and non military security purposes. Defence agreements covering these areas will continue be eligible, in principle, for industrial cooperation.

================================ Spain regards the use of reciprocated programmes linked to military acquisitions as an important accessory and the policy is applied vigorously to promote the interests of the Spanish defence sector. Guidelines are not available and the Ministry of Defence (MoD) relies upon an internal directive provided by the Secretary of State for Defence known as Directive 375/2000, amended under Art. 42. RD 1126/2008 of 4th July. An industrial cooperation policy has been introduced and runs in tandem with the offset policy. The distinction is that in Spain offset is applied to foreign acquisitions, while industrial cooperation is based on the existing capabilities of the Spanish defence sector and its compatibility for entering international collaborative programmes with foreign industries. The decision as to which model to use will depend on the situation, and will be decided case by case. The MoD is responsible for defence policy in co-operation with the Ministry of Science and Technology (MST). The State Secretariat of Defence is responsible for negotiating all acquisitions of defence materials. Under the State Secretariat of Defence the ministry has set up the Dirección General de Armamento y Material (General Directorate of Armament and Material - DGAM), which is responsible for maintaining permanent relationships between the ministry and national industry and for formalising offset agreements. The DGAM reports to the State Secretary of Defence. The Industrial Cooperation Directorate (DICOIN) of Isdefe-Gerencia de Cooperación Industrial (Isdefe) administers the IC policy on behalf of DGAM. Isdefe has four operational divisions of which one is the industrial co-operation division. The Office of External Support is tasked to assist Spanish defence industry in its export efforts and operates as a department of the DGAM. This support typically involves the management of co-operation contracts with foreign companies. Policy has evolved towards securing activities in support of exports of defence-related equipment through agreements with Spanish companies, and providing technical support for the MoD. The support given by Isdefe to the Ministry of Defence in the negotiation and/or Economic and Financial Offer Analysis consists mainly of detailed evaluation of

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economic aspects concerning the final price of the acquisition. It also considers elements of cost, economic conditions, comparative offers, payment schedules and contractual planning. The main objective is to negotiate prices on acceptable terms for the Ministry of Defence. It is the DGAM that tasks Isdefe with the negotiation of industrial cooperation agreements and their follow-up. Isdefe reports to DGAM once the negotiation is ended. It is DGAM that signs industrial cooperation agreements. Objectives: The main policy objectives are:

• The acquisition of technology, directly or indirectly related to the systems acquired.

• The certification of Spanish industry as a supplier of goods and services by foreign companies and organizations.

• The procurement of technology, documentation, etc. for Spanish industry and for the Armed Forces, with regard to maintenance, modifications and updating of weapon systems during their life cycle.

• Staff training in both operational and industrial defence-related aspects as well as in areas of civilian application.

• To provide Spanish industry with productive activities that result in opportunities for employment.

• The improvement of quality assurance techniques and project management.

• Reduction of the deficit in the balance of payments either by an increase in Spanish exports or by the substitution of imports for offsets.

In summary: The Spanish government places importance on R&D as a means for building national capabilities. Import substitution is an important objective. The technologies that Spain requires should correspond to the needs of the Armed Forces. Offset is used strongly as a marketing tool and to secure contracts for domestic industry. Dual use solutions are acceptable, particularly in high technology sectors. Threshold: €1m. This also applies to supplementary purchases throughout the life cycle of the original purchase. One of the requirements of the procurement procedure is the completion of an Industrial Cooperation Agreement (ICA) with the equipment provider acting as prime contractor or subcontractor of a Spanish prime when the supply value is equal to or exceeds the threshold. This is also applicable to foreign suppliers for Government to Government contracts.

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Direct/Indirect: The intention is usually to have as much direct offset as possible, but this varies contract to contract. As a general rule the contractor should accomplish at least 70 percent with direct projects. Semi-directs are acceptable but indirects tend not to exceed 10 percent of the value of the obligation and are accepted in very few cases. When an obligor satisfies the MoD that it is unable to execute benefits for the defence sector then an indirect solution will be negotiated, but the commitment is increased and only activities with suitable technological content will be acceptable. The MoD will not permit offset credits to be awarded for the purchase of Spanish commodities. Quota: No percentage is mentioned in the internal MoD directive. Projects are negotiated case by case, usually for specific industrial objectives deemed to be of high importance. Usually the MoD asks for projects equivalent to 100 percent of contract price and there are frequently other unspecified terms and conditions. Fulfilment Period: Offset obligations must be fulfilled within the lifetime of the supply contract. Multipliers: Multipliers generally are not used. However, evaluation procedures allow the MoD to award credits for projects at higher than normal market value. The consequence is understood to be equivalent to achieving multipliers in the range of 2-5. Penalties: Liquidated damage clauses are applied to all offset agreements and usually are expressed in terms of an increase in the overall commitment or/and a financial punishment. There is typically a liquidated damages clause for 5 to 10 percent of supply contract value, but it is a matter for negotiation. There are regular reviews and penalties are assessed at milestones. Their occurrence will depend on the lifetime of the supply contract. An incremental 10 percent will be added to the unfulfilled obligation at each milestone; in some circumstance this may be as high as 20 percent. For instance, the milestones will be every 2 years on a 10 year programme, and every year on shorter programmes, though it is possible to negotiate fixed project completion periods instead. Credit Banking:

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Credit banking is not permitted, though exceptions may be made when there is certainty that the obligor will receive a purchase order in the near future against which it can use the credits. Credit swaps have occasionally been approved, but are not favoured. Policy Snapshot:

Source: Isdefe

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Sri Lanka

[01/05]

The Board of Investment and the Bureau of Infrastructure Investment encourage the use of compensation structures yet countertrade and offset do not feature highly in Sri Lankan trade procedures. There is no clear government policy on countertrade but some bilateral activity does take place. Prime Minister Makinda Rajapakse has expressed interest in having regional agricultural bilateral barter agreements. Sri Lanka is keen to capture investment through the transfer of technology into sectors such as agri-business and information technology.

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Sweden [10/11]

The Swedish Defence Materiel Administration, FMV, will not apply any particular offset policy. Such issues will be dealt with on a case by case basis following the provisions of the EC Treaty and the relevant directives. The guidelines provided below are indicative only. FMV is an independent civil authority that is subordinated to the government. It reports directly to the government and follows the rules laid down for handling defence procurement. As the main procurement agency for the Armed Forces, FMV ensures that industrial participation is included when needed. An IP reference group evaluates and recommends on how to proceed with individual cases. This group consists of representatives from FMV, The Swedish Armed Forces (FM), and the Swedish Defence Research Agency (FOI). Representatives from other authorities and organisations, e.g. the Association of Swedish Defence Industries (FIF) will be invited to participate in this reference group on a regular basis. FMV will monitor all IP agreements for the purpose of securing the fulfilment of the IP commitments, and FMV will carry out a financial assessment of all completed procurement programmes involving IP requirements. The monitoring and assessment data shall be analysed by the Reference Group for IP. Direct IP agreements must be defined and quantified before the procurement contract award and should provide for domestic maintenance and/or subsequent modification of the procured system or sub-systems. Objectives: Sweden has declared that its offset program will focus on products that combine civil and military use. The present direction is to develop the civil security area, for example, with networked-based defence projects. Consideration will be given to the requirements of the police and agencies involved with security for civil society. If there is a choice between direct procurement and development in international cooperation, that which offers the most favourable opportunities for the defence industry will be chosen. There is no particular interest in direct IP except perhaps for maintenance. There is every interest in defence-related benefits. Policy will concentrate on strengthening the expertise, marketing capacity and potential of domestic defence industries, test facilities, and research agencies. The ambition is to increase export potential and to internationalise. Solutions, whether direct or indirect, must be defence-related. Sweden considers it important to ensure a domestic maintenance capability for procured equipment and to achieve technology transfer to Swedish defence industries. Offsets are no longer required for regional economic development or for the civilian sector, with the exception of supporting dual-use technologies.

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Some of the technology areas listed below reflects an emphasis on very advanced defence applications, such as anti-ballistic defences. Many of the technologies listed are relevant for net-centric defences (such as sensors), which Sweden is developing, and is likely to become an increasingly important requirement.

- Electronic warfare Technology - Advanced Signature Control - Aerospace Technology - Command, Communication and Control - Information Technology (Information warfare) - Man-Machine interaction - Under water Technology - Weapon Technology and Ballistic protection - Unmanned vehicles Technology, e.g. UAV - Modelling and simulation - Signature adaptation/Camouflage - Use of FMV test facilities

Fulfilment Period: The IP obligations shall in principal be fulfilled within the time frame of the procurement programme. Exemptions may be made for long-term contractual co-operation. Multipliers: Multipliers are set at a top rate of 3. They are valid for no more than 10% of a contract’s value. The concept of multipliers is not favoured and as a rule will not be applied. They may, however, be awarded for indirect R&D projects (for the defence sector), and the authorities are open to persuasion. Banking: Banking and the swapping of credits is allowed, but swaps are restricted to 15 percent of the value of the obligation and shall be utilised for new business opportunities. IP activities implemented between the date of the Request for Quotation (RfQ) and the signature of the procurement contract may be banked to be used within the procurement contract. Realised IP exceeding the total commitment in a procurement contract, may not be transferred for the purpose of fulfilling any other IP undertakings. However, when the IP commitment has been fulfilled, IP credits may be granted, subject to a separate agreement. Any excess credit shall be utilized within three 3 years. Threshold: The threshold was Skr 100m (US$15m) but is no longer applicable.

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Quota: The quota is for 100 percent of contract value. Penalties: A milestone system has been introduced, and a 5 percent penalty may be applied on unsatisfied obligations at each milestone. The first milestone is 1/3rd way through the contract period. The second milestone is 2/3rd through. Final assessment will take place when the contractual period is over. Sanctions have not yet been applied. Pre-Performance: Business deals in place before the publication of the Request for Quotation may not be submitted as a claim for offset credits unless pre-approved.

NORDAC - NORDIC FRAMEWORK AGREEMENT: Agreement between Denmark, Finland, Norway, and Sweden: An agreement concerning support for Industrial Co-operation in the Defence Materiel Area came into force between these countries on 24th November 2002. The document takes into account inter-dependence within the field of defence materiel and the consequential effect of mergers in the industry. It seeks to create a political and legal framework necessary to facilitate industrial operations in order to promote more competitive and robust Nordic defence industries and of supporting these industries as home market suppliers.

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Recognition is to be given to closer industrial co-operation in the defence materiel area, supported by a ‘more flexible approach’ to applying national industrial compensation requirements. A Governmental Consultation Group has been established to ensure the efficient operation of the Agreement. The following has been agreed with regard to Industrial Compensation:





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Switzerland

[07/10]

Armasuisse established an offset agency in Berne on 1st January 2010 in partnership with the trade associations Swissmem and GRPM. The partnership replaces Armasuisse as the sole official administrator for offsets, though Swissmem has been assisting Armasuisse informally for some time.

The arrangement is the first Public Private Partnership (PPP) by the Department of Defence, Civil Protection and Sport (DDPS), to which Armasuisse reports. The ministry retains overall control.

Swissmem represents mechanical and electrical engineering companies in the German-speaking cantons. GRPM stands for ‘the Group of Defence and Security Equipment Manufacturers and Subcontractors of Western (French speaking) Switzerland’.

The new offset agency has three main goals:

• To establish contacts with parties committed to offset,

• To check the validity of offset transactions and their eligibility for credits,

• To organise activities and events in Switzerland in order to establish contacts and to explain how offset works.

Armasuisse retains ownership of the contract and is responsible for overall supervision. It decides conditions such as the threshold, quota, and penalty provisions.

Swissmem will audit offset benefits; it is also going to facilitate them, convene meetings with SMEs, and promote the offset concept to its members.

Swissmem and GRPM will ensure that when Armasuisse purchases defence equipment abroad it provides opportunities for Swiss SMEs to have access to foreign supply chains and acquires a high level of technology transfer. They will also make sure that industry participation is in the best interests of Swiss industry. The trade associations will hold discussions with suppliers who have an offset obligation to determine ahead of time whether the offset will be eligible and under what conditions.

When awarding contracts, aspects of regional policy are also taken into account. In this connection the buyers have to observe the Federal Council’s armament policy guidelines and legal regulations. In order to obtain offset credits the foreign contractor must provide a written statement from the Swiss supplier for each transaction certifying that the contract was actually awarded in accordance with the established criteria. Swissmem will conduct

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the audit. The Swiss supplier must complete the report form as soon as it has been awarded the contract, and return it immediately to the system supplier. The relevant procurement agencies, not the offset authority, run direct programmes.

Direct / Indirect:

Direct participation is referred to as ‘industrial participation’, indirect is ‘offset’. Direct industrial participation is preferred but Switzerland does not have an armaments industry comparable in size to that of other European countries, and indirect (defence and security) participation is possible. Direct participation includes co-production, sub-contracting, final assembly, and buy-back. Generally, Armasuisse will set its sights on a 40/60 split (IP/Offset), though it is open to persuasion for a 100 percent offset programme. Buy-backs qualify as directs (IP) when there is a close relationship the procurement. The feasibility of direct industry projects will be examined by Armasuisse and its partners in cooperation with the foreign contractor during the project evaluation process. Indirect (commercial) offsets are also acceptable though certain products and service contracts (i.e., consumer products, agricultural products, consulting, services of banking, tourism and insurance industry) are not eligible.

Indirect offsets should provide access to new markets, advanced technology, additional contract and export volume. These initiatives must be sustainable over the long term. Job security is a consideration. Additional contract awards to Swiss manufacturing industries are preferred. High quality technology transfer is essential. Cooperation with universities is welcome.

The eligibility of contracts in critical areas is examined on a case by case basis.

Swiss industry will be encouraged to actively pursue opportunities to compete for contracts under participation agreements. Obligors may use compensation structures (buy-backs) to satisfy their obligations. The obligor must establish that contracts to Swiss firms were awarded under the offset agreement.

Targets and the extent to which direct and indirect offsets are acceptable will be established at the bid evaluation stage.

Evaluation Process:

Competitors may be asked to present a potential ‘offset portfolio’ that would be weighted at the evaluation phase. Past performance would be investigated to establish how each contractor progressed with their obligations through each milestone over the discharge period.

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Eligibility Criteria:

Eligibility is designated by so-called ‘additionality codes’:

Code 1 concerns new business where:

a) there has been no previous business connection to the Swiss company,

b) the business relation covers products or services not used in the past; or

Code 2 concerns the increase of existing business relationships, where the work:

a) constitutes a measurable increase in sales compared to the average turnover of the last three years for the same product(s) or the same service(s),

b) constitutes an increase in business, which has already been recognized by Armasuisse and was documented accordingly by the foreign company,

c) constitutes an increase in business which is based on a new basic agreement with a duration of several years, and which has been recognized by Armasuisse.

Confirmation or evidence of performance are the responsibility of the Swiss company; or

Code 3 concerns an existing business connection that is reactivated; alternatively, a contract is placed with the Swiss company

a) without inviting other offers,

b) if during an open and competitive invitation of offers the Swiss company proves to be at least as competitive as the best offer.

The recognizable value is defined by Armasuisse, which will calculate the additionality; or

Code 4 - concerns every other transaction.

The foreign contactor must show that the transaction with the Swiss company was realized solely due to its efforts. The credit value is fixed by Armasuisse from case to case, depending on the importance of the additionality.

Quota: At least 100 percent of supply contract value. Although direct solutions are preferred it is not unusual to settle upon a 40/60 direct/indirect solution, where indirect is either defence-related or commercial. A loophole under Swiss intellectual property law allows for a qualifying transaction to be regarded as of Swiss origin and therefore to be worth 100 percent of face value when local content is greater than or equal to 51 percent.

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Multipliers: Multipliers have been replaced by a project-based system. The focus is on securing projects that are new and that result in clear and measurable economic benefits.

At least 20 percent of an offset project must be Swiss-made; when the proportion reaches 51 percent or more, the transaction will count as 100 percent.

Threshold: The threshold is decided by Armasuisse on a case-by-case basis. Fulfilment Period:

As a rule the foreign contractor must complete its contractual indirect obligations no later than three years after the completion of the defence contract.

Penalties: The penalty is decided by Armasuisse on a case-by-case basis. It is likely to be in the 5 percent range but unfulfilled obligations tend to result in a negotiated solution. Collected penalties flow to the coffers of the Ministry of Finance, not the MoD. Credit Banking: Credit banking is recognised for both pre-performance and over-achievement at Armasuisse’s discretion. Levy on Beneficiaries:

Offset office costs will be paid for by financial contributions from beneficiaries. These will be levied at 0.1 percent of the offset value, deposited into an escrow account administered by a trust managed by the Centre Patronal Berne.

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Syria

[10/11]

No formal policy is in place; however, sanctions on oil exports are obliging Syria to offer oil exports in exchange for fuels. Syria is offering its crude oil in exchange for the oil products required to run its oil-fired power plants, keep its economy afloat, and prevent widespread disruption to civilian life.

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Taiwan

[10/10]

The Ministry of Economic Affairs (MOEA) has established an Industrial Cooperation Steering Committee on which both the Vice Minister of the Ministry of National Defence ("MND") and MOEA are designated as co-chairmen.

An Executive Committee reports to the IC Steering Committee. The Executive Committee is chaired by the Director General of the Industrial Development Bureau (IDB), an agency of the MOEA. Members are drawn from relevant government agencies, academics, experts, and representatives of industry. It is responsible for the management of Industrial Cooperation Programme(s) (ICP) and for reviewing and evaluating all proposed ICP projects.

Organizational Structure Duties

Co-Chairmen: Vice Ministers of IDB and MND Members: Vice Ministers/Directors of relevant Ministries /Administrations Executive Secretary: Director General of IDB

1.To determine mid- or long-term ICP policies and measures.

2.To review strategies, regulations and major plans of ICPs.

3.To conduct coordination, integration, supervision of ICP-related matters.

4.To advise other important matters associated with ICPs.

Co-Chairmen: Vice Ministers of IDB and MND Members: Recommended by relevant Departments Executive Secretary: Operation Supervisor(s) under IDB Deputy Executive Secretary: General Project Manager(s)

1.To develop mid- or long-term ICP promotional strategies and measures.

2.To examine and approve industrial cooperation agreements and relevant ICP plans.

3.To supervise, examine and approve the implementation of the ICP.

4.To allocate the resources of ICP. 5.To formulate regulations for ICP promotion

and execution.

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The principal contractor shall enter into the Industrial Cooperation Agreement in its own name, and be responsible for carrying out the ICP.

Within one month of preliminary approval of an ICP proposal the beneficiary shall cooperate with the obligor in preparing and providing the ICP Office with an action plan detailing major milestones. The beneficiary shall then provide a quarterly report on the status of implementation.

Proposals, as well as offset credit claims, should be submitted to the IDB’s Executive Committee two months before they meet in order to receive timely consideration. The committee typically convenes in April or October each year and although other special committee meetings are also held, these discuss a range of issues and time may not be allocated to discussing offset proposals.

Contractors must commit their industrial cooperation plan to a Letter of Undertaking, to be submitted with other relevant documents. The ICA is signed together with the master contract, so contractors must have their ICA ready at that time.

When preparing an industrial cooperation plan obligors should provide the specifications first, then negotiate the plan. Typically, obligors should include milestones in their proposals but the plan does not have to be cast in stone. Obligations can be changed over the ten year contract period.

The proposal is very important and must contain sufficient detail. Technology transfer, for example, should describe the development trend of that technology, its current status and most importantly, the output to be achieved from that technology with the advantages to local industry and its applications clearly quantified.

Contractors should ask if the IDB can provide the marketing data on the local side for a particular technology. Preparing summaries in Mandarin helps to facilitate the process but all procedures are in English.

Objectives:

Taiwan does not ask contractors specifically for direct or indirect ICP projects, but prefers defence-related programmes. Projects of benefit to Taiwan’s commercial industries are also welcome. However, the objective is for 50 percent of ICP credit values to be put into military defence.

The prime objective is to promote technology and industrial capability. The focus is also on establishing new high-tech industries and upgrading traditional industries.

Objectives include:

Introducing high-tech industries and key technologies into Taiwan;

Attracting foreign investments;

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Promoting export and establishing international marketing channels;

Improving industrial structure and upgrading industries;

Establishing long-term cooperation in international trade; and

Encouraging foreign enterprises to set up R&D centres and/or

Industrial ICP Priority List (Preferred) Date of amendment: September 23, 2011

No. Items Name Transaction Categories Possible Partners

1

Boehringer Ingelheim’s Bi Hex® platform technology for cell line development

Technology Transfer、 Local Investment、 Training

Boehringer Ingelheim Biopharmaceuticals(BI)

2

Triomab® Antibodies - Bispecific, Tri-functional Antibody

Technology Transfer、Research and Development、 International certification

Roche-PDL、 Novartis-Cerim on Pharma、 J&J-Centocor、 Genentech

3

Humanized Anti-IL-2 mAb MT204 unique biologic compound with dual mode of action

Technology Transfer、Research and Development、International certification

Roche-PDL、 Novartis-Cerim on Pharma、 J&J-Centocor、 Genentech

4 offshore wind turbine system design

Technology Transfer Garrad Hassan (UK)、CATUM (Germany)

5

Integrated power converter module and permanent magnet generator using intelligent control technique

Technology Transfer Windtec (Austria)、Enercon (Germany)、Mitsubishi(Japan)

6 C4MJ CPV Technology Transfer、 Local Procurement Spectrolab

7 Thin film SiC Local Investment、 Mitsui Engineering & Shipbuilding、

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chemical vapor deposition and crystal growth technology

Technology Transfer Toyo Tanso

8

Ocean Energy - Ocean Thermal Energy Conversion

Technology Transfer、 Local Investment、 Research and Development

University of Hawaii、Lockheed Martin

9

Technology transfer and certification for aviation composite material

Technology Transfer、International certification

Airbus、Boeing、EADS、Eurocopter、 Snecma

10

Post process for aircraft landing gear parts

Technology Transfer Goodrich、Messier-Dowty、Summitomo

11 Power Bogie Technology Transfer Nippon Shayro、Kawasaki、Bombardier

12

System Integration of EMU Door Operator and Platform Door


Wooree、SEMEC、NABTESCO、FAIVELY、KNO

13

Train Control & Monitor System (TCMS)

Technology Transfer、 Local Procurement Alstom Signaling Inc.

14 Electrical Multiple Units (EMU) Body

Technology Transfer Nippon Sharyo、Kawasaki Heavy Industries、Bombardier Transportation

15 CNC Controller

Local Investment、 Local Procurement Mitsubishi Electric

16

Individual medicine – combination of medical device with clinical trials for cancer patients

Research and Development University of Medicine & Dentistry of New Jersey

17

Biotechnology training program collaborating with

Training Novartis、 Johnson & Johnson

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multinational biotech companies

18 Organic Photovoltaic

Technology Transfer、Research and Development、Training

Solarmer、Konarka

19 Gear Box of Drive System

Technology Transfer、 Local Procurement Mitsubishi Heavy Industries Ltd.

20

High modulus & high strength PE fiber

Technology Transfer Honeywell(USA)

21 Floating Slab Track (FST)

Technology Transfer、 Local Procurement GERB(Germany)

22

3D Holographic Display Technology

Technology Transfer、Research and Development

Holografika(Hungary)

23 3D Engine Research and Development Zealot Digital Pte. Ltd.

24

Design & Manufacture Of Disaster Observation Instrument

Technology Transfer SonTek/YSI、MGD、ALECELEC

25

Oceanology & Coast Investigation Instrument

Technology Transfer Experimental Design Bureau of Oceanological Engineering, Russian Academy of Science

26

Smart Substation Planning And Deployment

Technology Transfer ABB、GE

27

The Oil and Hazardous Substances Spill Training on Marine Pollution Emergency Response

Training 1.Japan Maritime Disaster Prevention Center 2.Oil SpResponse Limited (England) 3.Canadian Spill ResponOrganization (Canada)

28

Digital radiography Flat panel-Technical Transfer

Technology Transfer GE

29 Technology of Composite

Technology Transfer、International Bell、Sikorsky

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Rotor Blade Manufacturing and Testing

certification

30

Flight Recorders Readout and Analysis System

Training Boeing

31

Innovated High-tech Ultra-light Mg-Li Alloys

Technology Transfer、Local Procurement、International certification International Marketing and Trade Promotion Assistance、International Marketing and Trade Promotion Assistance

GE

32

Apply Taiwan’s Digital Optics Technology for Biomedical Celluscope Application in Switzerland

Research and Development University Hospital of Lausanne CHUV, Switzerland

33

Pulsed Electric Field(PEF)- Nonthermal extraction and sterilization technology for functional food and biotech products

Technology Transfer DIL

Industrial ICP Priority List (General) No. Items Name Transaction Categories Possible foreign partners 1 Rail Fastener Local Procurement

2 Game Engine Technology Transfer、Research and Development Epic Games

3 Game Engine Technology Transfer、Research and Development Critek

4 Test Tools for Games

Technology Transfer、Research and Development

5 Technical International certification GE Aviation、Rolls-Royce、 P&W

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Transfer and Qualification of Stainless Steels and Nickel Alloys for Aero Engines

6

Hot stamping technology for advanced high strength steel

Technology Transfer AP&T(Sweden)

7

Establishing of a MIT(Made In Taiwan) brand, specializing in developing In Vitro Diagnostic (IVD) products

International Marketing and Trade Promotion Assistance

1.One Lambda, Inc., USA 2.Conmed Corporation, USA 3.US Medical Innovations 4.SAP, Germany 5.The Boston Consulting Group, USA

8

Digital radiography Flat panel-Domestic Purchase

Local Procurement GE

9

Software of CNC controllers for multi-tasking and 5-axis machine tools

Technology Transfer Module Works、GmbH、Machine Works

10

Technology for manufacturing of IGBT used in CNC control system

Technology Transfer Mitsubishi Electric Corporation

11

Technology for manufacturing of absolute encoder used in CNC control system

Technology Transfer Tamagawa Seiki Co., Inc.

12 Technology for Technology Transfer Harmonic Drive Systems

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manufacturing of harmonic drive used in Industrial robot

13 Excimer Laser Annealing

Technology Transfer、Local Investment TCZ、ULVAC、JSW、ALTEDEC

14

Optimization of Entire Machining Strategy through Machining Dynamics Kit and Best Practice Programming Techniques Transfer

Technology Transfer AMRC

15 Rubstrip Plasma Spray Coating


UTC/PW

16

Technology of Composite Rotor Blade Inspection and Repair


Sikorsky、Boeing

17

Apache Block III shipping containers of Main Rotor Blade Assy. & Main Transmission

Local Procurement Boeing

18

Chemical vapor deposition (CVD) technology of silicon thin film with low-degradation and high-deposition rate and sputtering growth intermediate layer between

Technology Transfer、Local Investment、Research and Development、International Marketing and Trade Promotion Assistance

Mitsubishi Heavy Industries, LTD.

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a-Si/μ-si absorbing layers

19

The Qualification of Stainless Steel & NickelAlloy for Nuclear Application

International certification GE、Westinghouse、Areva

20

The Manufacturing Technique of High Temperature Proton Exchange Membrane Fuel Cell (HTPEMFC) Power System

Technology Transfer、Local Procurement Trenergi

21 Friction Stir Welding Technology

Technology Transfer、Training、International Marketing and Trade Promotion Assistance

TWI(The Welding Institute)

Threshold:

$5m for defence procurement.

Quota:

For defence procurements the requirement is at least 40 percent of the procurement contract value. For some exceptional procurements the requirement may be up to 70 percent.

Taiwan is a signatory to the WTO’s Government Procurement Agreement (GPA) and is no longer permitted to require industrial cooperation programmes for civil (commercial) purchases, except for the transportation sector, which has an exemption until the end of 2011. The quota for the transportation sector is 33 percent.

Penalties:

The maximum penalty shall be decided by the Executive Committee on a case-by-case basis in an amount within the range of 3 - 5 percent of supply contract value.

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A contractor's default by delay will be reported to all relevant government agencies and state-owned enterprises for their reference in conducting contractor credit investigations for future procurement projects.

When there is a delay the penalty is calculated as follows:

a. If the credits granted to the contractor for its performance of the ICP are less than 10 percent of the required credits, the penalty shall be equal to the maximum penalty.

b. If the credits granted to the contractor for its performance of the ICP reach 10 percent or more of the required credits, the amount of the penalty shall be the maximum penalty multiplied by the percentage of the outstanding credits over the required credits.

Previous compliance will determine whether a performance bond is required or whether it can be waived in favour of a corporate guarantee. The penalty is not compulsory for every contract. In general a Performance Bond must be established for an amount equal to the maximum penalty, although a Letter of Guarantee may be provided instead when the obligor has established a good reputation with the MOEA. The contractor will undertake to enter into the ICA with the IDB within 180 days of receipt of the contract award notice. If it fails to do so the IDB shall be entitled to draw an amount of NT 10,000,000 as a penalty for each month of delay, where a part month shall be equal to a full month, up to the maximum amount of the ICP Performance Bond.

Multipliers: Local Procurement: 0.25-2 In principle, locally procured products must be exported. However, products approved by the Executive Committee for use in the procurement projects are not subject to this restriction. Technology Transfer: 1-10 The credits granted for technology transfer will be the sum of the following items: (i) the estimated fair market value of the technology to be transferred multiplied by a factor ranging from one (1) to ten (10); (ii) the actual direct time-material costs plus other direct costs for the activities of technology transfer, multiplied by a factor ranging from one (1) to ten (10). Local Investment: 1-10 Foreign contractors may set up a sole proprietorship or subsidiary in Taiwan or participate in a joint venture with government entities or private companies. Research and Development: 1-10

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Foreign contractors may initiate joint R&D projects with local institutions and/or companies or establish R&D centres that are conducive to the development or the upgrade of domestic industries. The credits subject to the multiplier will be the actual direct time-material costs and other actual R&D direct costs shared by the contractor. Training: 1-5 Foreign contractors may provide personnel training programmes to local institutions or companies in engineering, management, operation, examinations, testing as well as services. The FAA test flight pilot training is one such programme; and so are the training programmes for composite boarded structure fabrication, precision casting of engines, incinerator operation, management and industrial safety technology, quality assurance and certification, and environmental protection, health and safety. International Marketing Assistance: 1-5 Foreign contractors may make unrestricted gifts to independent organizations recognized to be dedicated to expanding and enhancing trade with Taiwan. The purpose is to enhance the competitive edge of local enterprises in the international market.

Multiplier Summary

Taiwanese Payback Requirement: The government requires domestic industries benefiting from the allocation of offset projects to make a contribution to the government. The rates are as follows:

1. Where local procurement arises 0.3 percent

2. For local investment 0.6 percent

3. For training, joint R&D, and technology transfer 0.7 percent

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However, when the beneficiary is from the aerospace sector or from other industries which the MoEA wants to encourage, such as biotechnology or semiconductors, the contributions are halved. An ICP beneficiary which has failed to pay the contribution in compliance with the requirement shall not be allowed to take part in any other eligible ICP transactions unless otherwise permitted by the Executive Committee. The obligor will receive credits for its actual direct costs exclusively incurred for ICP management efforts relating to approved eligible ICP Transactions, including items such as personnel, travel and accommodation. These will be multiplied by a factor of one (1); provided they shall not exceed three percent of the credits granted to such eligible ICP transactions. Fulfilment Period: 5 to 10 years, depending on the value of the procurement contract. Restriction on Technology transfer: The government is concerned by the effect on the economy of domestic manufacturers outsourcing to branches established oversees. To protect the relevant domestic industrial sector from these practises the IDB restricts the use of technology transfer received from obligors so that only beneficiaries in Taiwan can use the technology. The restriction lasts for two years. The IDB will specify in both the Specification for Industrial Cooperation Programme and the Industrial Cooperation Agreement that a foreign contractor shall submit to the Executive Committee of Industrial Cooperation Programmes, MOEA, a Letter of Undertaking for compliance with the export control of technologies acquired through Industrial Cooperation Programmes. Otherwise, no preliminary approval will be granted by the Executive Committee.

Credit Banking, Pre-Performance, and Over-performance: The banking of credits is allowed. Pre-performance offset qualifies for Reserved Credits. The use and transfer of Reserved Credits shall be specifically approved by the Executive Committee on a case-by-case basis. When approved, the Reserved Credit shall be valid for five years, commencing the date immediately following approval by the Executive Committee. Offset credits derived from defence procurement should mainly be applied to defence needs. The amount of the Reserved Credit to be used shall not be greater than one half of the total credit required when performed for other government procurement projects unless otherwise specifically approved by the Executive Committee on a case-by-case basis.

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Surplus credits are awarded for over-performance of the contractual requirement. Credits are valid for five years. No more than 1/2 of total credits may be used for other government procurements. A surplus credit is when the total credit completed by a company as audited and recognized by the Executive Committee exceeds the amount of credit required to be performed by the company. The principal contractor may assign its surplus credit pro-rata to its subcontractors, depending on the extent each subcontractor contributes in the performance of the Agreement; provided that the subcontractor, though not a signing party to the Industrial Cooperation Agreement, is willing to jointly undertake to perform the ICP and such willingness is expressly included in the Agreement. The subcontractor shall have the right to use any Surplus Credit so assigned to it. In the event that there are changes to the credit amount generated from an eligible ICP transaction, an adjustment proposal should be submitted the Executive Committee whenever the total value of credits claimed exceed $1m. When they are below $1m the Executive Committee will only grant final the credit amount as a preliminary approval.

Processing Procedure

Screening of procurement projects that require industrial cooperation

Reviewed by relevant procurement agencies and the ICP Office.

Stipulation of ICP specifications

Preparing ICP specifications by the ICP Office for use by the agency, taking into account of the nature of the procurement project.

Negotiations of industrial cooperation agreement(s) and ICP plan(s)

Negotiations between the foreign contractor and the ICP Office, submission of a draft ICP plan by foreign contractors, and review of the draft ICP Plan by relevant experts.

Execution of industrial cooperation agreement(s)

Signing of the industrial cooperation agreement by and between IDB and foreign contractors.

Preliminary approval of eligible ICP transaction(s)

Review of the eligible ICP transactions proposed by foreign contractors; Submission of the proposal to the Executive Committee for preliminary approval.

Monitoring implementation of eligible ICP transaction(s)

Monitoring the progress of ICP projects by the ICP Office

Final approval and credit-granting for implemented eligible ICP

Review and determination of the final credits to be granted by the Executive Committee upon completion of the eligible ICP transaction and provision of the relevant information by the foreign contractor.

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Review and completion of ICP

Compilation of data on ICP performance and achievements.

ICP Process:

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Thailand [01/10]

Thailand no longer has formal countertrade guidelines but is emerging from a period of self-imposed exile. In a bid to address liquidity problems caused by the global economic crisis Thailand is encouraging bilateral government-to-government and government-to-business barters to dispose of agricultural crops and some unappetising manufactured products.

The Ministries of Commerce and Agriculture are the lead ministries.

There is little interest in offsets. The country is reactive to them in the competitive process but will rely on the obligor to discharge benefits on a best endeavours basis.

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Tunisia

[01/10]

There are no formal offset guidelines and practices are unregulated, though transactions need to be approved by the Ministry of Commerce and the Central Bank. The expressions ‘offset’ and ‘countertrade’ are compatible.

The Tunisian government stepped tentatively into offsets in 2007 with an agreement securing the promise of 2,000 jobs in the domestic aerospace sector against the acquisition of sixteen Airbus aircraft for the civil airline Air Tunisia. Another target is the auto industry, but the offset policy has not moved beyond those two sectors.

When Tunisia imports vehicles the seller must buy and export auto spare parts worth at least 50 percent of import cost. Alternatively they may engage in the counterpurchase of other Tunisian products, such as textiles and electronics.

A seller that fails to achieve 50 percent in exports will have its import quota capped until it complies.

The most important objective is job creation, whether by direct or indirect projects.

Foreign companies are encouraged with generous tax breaks to invest in the country under a requirement to export 70 percent of their products if they sell 30 percent locally.

There is an absence of consistency in the attitude of the various ministries towards offset. The Ministry of Industry and Energy’s Industry Promotion Agency and the Ministry of Development and International Cooperation’s Foreign Investment Promotion Agency (FIPA) are the only agencies currently involved.

The Ministry of Foreign Trade and Economic Development provides a ‘one-stop-shop’ facility under its foreign direct investment (FDI) programme. This is not specifically designed to assist offset activities though contractors will find it helpful.

Tunisia does have some experience with BOTs.

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Turkey

[07/11] The authority for industrial participation and offset management is the Undersecretariat for Defence Industries (SSM). SSM is a civilian procurement agency affiliated to the Ministry of National Defence (MND). In Turkey ‘industrial participation’ refers to direct offset. ‘Offset’ covers indirect benefits for the defence, aerospace and homeland security sectors. Law No: 3238 of 1985 established SSM and authorised it to coordinate export and offset trade issues relating to defence industry products. The first offset handbook was published in July 1991. Offset directives were subsequently published in 2000, 2003, and 2007. With the directive issued in April 2011 SSM is on its fifth policy revision. SSM has well defined rules and processes for IP/O implementation. However, within this framework, SSM may take a flexible approach. The foreign contractor must sign the industrial participation & offset (IP&O) agreement with SSM prior to release of any advance payment under the supply contract. SSM’s IP&O department comprises three divisions. They are: aerospace; machinery and shipbuilding; and electronics and software.

SSM’s Industrial Participation and Offset Organisation

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Objectives: The policy focuses on work for the defence and homeland security sectors, with local content and export a primary requirement in the IP&O obligation. Preference is given for design and engineering projects. Also, more incentives are being put on the opportunities that benefit SMEs. The discharge of obligations in the civil sector is not acceptable. Only exceptions are civil aviation and space sectors. SSM is placing great emphasis on the scope of the industrial participation. It will evaluate regularly SME involvement in all programs. Additional sales arising from projects and potential export opportunities will also be subject to evaluation. The criteria that the government will consider in the assessment of offset proposals from obligors are: • Partnerships through increased involvement of local companies; • Involvement of Small and Medium Sized Enterprises (SME’s); • Creation of qualified employment; • Creation of export potential; • The level of technology and investment in local companies. Priority ventures are for aerospace, system integration, information satellites, network and electronic warfare, missile guidance control systems. Threshold: $5m for foreign obligors, no threshold for Turkish obligors. Quota: At least 70 percent of supply contract value. When the main contractor is a Turkish company that is sub-contracting a foreign supplier for some of the equipment, the 70 percent requirement will be for the full supply contract value. IP&O Categories: SSM has established three categories for industrial participation / offset within the defence, aerospace and homeland security sectors:-

Industrial Participation and Offset Categories: Category Content A Direct industrial participation (local content) B Export of products / services in the areas of defence, aerospace, and homeland security.

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C a) Gain of technology / capability; b) New investment in the areas of defence, aerospace, and homeland security. The minimum level of IP&O for SMEs or mid-size contractors under Category A is for 30 percent of the obligation. Multipliers:

For Category B - additional multipliers of 1 are allocated for SME involvement and exports to new markets. For Category C – the 6-8 range applies when the obligor agrees to SSM’s request for a particular requirement, specific capability, or technology. Evaluation Criteria: 50 percent of the score of each proposal counts towards technical performance of the system. 10 percent is for complying with the rules of the competition. 40 percent is for the IP&O proposals. Failure to propose any IP&O would not disqualify a contractor’s proposal, but it would receive a zero score for the relevant portion of the formula, seriously handicapping the offer.

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Evaluation Formula for Source Selection

Evaluation of Category B and Category C commitments will be made on the basis of;

1) total amount of the commitment (R), and 2) the period of performance (D / T)

Crediting Basis: Crediting is based on Domestic Net Added Value (DNAV). This is the Turkish portion of the transaction. Credits will be for the actual DNAV achieved. Penalties: The penalty for underperformance is 6 percent. This applies to the unfulfilled portion of the IP&O commitment. A bank guarantee must cover the 6 percent. Paying the penalty does not relinquish the obligation. Performance is evaluated at the end of each 12 month performance period. Unfulfilled commitments at the close of the last program period will render the obligor liable to the penalty, and the value may be held over and added to any future obligations that the contractor may have. Subject to the terms agreed between the parties and the characteristics of the program, an IP&O escalation clause may be required in the IP&O performance contract. The obligor’s cooperation during the program may influence how this clause will be dealt with. There is no blacklist.

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Fulfilment Period: The obligor shall have until the final delivery date specified in the supply contract to discharge its IP&O commitments. A two year extension may be negotiable. Temporary Credits: Temporary credits may be awarded at SSM’s discretion provided the obligor has signed the contract or agreed a purchase order with a Turkish defence company and paid the contractual deposit. Banking and Credit Transfers: The cross-transfer of creditsbetween categories is possible although restrictions apply: From Cat A to Cat A not possible From Cat A to Cat B possible From Cat A to Cat C not possible From Cat B to Cat A not possible From Cat B to Cat B possible From Cat B to Cat C not possible From Cat C to Cat A not possible From Cat C to Cat B possible From Cat C to Cat C possible There is a cap on the percentage of credits that can be transferred The maximum value of credits that may be fulfilled via transferred credits is 20 percent of the commitment. The value of transferred credits will also be halved. Excess credits and approved pre-performance credits may be banked and are valid for 5 years. They may be transferred to other eligible companies against their offset obligations, with the same restrictions above.

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UAE

[04/11]

The UAE Offsets Group was established in 1992. It became the Offset Program Bureau (OPB) in May 2007.

The focus of the offset program remains firmly on the defence acquisition side. The OPB also has significant interests in many non-offset commercial projects.

The guidelines require defence contractors to customize their programmes by selecting credit-generating components from both input and output activities in specified percentages. Credits for output activities are awarded only when projects are profitable. Defence contractors should partner with the local private sector in commercially viable ventures. The contract award process is linked to the signing of an offset agreement. Defence contractors must develop an offset fulfilment plan while negotiating the procurement contract with the UAE Armed Forces. Approval prior to Purchase Contract is mandatory. The bank guarantee in support of the offset penalty provisions is to be established within 30 days of contract. The OPB does not approve of UAE companies acting as middlemen between foreign contractors and government procurement agencies. An Offset Committee is made-up of representatives from the OPB and the General Headquarter (GHQ) of the UAE Armed Forces. It is mandated to create a formal platform between the OPB and the GHQ and to review, provide advice, and evaluate plans for offset projects and performance. The committee also oversees the procurement processes and advises on potential future contracts.

A Defence Contractors Council has been established to facilitate open dialogue between defence contractors and the OPB to assist with the objective of creating strategic and commercial partnerships. The council members consist of representatives from the OPB and defence contractors.

Contracts are subject to Swiss federal law.

Objectives:

The objective is a diversified and knowledge-driven economy through industrial partnerships. Technology and knowledge transfer and the creation of jobs for UAE citizens are important elements. Obligors should consider projects that are not labour intensive.

In particular obligors should focus on developing the industrial infra-structure; diversifying the UAE’s industrial base; helping develop the private sector with new business ventures; and providing management skills with regard to the UAE defence industry.

Long-term commercial viability and causality are important features of the policy.

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For the defence sector precision engineering and capabilities to make components for land, aerospace, and naval systems are wanted, as well as for munitions and weapons.

There are 5 principle areas of interest. Obligors should make available design capabilities, engineering, system integration, manufacturing, testing, and programme development in each area:

1. land and naval systems; 2. munitions; 3. aero-systems; 4. aerospace systems; 5. advanced materials and autonomous systems.

The OPB is also open to other suitable proposals outside of these areas.

Threshold: The threshold is $10m.

Cumulative defence procurements reaching $10m in value within a 5 year period will also qualify for offsets.

Quota:

60 percent of purchase contract value.

Input and Output-based Requirement:

No more than 30 percent of the obligation can be satisfied through input-based projects. The minimum level of output-based projects is 70 percent.

Input contributions may include equity contributions, apprenticeships, knowledge improvement programs, and contribution of specialist equipment.

Output credits are calculated on net profits generated by projects, export potential, and employment for UAE citizens (see Multipliers).

Fulfilment Period and Milestones:

Contractors must fulfil their offset obligations within seven years.

A grace period has been introduced to allow defence contractors to establish their joint ventures in terms of infrastructure, construction, training, etc., with regard to the input part of their program. The grace period is for negotiation, but up to 3 years is available, depending on the complexity and size of the project. This allows input-based activities to be generated in the grace period and realised as offset credits at the start of the 7 years program period.

Milestones are annual. The percentages of the obligation to be achieved at each annual milestone are: 5 percent, 10 percent, 10 percent, 15 percent, 15 percent, 20 percent, and 25 percent respectively for each year.

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Pre-offsets: Pre-offset activity is encouraged. Defence contractors may transfer their offset credits to another contractor or use them for future obligations.

Multipliers:

Inputs qualify for multipliers of 1-2. Outputs qualify for 2-5. A complex formula is used to allocate output-based multipliers according to the profitability, export activity, and the employment level of UAE citizens in the partnership.

Output generated multipliers where the main activity is export related, and for the percentage of UAE nationals employed:

Increased Exports (based on net profit) Bonus multipliers for Employment of Nationals as % of Employees

By 5 – 20 percent 1.5 10 – 30 percent additional multiplier of 1.0

By 21 – 50 percent 2.0 31 – 70 percent additional multiplier of 1.5

By 51 percent and more 3.0 71 percent and above additional multiplier of 2.0

Net profit re domestic sales 2.0 Inputs will qualify for multipliers of 1-2.

Penalties:

Liquidated damages of 8.5 percent will be assessed for under-performance. They will be charged on the unfulfilled portion of the obligation, calculated at each annual milestone. This deals with the obligor’s commitment for that year alone.

Fifty percent of the penalty payment at each milestone will be cashed under the bank guarantee and 50 percent will be rolled over to a default account. The roll-over may then be reduced, depending on the overall performance of the next milestone or at the end of the program. At the end of each milestone the OPB will release back to the contractor all penalties paid at interim milestones if they have caught up with the shortfalls.

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The OPB reserves the right to withhold payments under the purchase contract and to publicise the names of companies that are non-compliant.

Banking:

Offset credits may be banked for ten years. They are transferable and may be swapped or traded.

Tawazun Holding Company:

Tawazun is the OPB’s investment arm. Its focus is on strategic investment holdings in the UAE, not necessarily offset-related. Investments are also made in key offset programs to promote desirable technologies and knowledge-based companies.

Tawazun’s portfolio is balanced between end-user product (systems) and supplier products/services (components).

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Ukraine [04/09]

The government of Ukraine has for some time expressed an interest in developing a formal offset policy but is constrained by internal differences of opinion. The intention is to place before parliament a resolution to make defence acquisitions subject to offsets. This is unlikely to happen for some time.

Legislation is in place to permit the concept to proceed. Further resolutions would be more specific, facilitating, for instance, leasing and offset programmes in defence technologies.

The government is meanwhile receptive to offers of industrial participation and encourages joint ventures between foreign contractors and companies of the Ukrainian Digital Intelligence Centre (DIC), which develops and produces arms and military goods.

The existence of facilities for manufacturing and launching satellites, and the scientific and technological capabilities for designing and building the ground infrastructure, should offer opportunities for resolving purely defence tasks in combination with civilian space programmes.

Barter Law:

Legislative amendments to regulate commodity barter transactions were passed in March 2009.

A central executive body for economic policy will decide whether to issue a one-time individual permit to a company applying to execute barter contracts with foreign companies. The body must decide no later than 15 working days after the company submits all required documents.

The law says that a one-time individual permit is cancelled and is void from the moment the decision on its cancellation is made by the central executive body for economic policy.

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United Kingdom [07/09] Policy is administered by the Industrial Participation Unit (IPU), a department within the Defence & Security Organisation (DSO). The DSO is part of ‘UK Trade & Investment’ (UKTI). The MoD retains a lead role in IP policy. DESO, which previously was responsible for industrial participation, has been disbanded. The role of the DSO is to identify when IP is applicable, assess proposals, negotiate agreements, and monitor their progress. In Britain the term used for inward benefits is ‘industrial participation’. Obligations that British industry has with other countries are referred to as ‘offsets’. IP work must be carried out in the UK. It is recognised, however, that a UK company may then sub-contract part of this work offshore for its own commercial reasons, and providing this is not excessive and has not been directed by other parties, IP credit may be awarded. All claims for work containing offshore content will be individually assessed. Work should be placed as a result of the IP agreement and comprise either: a. Products/services purchased from a new UK supplier. b. New products/services from an existing UK supplier. c. Purchase orders/contracts for existing products/services from a UK supplier that

has been the subject of re-competition or re-evaluation. Where the prospective prime contractor is an offshore company, that company will be responsible for the entire IP proposal, including other offshore companies in the supply chain. Where a UK company is the potential prime contractor, it is responsible for advising the IPU of all offshore companies within its supply chain for the programme to enable IP proposals to be invited. UK companies themselves do not have IP commitments but to ensure the IPU has a comprehensive picture of a bid, the UK prime contractor should provide details of the UK content. Where offshore companies providing IP proposals are involved, this will be the combined value of the Direct IP and the work carried out by UK companies on the programme in the UK. The IPU will pursue opportunities to carry out exchanges of IP and offset obligations with other offset authorities on a bilateral basis. Objectives: Juste Retour: The primary reason for having an IP policy is to assist UK companies that face barriers to trade in the form of protectionist measures or stringent offset regimes in other countries, particularly America, by obliging defence companies in those countries to engage with British industry when they sell defence equipment to the UK Government.

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Technology transfer: There are two approaches to technology transfer. Where technology transfer takes place as part of the direct IP requirement, only the value of the work resulting from the technology transfer will be considered for IP credit. No additional IP credit will be awarded for the value of the technology itself. Subsequent exports generated by the UK company receiving the technology can generate IP credits against the indirect element of an IP commitment. Technology transferred to a UK company solely for indirect IP will be accepted providing the UK company receiving the technology enjoys free user and intellectual property rights. All technology transfers must be free of charge to the UK company if it is to be considered for IP credit. The work generated by the technology transfer must be defence or defence-related. Research and Development: Consideration for IP credit will depend on the extent to which the UK defence contractor is able to use the intellectual property rights derived from the research for its own purposes. IP credit will be generated by the subsequent defence sales resulting from the research. Marketing Assistance: IP credit may be considered for marketing assistance provided free of charge to UK companies which results in them winning orders to third parties. The offshore company must be able to demonstrate that it was instrumental in the UK company winning a contract. Companies should discuss with the IPU any plans concerning the activities listed above at an early stage (prior to any implementation) to establish eligibility for IP credit. Evaluation Process: IP is not bound by legislation and it does not form part of the tender selection process. However, the UK MoD’s Defence Industrial Strategy (DIS) makes clear that IP can be a factor in the UK MoD’s consideration of a company’s bid. It is important, therefore, that IP proposals provide a clear picture of the capabilities that will be created or sustained in the UK. It is important to present a clear picture of the structure of a bid so that a fair and equitable comparison with other bidders is possible. Direct / Indirect: Work must be defence or defence-related to be credited against an offshore company’s IP commitment. Commercial equipment provided as part of a defence system may be admissible for IP purposes.

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Some dual-use civil work may be acceptable for fulfilling commitments where that work also has a military application, but purely commercial work remains inadmissible for IP credits. Threshold: IP is usually required when the offshore content of a bid exceeds £10m (c$20m), though it is £50m for France and Germany. Quota: Maximum of 100 percent of foreign content value in the Supply Contract. Penalties: The UK does not impose financial non-performance penalties. However, the IPU will take into consideration the past performance of the offshore company in IP activities, including its record of fulfilment on previous IP commitments and the IP offered on other MoD programmes. Contractors that fail to fulfil their obligations may be blacklisted for future defence procurements. IP Letter of Agreement: The LoA is not a legally binding document, nor should it be seen as a ‘best endeavours’ agreement. The MoD fully expects companies signing the LoA to fulfil the commitment made. The LoA will detail how the IP commitment will be fulfilled, what can be claimed and the completion date for the IP commitment. Fulfilment Period: Typically the IP commitment matches the timeframe of the MoD contract. Pre-Performance: If an offshore company is actively bidding on a UK MoD programme and it has no outstanding IP commitments, it can apply to open an account with the intention of accumulating IP credits in anticipation of their selection. An account can be only be used against no more than 50 percent of the indirect part of an IP commitment. If unsuccessful, the account will be terminated and the IP credit held for a period of five years for use against any other IP commitments that materialise.

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Banking: If the credit awarded for contracts placed by offshore companies in the scope of the Letter of Agreement exceeds the IP commitment the excess may be used against the indirect element of other future MoD IP commitments undertaken by the contractor. Excess credits to a maximum of £20m generated at the end of an IP commitment can be placed in an IP account pending a further IP commitment. The credits will be held for a period of five years and cannot be added to unless the company is actively bidding on a UK MoD programme. Multipliers: Not available for IP credit. Abatements: To assist UK based companies in their efforts to export the IPU will pursue opportunities to carry out exchanges of IP and offset with other offset authorities on a bi-lateral basis.

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Uruguay [01/06]

Uruguay is not traditionally among those countries entering bilateral countertrade agreements but has during 2005 agreed terms and signed Letters of Intent for Venezuela’s state energy corporation Petróleos de Venezuela S.A. (PDVSA) to purchase Uruguayan cement in exchange for enhanced oil refining capacity. PDVSA would trade its refining by-product, petcoke, for Uruguayan Portland-type cement to be used in Venezuelan housing projects.

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USA [10/09] The United States has no offset policy. The US Government is committed to the principles of free and fair trade, and consequently views offsets for military exports as economically inefficient and market distorting. Because US policy considers offsets ‘market distorting,’ it places no international restrictions on defence offsets and leaves responsibility for their negotiation and implementation with US exporters. Offsets are a separate commercial part of a defence sale (either FMS or DCS). The USG cannot be party of any offset arrangement. They are exclusively between the U.S. contractor and the purchasing country. By law, Sec 123, PL 102-558, Defence Production Act (Amendments of 1922) "No USG agency shall encourage, enter directly into, or commit U.S. firms to any offset arrangement related to the sale of U.S. defence articles or services. Negotiations or decisions’ regarding offset commitments and implementation reside with the companies involved." They can be termed either direct or indirect. The American government has yet to award a major contract to a foreign company. The Feingold Amendment: The Feingold Amendment, which was passed in 1994 as an amendment to the Arms Control Act, is designed specifically to restrict a particular kind of offset activity by US firms. The law prohibits US obligors earning offset credits by paying US companies to buy foreign goods. The amendment was tabled by Senator Feingold of Wisconsin after Northrop Corp. offered to pay the shipping costs of a Finnish paper machine manufacturer bidding for a US contract against a local competitor. Northrop had previously agreed to act as US agent for the Finnish company as part of an offset agreement. The US competitor was based in the Senator’s state. Although the amendment would not have affected the original deal it was passed into law, and now prevents US companies from buying their way out of obligations by subsidising foreign imports.

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Uzbekistan [01/09] Countertrade practices in Uzbekistan are regulated by a series of decrees issued by the Cabinet. Certain products may not be exported under barter transactions except in certain circumstances. The export of many other products under barter terms is subject to approval by regional administrations. Barter contracts must be registered with the Ministry of Foreign Economic Relations and with the authorised bank where the company has opened a deposit account. The authorised bank shall investigate the contract within two working days and give it an identification number. The import of products shall be completed prior to the export operation, or a bank guarantee shall be sent to the authorised bank with the confirmation of availability of financing. The main customs department of the state tax committee must confirm that the import shipment has arrived in Uzbekistan. Barter agreements for the products listed on the menu of acceptable goods may be conducted only in the two following circumstances: (1) Intergovernmental agreements with CIS and Baltic States. (2) With special permission from the cabinet of ministers. Barter contracts for the export of products that are not included in the list of prohibited products may be conducted only with the permission of the following government agencies: Council of Ministers of the Republic of Karakalpakstan, regional Hokim's (Governor's) offices and the Tashkent Mayor's Office. Such contracts shall be conducted only with enterprises from the CIS and Baltic States by manufacturing companies from Uzbekistan (for export of fruits and vegetables).

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Venezuela

[10/08]

Venezuela’s armed forces have been obliging foreign contractors to engage in industrial participation programmes designed primarily to develop the domestic defence sector. It is almost essential to provide industrial participation in order to win a defence contract. There is no formal procedure but the armed forces are asked to ensure industrial participation is applied to all major procurements. The threshold is applied arbitrarily. Indirect investments may be acceptable, and counterpurchase is another opportunity that is open for negotiation. The Ministry of Foreign Affairs needs to be consulted regarding any potential countertrade agreement. SAFAV is a state-supported authority to assist in the development of the aerospace industry, which is a sector that Venezuela would like to develop. Venezuela is likely to require that up-grade work in particular be fully fulfilled in-country. The objective is to acquire technology transfer and investment, particularly for joint ventures. It is also possible to have investments in the civil sector, such as in agriculture, energy, oil exploration, and aluminium conversion. Percentages are not important. Countertrade: President Hugo Chavez is taking full advantage of Venezuela’s energy resources to influence trade and secure political favours by supplying oil and gas with bilateral barter provisos, sometimes with overly advantageous payment terms to selective buyers. These usually are framed under bilateral agriculture cooperation agreements. Energy supplies are frequently tied to undertakings to provide Venezuela with appropriate technology transfer in the defence sector, particularly with regard to aerospace, and for development of and participation in the manufacture of equipment for the energy sector. State oil company PDVSA is spearheading the policy and includes as many compensatory mechanisms as possible to achieve its aims.

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Vietnam [04/10]

Vietnam sometimes uses ‘clearing account’ programmes either to settle historic bilateral debt with Russia or to pay for new defence acquisitions. Clearing arrangements and trade exchange under similar schemes had lost their appeal for a while but are sometimes used. Build-Operate Transfer: Decree 108, the latest relevant legal document introduced by the Vietnam government, took effect January 15, 2010, and provides guidelines for investments under build - operate- transfer (BOT), build-transfer-operate (BTO), and build-transfer (BT) models. The decree sets out key investor protections including tax incentives, exemptions from land rent during construction and operations, and the right to mortgage land or infrastructure for project financing purposes. The newest feature in the decree enables the application of foreign law to project contracts, and for the possibility of international arbitration.

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Zimbabwe

[07/07] Zimbabwe has sponsored several bilateral G2G countertrade agreements to overcome severe foreign exchange shortages. Elaborate compensation-type structures have been encouraged to support major industries that have insufficient capital to renew plant and equipment. Zimbabwe established in March 2007 a Joint Operations Command (JOC) food taskforce to bring together the army, police, intelligence service and ministries of Agriculture and Industry. The JOC was told to find ways to ease the country’s food shortages. The JOC then signed a bilateral agreement with Malawi to barter Zimbabwean sugar for Malawian maize.

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Country Changes in this edition:

1) Belgium 2) Bulgaria 3) Finland 4) Greece 5) Hungary 6) Indonesia 7) Libya 8) Malaysia 9) Norway 10) Poland 11) Portugal (policy discontinued - deleted) 12) Russia 13) Saudi Arabia 14) Slovakia (policy discontinued - deleted) 15) Slovenia 16) South Korea 17) Spain 18) Sweden 19) Syria (new) 20) Taiwan 21) Turkey

Disclaimer This bulletin has been prepared by CTO Data Service Co. (CTO). It is provided to you for information purposes only. Any pricing in this bulletin is indicative and is subject to variation. The information contained herein has been obtained from sources believed to be reliable but CTO does not represent or warrant that it is perfect and complete. Neither CTO nor any officer or employee thereof accepts any liability whatsoever for any direct or consequential loss arising from any use of this bulletin or its contents. Copyright in this bulletin is owned by CTO. No part of this bulletin may be reproduced in any manner without the prior written permission of CTO.

qb october 2011

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