Offset Strategy of the Brazilian Air Force

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1 Offset Strategy of the Brazilian Air Force A comprehensive approach Lt Col Diógenes Lima Neto M.Sc., MBA

2 Objective A comprehensive understanding of the BAF s offset strategy, with special attention to the relationships between commercial contracts, offset agreements and buyer s credit operations.

3 Agenda Brazilian Military Offset Focus Legal Provisions on Defense Offsets Brazilian Defense Industry s Synergy Defense and Related Policies Main civilian players: industries Offset Strategy of MoD and BAF BAF s Offset Features & Portfolio Brazilian Offset Trends

4 Brazilian Military Offset Focus NSD is the driver for new high-profile programs, under MoD-issued guidelines for Industrial Participation. Other government domains than defense will be increasingly concerned on possible benefits of industrial participation and offsets, such as MoI&T, MRE, MTran, MME and BNDES, specially for large national projects such as high-speed rail transportation and hydrocarbons offshore prospection.

5 Legal Provisions on Defense Offsets National Policy Defense Decree nr. 5484, 30 Jun 2005 National Strategy of Defense Decree nr , 18 Dec 2008 National Defense Industry Policy (NDIP) Order nr. 899/MoD, 19 Jul 2005 Strategic Actions towards NDIP Normative Order nr. 586/MoD, 24 Apr 2006 Policy and Directives on Offsets Order nr. 764/MoD, 27 Dec 2002 Joint-workgroup on improving national defense industry capabilities Joint-Order nr. 1068, 21 Jul 2008 (MoI&T and MoD)

6 Brazilian Defense Industry s Synergy Political President Legislations Ministers Parliamentary Front on National Security MoD MoI&T MoC&T Agencies Government Industrial Associations Defense and Security Materials Aerospace Regional

7 Defense and Related Policies National Policy Defense National Strategy of Defense Navy Command Army Command Air Force Command Brazilian Agency for Industrial Dev. - ABDI National Development Bank BNDES Defense Industrial Complex Research and Projects Financing FINEP Public and Private Universities

8 Main civilian players: Defense Industry Associations Federation Industries of São Paulo State Brazilian Association of Defense and Security Materials Industries Brazilian Aerospace Industries Association Brazilian Association of Chemical and Biotech Industries... Among many others...

9 Main civilian players: Defense related industries Source: ABIMDE Among many others...

10 Offset area Threshold Minimum obligation Timeframe Source of obligation Multipliers Penalties Focus Direct offsets Indirect offsets Eligible activities Offset Strategy of MoD MoD Order 764/MD - Essentials Defense FOB 5 million US$, 12 months 100% commercial contract Commercial Contract duration Direct commercial sales or subcontracting (indirect supply) Empirical, case-by-case basis Brazilian administrative legislation Defense and aerospace industry sectors Preferential Acceptable Transfer of technology, investments, co-production, licensed production, marketing support, training, other forms of countertrade.

11 Defense Offset Agreements General Schema - Brazil MoF MoD MoC&T MoI&T Army FINEP BNDES Navy Air Force funding funding Private Sector Financing Contract Commercial Contract Offset Agreement Companies Universities Civilian Organ. Lenders funding Suppliers Offset Beneficiaries

12 Liquidated damages Bank guaranties Yes Multipliers 1 to 4 Waiver Banking Pre-offsets Swaps Industrial Participation Penalties MoU BAF Offset Features Usually 5% of the obligation Sole-source suppliers, government-to-government international agreements (except under competitive environments) 50% of new commercial contracts, 5 years, transferable under the same holding No, but may be considered in a case-by-case basis No, but may be considered in a case-by-case basis Acceptable, but only if joint projects are defined upfront and milestones are established Credit-increase based settlements may be accepted Mandatory, even if the beneficiary is an AF organization

13 BAF s Acquisition & Offset Process EMAER Mil.Org. DCTA IFI SEFA (BAF s Gen.Staff) (Buyers) (C&T Dep.) (Inst. for Ind. Sup.) Policy & Strategy Co-ordination Acquisition Process & Execution Technical support Budgetary & Financial support Accounting Internal Control & Auditing

14 Financial Institutions SEFA in context Air Force Secretariat for Economy and Finances Banks ECAs Foreign Gov t Entities General Attourney National Treasury Central Bank Gov t Auditing and Control TCU MPU CGU BAF Mil Org Int l Affairs Secretariat Federal Budgetary Secretariat TCU: The Brazilian Court of Audit MPU: The Federal Prosecution Office CGU: The Office of the Comptroller General

15 5 offset and IP agreements, valued ~US$ 4 billion. (~US$ 500 million credited) EADS CASA P-3 &CL-X Airbus VC-X BAF s Offsets (*) Elbit Systems F-5BR & AL-X Eurocopter H-XBR 18 agreements under negotiation, valued ~US$ 9 billion. A-1M Elbit Systems (T&C agreed) CL-X2 Airbus Military H-XBR CLS Eurocopter & Turbomeca F-X2 waiting final decision from the National Defense Council SDDP: Underdepartment of Development and Programs *SDDP examples

16 Latest Success Case: HX-BR Project Industrial cooperation agreement for local production and nationalization of 50 EC-725 helicopters, focused on transfer of technology and local industry development. First joint acquisition program in Brazilian military history. 22 ICP projects, managed by SDDP with AF, Navy, Army and MoI&T participation. Keywords in this project: Industrial co-operation & sustainable benefits Long term relationship Pro-active approach Global strategy MDIC: Ministry of Development, Industry and Trade The first EC-725 shipped to Brazil Oct 2010 Source: DefesaNet

17 BAF Offset Agreements: Controls and Auditing Few years ago, the controlling was made exclusively by EMAER. Recently, this control was split between EMAER and SEFA. EMAER: strategic aspects of offset; SEFA: fulfillment of the offset credits and its balance. The Brazilian Court of Audit (TCU) has demonstrated some concerns with a possible negligence on the fulfillment on offset credits. Additionally to the external control exercised by TCU, SEFA is in charge of all activities related to Auditing inside the BAF realm.

18 Brazilian Offset Tendencies Brazil is moving from decentralized offset management toward industrial participation using high profile programs as drivers of the change. This implies a different approach to manage offset/ip on Government procurements: Projects must be discussed at the early stages of program lifecycles, given that effective industrial participation is in fact direct and so set in the beginning for joint development and production to succeed (the CMA issue). Industrial cooperation demands more institutional support from the offset authority to the local industry, including investments and continuous workload. Sound business plans are paramount.

19 Agenda Brazilian Military Offset Focus Legal Provisions on Defense Offsets Brazilian Defense Industry s Synergy Defense and Related Policies Main civilian players: industries Offset Strategy of MoD and BAF BAF s Offset Features & Portfolio Brazilian Offset Trends

20 Objective A comprehensive understanding of the BAF offset strategy, with special attention to the relationships between commercial contracts, offset agreements and buyer s credit operations.

21 Offset Strategy of the Brazilian Air Force A comprehensive approach Lt Col Diógenes Lima Neto International Projects Management Tel: diogenesln@sefa.aer.mil.br / diogeneslima@hotmail.com Special thanks to Lt Col Eduardo Quesado for his brilliant contribution.

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