Ministry of Defense BAF Command Offset Strategy of the Brazilian Air Force A comprehensive approach Lt Col Diógenes Lima Neto M.Sc., MBA Air Force Secretariat for Economy and Finances (SEFA) Offsets 2011 – Sofia, Bulgaria Ministry of Defense BAF Command 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. Air Force Secretariat for Economy and Finances (SEFA) Offsets 2011 – Sofia, Bulgaria Ministry of Defense BAF Command 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 Air Force Secretariat for Economy and Finances (SEFA) Offsets 2011 – Sofia, Bulgaria Ministry of Defense BAF Command 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. Air Force Secretariat for Economy and Finances (SEFA) Offsets 2011 – Sofia, Bulgaria Ministry of Defense BAF Command Legal Provisions on Defense Offsets • National Policy Defense – • National Strategy of Defense – • Normative Order nr. 586/MoD, 24 Apr 2006 Policy and Directives on Offsets – • Order nr. 899/MoD, 19 Jul 2005 Strategic Actions towards NDIP • • Decree nr. 6.703, 18 Dec 2008 National Defense Industry Policy (NDIP) – • Decree nr. 5484, 30 Jun 2005 Order nr. 764/MoD, 27 Dec 2002 Joint-workgroup on improving national defense industry capabilities – Joint-Order nr. 1068, 21 Jul 2008 Air Force Secretariat for Economy and Finances (SEFA) (MoI&T and MoD) Offsets 2011 – Sofia, Bulgaria Ministry of Defense BAF Command 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 Air Force Secretariat for Economy and Finances (SEFA) Offsets 2011 – Sofia, Bulgaria 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 Ministry of Defense BAF Command 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... Air Force Secretariat for Economy and Finances (SEFA) Offsets 2011 – Sofia, Bulgaria Ministry of Defense BAF Command Main civilian players: Defense related industries Source: ABIMDE http://www.abimde.org.br/?on=associados ... Among many others... Air Force Secretariat for Economy and Finances (SEFA) Offsets 2011 – Sofia, Bulgaria Ministry of Defense BAF Command Offset Strategy of MoD MoD Order 764/MD - Essentials Offset area Defense Threshold FOB 5 million US$, 12 months Minimum obligation 100% commercial contract Timeframe Commercial Contract duration Source of obligation Direct commercial sales or subcontracting (indirect supply) Multipliers Empirical, case-by-case basis Penalties Brazilian administrative legislation Focus Defense and aerospace industry sectors Direct offsets Preferential Indirect offsets Acceptable Eligible activities Transfer of technology, investments, co-production, licensed production, marketing support, training, other forms of countertrade. Air Force Secretariat for Economy and Finances (SEFA) Offsets 2011 – Sofia, Bulgaria Defense Offset Agreements General Schema - Brazil MoF MoD MoC&T MoI&T FINEP Army BNDES Navy Air Force funding funding Financing Contract Commercial Contract Offset Agreement Private Sector Companies Universities Civilian Organ. Suppliers Lenders funding Offset Beneficiaries Ministry of Defense BAF Command BAF Offset Features Liquidated damages Yes Bank guaranties Usually 5% of the obligation Multipliers 1 to 4 Waiver Sole-source suppliers, government-to-government international agreements (except under competitive environments) Banking 50% of new commercial contracts, 5 years, transferable under the same holding Pre-offsets No, but may be considered in a case-by-case basis Swaps No, but may be considered in a case-by-case basis Industrial Participation Acceptable, but only if joint projects are defined upfront and milestones are established Penalties Credit-increase based settlements may be accepted MoU Mandatory, even if the beneficiary is an AF organization Air Force Secretariat for Economy and Finances (SEFA) Offsets 2011 – Sofia, Bulgaria Ministry of Defense BAF Command BAF’s Acquisition & Offset Process EMAER Mil.Org. DCTA IFI (BAF’s Gen.Staff) (Buyers) (C&T Dep.) (Inst. for Ind. Sup.) SEFA Policy & Strategy Co-ordination Acquisition Process & Execution Technical support Budgetary & Financial support Accounting Internal Control & Auditing Air Force Secretariat for Economy and Finances (SEFA) Offsets 2011 – Sofia, Bulgaria Ministry of Defense BAF Command SEFA in context Financial Institutions Air Force Secretariat for Economy and Finances General Attourney Banks National Treasury ECAs Central Bank Foreign Gov’t Entities Gov’t Auditing and Control TCU Int’l Affairs Secretariat MPU CGU TCU: The Brazilian Court of Audit MPU: The Federal Prosecution Office Air Force Secretariat for Economy and CGU: The Office of the Comptroller General BAF Mil Org Finances (SEFA) Federal Budgetary Secretariat Offsets 2011 – Sofia, Bulgaria Ministry of Defense BAF Command BAF ‘s Offsets (*) • 5 offset and IP agreements, valued ~US$ 4 billion. (~US$ 500 million credited) • • • • EADS CASA – P-3 &CL-X Airbus – VC-X 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 Air Force Secretariat for Economy and Finances (SEFA) *SDDP examples Offsets 2011 – Sofia, Bulgaria Ministry of Defense BAF Command 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 Air Force Secretariat for Economy and Finances (SEFA) The first EC-725 shipped to Brazil – Oct 2010 Source: DefesaNet Offsets 2011 – Sofia, Bulgaria Ministry of Defense BAF Command 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. Air Force Secretariat for Economy and Finances (SEFA) Offsets 2011 – Sofia, Bulgaria Ministry of Defense BAF Command 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. Air Force Secretariat for Economy and Finances (SEFA) Offsets 2011 – Sofia, Bulgaria Ministry of Defense BAF Command 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 Air Force Secretariat for Economy and Finances (SEFA) Offsets 2011 – Sofia, Bulgaria Ministry of Defense BAF Command 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. Air Force Secretariat for Economy and Finances (SEFA) Offsets 2011 – Sofia, Bulgaria Ministry of Defense BAF Command Offset Strategy of the Brazilian Air Force A comprehensive approach Lt Col Diógenes Lima Neto International Projects Management Tel: +351 939 631 921 E-mail: diogenesln@sefa.aer.mil.br / diogeneslima@hotmail.com Special thanks to Lt Col Eduardo Quesado for his brilliant contribution. Air Force Secretariat for Economy and Finances (SEFA) Offsets 2011 – Sofia, Bulgaria