GICC Budapest 2010 - Offset Strategy of the Brazilian Air Force

BAF CommandBAF CommandMinistry of DefenseMinistry of Defense

Air Force Secretariat for Economy and Finances (SEFA) GICC – 2010 – Budapest, Hungary

Offset Strategy of the

Brazilian Air Force

Offset Strategy of the

Brazilian Air Force

A comprehensive approachA comprehensive approach

Major DiMajor Dióógenes Lima Netogenes Lima NetoM.Sc., MBA



ObjectiveObjective

• To have a better 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)



AgendaAgenda

• Brazilian Military Offset Focuses & Tendencies

• Offset Strategy of MoD and BAF

• BAF’s Offset Features & Portfolio

• SEFA in context

• Negotiating Commercial, Financial and Offset's Agreements – a comprehensive approach

• Offset Agreements: Controls and Auditing



Brazilian Military Offset FocusBrazilian Military Offset Focus

• NSD will be 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 MDIC, MRE, MTran, MME and BNDES, specially for large national projects such as high-speed rail transportation and hydrocarbons offshore prospection.



Brazilian Offset TendenciesBrazilian 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.

MoDMoD

Army

NavyAir Force

MoTradeMoTrade

BNDES

MoC&TMoC&T

FINEP

Companies

UniversitiesCivilian Organ.

Private Sector

SuppliersSuppliers

Commercialcontract

funding

funding

OffsetAgreement

LendersLenders

FinancingContract

funding

Commercial, Offset and Financing relationshipsCommercial, Offset and Financing relationships



Offset Strategy of Offset Strategy of MoDMoD

• MoD - Strategic level– Order nr. 764/MD/2002, “Policy and Directives for Offsets”.

• BAF – Strategic level

• DCA 360-1/2005, “Policy and Strategy for Offset Agreements”.

• Order nr. 1.396/GC4/2005 – Institutes the Air Force Offset Committee, under the AF General Staff.

– Execution level• ICA 360-1/2005, “Principles for Offset Agreements

Negotiations”.



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.

Offset Strategy of Offset Strategy of MoDMoDMoD Order 764/MD - Essentials



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

BAF Offset FeaturesBAF Offset Features



• 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, KC-X – selection in progress

BAFBAF’’ss & Offsets& Offsets**

SDDP: SDDP: UnderdepartmentUnderdepartment of Development and Programsof Development and Programs *SDDP *SDDP examplesexamples



• 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 MDIC participation.

• Keywords in this project:

� Industrial co-operation & sustainable benefits

� Long term relationship

� Pro-active approach

� Global strategy

Latest Success Case: HXLatest Success Case: HX--BR ProjectBR Project

MDIC: MDIC: MinistryMinistry ofof DevelopmentDevelopment, , IndustryIndustry andand TradeTrade Recent Success Story: HX-BR Project



BAFBAF’’ss Acquisition & Offset ProcessAcquisition & Offset Process

Internal Control & Auditing

Accounting

Budgetary & Financial support

Technical support

Acquisition Process & Execution

Co-ordination

Policy & Strategy

SEFAIFI(Inst. for

Ind. Sup.)

DCTA(C&T Dep.)

Mil.Org.(Buyers)

EMAER(BAF’s Gen.Staff)



SEFA in context SEFA in context Air Force Secretariat for Economy and Finances

Int’l AffairsSecretariat

IntInt’’l Affairsl Affairs

SecretariatSecretariat

Federal BudgetarySecretariat

Federal BudgetaryFederal Budgetary

SecretariatSecretariat

General AttourneyGeneral General AttourneyAttourney

National TreasuryNational TreasuryNational Treasury

Central BankCentral BankCentral Bank

BanksBanksBanks

ECAsECAsECAs

Financial InstitutionsFinancial Institutions

TCUTCUTCU

MPUMPUMPU

GovGov’’tt Auditing and ControlAuditing and Control

CGUCGUCGU

Foreign Gov’t EntitiesForeign Foreign GovGov’’tt EntitiesEntities

BAF Mil OrgBAF Mil Org

TCU: the Brazilian Government Accounting Office

MPU: a public prosecution serviceMPU: a public prosecution serviceCGU: federal comptroller general CGU: federal comptroller general



FINANCING PROCUREMENT

Negotiating Commercial, Financial and Offset's Agreements Negotiating Commercial, Financial and Offset's Agreements –– a comprehensive approacha comprehensive approach

RFI / RFP PROPOSALS EVALUATION SHORT LISTSHORT LISTSHORT LIST

FIRST PHASE - PRELIMINARY ASSESSMENT

SECOND PHASE – FINAL SELECTION

REVISED REVISED

PROPOSALSPROPOSALSANALYSISANALYSIS

FACE TO FACEFACE TO FACE

ONON--SITE SURVEYSITE SURVEY

FLIGHTSFLIGHTS

COMPLEMENTARYCOMPLEMENTARY

INFORMATIONINFORMATIONBAFOBAFO

THIRD PHASE - CONTRACTING

AWARD AND SIGNATUREAWARD AND SIGNATUREAWARD AND SIGNATURE

COMMERCIAL, LOGISTICS , TECHNICAL OFFSET

SELECTED BIDDER

SELECTED SELECTED

BIDDERBIDDER

BAF Commander

FINAL COMMERCIAL NEGOTIATIONFINAL COMMERCIAL NEGOTIATION

COMMERCIALCONTRACT

OFFSET OFFSET AGREEMENTAGREEMENT

Courtesy of Maj Int Eduardo Quesado Filgueiras – SDDP/COPAC



BAF Offset Agreements: Controls and AuditingBAF 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: accomplishment of the offset credits and its balance.

• Our Government Accounting Office (TCU) has demonstrated deep concerns with a possible non-utilization of some of those offset credits.

• Additionally to the external control exercised by TCU, SEFA is in charge of all activities related to Auditing inside the BAF realm.



AgendaAgenda

• Brazilian Military Offset Focuses & Tendencies

• Offset Strategy of MoD and BAF

• BAF’s Offset Features & Portfolio

• SEFA in context

• Negotiating Commercial, Financial and Offset's Agreements – a comprehensive approach

• Offset Agreements: Controls and Auditing



ObjectiveObjective

• To have a better 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)



Offset Strategy of the Brazilian Air ForceOffset Strategy of the Brazilian Air ForceA comprehensive approachA comprehensive approach

Major Diógenes Lima NetoDivisão de Contratos e Convênios

Secretaria de Economia e Finanças da Aeronáutica – SEFAEsplanada dos Ministérios, bloco “M”, 2º andarBrasília – Distrito FederalBrasilCEP 70.045-900

TEL: +55 (61) 3962-1463

E-mail: [email protected]

Special thanks to Maj Eduardo Quesado Filgueiras, from the SDDP/COPAC, for his precious support in the elaboration of this presentation.

Documents

GICC Budapest 2010 - Offset Strategy of the Brazilian Air Force