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Secretaria de Economia e Finanças da Aeronáutica
44thth ECCO SymposiumECCO Symposium
The BrazilianThe BrazilianDefense Roadmap:Defense Roadmap:Offsets as a tool to transform Offsets as a tool to transform
the local defense industry environmentthe local defense industry environment
Lt. Col. Eduardo Quesado Filgueiras, M.Sc.Lt. Col. Eduardo Quesado Filgueiras, M.Sc.Secretariat of Economy and Finance of the Air ForceSecretariat of Economy and Finance of the Air ForceMinistry of DefenseMinistry of Defense
Paris, June 2012
Secretaria de Economia e Finanças da Aeronáutica
SCOPESCOPETo understand how the National Defense To understand how the National Defense
Strategy of Brazil alters the focus on the offsets Strategy of Brazil alters the focus on the offsets requested by the Brazilian Military.requested by the Brazilian Military.
Secretaria de Economia e Finanças da Aeronáutica
What is What is ““ offsetoffset ”” for the Brazilians?for the Brazilians?
““In the past, Brazilian armed forces purchased In the past, Brazilian armed forces purchased military hardware as a sort of military hardware as a sort of ““barterbarter”” –– Italian Italian
subs traded for coffee before WW II, British jets subs traded for coffee before WW II, British jets for cotton afterwards. (for cotton afterwards. (……) )
But armed forces now think on But armed forces now think on ‘‘offsetsoffsets’’ as a way as a way to generate employment and to obtain transfer to generate employment and to obtain transfer of technology, and not as a simple exchange of of technology, and not as a simple exchange of
primary products.primary products.””FolhaFolha de São Paulo 19de São Paulo 19--1111--20072007
Secretaria de Economia e Finanças da Aeronáutica
A Traditional Way of ThinkingA Traditional Way of Thinking““To obtain To obtain reciprocityreciprocity from foreign suppliers from foreign suppliers of goods and services, focusing primarily on of goods and services, focusing primarily on
civilian and military aerospace activities, civilian and military aerospace activities, aiming equally development and aiming equally development and
technological modernization of the Brazilian technological modernization of the Brazilian Defense Industry and, Defense Industry and, exceptionallyexceptionally, other , other areas of interest as deemed convenient by areas of interest as deemed convenient by
the Government.the Government.””Air Force DCA 360Air Force DCA 360--11
Secretaria de Economia e Finanças da Aeronáutica
Offset as Offset as ““ CompensationCompensation ””
All and any direct or indirect All and any direct or indirect compensationcompensation practices practices agreed among the parties, as an opportunity when agreed among the parties, as an opportunity when goods and services are being imported, focused on goods and services are being imported, focused on generating industrial, commercial or technological generating industrial, commercial or technological benefits, in the form of:benefits, in the form of:
Order 764/ MoD, 2002
Secretaria de Economia e Finanças da Aeronáutica
A Standard Strategy for Commercial, Industrial A Standard Strategy for Commercial, Industrial and Technological and Technological CompensationCompensation
•• ““To promote the growth of technology and quality levels To promote the growth of technology and quality levels of the Brazilian Aerospace Industry, modernizing of the Brazilian Aerospace Industry, modernizing methods and processes of production and implementing methods and processes of production and implementing new technologies.new technologies.””
Air Force DCA 360Air Force DCA 360--11
Secretaria de Economia e Finanças da Aeronáutica
A Change:A Change:
““We have decided to employ the National We have decided to employ the National Defense Strategy as a tool for economical Defense Strategy as a tool for economical
development and technological development and technological autonomy.autonomy.””
Luiz IgnLuiz Ign áácio Lula da Silvacio Lula da SilvaPresident of the Federative Republic of BrazilPresident of the Federative Republic of Brazil
Secretaria de Economia e Finanças da Aeronáutica
“Drive to change; this is what the nation requires from its sailors, soldiers and aviators. It is not only a matter of funding and equipping the Armed Forces. It has to do with having the Armed Forces transformed to better defend Brazil.”END/2008
CARACTERISTICS• Greater involvement of the Brazilian
society in defense;• Recognition of the need to provide a
defense structure in sync with Brazil’s political and economical stature; e
• Addition of defense issues into the national agenda.
Secretaria de Economia e Finanças da Aeronáutica
(...)“The Plan focuses on middle and long term strategic actions , and aims at modernizing the national defense structure , acting upon three structuring axes: reorganization of the Armed Force s, the restructuringof the Brazilian industry of defense materials , and the troop composition policy for the Armed Forces..”(...)
“The restructuring of the Brazilian industry of def ense materials isintended to ensure that the equipment needs of the Armed Forces aremet and be based on technologies that are domestically mastered .”(...)
“ inserting defense issues into the national agenda and designing a long term planning for the defense of the country i s an unprecedented fact in the Brazilian State. This establishes a new step in the treatment of this relevant theme, intimately linked to national development .”(...)
Secretaria de Economia e Finanças da Aeronáutica
(...)“ Partnerships will be attempted with other countries , aiming atdeveloping technological training and the making of national defensematerials to gradually rule out the need to purchas e imported servicesand products. Whenever possible, these partnerships will be built as an expression of a more comprehensive strategic associ ation betweenBrazil and the partner country . This association will stand out in defense collaboration and development efforts, and it will be ruled by two orders of basic motivation: international and n ational.”(...)
“ Brazil will always make clear to the foreign partie s that it intends to be a partner, and not a client or buyer . The country is far more interested in partnerships to strengthen its independent capac ity building, than in purchasing finished products and services. In princ iple, these partnerships should anticipate that substantial part of research and manufacturing should be done in Brazil , and will gain further importance when they are an expression of comprehen sive strategic collaborations..”(...)
Secretaria de Economia e Finanças da Aeronáutica
(...)“make sure that purchasing follows the guidelines of theNational Strategy of Defense and its design over the time.”(...)
“ link the purchasing of foreign defense materials to the substantialtransfer of technology , including through partnership arrangements forresearch and manufacturing in Brazil of part of the se products or theirsubstitutes;.”(...)
(...)“ Joint initiatives of Armed Forces research organizations, nationaleducation institutions and Brazilian private compan ies will be encouraged.”(...)
Secretaria de Economia e Finanças da Aeronáutica
Legal BasisLegal Basis•• Constitution of BrazilConstitution of Brazil
–– Article 218. Article 218. The State shall promote and foster The State shall promote and foster scientific development, research and technological scientific development, research and technological expertise.expertise.
–– Article 219. Article 219. The local market is part of the national The local market is part of the national patrimony and shall be supported so as to improve patrimony and shall be supported so as to improve cultural and sociocultural and socio--economic development, promote economic development, promote welfare of the people and achieve technological welfare of the people and achieve technological autonomy of the country.autonomy of the country.
Secretaria de Economia e Finanças da Aeronáutica
Legal BasisLegal Basis•• Ministry of Defense Ministry of Defense
–– Order 764/MD, Policy and Directives for Offsets, Order 764/MD, Policy and Directives for Offsets, 2002.2002.
–– Decree NDecree Nºº 6.703, 18 Dec. 2008. National Defense 6.703, 18 Dec. 2008. National Defense Strategy.Strategy.
•• Air ForceAir Force–– Order NOrder Nºº 1.396/GC4 1.396/GC4 –– Institutes the Air Force Offset Institutes the Air Force Offset
Committee, under the AF General Staff, 2005.Committee, under the AF General Staff, 2005.–– DCA 360DCA 360--1 1 –– AF Policy and Strategy for Offsets, AF Policy and Strategy for Offsets,
2005. 2005. –– ICA 360ICA 360--1 1 –– AF Regulation for Offset Activities, 2005.AF Regulation for Offset Activities, 2005.
Secretaria de Economia e Finanças da Aeronáutica
Legal BasisLegal Basis•• Navy Navy
–– Order nOrder nºº 59, 18 Feb 2010, Brazilian Navy Offset Guidelines.59, 18 Feb 2010, Brazilian Navy Offset Guidelines.–– Order nOrder nºº 180/EMA, 10 Aug 10, Navy Offset Committee; 180/EMA, 10 Aug 10, Navy Offset Committee; –– EMAEMA--420 420 –– Navy Logistics Manual (Chapter 06);Navy Logistics Manual (Chapter 06);–– SGMSGM--102 102 –– Navy Acquisition Rules (Chapter 14).Navy Acquisition Rules (Chapter 14).–– Players: Offset Committee, Navy General Staff, Navy Departments,Players: Offset Committee, Navy General Staff, Navy Departments,
General Secretariat of the Navy, EMGEPROM, Navy Secretariat of CGeneral Secretariat of the Navy, EMGEPROM, Navy Secretariat of C&T &T (SecCTM).(SecCTM).
–– SecCTM is responsible for the technical opinion in acquisitions,SecCTM is responsible for the technical opinion in acquisitions,concerning offsets related to ToT.concerning offsets related to ToT.
–– Focus is on the development of the Defense Industry.Focus is on the development of the Defense Industry.
Secretaria de Economia e Finanças da Aeronáutica
Legal BasisLegal Basis•• ArmyArmy
–– Order nOrder nºº 201/EME, Brazilian Army Rules for the 201/EME, Brazilian Army Rules for the Management of Commercial, Industrial and Management of Commercial, Industrial and Technological Agreements, 26 Dec 2011Technological Agreements, 26 Dec 2011..
–– Creates the Creates the ““System for the Management of Commercial, Industrial System for the Management of Commercial, Industrial and Technological Agreementsand Technological Agreements”” (SISGAC)(SISGAC)
–– Establishes the Establishes the OffsetOffset Permanent CommitteePermanent Committee, composed by , composed by representatives from the Army Departments and IMBEL.representatives from the Army Departments and IMBEL.
–– Moves from Moves from ““best effortsbest efforts”” to mandatory obligations.to mandatory obligations.
Secretaria de Economia e Finanças da Aeronáutica
Comptroller Ministry of Defense
Offset area Defense
Threshold FOB 5 million US$, 12 months
Minimum obligation 100% commercial contract
Timeframe Contract duration
Source of obligation Direct commercial sales or subcontracting (indirect supply)
Multipliers Empirical, case-by-case basis
Penalties Brazilian administrative legislation
Focus Defense and aerospace industry sectors
Direct offsets Preferential
Indirect offsets Acceptable
Eligible activities Transfer of technology, investments, co-production, licensed production, marketing support, training, other forms of countertrade.
Secretaria de Economia e Finanças da Aeronáutica
Manager Air Force
Liquidated damages Yes
Bank guaranties Usually 5% of the obligation
Multipliers 1 to 4
Waiver Sole-source suppliers, government-to-government international agreements (except under competitive environments)
Banking 50% of new commercial contracts, 5 years, transferable under the same holding
Pre-offsets No, but may be considered in a case-by-case basis
Swaps No, but may be considered in a case-by-case basis
Industrial Participation
Acceptable, but only if joint projects are defined upfront and milestones are established
Penalties Credit-increase based settlements may be accepted
MOU Mandatory, even if the beneficiary is an AF organization
Secretaria de Economia e Finanças da Aeronáutica
Economical:
At least
US$ 18,75 billion
in exports for the
next 20 years
I M P A C T S
Social:
Create and sustain
direct and indirect
jobs
Tecnological:
Create leading
edge technology.
New competences
in the engineering
field.
Political:
Better regional
integration
Strategical:
Global projection.
Potential for
exports to over 70
countries.
+ + + +
KCKC--390390
Secretaria de Economia e Finanças da Aeronáutica
A Change in Thinking...A Change in Thinking...
09/03/201009/03/2010 -- President Luiz InPresident Luiz Ináácio Lula da Silva said last cio Lula da Silva said last Tuesday (...), that the decision for the fighter acquisition Tuesday (...), that the decision for the fighter acquisition program was still not taken due to its importance to program was still not taken due to its importance to defense capabilities. "FAB (the Air Force) has already defense capabilities. "FAB (the Air Force) has already made its analysis and have premade its analysis and have pre--selected three models selected three models that are able to fulfill its needs.that are able to fulfill its needs. Now it is time for the Now it is time for the government to make the strategical, political and government to make the strategical, political and economical analysis so as to decide which proposal economical analysis so as to decide which proposal will bring greater benefits for the Brazilian Socie tywill bring greater benefits for the Brazilian Socie ty ”” ..
Secretaria de Economia e Finanças da Aeronáutica
And Rules!And Rules!
09/03/201009/03/2010 -- President Luiz InPresident Luiz Ináácio Lula da Silva said last cio Lula da Silva said last Tuesday (...), that the decision for the fighter acquisition Tuesday (...), that the decision for the fighter acquisition program was still not taken due to its importance to program was still not taken due to its importance to defense capabilities. "FAB (the Air Force) has already defense capabilities. "FAB (the Air Force) has already made its analysis and have premade its analysis and have pre--selected three models selected three models that are able to fulfill its needs.that are able to fulfill its needs. Now it is time for the Now it is time for the government to make the strategical, political and government to make the strategical, political and economical analysis so as to decide which proposal economical analysis so as to decide which proposal will bring greater benefits for the Brazilian Socie tywill bring greater benefits for the Brazilian Socie ty ”” . . We have decided to make the National Defense Policy We have decided to make the National Defense Policy an axis for economic development and technological an axis for economic development and technological autonomy. (autonomy. (……) Whatever the selectee, there must be a ) Whatever the selectee, there must be a compromise on transferring all leading edge technology.compromise on transferring all leading edge technology.
Secretaria de Economia e Finanças da Aeronáutica
Brazilian Defense White BookBrazilian Defense White Book•• Supplementary Law 136, 2009: The Defense White Book Supplementary Law 136, 2009: The Defense White Book
is fundamental for the Country is fundamental for the Country and is a key document for and is a key document for Policies, offering Government views in respect to Policies, offering Government views in respect to defense. It is public domain and describes a broad defense. It is public domain and describes a broad spectrum of strategical policies for spectrum of strategical policies for long term defense long term defense planningplanning. It also . It also allows budget and multiallows budget and multi--annual planning annual planning for defense programsfor defense programs..
Secretaria de Economia e Finanças da Aeronáutica
Large Defense ProgramsLarge Defense ProgramsProgram Scope
F-X2 Figther jets
Sisfron Border surveillance
SisGAAz "Blue Amazon"
PROSUPER Surface ships
M-113 APC modernization
PROSUB Submarines
F-5M Figther modenization
KC-390 Tactical airlifter
EC-725 Helicopters
Mi-35 Helicopters
VBTP-MR APC Guarani
Sources: MoD, ABIMDE
US$ 40 Billion
Secretaria de Economia e Finanças da Aeronáutica
GovernmentGovernment Procurement RegulationsProcurement Regulations
•• LAW 8.666/93 LAW 8.666/93 –– Art. 3Art. 3rdrd -- The procurement process must The procurement process must (...) (...) promote sustainable national developmentpromote sustainable national development (...). (...).
§§11. 11. RFPs (...) may ask for (...) RFPs (...) may ask for (...) offset provisionsoffset provisions..•• DECREE NDECREE Nºº 7.546, 2 AUG 2011:7.546, 2 AUG 2011:
•• Preference margin for Brazilian IndustryPreference margin for Brazilian Industry;;
•• Creates the Comissão Interministerial de Compras PCreates the Comissão Interministerial de Compras Púúblicas blicas ––(Inter(Inter--Ministry Commission for Government Acquisitions), Ministry Commission for Government Acquisitions), which which regulates preference margins regulates preference margins and and evaluates offset evaluates offset proposals;proposals;
•• CICI--CP is composed by the Ministries of CP is composed by the Ministries of FinanceFinance, , Budget and Budget and PlanningPlanning, , Development, Industry and CommerceDevelopment, Industry and Commerce, , Science Science and Technologyand Technology and and Foreign AffairsForeign Affairs, , eventuallyeventually other other ministries, such as Defense.ministries, such as Defense.
Secretaria de Economia e Finanças da Aeronáutica
SCOPESCOPETo understand how the National Defense To understand how the National Defense
Strategy of Brazil alters the focus on the offsets Strategy of Brazil alters the focus on the offsets requested by the Brazilian Military.requested by the Brazilian Military.