Foreign military and direct commercial sales – "no known offsets" and FMF
Off set - FMS:
For the U.S., the major world exporter of weapons by far, there are two main ways to sell weapons to a foreign country. The first is referred to as "Direct Commercial Sale" and it is a company to government sale. The second way is referred to as "Foreign Military Sales", that is a government to government sale.
A Direct Commercial Sale is highly supervised by U.S. Government and even by the U.S. Congress, in spite of its free market appearance. The arms trade, because of its connection with national security, is never free from strict government supervision.[23]
For a sale to a foreign country's Defense Department, a U.S. defense firm must be licensed. It is checked by the Defense Department and by the State Department, and, in the case of relevant sales, even authorized or vetoed by U.S. Congress. Direct Commercial Sales are highly regulated because of security, political, and commercial reasons. Even from the point of view of indirect and non-military offset agreements, U.S. Defense companies and their subcontractors (offset fulfillers) must present detailed report of their offset activities to the Commerce Department, Bureau of Industry and Security (BIS).[24]
Foreign Military Sales are indirect sales of weapons produced by one or more U.S. contractors through an agency of the Department of Defense, the Defense Security Cooperation Agency, DSCA.[25][26] In a way, DSCA acts as Prime Contractor's agent in promoting and selling U.S. made weapons to foreign countries. The known FMS disadvantage is that DSCA adds to the final sale price a small percentage for its own administrative costs; the advantage is some free training with U.S. Armed Forces for joint international operations.[27] In this type of sale, however, there are two important aspects in regards to the offset business.
1)
Since 1990, under a specific directive by President George Bush,[28] no U.S. Federal Agency or U.S. Government employee can be involved in the offset business. To each press release about a FMS (or of any documents regarding a FMS), there is a standard disclaimer: “There are no known offset agreements proposed in connection with this (potential) sale.” [29] However, while DSCA acts on behalf of the prime contractor with a foreign government - and refuses even the mere knowledge about offsets - under the FMS program prime contractors are allowed to put all their offset costs into the final price.[30]
The cost of the offset is not even itemized in the FMS offer, and if the client wants to discuss or simply to know the cost of the offset, the client must speak directly with the Contractor and not with DSCA. In other words, U.S. Government cannot deal with offsets, U.S. Defense Prime Contractors can and do. DSCA has made available in its complete manual details and analytical explanations for U.S. Defense companies on how to include the offset various costs into their contract and invoices.[31] So prime contractors, even under FMS, are allowed to recover all costs “of any offsets which are associated with those contracts.” To be sure, “U.S. Government agencies may not enter into or commit U.S. companies to any offset agreement.” De facto during the cold war offsets had different functions and often U.S. Government Agencies were directly involved. President Bush, by ending the cold war with a victory, likewise ended U.S. agencies’ liability in delicate practices like the offsets (1990), since they lost the primary political value they had during the cold war.[32]
2) U.S. funds assigned by United States Foreign Military Financing (FMF) that may be connected with Foreign Military Sales (FMS) cannot be used for any type of offsets.
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List of countries' offset policies
The following is a cursory survey on some countries' offset policies. It does not enter into details, and basically it gives: 1) the legal base for the offset; 2) the purchase threshold above which there is a requests for offset; 3) the requested “quantity” of offset by the country in terms of percentages of the contract value; 4) the applied multipliers, that qualify (“quality”) through a number the appreciations of a certain type of offsets (the “Credit Value” of an offset is the “Actual Value” by the multiplier); 5) and some remarks or specific information, including the websites of the National Offset activities.
A detailed list of the National Laws and Policies of the Countries of the European Union can be found in the website of European Defense Agency in a new “EU Offset Portal”[26]. Another very useful analysis of country policies can be found in Belgian Ministry of Economy (in charge of Belgian offsets). This publicly available document gives one of the most intelligent global analysis of countries offsets policies, with a purchaser's perspective, that is the point of view of weapons importer countries [27]. From a similar point of view, one can see the purchaser's point of view on offsets in UAE offset web-page [28], in the new Kuwaiti articulated offset policy [29].
On the seller's point of view, in Bureau of Industry and Security (BIS) Annual Reports to U.S. Congress one can find the position on offsets of weapons exporters countries like U.S. Magazines and specialized publications like Jane's Defense Industry [30], EPICOS[31], Countertrade & Offset or CTO [32] give detail accounts and updates on national policies, requests, changes, etc.
Australia: The Department of Defense (Defense Material Organization) is in charge of the offset. The threshold is 5 millions of Australian Dollars. Multipliers go from 1 to 6. By rule, Australia does not accept indirect (civilian) offsets, unless such offsets brings benefits to the Australian Defense Industry.[33]
Austria: Offset Agreements are negotiated by the Federal Ministry of Economic Affairs and Labor on a case by case basis; the percentage of offset is above 100%, up to 200% (and sometimes even more) of the contract values. Austria has one of the highest requests in the world for nominal quantity offsets. However, multipliers can go up to 10. The minimum value of the sale for mandatory offsets is 726.000 Euro.[34]
Belgium: A Royal Decree (6/2/1999, and modified-6/12/2001) is the legal foundation of the Belgian Industrial Benefits Program. The program is directed by Ministry of Economic Affairs (Industrial Benefits in the Field of Defense Procurement [35] ). The threshold value is usually EUR 11 million, but it is lower if it is not a public and open tender. The minimum required offset is 100%. Multipliers are not specified. The focus is on high technology and new or additional business flow. The Belgian offset guidelines are very sophisticated. One of the most important and explicit points is the so-called “newness aspect:” offsets, such export assistance, “must create unambiguously a new or additional business flow in export” for Belgian companies. Belgium distinguishes three forms of offsets: direct, semi-direct, and indirect.
Brazil: Under the Ministry of Defense, Air Force, Navy and Army have separate offset policies, or Industrial Cooperation Divisions. Offsets thresholds are different for each branch of the Brazilian Armed Forces (between 1 million and 5 million USD). The total offset request above 5 million USD is 100%. Multipliers are between 1 and 4. Brazilian offset policies emphasize technological development of its defense industry through technology transfers, cooperation, co-production.
Bulgaria: Public Procurement Law 2004, revised in 2009. Direct offsets are supervised by the Defense Ministry, and indirect offsets by the Ministry of Economy and Energy. There is however a Permanent Inter-Ministerial Council of Special Purpose Public Procurement to approve offset agreements. The Agency for Information, Technology and Communications (SAITC) assists and coordinates offset projects. The threshold for offset is 5 millions Euro. The minimum Value is 110% of the contract value. Multipliers are between 1 and 3. Offsets are generally 30% direct and 70% indirect.[36]
Canada: Canada's offset agreements (known as Industrial and Regional Benefits (IRB)) are managed by the IRB directorate within the Canadian government's Department of Industry. The IRB Policy was created in 1986 to assist Canadian companies in leveraging government procurement. The Policy requires that prime contractors place sub-contracts and investments in the high-tech sectors of the Canadian economy in an amount usually equal to the value of the defence contract won. Investments can be direct (transactions that give small- to medium-sized enterprises an opportunity to provide goods, services and/or long-term service support directly for the items being procured by the government) or indirect (transactions which are not directly related to the procured items and are, instead, related to investments, technology cooperation, and product mandates). [37].
Czech Republic: Offset regulations are set by Government Resolution 9 - 2005. The Ministry of Trade and Industry is in charge of Industrial Cooperation (also through an Offset Commission). The minimum value of the contract is CZK 500 million. The minimum offset percentage is 100 per cent. No multipliers are used. Offset focus is on new technologies, co-operation and technology transfer. Minimum 20% of direct offset. The Offset Commission issues Annual Reports on the status of the offsets.
Denmark: Ministry of Defense is in charge, but the Ministry of Economic Affairs is monitoring offset implementations. The Industrial Cooperation policy was issued in 2005. The threshold is DKK 25 million. Minimum offset requirement of 100%. Multipliers but can be considered for R&D and technology transfers. Denmark signed a trilateral agreement with UK and The
Netherlands on “best practice for the application of abatements in offset” regarding swaps of offset obligations.
Estonia: No offset law. Estonia is particularly interested in counter-trade.
Finland: No law, only public guidelines on Industrial Participation. The Ministry of Defense is in charge, Defense Materiel Industry and Industrial Participation, but with The Ministry of Trade and Industry. The minimum contract value for offsets is EUR 10 million. 100% minimum of offset requirement. Multipliers are between 0.3 and 3.0 (for Finnish export). Technology transfer multipliers are negotiated. Finland's focus is on its domestic defense industry.
France: No formal offset policy, but has counter-trade and offset departments in the Ministry of Economic Affairs and in the Ministry of Defense. However, France like U.S., is almost completely independent on its own military needs, and it has a minimal amount of weapon procurements from foreign countries.
Germany: German official position is that offset arrangements are economically counterproductive in defense trade. However, Germany applies a policy of “industrial balances,” based on 100% of the contract value. German Federal Ministry of Defense (BMVg), and The Federal Office of Defense Technology and Procurement (Das Bundesamt für Wehrtechnik und Beschaffung - BWB, that is an Acquisition Agency)[33] are in charge of procurement and cooperation. The Agency has a branch office for U.S. and Canada in Reston, Virginia [38]. It is worth noticing that Germany, while being the third world exporter of weapons, does not have huge “defense corporations”, that is, large companies whose core business is weapons production, but civilian companies that produce weapons in addition to their main business. WT - Wehr Technik [34] is a source of information on BWB activities.
Greece: Offset regulation is in the official Procurement Law, 3433/2006. The Hellenic Ministry of National Defense is in charge through the department of General Armaments Directorate (GAD), and the Division of Offsets (DO). The threshold for offset request is EUR10 million. The minimum offset requirement is between 80 and 120%. Multipliers are from 1 to 10. Greece does not accept indirect offsets, since it is focused on the strengthening of its military capabilities. According to SIPRI open source data, Greece is the major EU importer of weapons.[39]
Hungary: The offset legal base is a Government Decree 228/2004 and offset authority is the Ministry for National Development and Economy - Directive No. 23/2008. The threshold is HUF1 billion (3.5 Mil Euro) with a minimum offset requirement of 100%. Multipliers can go up to 15. The confidentiality clause on offsets is essentially commercial, as a normal Non Disclosure Agreement.[40]
Japan: No formal offset policy. Japan Defense Agency (JDA) depended directly on the Prime Minister and was in charge of defense procurement, thorough the Bureau of Equipment and the Bureau of Finance. However, since 2007 the Japan Defense Agency (JDA) has been transformed into a full Ministry of Defense, with a minister in cabinet-level decisions. Most of the Japanese defense import is from U.S., and it is regulated by bilateral agreements. The majority of defense bidding goes through the representation of Japanese trading companies, though direct bidding is theoretically possible. There is an unspoken policy for the largest Japanese companies that is an understood as “Buy Japanese” products policy. Two remarks: Japan, Germany and Italy, in spite of evident cultural differences, have similar political attitudes in “balancing” foreign weapons procurements. But Japan, in the name of political principles and then of official laws, restrained itself on weapon exports, and since the 1970s Japanese defense industry is self-confined to Japanese domestic market.[41]
India: Government issued a Defense Procurement Procedure in 2006, revised in 2008. The threshold is 3 billion RS (65 mil USD), 30% of offset. Multipliers are not clear. Above 300 billion RS (697 mil USD), there is a requirement of “indigenization,” that is a Buy Indian requirement for 30-50% of the contract value. For offset are also accepted subcontract in outsourced services, such as engineering, design, and defense software.
Israel: Ministry of Industry, Trade and Labor is in charge of the offset policy and implementation. Threshold is 100,000 USD. Minimum offset request is 35%, multipliers are either 1 or 2. The main point about Israel and its offset policy is the fact that Israel is by far the largest beneficiary of United States Foreign Military Financing (FMF), getting more than 50% of the entire available U.S. FMF budget. This circumstance sets a strong limit to offsets request by Israel to U.S., since FMF funds cannot be used for offsets.[42]
Italy: There is no public law on offsets. There is not even an official name for the offset policy. The public position is that Italy has no general offset policy, just ad hoc (offset) policies. The National Armament Directorate of Ministry of Defense is in charge of offsets. The threshold for offset is 5 million Euro. The minimum offset request is 70%, but generally goes up to 100%. The highest multiplier is 3. The focus is on export opportunities for Italian defense companies. There is no website or web-page for a nameless offset program, the closest would be the Minister of Defense website [43].
Kuwait: New Guidelines for Kuwait Offset Program were published in 2007, following to a Minister of Finance directive, that regards all foreign procurements related to both military and non military contracts. The National Offset Company (NOC) is a state-owned company, and its activities in the Kuwait Offset Program are on behalf of the Ministry of Finance. The offset commitment is still at 35% of the monetary value of military contracts. Threshold is KD 3m, (for civilian contracts is KD 10m.) After 2007 there were fundamental changes, making offsets requirements more effective and complex, including the multipliers systems, with more attention on the tangible benefits for Kuwait.[44]
Lithuania: Resolution No. 918/03 of the Government of the Republic of Lithuania (15-7-03). The Ministry of Economy is in charge of offsets. The threshold is LTL 5 million, about 1.5 million euro. Minimum offset requirement of 100%. Multipliers are between 1 to 5.[45]
Netherlands: The Ministry of Economic Affairs - Commissariat for Military Production (CMP) is in charge of offset policy and implementation (following to a protocol of agreement with the Ministry of Defense). The threshold for offset is EUR 5 million. Minimum offset requirement of 100% . Multipliers are between 1 and 5. The focus is on innovation and marketing support and it is directed by the Ministry of Economic Affairs [46]. Guidelines to an Industrial Benefits and Offsets Program in the Netherlands are available at [47]
Norway: Norwegian Ministry of Defense has the responsibility for Industrial Cooperation Agreements (ICA) and the supervision of the agreements during their implementation. The offset threshold of contract value is usually NOK 50 million, (about 5.5 Million Euro). The required offset quantity is 100% of the contract value and multipliers are from 1 to 5. Note:
Norway is not part of European Union, but has joined the European Defense Agency with no voting rights. The guidelines of procurement and offsets can be found at: [48] and [49]
Poland: Ministry of Economy is in charge of offset. Polish Offset Law was issued in 1999; Offset regulations were approved in 1996 and revised in 2007. The threshold value for offsets is 5 million Euro and the request is for 100% of offset. The Multipliers are between 2.0 and 5.0. Direct offsets for country's defense industry, and opening of new export markets are Polish priorities.[50]
Portugal: Defense Minister's directive on Contrapartidas (offsets) has been issued in 2002. Decree-Law 153/2006 and 154/2006 regulates Portuguese Contrapartidas. The Permanent Commission on Offsets (CPC) is a government agency, which depends on the Ministries of Defense and of Economy, and it is in charge of negotiating and supervising offsets. The threshold is 10 million Euro, and the minimum offset request is 100 %. Multipliers have been set between 1 and 5 in 2006. There is no preference with regard to direct or indirect offsets.
Qatar: Qatar has no official offset policy but foreign Defense Companies involved with the Qatar Ministry of Defense are encouraged to invest and to build partnership in R&D and Education in Qatar.
Romania: Ministry of National Defense and an Agency for Special Offset Techniques are in charge, and Law 336/2007 regulates offsets. Romania requests offset for defense purchase above 3 million Eur, and the minimum amount of offset proposals is 80% of the contract value. Multipliers can go to 5. Indirect offset are accepted, especially in ecology and shipbuilding. Romania is the only EU country that did not sign the EU Code of Conduct on Offsets (July 2009)[51]
audi Arabia: Saudi Economic Offset Program is under the Deputy Minister of Defense. Saudi offset request is that 35% of their contract value is invested in Saudi jobs creation and training, economic diversification, technology transfer and foreign direct investments in general. Threshold is 400 million Saudi Reals (107 million USD). UK and France have established bilateral offset program with Saudi Arabia. UK Al Yamamah Economic Offset Program (I, II and III) is the most complex and longest program, it began in 1987 and still alive. The French Offset is directed by Societe Francaise d'Exportation de Systemes Avances (SOFRESA), a private company operating on behalf of the French government. The U.S., in spite of the fact the most of its defense sales to the Kingdom are U.S. Defense Department Foreign Military Sales, leaves offsets to the private contractors, such as Lockheed Martin, SAIC, Boeing, and General Dynamics. Foreign Direct Investments are authorized and supervised by SAGIA [52], and they receive high multipliers according to the most strategic sectors and the Kingdom's priorities (such as water, electricity, communications, etc.).
Slovakia: Ministry of Economy is the governing body for offsets. The threshold (not established clearly) can go down to 130,000 euro. The amount of offset proposal is negotiable, but usually is equivalent to 100% of the contract value. Higher multipliers are for direct offsets.[53]
Slovenia: Ministry of Defense is in charge, and offset guidelines were issued in 2000. The threshold is around 500,000 Euro, and the offset request is of 100% of the contract value. Multipliers go up to 7. Foreign Direct Investments and technology transfers have the highest multipliers [54]
South Korea: DAPA, the Defense Acquisition Program Administration, is in charge of country offset policy, that was published in 2008. Threshold is 10 million USD. Minimum offset is 30%. Multipliers are between 1 and 6. The contractual Memorandum of Understanding on offsets is a substantial part of the main contract.
Spain: Ministry of Defense - General Direction of Armaments and Material (DGAM) - Industrial Cooperation Agency of Spain (ICA) is responsible for the negotiation and the supervision of offsets. The guidelines for offset are not public, but issued by the Minister of Defense through internal and confidential procedures. The general request is 100% of the contract value. Multipliers are between 2 and 5.[55]
Sweden: The offset policy was issued by the Government in 1999. The Industrial Participation program is directed by Minister of Defense, Defence Material Administration (FMV), and offset guidelines were issued in 2002. The contract value offset threshold is about 10 million Euro. The request for offset is 100%. Multipliers can be applied only to 10% of the total offset value. Only defense related offsets (direct offsets) are accepted, since Sweden applies art. 346 of the European Treaty of Lisbon [56].
Switzerland: The Federal Department of Defence, Civil Protection and Sport, division "armasuisse" is in charge of offsets. The threshold for offset request is 15 million Swiss Francs. The offsets are minimum 100% and multipliers are between 2 and 3.[57]
Turkey: The Minister of Defense through an undersecretary for the Defense Industries is in charge of the Industrial Participation / Offset Directive (2007). The threshold is about 5 million USD. The minimum required offset is 50%. Multipliers are between 1 and 6. The offset fulfillment time is 2 years, that is unusually short. Mostly interested in direct offsets to develop the Turkish defense industry.[58]
United Arab Emirates: The United Arab Emirates Offset Program Bureau (OFFSET) is in charge of offsets; Chairman of the bureau is the Crown Prince of Abu Dhabi. The criteria are more sophisticated than most offset policies. The request for offset is 60% of the contract value. The offset credit is not evaluated on the investments, but through profit over time of an offset venture (a kind of multiplier ex post). Joint ventures in the UAE and partnership with local companies are the most common offset proposal, as direct and indirect offset.[59]
United Kingdom: No official Policy. The Department of Defense is in charge, but offsets go through UKTI, UK Trade & Investment, under the Minister of State for Trade, Investment and Business. In 2007 the Prime Minister announced a change, transferring responsibility for defense trade from the Defense Export Services Organization (DESO) to UK Trade and Investment (UKTI). Since April 2008 UKTI DSO (Defense & Security Organization) has responsibility for supporting both defense and security exports. The general threshold is 10 million GBP, but through bilateral agreements with Germany and France, has been reciprocally set to 50 million GBP. The offset is generally around 100%, no multipliers. [60].
United States: The U.S. is formally against offsets. To date, the U.S. is the only country that prohibits U.S. government officials and employees, as well as Government agencies, to get involved in any offset business. It depends on foreign defense “prime” contractors for less than 2% of its defense procurement. However, many countries consider the Buy American Act an equivalent, for practical purposes, to offset policies of other countries. Partners or defense subcontractors of U.S. prime contractors of U.S. Government are subjected to Buy American Act.
http://en.wikipedia.org/wiki/Offset_agreement